SISON VS.

ANCHETA
GR No. L-59431, 25 July 1984

Facts:
 Section 1 of BP Blg 135 amended the Tax Code and petitioner
Antero M. Sison, as taxpayer, alleges that "he would be unduly
discriminated against by the imposition of higher rates of tax upon his
income arising from the exercise of his profession vis-a-vis those which are
imposed upon fixed income or salaried individual taxpayers. He
characterizes said provision as arbitrary amounting to class legislation,
oppressive and capricious in character. It therefore violates both the equal
protection and due process clauses of the Constitution as well as of the
rule requiring uniformity in taxation.

Issue:
 Whether or not the assailed provision violates the equal
protection and due process clauses of the Constitution while also
violating the rule that taxes must be uniform and equitable.

Held: 
The petition is without merit.
On due process - it is undoubted that it may be invoked where a taxing
statute is so arbitrary that it finds no support in the Constitution. An obvious
example is where it can be shown to amount to the confiscation of property
from abuse of power. Petitioner alleges arbitrariness but his mere
allegation does not suffice and there must be a factual foundation of such
unconstitutional taint.
On equal protection - it suffices that the laws operate equally and
uniformly on all persons under similar circumstances, both in the privileges
conferred and the liabilities imposed.
On the matter that the rule of taxation shall be uniform and equitable -
this requirement is met when the tax operates with the same force and
effect in every place where the subject may be found." Also, the rule of
uniformity does not call for perfect uniformity or perfect equality,
because this is hardly unattainable." When the problem of
classification became of issue, the Court said: "Equality and
 uniformity in taxation means that all taxable articles or kinds of
property of the same class shall be taxed the same rate. The taxing
power has the authority to make reasonable and natural
classifications for purposes of taxation..." As provided by this Court,
where "the differentation" complained of "conforms to the practical
dictates of justice and equity" it "is not discriminatory within the
meaning of this clause and is therefore uniform."

Commissioner of Internal Revenue vs. Algue Inc.

GR No. L-28896 | Feb. 17, 1988

Facts:

·         Algue Inc. is a domestic corp engaged in engineering, construction and

other allied activities
·         On Jan. 14, 1965, the corp received a letter from the CIR regarding its
delinquency income taxes from 1958-1959, amtg to P83,183.85
·         A letter of protest or reconsideration was filed by Algue Inc on Jan 18
·         On March 12, a warrant of distraint and levy was presented to Algue
Inc. thru its counsel, Atty. Guevara, who refused to receive it on the ground
of the pending protest.
·         Since the protest was not found on the records, a file copy from the
corp was produced and given to BIR Agent Reyes, who deferred service of
the warrant
·         On April 7, Atty. Guevara was informed that the BIR was not taking any
action on the protest and it was only then that he accepted the warrant of
distraint and levy earlier sought to be served
·         On April 23, Algue filed a petition for review of the decision of the CIR
with the Court of Tax Appeals
·         CIR contentions:
-          the claimed deduction of P75,000.00 was properly disallowed because
it was not an ordinary reasonable or necessary business expense
-          payments are fictitious because most of the payees are members of
the same family in control of Algue and that there is not enough
substantiation of such payments
·         CTA: 75K had been legitimately paid by Algue Inc. for actual services
rendered in the form of promotional fees. These were collected by the
Payees for their work in the creation of the Vegetable Oil Investment
 Corporation of the Philippines and its subsequent purchase of the
properties of the Philippine Sugar Estate Development Company.

Issue: 
Whether or not the Collector of Internal Revenue correctly disallowed
the P75,000.00 deduction claimed by Algue as legitimate business
expenses in its income tax returns

Ruling:

·         Taxes are the lifeblood of the government and so should be collected

without unnecessary hindrance, made in accordance with law.
·         RA 1125: the appeal may be made within thirty days after receipt of the
decision or ruling challenged
·         During the intervening period, the warrant was premature and could
therefore not be served.
·         Originally, CIR claimed that the 75K promotional fees to be personal
holding company income, but later on conformed to the decision of CTA
·         There is no dispute that the payees duly reported their respective
shares of the fees in their income tax returns and paid the corresponding
taxes thereon. CTA also found, after examining the evidence, that no
distribution of dividends was involved
·         CIR suggests a tax dodge, an attempt to evade a legitimate
assessment by involving an imaginary deduction
·         Algue Inc. was a family corporation where strict business procedures
were not applied and immediate issuance of receipts was not required. at
the end of the year, when the books were to be closed, each payee made
an accounting of all of the fees received by him or her, to make up the total
of P75,000.00. This arrangement was understandable in view of the close
relationship among the persons in the family corporation
·         The amount of the promotional fees was not excessive. The total
commission paid by the Philippine Sugar Estate Development Co. to Algue
Inc. was P125K. After deducting the said fees, Algue still had a balance of
P50,000.00 as clear profit from the transaction. The amount of P75,000.00
was 60% of the total commission. This was a reasonable proportion,
considering that it was the payees who did practically everything, from the
formation of the Vegetable Oil Investment Corporation to the actual
purchase by it of the Sugar Estate properties.
·         Sec. 30 of the Tax Code: allowed deductions in the net income
– Expenses - All the ordinary and necessary expenses paid or incurred
 during the taxable year in carrying on any trade or business, including a
reasonable allowance for salaries or other compensation for personal
services actually rendered xxx
·         the burden is on the taxpayer to prove the validity of the claimed
deduction
·         In this case, Algue Inc. has proved that the payment of the fees was
necessary and reasonable in the light of the efforts exerted by the payees
in inducing investors and prominent businessmen to venture in an
experimental enterprise and involve themselves in a new business
requiring millions of pesos.
·         Taxes are what we pay for civilization society. Without taxes, the
government would be paralyzed for lack of the motive power to activate
and operate it. Hence, despite the natural reluctance to surrender part of
one's hard earned income to the taxing authorities, every person who is
able to must contribute his share in the running of the government. The
government for its part, is expected to respond in the form of tangible and
intangible benefits intended to improve the lives of the people and enhance
their moral and material values
·         Taxation must be exercised reasonably and in accordance with the
prescribed procedure. If it is not, then the taxpayer has a right to complain
and the courts will then come to his succor

Algue Inc.’s appeal from the decision of the CIR was filed on time
with the CTA in accordance with Rep. Act No. 1125. And we also find that
the claimed deduction by Algue Inc. was permitted under the Internal
Revenue Code and should therefore not have been disallowed by the CIR

Roxas v CTA (1968)

FACTS:
Antonio, Eduardo and Jose Roxas, brothers and at the same time
partners of the Roxas y Compania, inherited from their grandparents
several properties which included farmlands. The tenants expressed their
desire to purchase the farmland. The tenants, however, did not have
enough funds, so the Roxases agreed to a purchase by installment.
Subsequently, the CIR demanded from the brothers the payment of
deficiency income taxes resulting from the sale, 100% of the profits derived
therefrom was taxed. The brothers protested the assessment but the same
was denied. On appeal, the Court of Tax Appeals sustained the
assessment. Hence, this petition.

ISSUE:
Whether or not Roxas

RULING:

No. It should be borne in mind that the sale of the farmlands to the
very farmers who tilled them for generations was not only in consonance
with, but more in obedience to the request and pursuant to the policy of our
Government to allocate lands to the landless.

In order to maintain the general public’s trust and confidence in the

Government this power must be used justly and not treacherously. It does
not conform with the sense of justice for the Government to persuade the
taxpayer to lend it a helping hand and later on penalize him for duly
answering the urgent call.

In fine, Roxas cannot be considered a real estate dealer and is not liable
for 100% of the sale. Pursuant to Section 34 of the Tax Code, the lands
sold to the farmers are capital assets and the gain derived from the sale
thereof is capital gain, taxable only to the extent of 50%. 

G.R. No. L-25043             April 26, 1968

ANTONIO ROXAS, EDUARDO ROXAS and ROXAS Y CIA., in their own respective behalf and
as judicial co-guardians of JOSE ROXAS, petitioners,
vs.
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.

Leido, Andrada, Perez and Associates for petitioners.

Office of the Solicitor General for respondents.

BENGZON, J.P., J.:

Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects, transmitted to their grandchildren by
hereditary succession the following properties:
 (1) Agricultural lands with a total area of 19,000 hectares, situated in the municipality of
Nasugbu, Batangas province;

(2) A residential house and lot located at Wright St., Malate, Manila; and

(3) Shares of stocks in different corporations.

To manage the above-mentioned properties, said children, namely, Antonio Roxas, Eduardo Roxas
and Jose Roxas, formed a partnership called Roxas y Compania.

AGRICULTURAL LANDS

At the conclusion of the Second World War, the tenants who have all been tilling the lands in
Nasugbu for generations expressed their desire to purchase from Roxas y Cia. the parcels which
they actually occupied. For its part, the Government, in consonance with the constitutional mandate
to acquire big landed estates and apportion them among landless tenants-farmers, persuaded the
Roxas brothers to part with their landholdings. Conferences were held with the farmers in the early
part of 1948 and finally the Roxas brothers agreed to sell 13,500 hectares to the Government for
distribution to actual occupants for a price of P2,079,048.47 plus P300,000.00 for survey and
subdivision expenses.

It turned out however that the Government did not have funds to cover the purchase price, and so a
special arrangement was made for the Rehabilitation Finance Corporation to advance to Roxas y
Cia. the amount of P1,500,000.00 as loan. Collateral for such loan were the lands proposed to be
sold to the farmers. Under the arrangement, Roxas y Cia. allowed the farmers to buy the lands for
the same price but by installment, and contracted with the Rehabilitation Finance Corporation to pay
its loan from the proceeds of the yearly amortizations paid by the farmers.

In 1953 and 1955 Roxas y Cia. derived from said installment payments a net gain of P42,480.83 and
P29,500.71. Fifty percent of said net gain was reported for income tax purposes as gain on the sale
of capital asset held for more than one year pursuant to Section 34 of the Tax Code.

RESIDENTIAL HOUSE

During their bachelor days the Roxas brothers lived in the residential house at Wright St., Malate,
Manila, which they inherited from their grandparents. After Antonio and Eduardo got married, they
resided somewhere else leaving only Jose in the old house. In fairness to his brothers, Jose paid to
Roxas y Cia. rentals for the house in the sum of P8,000.00 a year.

ASSESSMENTS

On June 17, 1958, the Commissioner of Internal Revenue demanded from Roxas y Cia the payment
of real estate dealer's tax for 1952 in the amount of P150.00 plus P10.00 compromise penalty for
late payment, and P150.00 tax for dealers of securities for 1952 plus P10.00 compromise penalty for
late payment. The assessment for real estate dealer's tax was based on the fact that Roxas y Cia.
received house rentals from Jose Roxas in the amount of P8,000.00. Pursuant to Sec. 194 of the
Tax Code, an owner of a real estate who derives a yearly rental income therefrom in the amount of
P3,000.00 or more is considered a real estate dealer and is liable to pay the corresponding fixed tax.
The Commissioner of Internal Revenue justified his demand for the fixed tax on dealers of securities
against Roxas y Cia., on the fact that said partnership made profits from the purchase and sale of
securities.

In the same assessment, the Commissioner assessed deficiency income taxes against the Roxas
Brothers for the years 1953 and 1955, as follows:

1953 1955
Antonio Roxas P7,010.00 P5,813.00
Eduardo Roxas 7,281.00 5,828.00
Jose Roxas 6,323.00 5,588.00

The deficiency income taxes resulted from the inclusion as income of Roxas y Cia. of the unreported
50% of the net profits for 1953 and 1955 derived from the sale of the Nasugbu farm lands to the
tenants, and the disallowance of deductions from gross income of various business expenses and
contributions claimed by Roxas y Cia. and the Roxas brothers. For the reason that Roxas y Cia.
subdivided its Nasugbu farm lands and sold them to the farmers on installment, the Commissioner
considered the partnership as engaged in the business of real estate, hence, 100% of the profits
derived therefrom was taxed.

The following deductions were disallowed:

ROXAS Y CIA.:
1953
Tickets for Banquet in honor of
P 40.00
          S. Osmeña
Gifts of San Miguel beer 28.00
Contributions to —
Philippine Air Force Chapel 100.00
Manila Police Trust Fund 150.00

Philippines Herald's fund for Manila's

neediest families 100.00
1955
Contributions to Contribution to
          Our Lady of Fatima Chapel,
FEU 50.00
ANTONIO ROXAS:
1953
Contributions to —
Pasay City Firemen Christmas Fund 25.00
Pasay City Police Dept. X'mas fund 50.00
 1955
Contributions to —
Baguio City Police Christmas fund 25.00
Pasay City Firemen Christmas fund 25.00
Pasay City Police Christmas fund 50.00
EDUARDO ROXAS:
1953
Contributions to —
Hijas de Jesus' Retiro de Manresa 450.00
Philippines Herald's fund for Manila's
neediest families 100.00
1955
Contributions to Philippines
          Herald's fund for Manila's
          neediest families 120.00
JOSE ROXAS:
1955
Contributions to Philippines
          Herald's fund for Manila's
          neediest families 120.00

The Roxas brothers protested the assessment but inasmuch as said protest was denied, they
instituted an appeal in the Court of Tax Appeals on January 9, 1961. The Tax Court heard the
appeal and rendered judgment on July 31, 1965 sustaining the assessment except the demand for
the payment of the fixed tax on dealer of securities and the disallowance of the deductions for
contributions to the Philippine Air Force Chapel and Hijas de Jesus' Retiro de Manresa. The Tax
Court's judgment reads:

WHEREFORE, the decision appealed from is hereby affirmed with respect to petitioners
Antonio Roxas, Eduardo Roxas, and Jose Roxas who are hereby ordered to pay the
respondent Commissioner of Internal Revenue the amounts of P12,808.00, P12,887.00 and
P11,857.00, respectively, as deficiency income taxes for the years 1953 and 1955, plus 5%
surcharge and 1% monthly interest as provided for in Sec. 51(a) of the Revenue Code; and
modified with respect to the partnership Roxas y Cia. in the sense that it should pay only
P150.00, as real estate dealer's tax. With costs against petitioners.

Not satisfied, Roxas y Cia. and the Roxas brothers appealed to this Court. The Commissioner of
Internal Revenue did not appeal.
The issues:

(1) Is the gain derived from the sale of the Nasugbu farm lands an ordinary gain, hence
100% taxable?

(2) Are the deductions for business expenses and contributions deductible?

(3) Is Roxas y Cia. liable for the payment of the fixed tax on real estate dealers?

The Commissioner of Internal Revenue contends that Roxas y Cia. could be considered a real
estate dealer because it engaged in the business of selling real estate. The business activity alluded
to was the act of subdividing the Nasugbu farm lands and selling them to the farmers-occupants on
installment. To bolster his stand on the point, he cites one of the purposes of Roxas y Cia. as
contained in its articles of partnership, quoted below:

4. (a) La explotacion de fincas urbanes pertenecientes a la misma o que pueden pertenecer

a ella en el futuro, alquilandoles por los plazos y demas condiciones, estime convenientes y
vendiendo aquellas que a juicio de sus gerentes no deben conservarse;

The above-quoted purpose notwithstanding, the proposition of the Commissioner of Internal

Revenue cannot be favorably accepted by Us in this isolated transaction with its peculiar
circumstances in spite of the fact that there were hundreds of vendees. Although they paid for their
respective holdings in installment for a period of ten years, it would nevertheless not make the
vendor Roxas y Cia. a real estate dealer during the ten-year amortization period.

It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who tilled
them for generations was not only in consonance with, but more in obedience to the request and
pursuant to the policy of our Government to allocate lands to the landless. It was the bounden duty
of the Government to pay the agreed compensation after it had persuaded Roxas y Cia. to sell its
haciendas, and to subsequently subdivide them among the farmers at very reasonable terms and
prices. However, the Government could not comply with its duty for lack of funds. Obligingly, Roxas
y Cia. shouldered the Government's burden, went out of its way and sold lands directly to the
farmers in the same way and under the same terms as would have been the case had the
Government done it itself. For this magnanimous act, the municipal council of Nasugbu passed a
resolution expressing the people's gratitude.

The power of taxation is sometimes called also the power to destroy. Therefore it should be
exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised
fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg". And, in order
to maintain the general public's trust and confidence in the Government this power must be used
justly and not treacherously. It does not conform with Our sense of justice in the instant case for the
Government to persuade the taxpayer to lend it a helping hand and later on to penalize him for duly
answering the urgent call.

In fine, Roxas y Cia. cannot be considered a real estate dealer for the sale in question. Hence,
pursuant to Section 34 of the Tax Code the lands sold to the farmers are capital assets, and the gain
derived from the sale thereof is capital gain, taxable only to the extent of 50%.

DISALLOWED DEDUCTIONS
Roxas y Cia. deducted from its gross income the amount of P40.00 for tickets to a banquet given in
honor of Sergio Osmena and P28.00 for San Miguel beer given as gifts to various persons. The
deduction were claimed as representation expenses. Representation expenses are deductible from
gross income as expenditures incurred in carrying on a trade or business under Section 30(a) of the
Tax Code provided the taxpayer proves that they are reasonable in amount, ordinary and necessary,
and incurred in connection with his business. In the case at bar, the evidence does not show such
link between the expenses and the business of Roxas y Cia. The findings of the Court of Tax
Appeals must therefore be sustained.

The petitioners also claim deductions for contributions to the Pasay City Police, Pasay City Firemen,
and Baguio City Police Christmas funds, Manila Police Trust Fund, Philippines Herald's fund for
Manila's neediest families and Our Lady of Fatima chapel at Far Eastern University.

The contributions to the Christmas funds of the Pasay City Police, Pasay City Firemen and Baguio
City Police are not deductible for the reason that the Christmas funds were not spent for public
purposes but as Christmas gifts to the families of the members of said entities. Under Section 39(h),
a contribution to a government entity is deductible when used exclusively for public purposes. For
this reason, the disallowance must be sustained. On the other hand, the contribution to the Manila
Police trust fund is an allowable deduction for said trust fund belongs to the Manila Police, a
government entity, intended to be used exclusively for its public functions.

The contributions to the Philippines Herald's fund for Manila's neediest families were disallowed on
the ground that the Philippines Herald is not a corporation or an association contemplated in Section
30 (h) of the Tax Code. It should be noted however that the contributions were not made to the
Philippines Herald but to a group of civic spirited citizens organized by the Philippines Herald solely
for charitable purposes. There is no question that the members of this group of citizens do not
receive profits, for all the funds they raised were for Manila's neediest families. Such a group of
citizens may be classified as an association organized exclusively for charitable purposes mentioned
in Section 30(h) of the Tax Code.

Rightly, the Commissioner of Internal Revenue disallowed the contribution to Our Lady of Fatima
chapel at the Far Eastern University on the ground that the said university gives dividends to its
stockholders. Located within the premises of the university, the chapel in question has not been
shown to belong to the Catholic Church or any religious organization. On the other hand, the lower
court found that it belongs to the Far Eastern University, contributions to which are not deductible
under Section 30(h) of the Tax Code for the reason that the net income of said university injures to
the benefit of its stockholders. The disallowance should be sustained.

Lastly, Roxas y Cia. questions the imposition of the real estate dealer's fixed tax upon it, because
although it earned a rental income of P8,000.00 per annum in 1952, said rental income came from
Jose Roxas, one of the partners. Section 194 of the Tax Code, in considering as real estate dealers
owners of real estate receiving rentals of at least P3,000.00 a year, does not provide any
qualification as to the persons paying the rentals. The law, which states:  1äwphï1.ñët

. . . "Real estate dealer" includes any person engaged in the business of buying, selling,
exchanging, leasing or renting property on his own account as principal and holding himself
out as a full or part-time dealer in real estate or as an owner of rental property or properties
rented or offered to rent for an aggregate amount of three thousand pesos or more a year: . .
. (Emphasis supplied) .

is too clear and explicit to admit construction. The findings of the Court of Tax Appeals or, this point
is sustained.1äwphï1.ñët
To Summarize, no deficiency income tax is due for 1953 from Antonio Roxas, Eduardo Roxas and
Jose Roxas. For 1955 they are liable to pay deficiency income tax in the sum of P109.00, P91.00
and P49.00, respectively, computed as follows: *

ANTONIO ROXAS
Net income per return P315,476.59
Add: 1/3 share, profits in Roxas y
P 153,249.15
Cia.
Less amount declared 146,135.46

Amount understated P 7,113.69

Contributions disallowed 115.00

P 7,228.69
Less 1/3 share of contributions
amounting to P21,126.06 disallowed
from partnership but allowed to
partners 7,042.02 186.67

Net income per review P315,663.26

Less: Exemptions 4,200.00

Net taxable income P311,463.26

Tax due 154,169.00
Tax paid 154,060.00

Deficiency P 109.00
==========
EDUARDO ROXAS
P
Net income per return
304,166.92
Add: 1/3 share, profits in Roxas y Cia P 153,249.15
Less profits declared 146,052.58

Amount understated P 7,196.57

Less 1/3 share in contributions
amounting to P21,126.06 disallowed
from partnership but allowed to
partners 7,042.02 155.55
 Net income per review P304,322.47
Less: Exemptions 4,800.00

Net taxable income P299,592.47

Tax Due P147,250.00
Tax paid 147,159.00

Deficiency P91.00
===========
JOSE ROXAS
Net income per return P222,681.76
Add: 1/3 share, profits in Roxas y
P153,429.15
Cia.
Less amount reported 146,135.46

Amount understated 7,113.69

Less 1/3 share of contributions
disallowed from partnership but
allowed as deductions to partners 7,042.02 71.67

Net income per review P222,753.43

Less: Exemption 1,800.00

Net income subject to tax P220,953.43

Tax due P102,763.00
Tax paid 102,714.00

Deficiency P 49.00
===========

WHEREFORE, the decision appealed from is modified. Roxas y Cia. is hereby ordered to pay the
sum of P150.00 as real estate dealer's fixed tax for 1952, and Antonio Roxas, Eduardo Roxas and
Jose Roxas are ordered to pay the respective sums of P109.00, P91.00 and P49.00 as their
individual deficiency income tax all corresponding for the year 1955. No costs. So ordered.

CIR VS. TOURS SPECIALISTS

Gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the
taxpayer which do not belong to them and do not redound to the taxpayer’s benefit; and it is not
necessary that there must be a law or regulation which would exempt such monies or receipts
within the meaning of gross receipts under the Tax Code
Facts:
The Commissioner of Internal Revenue filed a petition to review on certiorari to the CTA decision
which ruled that the money entrusted to private respondent Tours Specialist (TS), earmarked and
paid for hotel room charges of tourists, travellers and/or foreign travel agencies do not form part of
its gross receipt subject to 3% independent contractor’s tax.

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

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

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

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

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

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

Pirovano v. CIR (14 SCRA 232)

Sec. 32[B] of the NIRC provides that Gifts, bequests and devises are excluded
from gross income liable to tax. Instead, such donations are subject to estate
or gift taxes. However, if the amount is received on account of services
rendered, whether constituting a demandable debt or not (such as
remuneratory donations under Civil Law), the donation is considered taxable
income.

Facts: De la Rama Steamship Co. insured the life of Enrico Pirovano who was then its
President and General Manager. The company initially designated itself as the beneficiary of
the policies but, after Pirovano’s death, it renounced all its rights, title and interest therein,
in favor of Pirovano’s heirs.

The CIR subjected the donation to gift tax. Pirovano’s heirs contended that the grant was
not subject to such donee’s tax because it was not a simple donation, as it was made for a
full and adequate compensation for the valuable services by the late Priovano (i.e. that it
was remuneratory).

Issue: WON the donation is remuneratory and therefore not subject to donee’s

tax, but rather taxable as part of gross income.

Held: No. the donation is not remuneratory. There is nothing on record to show that when
the late Enrico Pirovano rendered services as President and General Manager of the De la
Rama Steamship Co. and was “largely responsible for the rapid and very successful
development of the activities of the company", he was not fully compensated for such
services. The fact that his services contributed in a large measure to the success of the
company did not give rise to a recoverable debt, and the conveyances made by the company
to his heirs remain a gift or a donation. The company’s gratitude was the true consideration
for the donation, and not the services themselves.

Pirovano v CIR (Tax)

G.R. No. L-19865 July 31, 1965

MARIA CARLA PIROVANO, etc., et al., petitioners-appellants, vs. THE
COMMISSIONER OF INTERNAL REVENUE, respondent-appellee.

FACTS:
Sometime in the early part of 1941, De la Rama Steamship Co. insured the
life of said Enrico Pirovano, who was then its President and General
Manager until the time of his death, with various Philippine and American
insurance companies for a total sum of one million pesos, designating itself
as the beneficiary of the policies, obtained by it. Due to the Japanese
occupation of the Philippines during the second World War, the Company
was unable to pay the premiums on the policies issued by its Philippine
insurers and these policies lapsed, while the policies issued by its
American insurers were kept effective and subsisting, the New York office
of the Company having continued paying its premiums from year to year.
During the Japanese occupation , or more particularly in the latter part of
1944, said Enrico Pirovano died.
Board of Directors of the Company renounced all its rights title, and interest
amount of P643,000.00 of insurance proceeds in favor of the minor children
of the deceased, subject to the express condition that said amount should
be retained by the Company in the nature of a loan to it, drawing interest at
the rate of five per centum (5%) per annum, and payable to the Pirovano
children after the Company shall have first settled in full the balance of its
present remaining bonded indebtedness in the sum of approximately
P5,000,000.00.
On February 26, 1948, Mrs. Estefania R. Pirovano, in behalf of her
children, executed a public document formally accepting the donation; and,
on the same date, the Company through its Board of Directors, took official
notice of this formal acceptance. On March 8, 1951, however, the majority
stockholders of the Company voted to revoke the resolution approving the
donation in favor of the Pirovano children.
As a consequence of this revocation and refusal of the Company to pay the
balance of the donation amounting to P564,980.90 despite demands
therefor, the herein petitioners-appellants represented by their natural
guardian, Mrs. Estefania R. Pirovano, brought an action for the recovery of
said amount, which they won.
On March 6, 1955, respondent Commissioner of Internal Revenue
assessed the amount of P60,869.67 as donees' gift tax, inclusive of
surcharges, interests and other penalties, against each of the petitioners-
appellants, or for the total sum of P243,478.68; and, on April 23, 1955, a
donor's gift tax in the total amount of P34,371.76 was also assessed
against De la Rama Steamship Co., which the latter paid.

ISSUE:
Whether the decision of the lower court ordering the payment of donees'
gift taxes as assessed by respondent as well as the imposition of surcharge
and interest on the amount of donees' gift taxes was proper

RULING:
Yes.
There is nothing on record to show that when the late Enrico Pirovano
rendered services as President and General Manager of the De la Rama
Steamship Co. he was not fully compensated for such services, or that,
because they were "largely responsible for the rapid and very successful
development of the activities of the company"
The fact that his services contributed in a large measure to the success of
the company did not give rise to a recoverable debt, and the conveyances
made by the company to his heirs remain a gift or donation.
This is emphasized by the directors' Resolution of January 6, 1947, that
"out of gratitude" the company decided to renounce in favor of Pirovano's
heirs the proceeds of the life insurance policies in question. The true
consideration for the donation was, therefore, the company's gratitude for
his services, and not the services themselves.
Whether remuneratory or simple, the conveyance remained a gift,
taxable under Chapter 2, Title III of the Internal Revenue Code. 

Collector of Internal Revenue vs Henderson

GR No. L-12954, 1961

Principle/s:
-          Gross Income includes gains, profits, and income derived from
salaries, wages, or compensation for personal services whatever kind
and in whatever form paid.

FACTS:
In the foregoing assessments, the Bureau of Internal Revenue considered
as part of the spouses (American Citizens) taxable income the taxpayer
husband’s allowances for rental, residential expenses, water, electricity and
telephone; bonus paid to him; withholding tax and entrance fee to the
Marikina Gun and Country Club paid by his employer for his account; and
traveling allowance of his wife.

ISSUE:
Whether the allowances shall all be exempted from gross income?
HELD:
“Gross Income” includes gains, profits, and income derived from salaries,
wages, or compensation for personal service whatever kind and in
whatever form paid, or from professions, vocations, trades, businesses,
commerce, sales, or dealings in property, whether real or personal, growing
out of the ownership or use of or interest in such property; also from
interest, rents, dividends, securities, or the transactions of any business
carried on for gain or profit, or gains, profits, and income derived from any
source whatever.

Their bills for rental and utilities were paid directly by the employer-
corporation to the creditors. Nevertheless, as correctly held by the Court of
Tax Appeals, the taxpayers are entitled only to a ratable value of the
allowances in question, and only the amount of P4,800.00 annually, the
reasonable amount they have spent for home rental and utilities such as
light, water, telephone, etc., should be the amount subject to tax, and the
excess considered as expenses of the corporation.

Gonzales v CTA G.R. No. L-14532 May 26, 1965

FACTS:

Both petitioners Jose and Juana Gonzales are co-heirs and co-owners, (one-sixth each) of a tract of land of 871,
[982.] square meters which they, along with four other co-heirs, inherited from their mother. So on November 15,
1956, Jose Leon Gonzales and Juana F. Gonzales submitted to the Court of Tax Appeals a joint petition seeking a
refund, this time of the amount of P86,166.00 for each of the two petitioners.

ISSUES:
(1) Whether or not petitioners' claim for refund of the total of P86,166.00 may be properly entertained; and

(2) Whether or not the sum of P89,309.61 which each of the petitioners received as interest on the value of the land
expropriated is taxable as ordinary income, and not as capital gain.

RULING:

1. No. the requirement of prior timely claim for refund of the sum of P86,166.00 had not been met in this case. The
demand for refund must precede the suit, and this requirement is mandatory; so much so that non-compliance
therewith bars the action

2. It is ordinary income."the acquisition by the Government of private properties through the exercise of the power of
eminent domain, said properties being justly compensated, is embraced within the meaning of the term 'sale' or
'disposition of property'" and the definition of gross income laid down by Section 29 of the Tax Code of the
Philippines. We also adhered to the view that the transfer of property through condemnation proceedings is a sale or
exchange and that profit from the transaction constitutes capital gain.

In fact, the authorities support the conclusion that for income tax purposes, interest does not form part of the price
paid by the Government in condemnation proceedings; and may not be treated as part of the capital gain.
G.R. No. L-14532             May 26, 1965

JOSE LEON GONZALES, petitioner-appellant,

vs.
THE HON. COURT OF TAX APPEALS and THE COLLECTOR OF INTERNAL
REVENUE, respondents-appellees.

-----------------------------

G.R. No. L-14533             May 26, 1965

JUANA G. GONZALES and FORTUNATO DE LEON, petitioners-appellants,

vs.
THE HON. COURT OF TAX APPEALS and THE COLLECTOR OF INTERAL
REVENUE, respondents-appellees.

Guillermo B. Ilagan and Delfin J. Hilario for petitioners-appellants.

Office of the Solicitor General for respondents-appellees.

BENGZON, C.J.:

Statement. — This is an appeal from the decision of the Court of Tax Appeals denying the refund of
income taxes imposed on, and paid by, Jose Leon Gonzales and Juana F. Gonzales.

The Facts. — Jose Leon Gonzales and Juana F. Gonzales are brother and sister [the latter being
married to Atty. Fortunato de Leon 1]. Both petitioners are co-heirs and co-owners, (one-sixth each)
of a tract of land of 871, [982.] square meters which they, along with four other co-heirs, inherited
from their mother.

This realty, located at Caloocan, Rizal, was the object of expropriation proceedings, which this Court
finally decided in May 1954, in G.R. No.L-4918. Therein, we fixed the just compensation for the
property at P1.50 per square meter. We also ordered the payment of interest at the legal rate of 6%
from January 25, 1947 (when the Government took possession of the property) to the date of
payment, which payment was actually made on October 31, 1954. Excluded from the payment of
interest was the sum of P28,850.00, the amount deposited by the Government upon taking
possession of the estate.

The total compensation paid the six heirs for the expropriated property amounted to P1,307,973.00.
Subtracting therefrom the amount of P28,850.00 just mentioned, there remained a difference of
P1,279,123.00, the interest on which, at the legal rate of 6% per annum, totalled P535,587.70.
Divided among the six heirs, this total gave a share of P89,305.61 as interest to each of them. 1äwphï1.ñët

Upon the amounts received from the Government, Jose Leon Gonzales and Juana F. Gonzales,
were each ascertained to have made a capital gain of P213,328.82 [P1,279,973.00 2 divided by 6
heirs], and each of them to have received the amount of P89,309.61 as share in the interests of
P535,857.70 (this, sum is divided by 6). A tentative return for 1954 was thus prepared and filed for
each of the two petitioners describing the amounts of P213,328.82 as capital gain, and in addition,
the amount of P89,309.61 as ordinary income. On the basis of such income, each of the petitioners
was assessed P86,166.00.
The Government paid to petitioners the proceeds of the expropriation award and interest through the
People's Homesite and Housing Corporation sometime in October 1954 the last check having been
delivered on November 4, 1954. However, the sum of P532,234.70 was retained by the Housing
Corporation; and on November 18, 1954, at the request of respondent Collector, it turned over to the
Bureau of Internal Revenue the amount of P516,007.00 representing income taxes reportedly due
and owing from the six co-heirs of the estate. Therefore, petitioners Jose Leon Gonzales and his
sister Juana F. Gonzales were each credited the amount of P86,166.00 as payment of their income
tax. (Official Receipts Nos. 520491 and 520496 dated November 19, 1954)

On February 29, 1956, petitioner Juana F. Gonzales wrote the respondent Collector a letter, seeking
the refund of P24,426.00 allegedly representing excess payment of income taxes for 1954. The
letter pertinently stated:

We respectively contend that the assessment was erroneous in that the amount of
P89,309.61 representing interest, was considered as ordinary income and not merely capital
gain. If the interest was computed as capital gain, there shall be due and owing from your
office the amount of P24,426.00 assuming for argument's sake that your assessment was
correct. (Exhs. H & 2, also par. 22, "Stifacts")

On November 5, 1956, petitioner Jose Leon Gonzales also wrote a letter to said respondent
requesting refund of a similar amount of P24,426.00 for the same reasons as his co-petitioner. No
action appears to have been taken on this refund claim.

On November 12, 1956, respondent Collector denied the request of Juana F. Gonzales for refund of
P24,426.00.

The Suits. — So on November 15, 1956, Jose Leon Gonzales and Juana F. Gonzales submitted to
the Court of Tax Appeals a joint petition seeking a refund, this time of the amount of P86,166.00 for
each of the two petitioners; but the next day, both petitioners amended their petition by filing
separate petitions which were docketed separately as CTA Case No. 328 and CTA Case No. 329.

It appears that on November 24, 1956, Atty. Fortunato de Leon wrote the respondent Collector the
following letter:

Sir:

This is to acknowledge receipt today of your letter of November 12, 1956, denying
the claim of Mrs. Juana F. Gonzales de Leon for refund, to which we take exception.

We are not only claiming the refund of P24,426.00 but the entire amount of
P86,166.00 for various reasons more specifically contained in our petition before the
Court of Tax Appeals on November 16, 1956, Case No. 328. We had to file the
petition because we believe our claim is meritorious and that the prescriptive period
may run out.

For all legal purposes we shall consider your letter herein referred to as a denial of
the claim for refund of the total amount of P86,166.00. And the difference in amount
may be considered for all purposes as variance only.

Respondent Collector, however, disclaims receipt of this second written claim for refund.
On December 5, 1956, respondent Collector contested the amended petitions. Trial ensued, and in
the course thereof the parties signed a "Partial Stipulation of Facts."

Decision. — On July 16, 1958, a decision was rendered by the Court of Tax Appeals denying
petitioners' claim for refund, with costs against them. Their motion for reconsideration and new trial
having been denied, petitioners perfected this appeal and now pray for reversal.

Issue. — A careful perusal of the debated issues will show that the resolution of this appeal hinges
decisively on two propositions:

(1) Whether or not petitioners' claim for refund of the total of P86,166.00 may be properly
entertained; and

(2) Whether or not the sum of P89,309.61 which each of the petitioners received as interest
on the value of the land expropriated is taxable as ordinary income, and not as capital gain.

Discussion. — The record shows that on November 18, 1954, at the request of respondent
Collector, the People's Homesite and Housing Corporation turned over to the Bureau of Internal
Revenue the sum of P516,007.00 representing income taxes due from the six co-owners of the
expropriated property. Of this amount, the two appellants Gonzales were each credited with the
amount of P86,166.00 as income taxes for 1954. (The receipts evidencing such payments are O.R.
No. 520491, dated November 19, 1954 for P86,166.00 for Jose Leon Gonzales and O.R. No.
520496 dated November 19, 1954 for Juana F. Gonzales.)

It likewise appears that appellant Juana F. Gonzales in her letter of February 29, 1956, requested for
the refund of P24,426.00 (only), citing as sole ground therefor that the amount of P89,309.61 which
was her share in the interests paid on the expropriated property was taxed by respondent Collector
as ordinary income. She contended that it should have been taxed as capital gain. Appellant Jose
Leon Gonzales on his part, in his letter of November 5, 1958, requested the refund of a similar
amount of P24,426.00 only.

Then a joint petition was filed by both parties before the Court of Tax Appeals first on November 15,
1956, but the next day, November 16, 1956, they filed separate petitions containing similar
allegations.

It would appear, therefore, that from November 19, 1954, when the payments for income taxes were
received from the appellants to February 29, 1956, when appellant Juana Gonzales filed her claim
for refund and to November 5, 1956, and appellant Jose Leon Gonzales filed his own refund claim,
less than two years had elapsed.

But, since their respective claims for refund were restricted to the amount of P24,426.00 only, it
should be clear that any demand for the return of an amount in excess thereof (P86,166.00) is not
included.

Remarkedly, the so-called claim for refund of the amount of P86,166.00 was made only on
November 24, 1956, (after the complaints had been filed) without giving the Collector "an opportunity
to consider his mistake, if mistake has been committed." (Kiener Co. vs. David, 92 Phil. 945) And it
refers specifically and exclusively to appellant Juana F. Gonzales' claim (Exh. "J"). Appellant Jose
Leon Gonzales seems not to have filed any refund claim for a similar amount.
Be that as it may, this later claim for refund for P86,166.00 made on November 24, 1956, by
appellant Juana F. Gonzales has been definitely filed beyond the statutory period of two year, from
the date of payment, which was November 19, 1954.

A stringent requirement of the Tax Code is that before a suit or proceeding for the refund of any
internal revenue tax can be maintained in any court, a written claim for its refund shall be filed with
the Collector of Internal Revenue before filing the action in court and before the expiration of two
years from the date of payment of the taxes to be refunded.3This requirement is mandatory and
failure to comply therewith is fatal to the action. 4 What is more, the claim for refund should set forth in
detail the facts and the grounds upon which it is based, so as to apprise the Collector accordingly. 5

Appellants maintain that it was not they who had paid the tax of P86,166.00 imposed upon each of
them, but that it was respondent Collector himself who paid those taxes and issued receipts therefor
without their knowledge and consent. And that even if the receipts of payment were in fact sent by
the respondent Collector to the People's Homesite and Housing Corporation and were received by
the latter on November 23, 1953, said receipts could not have been received by appellants earlier
than November 28, 1954, considering that the Rules of Court treats a service as complete only upon
the expiration of five days from mailing.

We find no merit in these contentions. To begin with, there is no proof positive on record that
appellant Juana F. Gonzales' so-called refund claim for the amount of P86,166.00 had been sent to,
let alone received by, respondent Neither have they protested against this payment by the
Collector to the Collector. In the second place, the refund letter of November 24, 1956, assuming
that it was duly filed, referred to Juana F. Gonzales' claim alone, and made no mention of Jose Leon
Gonzales'. ln the third place, the aforesaid refund claim does not set forth in detail the facts and
grounds upon which it was based and failed to apprise the respondent of her grounds for raising her
claim from P24,426.00 to P86,166.00 (see letter). Lastly, appellant Juana F. Gonzales' eleventh-
hour modification upping her refund claim from P24,426.00 to P86,166.00 was made on November
24, 1956 or eight days after the filing of her amended petition before the respondent court on
November 16, 1956, and a few days after the two-year period.

Obviously then, the requirement of prior timely claim for refund of the sum of P86,166.00 had not
been met in this case. The demand for refund must precede the suit, and this requirement is
mandatory; so much so that non-compliance therewith bars the action. 6

Appellants insist that payment of the tax was not made by them but by the respondent Collector
himself, and that, therefore, the prescriptive period should begin not from the date of such payment
but from the date appellants learned of such payment.

This contention offers no help to appellants' cause. Assuming that appellants indeed learned of their
payments only on November 24, 1953, they should have claimed the refund of P86,166.00 from said
date and before they filled their petitions with the respondent Court on November 15 or 16, 1956.
Neither could they blame the respondent Collector for failing to act on their refund claims sooner for
it was incumbent upon appellants to urge him to act expeditiously on their claims, knowing as they
did that the time for bringing an action for a refund of income tax, fixed by statute, is not extended by
the delay of the Collector of Internal Revenue in giving notice of the rejection of their claim.

Moreover, the provisions of section 306 of the Tax Code are mandatory and not subject to any
qualification and, hence, they apply regardless of the conditions under which the payment has been
made.8
With respect, therefore, to the issue of whether or not appellants' claim for refund of P86,166.00
(each) could now be entertained, we believe that the same has been barred by prescription.

Anyway, it is mainly based on the proposition that our ruling in Gutierrez vs. Court of Tax Appeals, L-
9738 and L-9771, May 31, 1957, should be abandoned, a proposition we are not disposed to
encourage.

Thus, our decision will, therefore, address itself only to appellants' earlier claim for refund in the sum
of P24,426.00. Which brings us to the question of whether or not the sum of P89,309.61 which each
of the appellants had received as share in the interest on the proceeds of the expropriation should
be taxed as capital gain or as ordinary income.

Appellants argue that the accessory follows the principal, that the amount paid in expropriation
proceedings (the principal, i.e., the profit thereon is admittedly capital gain, not ordinary income, and
that, therefore, the interest paid thereon (the accessory) is capital gain, not ordinary income.

This contention may not be sustained. In a previous case, 9 we held that "the acquisition by the
Government of private properties through the exercise of the power of eminent domain, said
properties being justly compensated, is embraced within the meaning of the term 'sale' or 'disposition
of property'" and the definition of gross income laid down by Section 29 of the Tax Code of the
Philippines. We also adhered to the view that the transfer of property through condemnation
proceedings is a sale or exchange and that profit from the transaction constitutes capital gain.

But to say that the proceeds of expropriation which is the return of capital and, therefore, a capital
gain, partakes of the same nature as interests paid thereon is far from correct; because interest is
compensation for the delay in the return of such capital. In fact, the authorities support the
conclusion that for income tax purposes, interest does not form part of the price paid by the
Government in condemnation proceedings; and may not be treated as part of the capital gain. It was
so held by the United States Supreme Court in Kieselback v. Commissioner of Internal Revenue,
317 U.S. 399.

Borrowing the words and phrases of said Court, we could say now:

The sum paid these taxpayers above the award of P1,307,973.00 was paid because of the
failure to put the award in the taxpayer's hands on the day, January 25, 1947, when the
property was taken. This additional payment was necessary to give the owners the full
equivalent of the value of the property at the time it was taken. Whether one calls it interest
on the value or payments to meet the constitutional requirement of just compensation is
immaterial. It is income paid to the taxpayers in lieu of what they might have earned on the
sum found to be the value of the property on the day the property was taken. It is not a
capital gain upon an asset sold. The sale price was the P1,307,973.00.10

The property was turned over in January, 1947. This was the sale. Title then passed. The
subsequent earnings of the property went to the Government. The transaction was as though a
purchase money lien at legal interest was retained upon the property. Such interest when paid
would, of course, be ordinary income.

Incidentally, the above Supreme Court's decision disapproved the Seaside Improvement case on
G.R. No. 163653 July 19, 2011 COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs.
FILINVEST DEVELOPMENT CORPORATION, Respondent. x - - - - - - - - - - - - - - - - - - - - -
- -x G.R. No. 167689 COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs.
FILINVEST DEVELOPMENT CORPORATION, Respondent. D E C I S I O N PEREZ, J.:
Assailed in these twin petitions for review on certiorari filed pursuant to Rule 45 of the 1997
Rules of Civil Procedure are the decisions rendered by the Court of Appeals (CA) in the
following cases: (a) Decision dated 16 December  2003 of the then Special Fifth Division in CA-
G.R. SP No. 72992;1 and, (b) Decision dated 26 January 2005 of the then Fourteenth Division in
CA-G.R. SP No. 74510.2 The Facts The owner of 80% of the outstanding shares of respondent
Filinvest Alabang, Inc. (FAI), respondent Filinvest Development Corporation (FDC) is a holding
company which also owned 67.42% of the outstanding shares of  Filinvest Land, Inc. (FLI). On
29 November 1996, FDC and FAI entered into a Deed of Exchange with FLI whereby the former
both transferred in favor of the latter parcels of land appraised at P4,306,777,000.00. In exchange
for  said parcels which were intended to facilitate development of medium-rise residential and
commercial buildings, 463,094,301 shares of stock of FLI were issued to FDC and FAI.3 As a
result of the exchange, FLI’s ownership structure was changed to the extent reflected in the
following tabular précis, viz.: Stockholder  Number and Percentage of Shares Held Prior to the
Exchange Number of   Additional Shares Issued Number and Percentage of Shares Held After
the Exchange FDC 2,537,358,000 67.42% 42,217,000 2,579,575,000 61.03% FAI 0 0
420,877,000 420,877,000 9.96% OTHERS 1,226,177,000 32.58% 0 1,226,177,000 29.01%
3,763,535,000 100% 463,094,301 4,226,629,000 (100%) On 13 January 1997, FLI requested a
ruling from the Bureau of Internal Revenue (BIR) to the effect that no gain or  loss should be
recognized in the aforesaid transfer of real properties. Acting on the request, the BIR issued
Ruling No. S-34-046-97 dated 3 February 1997, finding that the exchange is among those
contemplated under Section 34 if property is transferred to a corporation by a person in exchange
for a stock in such corporation of which as a result of such exchange said person, alone or
together with others, not exceeding four (4) persons, gains control of said corporation."5 With
the BIR’s reiteration of the foregoing ruling upon the 10 February 1997 request for clarification
filed by FLI,6 the latter, together with FDC and FAI, complied with all the requirements imposed
in the ruling.7 On various dates during the years 1996 and 1997, in the meantime, FDC also
extended advances in favor of its affiliates, namely, FAI, FLI, Davao Sugar Central Corporation
(DSCC) and Filinvest Capital, Inc. (FCI). 8  Duly evidenced by instructional letters as well as
cash and journal vouchers, said cash advances amounted to P2,557,213,942.60 in 19969 and
P3,360,889,677.48 in 1997.10 On 15 November 1996, FDC also entered into a Shareholders’
Agreement with Reco Herrera PTE Ltd. (RHPL) for the formation of a Singapore-based joint
venture company called Filinvest Asia Corporation (FAC), tasked to develop and manage FDC’s
50% ownership of its PBCom Office Tower Project (the Project). With their equity participation
in FAC respectively pegged at 60% and 40% in the Shareholders’ Agreement, FDC subscribed
to P500.7 million worth of shares in said joint venture company to RHPL’s subscription worth
P433.8 million. Having paid its subscription by executing a Deed of   Assignment transferring to
FAC a portion of its rights and interest in the Project worth P500.7 million, FDC eventually
reported a net loss of P190,695,061.00 in its Annual Income Tax Return for the taxable year
1996.11 On 3 January 2000, FDC received from the BIR a Formal Notice of Demand to pay
deficiency income and documentary stamp taxes, plus interests and compromise penalties,12 
covered by the following Assessment Notices, viz.: (a) Assessment Notice No. SP-INC-96-
00018-2000 for deficiency income taxes in the sum of  P150,074,066.27 for 1996; (b)
Assessment Notice No. SP-DST-96-00020-2000 for deficiency documentary stamp taxes in the
sum of P10,425,487.06 for 1996; (c) Assessment Notice No. SP-INC-97-00019-2000 for
deficiency income taxes in the sum of P5,716,927.03 for 1997; and (d) Assessment Notice No.
SP-DST-97-00021-2000 for  deficiency documentary stamp taxes in the sum of P5,796,699.40
for 1997.13 The foregoing deficiency taxes were assessed on the taxable gain supposedly
realized by FDC from the Deed of Exchange it executed with FAI and FLI, on the dilution
resulting from the Shareholders’ Agreement FDC executed with RHPL as well as the "arm’s-
length" interest rate and documentary stamp taxes imposable on the advances FDC extended to
its affiliates.14 On 3 January 2000, FAI similarly received from the BIR a Formal Letter of
Demand for deficiency income taxes in the sum of P1,477,494,638.23 for the year
1997.15 Covered by Assessment Notice No. SP-INC-97-0027-2000,16 said deficiency tax was
also assessed on the taxable gain purportedly realized by FAI from the Deed of Exchange it
executed with FDC and FLI.17 On 26 January 2000 or within the reglementary period of thirty
(30) days from notice of the assessment, both FDC and FAI filed their respective requests for
reconsideration/protest, on the ground that the deficiency income and documentary stamp taxes
assessed by the BIR were bereft of factual and legal basis.18 Having submitted the relevant
supporting documents pursuant to the 31 January 2000 directive from the BIR  Appellate
Division, FDC and FAI filed on 11 September 2000 a letter requesting an early resolution of
their request for reconsideration/protest on the ground that the 180 days prescribed for the
resolution thereof under Section 228 of the NIRC was going to expire on 20 September 2000.19
In view of the failure of petitioner Commissioner of Internal Revenue (CIR) to resolve their
request for  reconsideration/protest within the aforesaid period, FDC and FAI filed on 17
October 2000 a petition for review with the Court of Tax Appeals (CTA) pursuant to Section 228
of the 1997 NIRC. Docketed before said court as CTA Case No. 6182, the petition alleged,
among other matters, that as previously opined in BIR Ruling No. S-34-046-97, no taxable gain
should have been assessed from the subject Deed of Exchange since FDC and FAI collectively
gained further control of FLI as a consequence of the exchange; that correlative to the CIR's lack
of authority to impute theoretical interests on the cash advances FDC extended in favor of its
affiliates, the rule is settled that interests cannot be demanded in the absence of a stipulation to
the effect; that not being promissory notes or certificates of  obligations, the instructional letters
as well as the cash and journal vouchers evidencing said cash advances were not subject to
documentary stamp taxes; and, that no income tax may be imposed on the prospective gain from
the supposed appreciation of FDC's shareholdings in FAC. As a consequence, FDC and FAC
both prayed that the subject assessments for deficiency income and documentary stamp taxes for
the years 1996 and 1997 be cancelled and annulled.20 On 4 December 2000, the CIR filed its
answer, claiming that the transfer of property in question should not be considered tax free since,
with the resultant diminution of its shares in FLI, FDC did not gain further control of said
corporation. Likewise calling attention to the fact that the cash advances FDC extended to its
affiliates were interest free despite the interest bearing loans it obtained from banking
institutions, the CIR invoked Section 43 of the old NIRC which, as implemented by Revenue
Regulations No. 2, Section 179 (b) and (c), gave him "the power to allocate, distribute or
apportion income or deductions between or among such organizations, trades or business in
order to prevent evasion of taxes." The CIR justified the imposition of documentary stamp taxes
on the instructional letters as well as cash and journal vouchers for said cash advances on the
strength of Section 180 of the NIRC and . not they are evidenced by a formal agreement or by
mere office memo. The CIR also argued that FDC realized taxable gain arising from the dilution
of its shares in FAC as a result of its Shareholders' Agreement with RHPL.21  At the pre-trial
conference, the parties filed a Stipulation of Facts, Documents and Issues22 which was admitted
in the 16 February 2001 resolution issued by the CTA. With the further admission of the Formal
Offer of Documentary Evidence subsequently filed by FDC and FAI23 and the conclusion of the
testimony of Susana Macabelda anent the cash advances FDC extended in favor of its
affiliates,24  the CTA went on to render the Decision dated 10 September 2002 which, with the
exception of the deficiency income tax on the interest income FDC supposedly realized from the
advances it extended in favor of its affiliates, cancelled the rest of deficiency income and
documentary stamp taxes assessed against FDC and FAI for the years 1996 and 1997,25 thus:
WHEREFORE, in view of all the foregoing, the court finds the instant petition partly
meritorious. Accordingly,  Assessment Notice No. SP-INC-96-00018-2000 imposing deficiency
income tax on FDC for taxable year 1996,  Assessment Notice No. SP-DST-96-00020-2000 and
SP-DST-97-00021-2000 imposing deficiency documentary stamp tax on FDC for taxable years
1996 and 1997, respectively and Assessment Notice No. SP-INC-97-0027-2000 imposing
deficiency income tax on FAI for the taxable year 1997 are hereby CANCELLED and SET
ASIDE. However, [FDC] is hereby ORDERED to PAY the amount of P5,691,972.03 as
deficiency income tax for taxable year  1997. In addition, petitioner is also ORDERED to PAY
20% delinquency interest computed from February 16, 2000 until full payment thereof pursuant
to Section 249 (c) (3) of the Tax Code.26 Finding that the collective increase of the equity
participation of FDC and FAI in FLI rendered the gain derived from the exchange tax-free, the
CTA also ruled that the increase in the value of FDC's shares in FAC did not result in economic
advantage in the absence of actual sale or conversion thereof. While likewise finding that the
documents evidencing the cash advances FDC extended to its affiliates cannot be considered as
loan agreements that are subject to documentary stamp tax, the CTA enunciated, however, that
the CIR was justified in assessing undeclared interests on the same cash advances pursuant to his
authority under Section 43 of the NIRC in order to forestall tax evasion. For persuasive effect,
the CTA referred to the equivalent provision in the Internal Revenue Code of the United States
(IRC-US), i.e., Sec. 482, as implemented by Section 1.482-2 of 1965-1969 Regulations of the
Law of  Federal Income Taxation.27 Dissatisfied with the foregoing decision, FDC filed on 5
November 2002 the petition for review docketed before the CA as CA-G.R. No. 72992, pursuant
to Rule 43 of the 1997 Rules of Civil Procedure. Calling attention to the fact that the cash
advances it extended to its affiliates were interest-free in the absence of the express stipulation
on interest required under Article 1956 of the Civil Code, FDC questioned the imposition of an
arm's-length interest rate thereon on the ground, among others, that the CIR's authority under
Section 43 of the NIRC: (a) does not include the power to impute imaginary interest on said
transactions; (b) is directed only against controlled taxpayers and not against mother or holding
corporations; and, (c) can only be invoked in cases of understatement of taxable net income or
evident tax evasion.28 Upholding FDC's position, the CA's then Special Fifth Division rendered
the herein assailed decision dated 16 December 2003,29 the decretal portion of which states:
WHEREFORE, premises considered, the instant petition is hereby GRANTED. The assailed
Decision dated September 10, 2002 rendered by the Court of Tax Appeals in CTA Case No.
6182 directing petitioner Filinvest Development Corporation to pay the amount of P5,691,972.03
representing deficiency income tax on allegedly undeclared interest income for the taxable year
1997, plus 20% delinquency interest computed from February 16, 2000 until full payment
thereof is REVERSED and SET ASIDE and, a new one entered annulling Assessment Notice
No. SP-INC-97-00019-2000 imposing deficiency income tax on petitioner for taxable year 1997.
No pronouncement as to costs.30 With the denial of its partial motion for reconsideration of the
same 11 December 2002 resolution issued by the CTA,31 the CIR also filed the petition for
review docketed before the CA as CA-G.R. No. 74510. In essence, the CIR argued that the CTA
reversibly erred in cancelling the assessment notices: (a) for deficiency income taxes on the
exchange of property between FDC, FAI and FLI; (b) for deficiency documentary stamp taxes
on the documents evidencing FDC's cash advances to its affiliates; and (c) for deficiency income
tax on the gain FDC purportedly realized from the increase of the value of its shareholdings in
FAC.32 The foregoing petition was, however, denied due course and dismissed for lack of merit
in the herein assailed decision dated 26 January 200533 rendered by the CA's then Fourteenth
Division, upon the following findings and conclusions, to wit: 1. As affirmed in the 3 February
1997 BIR Ruling No. S-34-046-97, the 29 November 1996 Deed of Exchange resulted in the
combined control by FDC and FAI of more than 51% of the outstanding shares of FLI, hence, no
taxable gain can be recognized from the transaction under Section 34 (c) (2) of the old NIRC; . to
its affiliates are not subject to documentary stamp taxes pursuant to BIR Ruling No. 116-98,
dated 30 July 1998, since they do not partake the nature of loan agreements; 3. Although BIR
Ruling No. 116-98 had been subsequently modified by BIR Ruling No. 108-99, dated 15 July
1999, to the effect that documentary stamp taxes are imposable on inter-office memos
evidencing cash advances similar to those extended by FDC, said latter ruling cannot be given
retroactive application if to do so would be prejudicial to the taxpayer; 4. FDC's alleged gain
from the increase of its shareholdings in FAC as a consequence of the Shareholders'  Agreement
it executed with RHPL cannot be considered taxable income since, until actually converted thru
sale or disposition of said shares, they merely represent unrealized increase in capital.34
Respectively docketed before this Court as G.R. Nos. 163653 and 167689, the CIR's petitions for
review on certiorari assailing the 16 December 2003 decision in CA-G.R. No. 72992 and the 26
January 2005 decision in CAG.R. SP No. 74510 were consolidated pursuant to the 1 March 2006
resolution issued by this Court’s Third Division. The Issues In G.R. No. 163653, the CIR urges
the grant of its petition on the following ground: THE COURT OF APPEALS ERRED IN
REVERSING THE DECISION OF THE COURT OF TAX APPEALS AND IN HOLDING
THAT THE ADVANCES EXTENDED BY RESPONDENT TO ITS AFFILIATES ARE NOT
SUBJECT TO INCOME TAX.35 In G.R. No. 167689, on the other hand, petitioner proffers the
following issues for resolution: I THE HONORABLE COURT OF APPEALS COMMITTED
GRAVE ABUSE OF DISCRETION IN HOLDING THAT THE EXCHANGE OF SHARES OF
STOCK FOR PROPERTY AMONG FILINVEST DEVELOPMENT CORPORATION (FDC),
FILINVEST ALABANG, INCORPORATED (FAI) AND FILINVEST LAND
INCORPORATED (FLI) MET ALL THE REQUIREMENTS FOR THE NON-RECOGNITION
OF TAXABLE GAIN UNDER SECTION 34 (c) (2) OF THE OLD NATIONAL INTERNAL
REVENUE CODE (NIRC) (NOW SECTION 40 (C) (2) (c) OF THE NIRC. II THE
HONORABLE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN HOLDING
THAT THE LETTERS OF INSTRUCTION OR CASH VOUCHERS EXTENDED BY FDC
TO ITS AFFILIATES ARE NOT DEEMED LOAN AGREEMENTS SUBJECT TO
DOCUMENTARY STAMP TAXES UNDER SECTION 180 OF THE NIRC. III THE
HONORABLE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT GAIN ON
DILUTION AS A RESULT OF THE INCREASE IN THE VALUE OF FDC’S
SHAREHOLDINGS IN FAC IS NOT TAXABLE.36 The Court’s Ruling While the petition in
G.R. No. 163653 is bereft of merit, we find the CIR’s petition in G.R. No. 167689 impressed
with partial merit. In G.R. No. 163653, the CIR argues that the CA erred in reversing the CTA’s
finding that theoretical interests can be imputed on the advances FDC extended to its affiliates in
1996 and 1997 considering that, for said purpose, FDC resorted to interest-bearing fund
borrowings from commercial banks. Since considerable interest expenses were deducted by FDC
when said funds were borrowed, the CIR theorizes that interest income should likewise be
declared when the same funds were sourced for the advances FDC extended to its affiliates.
Invoking Section 43 of  the 1993 NIRC in relation to Section 179(b) of Revenue Regulation No.
2, the CIR maintains that it is vested with the power to allocate, distribute or apportion income or
deductions between or among controlled organizations, trades or businesses even in the absence
of fraud, since said power is intended "to prevent evasion of taxes or clearly to reflect the income
of any such organizations, trades or businesses." In addition, the CIR asseverates that the CA
should have accorded weight and respect to the findings of the CTA which, as the specialized
court dedicated to the study and consideration of tax matters, can take judicial notice of US
income tax laws and regulations.37  Admittedly, Section 43 of the 1993 NIRC38 provides that,
"(i)n any case of two or more organizations, trades or  businesses (whether or not incorporated
and whether or not organized in the Philippines) owned or controlled directly or indirectly by the
same interests, the Commissioner of Internal Revenue is authorized to distribute, apportion or
allocate gross income or deductions between or among such organization, trade or business, if he
determines that such distribution, apportionment or allocation is necessary in order to prevent
evasion of taxes or  clearly to reflect the income of any such organization, trade or business." In
amplification of the equivalent provision39 under Commonwealth Act No. 466,40 Sec. 179(b) of
Revenue Regulation No. 2 states as follows: Determination of the taxable net income of
controlled taxpayer. – (A) DEFINITIONS. – When used in this section – (1) The term
"organization" includes any kind, whether it be a sole proprietorship, a partnership, a trust, an
estate, or a corporation or association, irrespective of the place where organized, where operated,
or where its trade or business is conducted, and regardless of whether domestic or foreign,
whether  exempt or taxable, or whether affiliated or not. (2) The terms "trade" or "business"
include any trade or business activity of any kind, regardless of  whether or where organized,
whether owned individually or otherwise, and regardless of the place where carried on. (3) The
term "controlled" includes any kind of control, direct or indirect, whether legally enforceable,
and however exercisable or exercised. It is the reality of the control which is decisive, not its
form or  mode of exercise. A presumption of control arises if income or deductions have been
arbitrarily shifted. (4) The term "controlled taxpayer" means any one of two or more
organizations, trades, or businesses owned or controlled directly or indirectly by the same
interests. (5) The term "group" and "group of controlled taxpayers" means the organizations,
trades or  businesses owned or controlled by the same interests. (6) The term "true net income"
means, in the case of a controlled taxpayer, the net income (or as the case may be, any item or
element affecting net income) which would have resulted to the controlled taxpayer, had it in the
conduct of its affairs (or, as the case may be, any item or element affecting net income) which
would have resulted to the controlled taxpayer, had it in the conduct of its affairs (or, as the case
may be, in the particular contract, transaction, arrangement or other act) dealt with the other 
members or members of the group at arm’s length. It does not mean the income, the deductions,
or the item or element of either, resulting to the controlled taxpayer by reason of the particular
contract, transaction, or arrangement, the controlled taxpayer, or the interest controlling it, chose
to make (even though such contract, transaction, or arrangement be legally binding upon the
parties thereto). (B) SCOPE AND PURPOSE. - The purpose of Section 44 of the Tax Code is to
place a controlled taxpayer  on a tax parity with an uncontrolled taxpayer, by determining,
according to the standard of an uncontrolled taxpayer, the true net income from the property and
business of a controlled taxpayer. The interests controlling a group of controlled taxpayer are
assumed to have complete power to cause each controlled taxpayer so to conduct its affairs that
its transactions and accounting records truly reflect the net income from the property and
business of each of the controlled taxpayers. If, however, this has not been done and the taxable
net income are thereby understated, the statute contemplates that the Commissioner of Internal
Revenue shall intervene, and, by making such distributions, apportionments, or allocations as he
may deem necessary of gross income or deductions, or of any item or element affecting net
income, between or among the controlled taxpayers constituting the group, shall determine the
true net income of each controlled taxpayer. The standard to be applied in every case is that of an
uncontrolled taxpayer. Section 44 grants no right to a controlled taxpayer to apply its provisions
at will, nor does it grant any right to compel the Commissioner of Internal Revenue to apply its
provisions. (C) APPLICATION – Transactions between controlled taxpayer and another will be
subjected to special scrutiny to ascertain whether the common control is being used to reduce,
avoid or escape taxes. In determining the true net income of a controlled taxpayer, the
Commissioner of Internal Revenue is not restricted to the case of improper accounting, to the
case of a fraudulent, colorable, or sham transaction, or to the case of a device designed to reduce
or avoid tax by shifting or distorting income or deductions. The authority to determine true net
income extends to any case in which either by inadvertence or design the taxable net income in
whole or in part, of a controlled taxpayer, is other than it would have been had the taxpayer in
the conduct of his affairs been an uncontrolled taxpayer dealing at arm’s length with another 
uncontrolled taxpayer. 41 and (4) of the foregoing provision, it would appear that FDC and its
affiliates come within the purview of Section 43 of the 1993 NIRC. Aside from owning
significant portions of the shares of stock of FLI, FAI, DSCC and FCI, the fact that FDC
extended substantial sums of money as cash advances to its said affiliates for the purpose of
providing them financial assistance for their operational and capital expenditures seemingly
indicate that the situation sought to be addressed by the subject provision exists. From the tenor
of paragraph (c) of Section 179 of Revenue Regulation No. 2, it may also be seen that the CIR's
power to distribute, apportion or allocate gross income or  deductions between or among
controlled taxpayers may be likewise exercised whether or not fraud inheres in the transaction/s
under scrutiny. For as long as the controlled taxpayer's taxable income is not reflective of that
which it would have realized had it been dealing at arm's length with an uncontrolled taxpayer,
the CIR can make the necessary rectifications in order to prevent evasion of taxes. Despite the
broad parameters provided, however, we find that the CIR's powers of distribution,
apportionment or  allocation of gross income and deductions under Section 43 of the 1993 NIRC
and Section 179 of Revenue Regulation No. 2 does not include the power to impute "theoretical
interests" to the controlled taxpayer's transactions. Pursuant to Section 28 of the 1993
NIRC,42 after all, the term "gross income" is understood to mean all income from whatever
source derived, including, but not limited to the following items: compensation for services,
including fees, commissions, and similar items; gross income derived from business; gains
derived from dealings in property;" interest; rents; royalties; dividends; annuities; prizes and
winnings; pensions; and partner’s distributive share of the gross income of general professional
partnership.43  While it has been held that the phrase "from whatever source derived" indicates a
legislative policy to include all income not expressly exempted within the class of taxable
income under our laws, the term "income" has been variously interpreted to mean "cash received
or its equivalent", "the amount of money coming to a person within a specific time" or
"something distinct from principal or  capital."44 Otherwise stated, there must be proof of the
actual or, at the very least, probable receipt or realization by the controlled taxpayer of the item
of gross income sought to be distributed, apportioned or allocated by the CIR. Our circumspect
perusal of the record yielded no evidence of actual or possible showing that the advances FDC
extended to its affiliates had resulted to the interests subsequently assessed by the CIR. For all its
harping upon the supposed fact that FDC had resorted to borrowings from commercial banks, the
CIR had adduced no concrete proof  that said funds were, indeed, the source of the advances the
former provided its affiliates. While admitting that FDC obtained interest-bearing loans from
commercial banks,45  Susan Macabelda - FDC's Funds Management Department Manager who
was the sole witness presented before the CTA - clarified that the subject advances were sourced
from the corporation's rights offering in 1995 as well as the sale of its investment in Bonifacio
Land in 1997.46 More significantly, said witness testified that said advances: (a) were extended
to give FLI, FAI, DSCC and FCI financial assistance for their operational and capital
expenditures; and, (b) were all temporarily in nature since they were repaid within the duration
of one week to three months and were evidenced by mere journal entries, cash vouchers and
instructional letters."47 Even if we were, therefore, to accord precipitate credulity to the CIR's
bare assertion that FDC had deducted substantial interest expense from its gross income, there
would still be no factual basis for the imputation of  theoretical interests on the subject advances
and assess deficiency income taxes thereon. More so, when it is borne in mind that, pursuant to
Article 1956 of the Civil Code of the Philippines, no interest shall be due unless it has been
expressly stipulated in writing. Considering that taxes, being burdens, are not to be presumed
beyond what the applicable statute expressly and clearly declares,48 the rule is likewise settled
that tax statutes must be construed strictly against the government and liberally in favor of the
taxpayer.49 Accordingly, the general rule of requiring adherence to the letter in construing
statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be
extended by implication.50 While it is true that taxes are the lifeblood of the government, it has
been held that their assessment and collection should be in accordance with law as any
arbitrariness will negate the very reason for government itself.51 In G.R. No. 167689, we also
find a dearth of merit in the CIR's insistence on the imposition of deficiency income taxes on the
transfer FDC and FAI effected in exchange for the shares of stock of FLI. With respect to the
Deed of  Exchange executed between FDC, FAI and FLI, Section 34 (c) (2) of the 1993 NIRC
pertinently provides as follows: Sec. 34. Determination of amount of and recognition of gain or
loss.- x x x x (c) Exception – x x x x No gain or loss shall also be recognized if property is
transferred to a corporation by a person in exchange for  shares of stock in such corporation of
which as a result of such exchange said person, alone or together with others, not exceeding four
persons, gains control of said corporation; Provided, That stocks issued for services shall not be .
As even admitted in the 14 February 2001 Stipulation of Facts submitted by the parties,52 the
requisites for the nonrecognition of gain or loss under the foregoing provision are as follows: (a)
the transferee is a corporation; (b) the transferee exchanges its shares of stock for property/ies of
the transferor; (c) the transfer is made by a person, acting alone or together with others, not
exceeding four persons; and, (d) as a result of the exchange the transferor, alone or together with
others, not exceeding four, gains control of the transferee.53 Acting on the 13 January 1997
request filed by FLI, the BIR had, in fact, acknowledged the concurrence of the foregoing
requisites in the Deed of  Exchange the former executed with FDC and FAI by issuing BIR
Ruling No. S-34-046-97.54  With the BIR's reiteration of said ruling upon the request for
clarification filed by FLI,55 there is also no dispute that said transferee and transferors
subsequently complied with the requirements provided for the non-recognition of gain or loss
from the exchange of property for tax, as provided under Section 34 (c) (2) of the 1993 NIRC.56
Then as now, the CIR argues that taxable gain should be recognized for the exchange
considering that FDC's controlling interest in FLI was actually decreased as a result thereof. For
said purpose, the CIR calls attention to the fact that, prior to the exchange, FDC owned
2,537,358,000 or 67.42% of FLI's 3,763,535,000 outstanding capital stock. Upon the issuance of
443,094,000 additional FLI shares as a consequence of the exchange and with only 42,217,000
thereof accruing in favor of FDC for a total of 2,579,575,000 shares, said corporation’s
controlling interest was supposedly reduced to 61%.03 when reckoned from the transferee's
aggregate 4,226,629,000 outstanding shares. Without owning a share from FLI's initial
3,763,535,000 outstanding shares, on the other hand, FAI's acquisition of 420,877,000 FLI
shares as a result of the exchange purportedly resulted in its control of only 9.96% of said
transferee corporation's 4,226,629,000 outstanding shares. On the principle that the transaction
did not qualify as a tax-free exchange under Section 34 (c) (2) of the 1993 NIRC, the CIR
asseverates that taxable gain in the sum of P263,386,921.00 should be recognized on the part of
FDC and in the sum of P3,088,711,367.00 on the part of FAI.57 The paucity of merit in the
CIR's position is, however, evident from the categorical language of Section 34 (c) (2) of  the
1993 NIRC which provides that gain or loss will not be recognized in case the exchange of
property for stocks results in the control of the transferee by the transferor, alone or with other
transferors not exceeding four persons. Rather than isolating the same as proposed by the CIR,
FDC's 2,579,575,000 shares or 61.03% control of FLI's 4,226,629,000 outstanding shares should,
therefore, be appreciated in combination with the 420,877,000 new shares issued to FAI which
represents 9.96% control of said transferee corporation. Together FDC's 2,579,575,000 shares
(61.03%) and FAI's 420,877,000 shares (9.96%) clearly add up to 3,000,452,000 shares or
70.99% of FLI's 4,226,629,000 shares. Since the term "control" is clearly defined as "ownership
of stocks in a corporation possessing at least fifty-one percent of the total voting power of classes
of stocks entitled to one vote" under Section 34 (c) (6) [c] of the 1993 NIRC, the exchange of
property for stocks between FDC FAI and FLI clearly qualify as a tax-free transaction under
paragraph 34 (c) (2) of the same provision.  Against the clear tenor of Section 34(c) (2) of the
1993 NIRC, the CIR cites then Supreme Court Justice Jose Vitug and CTA Justice Ernesto D.
Acosta who, in their book Tax Law and Jurisprudence, opined that said provision could be
inapplicable if control is already vested in the exchangor prior to exchange.58 Aside from the
fact that that the 10 September 2002 Decision in CTA Case No. 6182 upholding the tax-exempt
status of the exchange between FDC, FAI and FLI was penned by no less than Justice Acosta
himself,59 FDC and FAI significantly point out that said authors have acknowledged that the
position taken by the BIR is to the effect that "the law would apply even when the exchangor
already has control of the corporation at the time of the exchange."60 This was confirmed when,
apprised in FLI's request for clarification about the change of percentage of ownership of its
outstanding capital stock, the BIR opined as follows: Please be informed that regardless of the
foregoing, the transferors, Filinvest Development Corp. and Filinvest  Alabang, Inc. still gained
control of Filinvest Land, Inc. The term 'control' shall mean ownership of stocks in a corporation
by possessing at least 51% of the total voting power of all classes of stocks entitled to vote.
Control is determined by the amount of stocks received, i.e., total subscribed, whether for
property or for services by the transferor or transferors. In determining the 51% stock ownership,
only those persons who transferred property for  stocks in the same transaction may be counted
up to the maximum of five (BIR Ruling No. 547-93 dated December  29, 1993.61  At any rate, it
also appears that the supposed reduction of FDC's shares in FLI posited by the CIR is more
apparent than real. As the uncontested owner of 80% of the outstanding shares of FAI, it cannot
be gainsaid that FDC ideally controls the same percentage of the 420,877,000 shares issued to its
said co-transferor which, by itself, represents 7.968% of the outstanding shares of FLI.
Considered alongside FDC's 61.03% control of FLI as a consequence of  the 29 November 1996
Deed of Transfer, said 7.968% add up to an aggregate of 68.998% of said transferee
corporation's outstanding shares of stock which is evidently still greater than the 67.42% FDC
initially held prior to Issues they submitted to the CTA. Inasmuch as the combined ownership of
FDC and FAI of FLI's outstanding capital stock adds up to a total of 70.99%, it stands to reason
that neither of said transferors can be held liable for  deficiency income taxes the CIR assessed
on the supposed gain which resulted from the subject transfer. On the other hand, insofar as
documentary stamp taxes on loan agreements and promissory notes are concerned, Section 180
of the NIRC provides follows: Sec. 180. Stamp tax on all loan agreements, promissory notes,
bills of exchange, drafts, instruments and securities issued by the government or any of its
instrumentalities, certificates of deposit bearing interest and others not payable on sight or
demand. – On all loan agreements signed abroad wherein the object of the contract is located or 
used in the Philippines; bill of exchange (between points within the Philippines), drafts,
instruments and securities issued by the Government or any of its instrumentalities or certificates
of deposits drawing interest, or orders for the payment of any sum of money otherwise than at
sight or on demand, or on all promissory notes, whether negotiable or non-negotiable, except
bank notes issued for circulation, and on each renewal of any such note, there shall be collected a
documentary stamp tax of Thirty centavos (P0.30) on each two hundred pesos, or fractional part
thereof, of the face value of any such agreement, bill of exchange, draft, certificate of deposit or
note: Provided, That only one documentary stamp tax shall be imposed on either loan agreement,
or promissory notes issued to secure such loan, whichever will yield a higher tax: Provided
however, That loan agreements or promissory notes the aggregate of which does not exceed Two
hundred fifty thousand pesos (P250,000.00) executed by an individual for his purchase on
installment for his personal use or that of his family and not for business, resale, barter or hire of
a house, lot, motor vehicle, appliance or furniture shall be exempt from the payment of
documentary stamp tax provided under this Section. When read in conjunction with Section 173
of the 1993 NIRC,63 the foregoing provision concededly applies to "(a)ll loan agreements,
whether made or signed in the Philippines, or abroad when the obligation or right arises from
Philippine sources or the property or object of the contract is located or used in the Philippines."
Correlatively, Section 3 (b) and Section 6 of Revenue Regulations No. 9-94 provide as follows:
Section 3. Definition of Terms. – For purposes of these Regulations, the following term shall
mean: (b) 'Loan agreement' – refers to a contract in writing where one of the parties delivers to
another money or other  consumable thing, upon the condition that the same amount of the same
kind and quality shall be paid. The term shall include credit facilities, which may be evidenced
by credit memo, advice or drawings. The terms 'Loan Agreement" under Section 180 and
"Mortgage' under Section 195, both of the Tax Code, as amended, generally refer to distinct and
separate instruments. A loan agreement shall be taxed under Section 180, while a deed of
mortgage shall be taxed under Section 195." "Section 6. Stamp on all Loan Agreements. – All
loan agreements whether made or signed in the Philippines, or  abroad when the obligation or
right arises from Philippine sources or the property or object of the contract is located in the
Philippines shall be subject to the documentary stamp tax of thirty centavos (P0.30) on each two
hundred pesos, or fractional part thereof, of the face value of any such agreements, pursuant to
Section 180 in relation to Section 173 of the Tax Code. In cases where no formal agreements or
promissory notes have been executed to cover credit facilities, the documentary stamp tax shall
be based on the amount of drawings or availment of the facilities, which may be evidenced by
credit/debit memo, advice or drawings by any form of check or withdrawal slip, under Section
180 of  the Tax Code.  Applying the aforesaid provisions to the case at bench, we find that the
instructional letters as well as the journal and cash vouchers evidencing the advances FDC
extended to its affiliates in 1996 and 1997 qualified as loan agreements upon which documentary
stamp taxes may be imposed. In keeping with the caveat attendant to every BIR Ruling to the
effect that it is valid only if the facts claimed by the taxpayer are correct, we find that the CA
reversibly erred in utilizing BIR Ruling No. 116-98, dated 30 July 1998 which, strictly speaking,
could be invoked only by ASB Development Corporation, the taxpayer who sought the same. In
said ruling, the CIR opined that documents like those evidencing the advances FDC extended to
its affiliates are not subject to documentary stamp tax, to wit: On the matter of whether or not the
inter-office memo covering the advances granted by an affiliate company is subject to
documentary stamp tax, it is informed that nothing in Regulations No. 26 (Documentary Stamp
Tax Regulations) and Revenue Regulations No. 9-94 states that the same is subject to
documentary stamp tax. Such being the case, said inter-office memo evidencing the lendings or
borrowings which is neither a form of promissory note nor a certificate of indebtedness issued by
the corporation-affiliate or a certificate of obligation, which are, more 175 of the Tax Code of
1997, respectively. Rather, the inter-office memo is being prepared for accounting purposes only
in order to avoid the co-mingling of funds of the corporate affiliates.1avvphi1 In its appeal
before the CA, the CIR argued that the foregoing ruling was later modified in BIR Ruling No.
108-99 dated 15 July 1999, which opined that inter-office memos evidencing lendings or
borrowings extended by a corporation to its affiliates are akin to promissory notes, hence, subject
to documentary stamp taxes.64 In brushing aside the foregoing argument, however, the CA
applied Section 246 of the 1993 NIRC65 from which proceeds the settled principle that rulings,
circulars, rules and regulations promulgated by the BIR have no retroactive application if to so
apply them would be prejudicial to the taxpayers.66  Admittedly, this rule does not apply: (a)
where the taxpayer deliberately misstates or omits material facts from his return or in any
document required of him by the Bureau of Internal Revenue; (b) where the facts subsequently
gathered by the Bureau of Internal Revenue are materially different from the facts on which the
ruling is based; or (c) where the taxpayer acted in bad faith.67 Not being the taxpayer who, in the
first instance, sought a ruling from the CIR, however, FDC cannot invoke the foregoing principle
on non-retroactivity of BIR rulings. Viewed in the light of the foregoing considerations, we find
that both the CTA and the CA erred in invalidating the assessments issued by the CIR for the
deficiency documentary stamp taxes due on the instructional letters as well as the journal and
cash vouchers evidencing the advances FDC extended to its affiliates in 1996 and 1997. In
Assessment Notice No. SP-DST-96-00020-2000, the CIR correctly assessed the sum of
P6,400,693.62 for  documentary stamp tax, P3,999,793.44 in interests and P25,000.00 as
compromise penalty, for a total of P10,425,487.06. Alongside the sum of P4,050,599.62 for
documentary stamp tax, the CIR similarly assessed P1,721,099.78 in interests and P25,000.00 as
compromise penalty in Assessment Notice No. SP-DST-97-00021- 2000 or a total of
P5,796,699.40. The imposition of deficiency interest is justified under Sec. 249 (a) and (b) of the
NIRC which authorizes the assessment of the same "at the rate of twenty percent (20%), or such
higher rate as may be prescribed by regulations", from the date prescribed for the payment of the
unpaid amount of tax until full payment.68 The imposition of the compromise penalty is, in turn,
warranted under Sec. 25069 of the NIRC which prescribes the imposition thereof "in case of
each failure to file an information or return, statement or list, or keep any record or supply any
information required" on the date prescribed therefor. To our mind, no reversible error can,
finally, be imputed against both the CTA and the CA for invalidating the  Assessment Notice
issued by the CIR for the deficiency income taxes FDC is supposed to have incurred as a
consequence of the dilution of its shares in FAC. Anent FDC’s Shareholders’ Agreement with
RHPL, the record shows that the parties were in agreement about the following factual
antecedents narrated in the 14 February 2001 Stipulation of Facts, Documents and Issues they
submitted before the CTA,70 viz.: "1.11. On November 15, 1996, FDC entered into a
Shareholders’ Agreement (‘SA’) with Reco Herrera Pte. Ltd. (‘RHPL’) for the formation of a
joint venture company named Filinvest Asia Corporation (‘FAC’) which is based in Singapore
(pars. 1.01 and 6.11, Petition, pars. 1 and 7, Answer). 1.12. FAC, the joint venture company
formed by FDC and RHPL, is tasked to develop and manage the 50% ownership interest of FDC
in its PBCom Office Tower Project (‘Project’) with the Philippine Bank of  Communications
(par. 6.12, Petition; par. 7, Answer). 1.13. Pursuant to the SA between FDC and RHPL, the
equity participation of FDC and RHPL in FAC was 60% and 40% respectively. 1.14. In
accordance with the terms of the SA, FDC subscribed to P500.7 million worth of shares of stock
representing a 60% equity participation in FAC. In turn, RHPL subscribed to P433.8 million
worth of shares of  stock of FAC representing a 40% equity participation in FAC. 1.15. In
payment of its subscription in FAC, FDC executed a Deed of Assignment transferring to FAC a
portion of FDC’s right and interests in the Project to the extent of P500.7 million. 1.16. FDC
reported a net loss of P190,695,061.00 in its Annual Income Tax Return for the taxable year 
1996."71  Alongside the principle that tax revenues are not intended to be liberally
construed,72 the rule is settled that the findings and conclusions of the CTA are accorded great
respect and are generally upheld by this Court, unless there is a clear showing of a reversible
error or an improvident exercise of authority.73 Absent showing of such error here, we find no
strong and cogent reasons to depart from said rule with respect to the CTA's finding that no
deficiency income tax can be assessed on the gain on the supposed dilution and/or increase in the
value of FDC's shareholdings in FAC which the CIR, at any rate, failed to establish. Bearing in
mind the meaning of "gross income" as above discussed, it cannot be gainsaid, even then, that a
mere increase or appreciation in the value of said shares cannot be considered income for
taxation purposes. Since "a mere advance in the value of the property of a person or corporation
in no sense constitute the ‘income’ specified in the revenue law," it has been held in the early
case of Fisher vs. Trinidad,74 that it "constitutes and can be treated merely as an increase of
capital." Hence, the CIR has no factual and legal basis in assessing income tax on the increase in
the value of FDC's shareholdings in FAC until the same is actually sold at a profit.
WHEREFORE, premises considered, the CIR's petition for review on certiorari in G.R. No.
163653 is DENIED for  lack of merit and the CA’s 16 December 2003 Decision in G.R. No.
72992 is AFFIRMED in toto. The CIR’s petition in G.R. No. 167689 is PARTIALLY
GRANTED and the CA’s 26 January 2005 Decision in CA-G.R. SP No. 74510 is MODIFIED.
Accordingly, Assessment Notices Nos. SP-DST-96-00020-2000 and SP-DST-97-00021-2000
issued for deficiency documentary stamp taxes due on the instructional letters as well as journal
and cash vouchers evidencing the advances FDC extended to its affiliates are declared valid. The
cancellation of Assessment Notices Nos. SP-INC-96-00018-2000, SP-INC-97-00019-2000 and
SP-INC-97- 0027-2000 issued for deficiency income assessed on (a) the "arms-length" interest
from said advances; (b) the gain from FDC’s Deed of Exchange with FAI and FLI; and (c)
income from the dilution resulting from FDC’s Shareholders’  Agreement with RHPL is,
however, upheld. SO ORDERED. JOSE PORTUGAL PEREZ  Associate Justice WE CONCUR:
RENATO C. CORONA Chief Justice ANTONIO T. CARPIO  Associate Justice PRESBITERO
J. VELASCO, JR.  Associate Justice TERESITA J. LEONARDO-DE CASTRO  Associate
Justice ARTURO D. BRION  Associate Justice DIOSDADO M. PERALTA  Associate Justice
LUCAS P. BERSAMIN  Associate Justice MARIANO C. DEL CASTILLO  Associate Justice
ROBERTO A. ABAD  Associate Justice MARTIN S. VILLARAMA, JR.  Associate Justice
JOSE CATRAL MENDOZA  Associate Justice (On Leave) MARIA LOURDES P. A. SERENO
Associate Justice C E R T I F I C A T I O N Pursuant to Section 13, Article VIII of the
Constitution, it is hereby certified that th G.R. No. 163653 July 19, 2011 COMMISSIONER OF
INTERNAL REVENUE, Petitioner, vs. FILINVEST DEVELOPMENT
CORPORATION, Respondent. x - - - - - - - - - - - - - - - - - - - - - - -x G.R. No. 167689
COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. FILINVEST DEVELOPMENT
CORPORATION, Respondent. D E C I S I O N PEREZ, J.:  Assailed in these twin petitions for
review on certiorari filed pursuant to Rule 45 of the 1997 Rules of Civil Procedure are the
decisions rendered by the Court of Appeals (CA) in the following cases: (a) Decision dated 16
December  2003 of the then Special Fifth Division in CA-G.R. SP No. 72992;1 and, (b) Decision
dated 26 January 2005 of the then Fourteenth Division in CA-G.R. SP No. 74510.2 The Facts
The owner of 80% of the outstanding shares of respondent Filinvest Alabang, Inc. (FAI),
respondent Filinvest Development Corporation (FDC) is a holding company which also owned
67.42% of the outstanding shares of  Filinvest Land, Inc. (FLI). On 29 November 1996, FDC and
FAI entered into a Deed of Exchange with FLI whereby the former both transferred in favor of
the latter parcels of land appraised at P4,306,777,000.00. In exchange for  said parcels which
were intended to facilitate development of medium-rise residential and commercial buildings,
463,094,301 shares of stock of FLI were issued to FDC and FAI.3 As a result of the exchange,
FLI’s ownership structure was changed to the extent reflected in the following tabular précis,
viz.: Stockholder  Number and Percentage of Shares Held Prior to the Exchange Number of 
Additional Shares Issued Number and Percentage of Shares Held After the Exchange FDC
2,537,358,000 67.42% 42,217,000 2,579,575,000 61.03% FAI 0 0 420,877,000 420,877,000
9.96% OTHERS 1,226,177,000 32.58% 0 1,226,177,000 29.01% 3,763,535,000 100%
463,094,301 4,226,629,000 (100%) On 13 January 1997, FLI requested a ruling from the Bureau
of Internal Revenue (BIR) to the effect that no gain or  loss should be recognized in the aforesaid
transfer of real properties. Acting on the request, the BIR issued Ruling No. S-34-046-97 dated 3
February 1997, finding that the exchange is among those contemplated under Section 34 if
property is transferred to a corporation by a person in exchange for a stock in such corporation of
which as a result of such exchange said person, alone or together with others, not exceeding four
(4) persons, gains control of said corporation."5 With the BIR’s reiteration of the foregoing
ruling upon the 10 February 1997 request for clarification filed by FLI,6 the latter, together with
FDC and FAI, complied with all the requirements imposed in the ruling.7 On various dates
during the years 1996 and 1997, in the meantime, FDC also extended advances in favor of its
affiliates, namely, FAI, FLI, Davao Sugar Central Corporation (DSCC) and Filinvest Capital,
Inc. (FCI). 8  Duly evidenced by instructional letters as well as cash and journal vouchers, said
cash advances amounted to P2,557,213,942.60 in 19969 and P3,360,889,677.48 in 1997.10 On
15 November 1996, FDC also entered into a Shareholders’ Agreement with Reco Herrera PTE
Ltd. (RHPL) for the formation of a Singapore-based joint venture company called Filinvest Asia
Corporation (FAC), tasked to develop and manage FDC’s 50% ownership of its PBCom Office
Tower Project (the Project). With their equity participation in FAC respectively pegged at 60%
and 40% in the Shareholders’ Agreement, FDC subscribed to P500.7 million worth of shares in
said joint venture company to RHPL’s subscription worth P433.8 million. Having paid its
subscription by executing a Deed of   Assignment transferring to FAC a portion of its rights and
interest in the Project worth P500.7 million, FDC eventually reported a net loss of
P190,695,061.00 in its Annual Income Tax Return for the taxable year 1996.11 On 3 January
2000, FDC received from the BIR a Formal Notice of Demand to pay deficiency income and
documentary stamp taxes, plus interests and compromise penalties,12  covered by the following
Assessment Notices, viz.: (a) Assessment Notice No. SP-INC-96-00018-2000 for deficiency
income taxes in the sum of  P150,074,066.27 for 1996; (b) Assessment Notice No. SP-DST-96-
00020-2000 for deficiency documentary stamp taxes in the sum of P10,425,487.06 for 1996; (c)
Assessment Notice No. SP-INC-97-00019-2000 for deficiency income taxes in the sum of
P5,716,927.03 for 1997; and (d) Assessment Notice No. SP-DST-97-00021-2000 for  deficiency
documentary stamp taxes in the sum of P5,796,699.40 for 1997.13 The foregoing deficiency
taxes were assessed on the taxable gain supposedly realized by FDC from the Deed of Exchange
it executed with FAI and FLI, on the dilution resulting from the Shareholders’ Agreement FDC
executed with RHPL as well as the "arm’s-length" interest rate and documentary stamp taxes
imposable on the advances FDC extended to its affiliates.14 On 3 January 2000, FAI similarly
received from the BIR a Formal Letter of Demand for deficiency income taxes in the sum of
P1,477,494,638.23 for the year 1997.15 Covered by Assessment Notice No. SP-INC-97-0027-
2000,16 said deficiency tax was also assessed on the taxable gain purportedly realized by FAI
from the Deed of Exchange it executed with FDC and FLI.17 On 26 January 2000 or within the
reglementary period of thirty (30) days from notice of the assessment, both FDC and FAI filed
their respective requests for reconsideration/protest, on the ground that the deficiency income
and documentary stamp taxes assessed by the BIR were bereft of factual and legal basis.18
Having submitted the relevant supporting documents pursuant to the 31 January 2000 directive
from the BIR  Appellate Division, FDC and FAI filed on 11 September 2000 a letter requesting
an early resolution of their request for reconsideration/protest on the ground that the 180 days
prescribed for the resolution thereof under Section 228 of the NIRC was going to expire on 20
September 2000.19 In view of the failure of petitioner Commissioner of Internal Revenue (CIR)
to resolve their request for  reconsideration/protest within the aforesaid period, FDC and FAI
filed on 17 October 2000 a petition for review with the Court of Tax Appeals (CTA) pursuant to
Section 228 of the 1997 NIRC. Docketed before said court as CTA Case No. 6182, the petition
alleged, among other matters, that as previously opined in BIR Ruling No. S-34-046-97, no
taxable gain should have been assessed from the subject Deed of Exchange since FDC and FAI
collectively gained further control of FLI as a consequence of the exchange; that correlative to
the CIR's lack of authority to impute theoretical interests on the cash advances FDC extended in
favor of its affiliates, the rule is settled that interests cannot be demanded in the absence of a
stipulation to the effect; that not being promissory notes or certificates of  obligations, the
instructional letters as well as the cash and journal vouchers evidencing said cash advances were
not subject to documentary stamp taxes; and, that no income tax may be imposed on the
prospective gain from the supposed appreciation of FDC's shareholdings in FAC. As a
consequence, FDC and FAC both prayed that the subject assessments for deficiency income and
documentary stamp taxes for the years 1996 and 1997 be cancelled and annulled.20 On 4
December 2000, the CIR filed its answer, claiming that the transfer of property in question
should not be considered tax free since, with the resultant diminution of its shares in FLI, FDC
did not gain further control of said corporation. Likewise calling attention to the fact that the
cash advances FDC extended to its affiliates were interest free despite the interest bearing loans
it obtained from banking institutions, the CIR invoked Section 43 of the old NIRC which, as
implemented by Revenue Regulations No. 2, Section 179 (b) and (c), gave him "the power to
allocate, distribute or apportion income or deductions between or among such organizations,
trades or business in order to prevent evasion of taxes." The CIR justified the imposition of
documentary stamp taxes on the instructional letters as well as cash and journal vouchers for said
cash advances on the strength of Section 180 of the NIRC and . not they are evidenced by a
formal agreement or by mere office memo. The CIR also argued that FDC realized taxable gain
arising from the dilution of its shares in FAC as a result of its Shareholders' Agreement with
RHPL.21  At the pre-trial conference, the parties filed a Stipulation of Facts, Documents and
Issues22 which was admitted in the 16 February 2001 resolution issued by the CTA. With the
further admission of the Formal Offer of Documentary Evidence subsequently filed by FDC and
FAI23 and the conclusion of the testimony of Susana Macabelda anent the cash advances FDC
extended in favor of its affiliates,24  the CTA went on to render the Decision dated 10 September
2002 which, with the exception of the deficiency income tax on the interest income FDC
supposedly realized from the advances it extended in favor of its affiliates, cancelled the rest of
deficiency income and documentary stamp taxes assessed against FDC and FAI for the years
1996 and 1997,25 thus: WHEREFORE, in view of all the foregoing, the court finds the instant
petition partly meritorious. Accordingly,  Assessment Notice No. SP-INC-96-00018-2000
imposing deficiency income tax on FDC for taxable year 1996,  Assessment Notice No. SP-
DST-96-00020-2000 and SP-DST-97-00021-2000 imposing deficiency documentary stamp tax
on FDC for taxable years 1996 and 1997, respectively and Assessment Notice No. SP-INC-97-
0027-2000 imposing deficiency income tax on FAI for the taxable year 1997 are hereby
CANCELLED and SET ASIDE. However, [FDC] is hereby ORDERED to PAY the amount of
P5,691,972.03 as deficiency income tax for taxable year  1997. In addition, petitioner is also
ORDERED to PAY 20% delinquency interest computed from February 16, 2000 until full
payment thereof pursuant to Section 249 (c) (3) of the Tax Code.26 Finding that the collective
increase of the equity participation of FDC and FAI in FLI rendered the gain derived from the
exchange tax-free, the CTA also ruled that the increase in the value of FDC's shares in FAC did
not result in economic advantage in the absence of actual sale or conversion thereof. While
likewise finding that the documents evidencing the cash advances FDC extended to its affiliates
cannot be considered as loan agreements that are subject to documentary stamp tax, the CTA
enunciated, however, that the CIR was justified in assessing undeclared interests on the same
cash advances pursuant to his authority under Section 43 of the NIRC in order to forestall tax
evasion. For persuasive effect, the CTA referred to the equivalent provision in the Internal
Revenue Code of the United States (IRC-US), i.e., Sec. 482, as implemented by Section 1.482-2
of 1965-1969 Regulations of the Law of  Federal Income Taxation.27 Dissatisfied with the
foregoing decision, FDC filed on 5 November 2002 the petition for review docketed before the
CA as CA-G.R. No. 72992, pursuant to Rule 43 of the 1997 Rules of Civil Procedure. Calling
attention to the fact that the cash advances it extended to its affiliates were interest-free in the
absence of the express stipulation on interest required under Article 1956 of the Civil Code, FDC
questioned the imposition of an arm's-length interest rate thereon on the ground, among others,
that the CIR's authority under Section 43 of the NIRC: (a) does not include the power to impute
imaginary interest on said transactions; (b) is directed only against controlled taxpayers and not
against mother or holding corporations; and, (c) can only be invoked in cases of understatement
of taxable net income or evident tax evasion.28 Upholding FDC's position, the CA's then Special
Fifth Division rendered the herein assailed decision dated 16 December 2003,29 the decretal
portion of which states: WHEREFORE, premises considered, the instant petition is hereby
GRANTED. The assailed Decision dated September 10, 2002 rendered by the Court of Tax
Appeals in CTA Case No. 6182 directing petitioner Filinvest Development Corporation to pay
the amount of P5,691,972.03 representing deficiency income tax on allegedly undeclared interest
income for the taxable year 1997, plus 20% delinquency interest computed from February 16,
2000 until full payment thereof is REVERSED and SET ASIDE and, a new one entered
annulling Assessment Notice No. SP-INC-97-00019-2000 imposing deficiency income tax on
petitioner for taxable year 1997. No pronouncement as to costs.30 With the denial of its partial
motion for reconsideration of the same 11 December 2002 resolution issued by the CTA,31 the
CIR also filed the petition for review docketed before the CA as CA-G.R. No. 74510. In essence,
the CIR argued that the CTA reversibly erred in cancelling the assessment notices: (a) for
deficiency income taxes on the exchange of property between FDC, FAI and FLI; (b) for
deficiency documentary stamp taxes on the documents evidencing FDC's cash advances to its
affiliates; and (c) for deficiency income tax on the gain FDC purportedly realized from the
increase of the value of its shareholdings in FAC.32 The foregoing petition was, however, denied
due course and dismissed for lack of merit in the herein assailed decision dated 26 January
200533 rendered by the CA's then Fourteenth Division, upon the following findings and
conclusions, to wit: 1. As affirmed in the 3 February 1997 BIR Ruling No. S-34-046-97, the 29
November 1996 Deed of Exchange resulted in the combined control by FDC and FAI of more
than 51% of the outstanding shares of FLI, hence, no taxable gain can be recognized from the
transaction under Section 34 (c) (2) of the old NIRC; . to its affiliates are not subject to
documentary stamp taxes pursuant to BIR Ruling No. 116-98, dated 30 July 1998, since they do
not partake the nature of loan agreements; 3. Although BIR Ruling No. 116-98 had been
subsequently modified by BIR Ruling No. 108-99, dated 15 July 1999, to the effect that
documentary stamp taxes are imposable on inter-office memos evidencing cash advances similar
to those extended by FDC, said latter ruling cannot be given retroactive application if to do so
would be prejudicial to the taxpayer; 4. FDC's alleged gain from the increase of its shareholdings
in FAC as a consequence of the Shareholders'  Agreement it executed with RHPL cannot be
considered taxable income since, until actually converted thru sale or disposition of said shares,
they merely represent unrealized increase in capital.34 Respectively docketed before this Court
as G.R. Nos. 163653 and 167689, the CIR's petitions for review on certiorari assailing the 16
December 2003 decision in CA-G.R. No. 72992 and the 26 January 2005 decision in CAG.R. SP
No. 74510 were consolidated pursuant to the 1 March 2006 resolution issued by this Court’s
Third Division. The Issues In G.R. No. 163653, the CIR urges the grant of its petition on the
following ground: THE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF
THE COURT OF TAX APPEALS AND IN HOLDING THAT THE ADVANCES EXTENDED
BY RESPONDENT TO ITS AFFILIATES ARE NOT SUBJECT TO INCOME TAX.35 In G.R.
No. 167689, on the other hand, petitioner proffers the following issues for resolution: I THE
HONORABLE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION IN
HOLDING THAT THE EXCHANGE OF SHARES OF STOCK FOR PROPERTY AMONG
FILINVEST DEVELOPMENT CORPORATION (FDC), FILINVEST ALABANG,
INCORPORATED (FAI) AND FILINVEST LAND INCORPORATED (FLI) MET ALL THE
REQUIREMENTS FOR THE NON-RECOGNITION OF TAXABLE GAIN UNDER
SECTION 34 (c) (2) OF THE OLD NATIONAL INTERNAL REVENUE CODE (NIRC)
(NOW SECTION 40 (C) (2) (c) OF THE NIRC. II THE HONORABLE COURT OF APPEALS
COMMITTED REVERSIBLE ERROR IN HOLDING THAT THE LETTERS OF
INSTRUCTION OR CASH VOUCHERS EXTENDED BY FDC TO ITS AFFILIATES ARE
NOT DEEMED LOAN AGREEMENTS SUBJECT TO DOCUMENTARY STAMP TAXES
UNDER SECTION 180 OF THE NIRC. III THE HONORABLE COURT OF APPEALS
GRAVELY ERRED IN HOLDING THAT GAIN ON DILUTION AS A RESULT OF THE
INCREASE IN THE VALUE OF FDC’S SHAREHOLDINGS IN FAC IS NOT TAXABLE.36
The Court’s Ruling While the petition in G.R. No. 163653 is bereft of merit, we find the CIR’s
petition in G.R. No. 167689 impressed with partial merit. In G.R. No. 163653, the CIR argues
that the CA erred in reversing the CTA’s finding that theoretical interests can be imputed on the
advances FDC extended to its affiliates in 1996 and 1997 considering that, for said purpose, FDC
resorted to interest-bearing fund borrowings from commercial banks. Since considerable interest
expenses were deducted by FDC when said funds were borrowed, the CIR theorizes that interest
income should likewise be declared when the same funds were sourced for the advances FDC
extended to its affiliates. Invoking Section 43 of  the 1993 NIRC in relation to Section 179(b) of
Revenue Regulation No. 2, the CIR maintains that it is vested with the power to allocate,
distribute or apportion income or deductions between or among controlled organizations, trades
or businesses even in the absence of fraud, since said power is intended "to prevent evasion of
taxes or clearly to reflect the income of any such organizations, trades or businesses." In
addition, the CIR asseverates that the CA should have accorded weight and respect to the
findings of the CTA which, as the specialized court dedicated to the study and consideration of
tax matters, can take judicial notice of US income tax laws and regulations.37  Admittedly,
Section 43 of the 1993 NIRC38 provides that, "(i)n any case of two or more organizations, trades
or  businesses (whether or not incorporated and whether or not organized in the Philippines)
owned or controlled directly or indirectly by the same interests, the Commissioner of Internal
Revenue is authorized to distribute, apportion or allocate gross income or deductions between or
among such organization, trade or business, if he determines that such distribution,
apportionment or allocation is necessary in order to prevent evasion of taxes or  clearly to reflect
the income of any such organization, trade or business." In amplification of the equivalent
provision39 under Commonwealth Act No. 466,40 Sec. 179(b) of Revenue Regulation No. 2
states as follows: Determination of the taxable net income of controlled taxpayer. – (A)
DEFINITIONS. – When used in this section – (1) The term "organization" includes any kind,
whether it be a sole proprietorship, a partnership, a trust, an estate, or a corporation or
association, irrespective of the place where organized, where operated, or where its trade or
business is conducted, and regardless of whether domestic or foreign, whether  exempt or
taxable, or whether affiliated or not. (2) The terms "trade" or "business" include any trade or
business activity of any kind, regardless of  whether or where organized, whether owned
individually or otherwise, and regardless of the place where carried on. (3) The term "controlled"
includes any kind of control, direct or indirect, whether legally enforceable, and however
exercisable or exercised. It is the reality of the control which is decisive, not its form or  mode of
exercise. A presumption of control arises if income or deductions have been arbitrarily shifted.
(4) The term "controlled taxpayer" means any one of two or more organizations, trades, or
businesses owned or controlled directly or indirectly by the same interests. (5) The term "group"
and "group of controlled taxpayers" means the organizations, trades or  businesses owned or
controlled by the same interests. (6) The term "true net income" means, in the case of a
controlled taxpayer, the net income (or as the case may be, any item or element affecting net
income) which would have resulted to the controlled taxpayer, had it in the conduct of its affairs
(or, as the case may be, any item or element affecting net income) which would have resulted to
the controlled taxpayer, had it in the conduct of its affairs (or, as the case may be, in the
particular contract, transaction, arrangement or other act) dealt with the other  members or
members of the group at arm’s length. It does not mean the income, the deductions, or the item
or element of either, resulting to the controlled taxpayer by reason of the particular contract,
transaction, or arrangement, the controlled taxpayer, or the interest controlling it, chose to make
(even though such contract, transaction, or arrangement be legally binding upon the parties
thereto). (B) SCOPE AND PURPOSE. - The purpose of Section 44 of the Tax Code is to place a
controlled taxpayer  on a tax parity with an uncontrolled taxpayer, by determining, according to
the standard of an uncontrolled taxpayer, the true net income from the property and business of a
controlled taxpayer. The interests controlling a group of controlled taxpayer are assumed to have
complete power to cause each controlled taxpayer so to conduct its affairs that its transactions
and accounting records truly reflect the net income from the property and business of each of the
controlled taxpayers. If, however, this has not been done and the taxable net income are thereby
understated, the statute contemplates that the Commissioner of Internal Revenue shall intervene,
and, by making such distributions, apportionments, or allocations as he may deem necessary of
gross income or deductions, or of any item or element affecting net income, between or among
the controlled taxpayers constituting the group, shall determine the true net income of each
controlled taxpayer. The standard to be applied in every case is that of an uncontrolled taxpayer.
Section 44 grants no right to a controlled taxpayer to apply its provisions at will, nor does it grant
any right to compel the Commissioner of Internal Revenue to apply its provisions. (C)
APPLICATION – Transactions between controlled taxpayer and another will be subjected to
special scrutiny to ascertain whether the common control is being used to reduce, avoid or escape
taxes. In determining the true net income of a controlled taxpayer, the Commissioner of Internal
Revenue is not restricted to the case of improper accounting, to the case of a fraudulent,
colorable, or sham transaction, or to the case of a device designed to reduce or avoid tax by
shifting or distorting income or deductions. The authority to determine true net income extends
to any case in which either by inadvertence or design the taxable net income in whole or in part,
of a controlled taxpayer, is other than it would have been had the taxpayer in the conduct of his
affairs been an uncontrolled taxpayer dealing at arm’s length with another  uncontrolled
taxpayer. 41 and (4) of the foregoing provision, it would appear that FDC and its affiliates come
within the purview of Section 43 of the 1993 NIRC. Aside from owning significant portions of
the shares of stock of FLI, FAI, DSCC and FCI, the fact that FDC extended substantial sums of
money as cash advances to its said affiliates for the purpose of providing them financial
assistance for their operational and capital expenditures seemingly indicate that the situation
sought to be addressed by the subject provision exists. From the tenor of paragraph (c) of Section
179 of Revenue Regulation No. 2, it may also be seen that the CIR's power to distribute,
apportion or allocate gross income or  deductions between or among controlled taxpayers may be
likewise exercised whether or not fraud inheres in the transaction/s under scrutiny. For as long as
the controlled taxpayer's taxable income is not reflective of that which it would have realized had
it been dealing at arm's length with an uncontrolled taxpayer, the CIR can make the necessary
rectifications in order to prevent evasion of taxes. Despite the broad parameters provided,
however, we find that the CIR's powers of distribution, apportionment or  allocation of gross
income and deductions under Section 43 of the 1993 NIRC and Section 179 of Revenue
Regulation No. 2 does not include the power to impute "theoretical interests" to the controlled
taxpayer's transactions. Pursuant to Section 28 of the 1993 NIRC,42 after all, the term "gross
income" is understood to mean all income from whatever source derived, including, but not
limited to the following items: compensation for services, including fees, commissions, and
similar items; gross income derived from business; gains derived from dealings in property;"
interest; rents; royalties; dividends; annuities; prizes and winnings; pensions; and partner’s
distributive share of the gross income of general professional partnership.43  While it has been
held that the phrase "from whatever source derived" indicates a legislative policy to include all
income not expressly exempted within the class of taxable income under our laws, the term
"income" has been variously interpreted to mean "cash received or its equivalent", "the amount
of money coming to a person within a specific time" or "something distinct from principal or 
capital."44 Otherwise stated, there must be proof of the actual or, at the very least, probable
receipt or realization by the controlled taxpayer of the item of gross income sought to be
distributed, apportioned or allocated by the CIR. Our circumspect perusal of the record yielded
no evidence of actual or possible showing that the advances FDC extended to its affiliates had
resulted to the interests subsequently assessed by the CIR. For all its harping upon the supposed
fact that FDC had resorted to borrowings from commercial banks, the CIR had adduced no
concrete proof  that said funds were, indeed, the source of the advances the former provided its
affiliates. While admitting that FDC obtained interest-bearing loans from commercial banks,45 
Susan Macabelda - FDC's Funds Management Department Manager who was the sole witness
presented before the CTA - clarified that the subject advances were sourced from the
corporation's rights offering in 1995 as well as the sale of its investment in Bonifacio Land in
1997.46 More significantly, said witness testified that said advances: (a) were extended to give
FLI, FAI, DSCC and FCI financial assistance for their operational and capital expenditures; and,
(b) were all temporarily in nature since they were repaid within the duration of one week to three
months and were evidenced by mere journal entries, cash vouchers and instructional letters."47
Even if we were, therefore, to accord precipitate credulity to the CIR's bare assertion that FDC
had deducted substantial interest expense from its gross income, there would still be no factual
basis for the imputation of  theoretical interests on the subject advances and assess deficiency
income taxes thereon. More so, when it is borne in mind that, pursuant to Article 1956 of the
Civil Code of the Philippines, no interest shall be due unless it has been expressly stipulated in
writing. Considering that taxes, being burdens, are not to be presumed beyond what the
applicable statute expressly and clearly declares,48 the rule is likewise settled that tax statutes
must be construed strictly against the government and liberally in favor of the
taxpayer.49 Accordingly, the general rule of requiring adherence to the letter in construing
statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be
extended by implication.50 While it is true that taxes are the lifeblood of the government, it has
been held that their assessment and collection should be in accordance with law as any
arbitrariness will negate the very reason for government itself.51 In G.R. No. 167689, we also
find a dearth of merit in the CIR's insistence on the imposition of deficiency income taxes on the
transfer FDC and FAI effected in exchange for the shares of stock of FLI. With respect to the
Deed of  Exchange executed between FDC, FAI and FLI, Section 34 (c) (2) of the 1993 NIRC
pertinently provides as follows: Sec. 34. Determination of amount of and recognition of gain or
loss.- x x x x (c) Exception – x x x x No gain or loss shall also be recognized if property is
transferred to a corporation by a person in exchange for  shares of stock in such corporation of
which as a result of such exchange said person, alone or together with others, not exceeding four
persons, gains control of said corporation; Provided, That stocks issued for services shall not be .
As even admitted in the 14 February 2001 Stipulation of Facts submitted by the parties,52 the
requisites for the nonrecognition of gain or loss under the foregoing provision are as follows: (a)
the transferee is a corporation; (b) the transferee exchanges its shares of stock for property/ies of
the transferor; (c) the transfer is made by a person, acting alone or together with others, not
exceeding four persons; and, (d) as a result of the exchange the transferor, alone or together with
others, not exceeding four, gains control of the transferee.53 Acting on the 13 January 1997
request filed by FLI, the BIR had, in fact, acknowledged the concurrence of the foregoing
requisites in the Deed of  Exchange the former executed with FDC and FAI by issuing BIR
Ruling No. S-34-046-97.54  With the BIR's reiteration of said ruling upon the request for
clarification filed by FLI,55 there is also no dispute that said transferee and transferors
subsequently complied with the requirements provided for the non-recognition of gain or loss
from the exchange of property for tax, as provided under Section 34 (c) (2) of the 1993 NIRC.56
Then as now, the CIR argues that taxable gain should be recognized for the exchange
considering that FDC's controlling interest in FLI was actually decreased as a result thereof. For
said purpose, the CIR calls attention to the fact that, prior to the exchange, FDC owned
2,537,358,000 or 67.42% of FLI's 3,763,535,000 outstanding capital stock. Upon the issuance of
443,094,000 additional FLI shares as a consequence of the exchange and with only 42,217,000
thereof accruing in favor of FDC for a total of 2,579,575,000 shares, said corporation’s
controlling interest was supposedly reduced to 61%.03 when reckoned from the transferee's
aggregate 4,226,629,000 outstanding shares. Without owning a share from FLI's initial
3,763,535,000 outstanding shares, on the other hand, FAI's acquisition of 420,877,000 FLI
shares as a result of the exchange purportedly resulted in its control of only 9.96% of said
transferee corporation's 4,226,629,000 outstanding shares. On the principle that the transaction
did not qualify as a tax-free exchange under Section 34 (c) (2) of the 1993 NIRC, the CIR
asseverates that taxable gain in the sum of P263,386,921.00 should be recognized on the part of
FDC and in the sum of P3,088,711,367.00 on the part of FAI.57 The paucity of merit in the
CIR's position is, however, evident from the categorical language of Section 34 (c) (2) of  the
1993 NIRC which provides that gain or loss will not be recognized in case the exchange of
property for stocks results in the control of the transferee by the transferor, alone or with other
transferors not exceeding four persons. Rather than isolating the same as proposed by the CIR,
FDC's 2,579,575,000 shares or 61.03% control of FLI's 4,226,629,000 outstanding shares should,
therefore, be appreciated in combination with the 420,877,000 new shares issued to FAI which
represents 9.96% control of said transferee corporation. Together FDC's 2,579,575,000 shares
(61.03%) and FAI's 420,877,000 shares (9.96%) clearly add up to 3,000,452,000 shares or
70.99% of FLI's 4,226,629,000 shares. Since the term "control" is clearly defined as "ownership
of stocks in a corporation possessing at least fifty-one percent of the total voting power of classes
of stocks entitled to one vote" under Section 34 (c) (6) [c] of the 1993 NIRC, the exchange of
property for stocks between FDC FAI and FLI clearly qualify as a tax-free transaction under
paragraph 34 (c) (2) of the same provision.  Against the clear tenor of Section 34(c) (2) of the
1993 NIRC, the CIR cites then Supreme Court Justice Jose Vitug and CTA Justice Ernesto D.
Acosta who, in their book Tax Law and Jurisprudence, opined that said provision could be
inapplicable if control is already vested in the exchangor prior to exchange.58 Aside from the
fact that that the 10 September 2002 Decision in CTA Case No. 6182 upholding the tax-exempt
status of the exchange between FDC, FAI and FLI was penned by no less than Justice Acosta
himself,59 FDC and FAI significantly point out that said authors have acknowledged that the
position taken by the BIR is to the effect that "the law would apply even when the exchangor
already has control of the corporation at the time of the exchange."60 This was confirmed when,
apprised in FLI's request for clarification about the change of percentage of ownership of its
outstanding capital stock, the BIR opined as follows: Please be informed that regardless of the
foregoing, the transferors, Filinvest Development Corp. and Filinvest  Alabang, Inc. still gained
control of Filinvest Land, Inc. The term 'control' shall mean ownership of stocks in a corporation
by possessing at least 51% of the total voting power of all classes of stocks entitled to vote.
Control is determined by the amount of stocks received, i.e., total subscribed, whether for
property or for services by the transferor or transferors. In determining the 51% stock ownership,
only those persons who transferred property for  stocks in the same transaction may be counted
up to the maximum of five (BIR Ruling No. 547-93 dated December  29, 1993.61  At any rate, it
also appears that the supposed reduction of FDC's shares in FLI posited by the CIR is more
apparent than real. As the uncontested owner of 80% of the outstanding shares of FAI, it cannot
be gainsaid that FDC ideally controls the same percentage of the 420,877,000 shares issued to its
said co-transferor which, by itself, represents 7.968% of the outstanding shares of FLI.
Considered alongside FDC's 61.03% control of FLI as a consequence of  the 29 November 1996
Deed of Transfer, said 7.968% add up to an aggregate of 68.998% of said transferee
corporation's outstanding shares of stock which is evidently still greater than the 67.42% FDC
initially held prior to Issues they submitted to the CTA. Inasmuch as the combined ownership of
FDC and FAI of FLI's outstanding capital stock adds up to a total of 70.99%, it stands to reason
that neither of said transferors can be held liable for  deficiency income taxes the CIR assessed
on the supposed gain which resulted from the subject transfer. On the other hand, insofar as
documentary stamp taxes on loan agreements and promissory notes are concerned, Section 180
of the NIRC provides follows: Sec. 180. Stamp tax on all loan agreements, promissory notes,
bills of exchange, drafts, instruments and securities issued by the government or any of its
instrumentalities, certificates of deposit bearing interest and others not payable on sight or
demand. – On all loan agreements signed abroad wherein the object of the contract is located or 
used in the Philippines; bill of exchange (between points within the Philippines), drafts,
instruments and securities issued by the Government or any of its instrumentalities or certificates
of deposits drawing interest, or orders for the payment of any sum of money otherwise than at
sight or on demand, or on all promissory notes, whether negotiable or non-negotiable, except
bank notes issued for circulation, and on each renewal of any such note, there shall be collected a
documentary stamp tax of Thirty centavos (P0.30) on each two hundred pesos, or fractional part
thereof, of the face value of any such agreement, bill of exchange, draft, certificate of deposit or
note: Provided, That only one documentary stamp tax shall be imposed on either loan agreement,
or promissory notes issued to secure such loan, whichever will yield a higher tax: Provided
however, That loan agreements or promissory notes the aggregate of which does not exceed Two
hundred fifty thousand pesos (P250,000.00) executed by an individual for his purchase on
installment for his personal use or that of his family and not for business, resale, barter or hire of
a house, lot, motor vehicle, appliance or furniture shall be exempt from the payment of
documentary stamp tax provided under this Section. When read in conjunction with Section 173
of the 1993 NIRC,63 the foregoing provision concededly applies to "(a)ll loan agreements,
whether made or signed in the Philippines, or abroad when the obligation or right arises from
Philippine sources or the property or object of the contract is located or used in the Philippines."
Correlatively, Section 3 (b) and Section 6 of Revenue Regulations No. 9-94 provide as follows:
Section 3. Definition of Terms. – For purposes of these Regulations, the following term shall
mean: (b) 'Loan agreement' – refers to a contract in writing where one of the parties delivers to
another money or other  consumable thing, upon the condition that the same amount of the same
kind and quality shall be paid. The term shall include credit facilities, which may be evidenced
by credit memo, advice or drawings. The terms 'Loan Agreement" under Section 180 and
"Mortgage' under Section 195, both of the Tax Code, as amended, generally refer to distinct and
separate instruments. A loan agreement shall be taxed under Section 180, while a deed of
mortgage shall be taxed under Section 195." "Section 6. Stamp on all Loan Agreements. – All
loan agreements whether made or signed in the Philippines, or  abroad when the obligation or
right arises from Philippine sources or the property or object of the contract is located in the
Philippines shall be subject to the documentary stamp tax of thirty centavos (P0.30) on each two
hundred pesos, or fractional part thereof, of the face value of any such agreements, pursuant to
Section 180 in relation to Section 173 of the Tax Code. In cases where no formal agreements or
promissory notes have been executed to cover credit facilities, the documentary stamp tax shall
be based on the amount of drawings or availment of the facilities, which may be evidenced by
credit/debit memo, advice or drawings by any form of check or withdrawal slip, under Section
180 of  the Tax Code.  Applying the aforesaid provisions to the case at bench, we find that the
instructional letters as well as the journal and cash vouchers evidencing the advances FDC
extended to its affiliates in 1996 and 1997 qualified as loan agreements upon which documentary
stamp taxes may be imposed. In keeping with the caveat attendant to every BIR Ruling to the
effect that it is valid only if the facts claimed by the taxpayer are correct, we find that the CA
reversibly erred in utilizing BIR Ruling No. 116-98, dated 30 July 1998 which, strictly speaking,
could be invoked only by ASB Development Corporation, the taxpayer who sought the same. In
said ruling, the CIR opined that documents like those evidencing the advances FDC extended to
its affiliates are not subject to documentary stamp tax, to wit: On the matter of whether or not the
inter-office memo covering the advances granted by an affiliate company is subject to
documentary stamp tax, it is informed that nothing in Regulations No. 26 (Documentary Stamp
Tax Regulations) and Revenue Regulations No. 9-94 states that the same is subject to
documentary stamp tax. Such being the case, said inter-office memo evidencing the lendings or
borrowings which is neither a form of promissory note nor a certificate of indebtedness issued by
the corporation-affiliate or a certificate of obligation, which are, more 175 of the Tax Code of
1997, respectively. Rather, the inter-office memo is being prepared for accounting purposes only
in order to avoid the co-mingling of funds of the corporate affiliates.1avvphi1 In its appeal
before the CA, the CIR argued that the foregoing ruling was later modified in BIR Ruling No.
108-99 dated 15 July 1999, which opined that inter-office memos evidencing lendings or
borrowings extended by a corporation to its affiliates are akin to promissory notes, hence, subject
to documentary stamp taxes.64 In brushing aside the foregoing argument, however, the CA
applied Section 246 of the 1993 NIRC65 from which proceeds the settled principle that rulings,
circulars, rules and regulations promulgated by the BIR have no retroactive application if to so
apply them would be prejudicial to the taxpayers.66  Admittedly, this rule does not apply: (a)
where the taxpayer deliberately misstates or omits material facts from his return or in any
document required of him by the Bureau of Internal Revenue; (b) where the facts subsequently
gathered by the Bureau of Internal Revenue are materially different from the facts on which the
ruling is based; or (c) where the taxpayer acted in bad faith.67 Not being the taxpayer who, in the
first instance, sought a ruling from the CIR, however, FDC cannot invoke the foregoing principle
on non-retroactivity of BIR rulings. Viewed in the light of the foregoing considerations, we find
that both the CTA and the CA erred in invalidating the assessments issued by the CIR for the
deficiency documentary stamp taxes due on the instructional letters as well as the journal and
cash vouchers evidencing the advances FDC extended to its affiliates in 1996 and 1997. In
Assessment Notice No. SP-DST-96-00020-2000, the CIR correctly assessed the sum of
P6,400,693.62 for  documentary stamp tax, P3,999,793.44 in interests and P25,000.00 as
compromise penalty, for a total of P10,425,487.06. Alongside the sum of P4,050,599.62 for
documentary stamp tax, the CIR similarly assessed P1,721,099.78 in interests and P25,000.00 as
compromise penalty in Assessment Notice No. SP-DST-97-00021- 2000 or a total of
P5,796,699.40. The imposition of deficiency interest is justified under Sec. 249 (a) and (b) of the
NIRC which authorizes the assessment of the same "at the rate of twenty percent (20%), or such
higher rate as may be prescribed by regulations", from the date prescribed for the payment of the
unpaid amount of tax until full payment.68 The imposition of the compromise penalty is, in turn,
warranted under Sec. 25069 of the NIRC which prescribes the imposition thereof "in case of
each failure to file an information or return, statement or list, or keep any record or supply any
information required" on the date prescribed therefor. To our mind, no reversible error can,
finally, be imputed against both the CTA and the CA for invalidating the  Assessment Notice
issued by the CIR for the deficiency income taxes FDC is supposed to have incurred as a
consequence of the dilution of its shares in FAC. Anent FDC’s Shareholders’ Agreement with
RHPL, the record shows that the parties were in agreement about the following factual
antecedents narrated in the 14 February 2001 Stipulation of Facts, Documents and Issues they
submitted before the CTA,70 viz.: "1.11. On November 15, 1996, FDC entered into a
Shareholders’ Agreement (‘SA’) with Reco Herrera Pte. Ltd. (‘RHPL’) for the formation of a
joint venture company named Filinvest Asia Corporation (‘FAC’) which is based in Singapore
(pars. 1.01 and 6.11, Petition, pars. 1 and 7, Answer). 1.12. FAC, the joint venture company
formed by FDC and RHPL, is tasked to develop and manage the 50% ownership interest of FDC
in its PBCom Office Tower Project (‘Project’) with the Philippine Bank of  Communications
(par. 6.12, Petition; par. 7, Answer). 1.13. Pursuant to the SA between FDC and RHPL, the
equity participation of FDC and RHPL in FAC was 60% and 40% respectively. 1.14. In
accordance with the terms of the SA, FDC subscribed to P500.7 million worth of shares of stock
representing a 60% equity participation in FAC. In turn, RHPL subscribed to P433.8 million
worth of shares of  stock of FAC representing a 40% equity participation in FAC. 1.15. In
payment of its subscription in FAC, FDC executed a Deed of Assignment transferring to FAC a
portion of FDC’s right and interests in the Project to the extent of P500.7 million. 1.16. FDC
reported a net loss of P190,695,061.00 in its Annual Income Tax Return for the taxable year 
1996."71  Alongside the principle that tax revenues are not intended to be liberally
construed,72 the rule is settled that the findings and conclusions of the CTA are accorded great
respect and are generally upheld by this Court, unless there is a clear showing of a reversible
error or an improvident exercise of authority.73 Absent showing of such error here, we find no
strong and cogent reasons to depart from said rule with respect to the CTA's finding that no
deficiency income tax can be assessed on the gain on the supposed dilution and/or increase in the
value of FDC's shareholdings in FAC which the CIR, at any rate, failed to establish. Bearing in
mind the meaning of "gross income" as above discussed, it cannot be gainsaid, even then, that a
mere increase or appreciation in the value of said shares cannot be considered income for
taxation purposes. Since "a mere advance in the value of the property of a person or corporation
in no sense constitute the ‘income’ specified in the revenue law," it has been held in the early
case of Fisher vs. Trinidad,74 that it "constitutes and can be treated merely as an increase of
capital." Hence, the CIR has no factual and legal basis in assessing income tax on the increase in
the value of FDC's shareholdings in FAC until the same is actually sold at a profit.
Wise & Co., Inc. v. Meer GR NO: 48231 (1947)
FACTS:
That during the year 1937, plaintiffs, except Mr. E.M.G. Strickland (who, as
husband of the plaintiff Mrs. E.M.G. Strickland, is only a nominal party
herein), were stockholders of Manila Wine Merchants, Ltd., a foreign
corporation duly authorized to do business in the Philippines.

That on May 27, 1937, the Board of Directors of Manila Wine Merchants,
Ltd., (hereinafter referred to as the Hongkong Company), recommended to
the stockholders of the company that they adopt the resolutions necessary
to enable the company to sell its business and assets to Manila Wine
Merchants, Inc., a Philippine corporation formed on May 27, 1937,
(hereinafter referred to as the Manila Company), for the sum of P400,000;

HK Company made a distribution of its earnings for the year 1937 to its
stockholders (Dividends declared and paid on June 8, 1937). HK Company
paid Philippine income tax on the entire earnings from which the said
distributions were paid.

After the June 8 distribution, HK Company had :

P74, 182 – surplus resulting from the active conduct of business
P270, 116 – total increased surplus as a result of the sale of the business
and assets

The stockholders by proper resolution directed that the company be

voluntarily liquidated and its capital distributed among the stockholders;
that the stockholders at such meeting appointed a liquidator duly paid off
the remaining debts of the Hongkong Company and distributed its capital
among the stockholders including plaintiffs; that the liquidator duly filed his
accounting on January 12, 1938, and in accordance with the provisions of
Hongkong Law, the Hongkong Company was duly dissolved at the
expiration of three moths from that date.

That plaintiffs duly filed Philippine income tax returns. That defendant
subsequently made the deficiency assessments. That said plaintiffs duly
paid the said amounts demanded by defendant under written protest, which
was overruled in due course; that the plaintiffs have since July 1, 1939
requested from defendant a refund of the said amounts which defendant
has refused and still refuses to refund.
CONTENTIONS:
CIR-The amounts received by Wise & Co et al from the HK Company were
liquidating dividends (thus, subject to normal tax)

Wise & Co et al say- The amounts were ordinary dividends

ISSUES:
a)W/N the amounts received by Wise & Co et al from the HK Company on
which the taxes were assessed were ordinary dividends or liquidating
dividends  (LIQUIDATING DIVIDENDS)

b)W/N such liquidating dividends are taxable income (YES)

RATIO:
a)The amounts received by the stockholders were liquidating dividends
•The parties agreed in the deed of sale that the sale and transfer shall take
effect as of June 1, 1937. Thus, the distribution of assets to the
stockholders made after that date must have been considered by them as
liquidating dividends.

•The said distributions were NOT in the ordinary course of business and
with intent to maintain the corporation as a going concern (in which case
they would be ordinary dividends) BUT they were made after the liquidated
of the business had been decided upon, which makes them payments for
the surrender and relinquishment of the stockholder’s interest in the
corporation, or liquidating dividends.

•Ordinary connotation of liquidating dividend involves the distribution of

assets by a corporation to its stockholders upon dissolution.

•Wise & Co et al (stockholders) say: It was only on August 19, 1937, that
the HK Company took the first corporate steps towards liquidation.

•SC: It was expressly stipulated in the formal deed of sale (see underlined
portion in facts) that the sale or transfer shall take effect on June 1, 1937.
After that date, and until completion of the transfer, the HK Company
continued to run the business in trust for the new owner, the Manila
Company.
•The determining element is whether the distribution was in the ordinary
course of business and with intent to maintain the corporation as a going
concern, or after deciding to quit with intent to liquidate the business.
•The fact that the distributions were called ‘dividends’ and were made, in
part, from earnings and profits, and that some of them were made before
liquidation or dissolution proceedings were commenced, is NOT controlling.

Liquidating dividend v Ordinary dividend

•                The distinction between a distribution in liquidation and an

ordinary dividend is factual; the result in each case depending on the
particular circumstances of the case and the intent of the parties.
•                If the distribution is in the nature of a recurring return on stock it
is an ordinary dividend.
•                However, if the corporation is really winding up its business or
recapitalizing and narrowing its activities, the distribution may properly be
treated as in complete or partial liquidation and as payment by the
corporation to the stockholder for his stock. The corporation is, in the latter
instances, wiping out all parts of the stockholders' interest in the
company . . .. “

b) Such liquidating dividends are taxable income

•Income tax law states that: “Where a corporation, partnership, association,

joint-account, or insurance company distributes all of its assets in complete
liquidation or dissolution, the gain realized or loss sustained by the
stockholder, whether individual or corporation, is a taxable income or a
deductible loss as the case may be.”

•Amounts distributed in the liquidation of a corporation shall be treated as

payments in exchange for the stock or share, and any gain or profit realized
thereby shall be taxed to the distributee as other gains or profits.

•The stockholders received the distributions in question in exchange for the

surrender and relinquishment by them of their stock in the HK Company
which was dissolved and in process of complete liquidation.

•That money in the hands of the corporation formed a part of its income
and was properly taxable to it under the Income Tax Law.
•When the corporation was dissolved and in process of complete liquidation
and its shareholders surrendered their stock to it and it paid the sums in
question to them in exchange, a transaction took place.

•The shareholder who received the consideration for the stock earned that
much money as income of his own, which again was properly taxable to
him under the Income Tax Law.

The profits earned by the stockholders are income from Philippine sources,
and thus subject to Philippine tax

Stockholders say: the profit realized by them does not constitute income
from Philippine sources and is not subject to Philippine taxes since all steps
in the carrying out of this so-called sale took place outside the Philippines

SC:
•The HK Company was at the time of the sale of its business in the
Philippines, and the Manila Company was a domestic corporation
domiciled and doing business also in the Philippines.
•The HK Company was incorporated for the purpose of carrying on
business in the Philippines which is the business of wine, beer, and spirit
merchants and the other objects set out in its memorandum of association.

•Hence, its earnings, profits, and assets, including those from whose
proceeds the distributions in question were made, the major part of which
consisted in the purchase price of thebusiness, had been earned and
acquired in the Philippines.

•As such, it is clear that said distributions were income "from Philippine
sources."

Judgment affirmed.

DISPOSITIVE PORTION: For the foregoing consideration, the judgment

appealed from will be affirmed with the costs of both instances against the
appellants. So ordered.

Resolution on Motion for Reconsideration: SC affirms its earlier ruling.

 COMMISSIONER vs. MANNING G.R. No. L-28398. August 6, 1975
Income Tax on Stock Dividends
DECEMBER 4, 2017

FACTS:
Manila Trading and Supply Co. (MANTRASCO) had an authorized capital
stock of P2.5 million divided into 25,000 common shares: 24,700 were
owned by Reese and the rest at 100 shares each by the Respondents.
Reese entered into a trust agreement whereby it is stated that upon
Reese’s death, the company would purchase back all of its shares. Reese
died. MANTRASCO repurchased the 24,700 shares. Thereafter, a
resolution was passed authorizing that the 24,700 shares be declared as
stock dividends to be distributed to the stockholders. The BIR ordered an
examination of MANTRASCO’s books and discovered that the 24,700
shares declared as dividends were not disclosed by respondents as part of
their taxable income for the year 1958. Hence, the CIR issued notices of
assessment for deficiency income taxes to respondents. Respondents
protested but the CIR denied. Respondents appealed to the CTA. The CTA
ruled in their favor. Hence, this petition by the CIR
 
ISSUE:
Whether the respondents are liable for deficiency income taxes on the
stock dividends?
 
HELD: 
Dividends means any distribution made by a corporation to its shareholders
out of its earnings or profits. Stock dividends which represent transfer of
surplus to capital account is not subject to income tax. But if a corporation
redeems stock issued so as to make a distribution, this is essentially
equivalent to the distribution of a taxable dividend the amount so distributed
in the redemption considered as taxable income.
 The distinctions between a stock dividend which does not and one which
does constitute taxable income to the shareholders is that a stock dividend
constitutes income if its gives the shareholder an interest different from that
which his former stockholdings represented. On the other hand, it does
constitute income if the new shares confer no different rights or interests
than did the old shares. Therefore, whenever the companies involved
parted with a portion of their earnings to buy the corporate holdings of
Reese, they were making a distribution of such earnings to respondents.
These amounts are thus subject to income tax as a flow of cash benefits to
respondents. Hence, respondents are liable for deficiency income taxes.

COMMISSIONER OF INTERNAL REVENUE versus SONY

PHILIPPINES, INC.
G.R. No. 178697 November 17, 2010

Facts:
     the CIR issued Letter of Authority (LOA 19734) authorizing certain revenue
officers to examine Sonys books of accounts and other accounting records
regarding revenue taxes for the period 1997 and unverified prior years.
    A preliminary assessment for 1997 deficiency taxes and penalties was
issued by the CIR which Sony protested.
     Thereafter, acting on the protest, the CIR issued final assessment
notices, the formal letter of demand and the details of discrepancies.
   The CIR assessed a deficiency VAT - P11,141,014.41

Issues:
1.     Whether or not he Letter of Authority is Valid
2.     Whether or not respondent (Sony) is liable for the deficiency VAT in the
amount of P11,141,014.41

Ruling:
1. Based on Section 13 of the Tax Code, a Letter of Authority or LOA is the
authority given to the appropriate revenue officer assigned to perform
assessment functions. It empowers or enables said revenue officer to
examine the books of account and other accounting records of a taxpayer
for the purpose of collecting the correct amount of tax.
            There must be a grant of authority before any revenue officer can
conduct an examination or assessment. Equally important is that the
revenue officer so authorized must not go beyond the authority given. In
the absence of such an authority, the assessment or examination is a
nullity.
The LOA 19734 covered the period 1997 and unverified prior years.
For said reason, the CIR acting through its revenue officers went beyond
the scope of their authority because the deficiency VAT assessment they
arrived at was based on records from January to March 1998 or using the
fiscal year which ended in March 31, 1998.
It violated also Section C of Revenue Memorandum Order No. 4390 -
A Letter of Authority should cover a taxable period not exceeding one
taxable year.

2. CIRs argument that Sonys advertising expense could not be considered

as an input VAT credit because the same was eventually reimbursed by
Sony International Singapore (SIS).
            Sonys deficiency VAT assessment stemmed from the CIRs
disallowance of the input VAT credits that should have been realized from
the advertising expense of the latter. It is evident under Section 110 of the
1997 Tax Code that an advertising expense duly covered by a VAT invoice
is a legitimate business expense.  There is also no denying that Sony
incurred advertising expense. Aluquin testified that advertising companies
issued invoices in the name of Sony and the latter paid for the same.
Indubitably, Sony incurred and paid for advertising expense/ services.
Where the money came from is another matter all together but will
definitely not change said fact.
The CIR further argues that Sony itself admitted that the reimbursement
from SIS was income and, thus, taxable.
Insofar as the subsidy may be considered as income and, therefore,

G.R. No. 178697               November 17, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
SONY PHILIPPINES, INC., Respondent.

DECISION

MENDOZA, J.:

This petition for review on certiorari seeks to set aside the May 17, 2007 Decision and the July 5,
2007 Resolution of the Court of Tax Appeals – En Banc1 (CTA-EB), in C.T.A. EB No. 90, affirming
the October 26, 2004 Decision of the CTA-First Division2 which, in turn, partially granted the petition
for review of respondent Sony Philippines, Inc. (Sony). The CTA-First Division decision cancelled the
deficiency assessment issued by petitioner Commissioner of Internal Revenue (CIR) against Sony
for Value Added Tax (VAT) but upheld the deficiency assessment for expanded withholding
tax (EWT) in the amount of ₱1,035,879.70 and the penalties for late remittance of internal revenue
taxes in the amount of ₱1,269, 593.90.3

THE FACTS:

On November 24, 1998, the CIR issued Letter of Authority No. 000019734 (LOA 19734) authorizing
certain revenue officers to examine Sony’s books of accounts and other accounting records
regarding revenue taxes for "the period 1997 and unverified prior years." On December 6, 1999,
a preliminary assessment for 1997 deficiency taxes and penalties was issued by the CIR which Sony
protested. Thereafter, acting on the protest, the CIR issued final assessment notices, the formal
letter of demand and the details of discrepancies.4 Said details of the deficiency taxes and penalties
for late remittance of internal revenue taxes are as follows:

DEFICIENCY VALUE -ADDED TAX (VAT)        

(Assessment No. ST-VAT-97-0124-2000)        
Basic Tax Due     P 7,958,700.00
Add: Penalties        
Interest up to 3-31-2000 P 3,157,314.41    
Compromise   25,000.00   3,182,314.41
Deficiency VAT Due     P 11,141,014.41
         
DEFICIENCY EXPANDED WITHHOLDING TAX (EWT)        
(Assessment No. ST-EWT-97-0125-2000)        
Basic Tax Due     P 1,416,976.90
Add: Penalties        
Interest up to 3-31-2000 P 550,485.82    
Compromise   25,000.00   575,485.82
Deficiency EWT Due     P 1,992,462.72
         
DEFICIENCY OF VAT ON ROYALTY PAYMENTS        
(Assessment No. ST-LR1-97-0126-2000)        
Basic Tax Due     P  
Add: Penalties        
Surcharge P 359,177.80    
Interest up to 3-31-2000   87,580.34    
Compromise   16,000.00   462,758.14
Penalties Due     P 462,758.14
         
LATE REMITTANCE OF FINAL WITHHOLDING TAX        
(Assessment No. ST-LR2-97-0127-2000)        
Basic Tax Due     P  
Add: Penalties        
Surcharge P 1,729,690.71    
Interest up to 3-31-2000   508,783.07    
Compromise   50,000.00   2,288,473.78
Penalties Due     P 2,288,473.78
         
LATE REMITTANCE OF INCOME PAYMENTS        
(Assessment No. ST-LR3-97-0128-2000)        
Basic Tax Due     P  
Add: Penalties        
25 % Surcharge P 8,865.34    
Interest up to 3-31-2000   58.29    
Compromise   2,000.00   10,923.60
Penalties Due     P 10,923.60
          
         
GRAND TOTAL     P 15,895,632.655
         

Sony sought re-evaluation of the aforementioned assessment by filing a protest on February 2,

2000. Sony submitted relevant documents in support of its protest on the 16th of that same month.6

On October 24, 2000, within 30 days after the lapse of 180 days from submission of the said
supporting documents to the CIR, Sony filed a petition for review before the CTA.7

After trial, the CTA-First Division disallowed the deficiency VAT assessment because the subsidized
advertising expense paid by Sony which was duly covered by a VAT invoice resulted in an input VAT
credit. As regards the EWT, the CTA-First Division maintained the deficiency EWT assessment on
Sony’s motor vehicles and on professional fees paid to general professional partnerships. It also
assessed the amounts paid to sales agents as commissions with five percent (5%) EWT pursuant to
Section 1(g) of Revenue Regulations No. 6-85. The CTA-First Division, however, disallowed the
EWT assessment on rental expense since it found that the total rental deposit of ₱10,523,821.99
was incurred from January to March 1998 which was again beyond the coverage of LOA 19734.
Except for the compromise penalties, the CTA-First Division also upheld the penalties for the late
payment of VAT on royalties, for late remittance of final withholding tax on royalty as of December
1997 and for the late remittance of EWT by some of Sony’s branches.8 In sum, the CTA-First
Division partly granted Sony’s petition by cancelling the deficiency VAT assessment but upheld a
modified deficiency EWT assessment as well as the penalties. Thus, the dispositive portion reads:

WHEREFORE, the petition for review is hereby PARTIALLY GRANTED. Respondent is ORDERED
to CANCEL and WITHDRAW the deficiency assessment for value-added tax for 1997 for lack of
merit. However, the deficiency assessments for expanded withholding tax and penalties for late
remittance of internal revenue taxes are UPHELD.

Accordingly, petitioner is DIRECTED to PAY the respondent the deficiency expanded withholding tax
in the amount of ₱1,035,879.70 and the following penalties for late remittance of internal revenue
taxes in the sum of ₱1,269,593.90:

1. VAT on Royalty P 429,242.07

2. Withholding Tax on Royalty 831,428.20
3. EWT of Petitioner's Branches 8,923.63
Total P 1,269,593.90

Plus 20% delinquency interest from January 17, 2000 until fully paid pursuant to Section 249(C)(3)
of the 1997 Tax Code.

SO ORDERED.9

The CIR sought a reconsideration of the above decision and submitted the following grounds in
support thereof:
 A. The Honorable Court committed reversible error in holding that petitioner is not liable for
the deficiency VAT in the amount of ₱11,141,014.41;

B. The Honorable court committed reversible error in holding that the commission expense in
the amount of P2,894,797.00 should be subjected to 5% withholding tax instead of the 10%
tax rate;

C. The Honorable Court committed a reversible error in holding that the withholding tax
assessment with respect to the 5% withholding tax on rental deposit in the amount of
₱10,523,821.99 should be cancelled; and

D. The Honorable Court committed reversible error in holding that the remittance of final
withholding tax on royalties covering the period January to March 1998 was filed on time.10

On April 28, 2005, the CTA-First Division denied the motion for reconsideration.  Unfazed, the CIR
1avvphi1

filed a petition for review with the CTA-EB raising identical issues:

1. Whether or not respondent (Sony) is liable for the deficiency VAT in the amount of
P11,141,014.41;

2. Whether or not the commission expense in the amount of ₱2,894,797.00 should be

subjected to 10% withholding tax instead of the 5% tax rate;

3. Whether or not the withholding assessment with respect to the 5% withholding tax on
rental deposit in the amount of ₱10,523,821.99 is proper; and

4. Whether or not the remittance of final withholding tax on royalties covering the period
January to March 1998 was filed outside of time.11

Finding no cogent reason to reverse the decision of the CTA-First Division, the CTA-EB dismissed
CIR’s petition on May 17, 2007. CIR’s motion for reconsideration was denied by the CTA-EB on July
5, 2007.

The CIR is now before this Court via this petition for review relying on the very same grounds it
raised before the CTA-First Division and the CTA-EB. The said grounds are reproduced below:

GROUNDS FOR THE ALLOWANCE OF THE PETITION

THE CTA EN BANC ERRED IN RULING THAT RESPONDENT IS NOT LIABLE FOR
DEFICIENCY VAT IN THE AMOUNT OF PHP11,141,014.41.

II

AS TO RESPONDENT’S DEFICIENCY EXPANDED WITHHOLDING TAX IN THE AMOUNT OF

PHP1,992,462.72:

A. THE CTA EN BANC ERRED IN RULING THAT THE COMMISSION EXPENSE

IN THE AMOUNT OF PHP2,894,797.00 SHOULD BE SUBJECTED TO A
WITHHOLDING TAX OF 5% INSTEAD OF THE 10% TAX RATE.
 B. THE CTA EN BANC ERRED IN RULING THAT THE ASSESSMENT WITH
RESPECT TO THE 5% WITHHOLDING TAX ON RENTAL DEPOSIT IN THE
AMOUNT OF PHP10,523,821.99 IS NOT PROPER.

III

THE CTA EN BANC ERRED IN RULING THAT THE FINAL WITHHOLDING TAX ON ROYALTIES
COVERING THE PERIOD JANUARY TO MARCH 1998 WAS FILED ON TIME. 12

Upon filing of Sony’s comment, the Court ordered the CIR to file its reply thereto. The CIR
subsequently filed a manifestation informing the Court that it would no longer file a reply. Thus, on
December 3, 2008, the Court resolved to give due course to the petition and to decide the case on
the basis of the pleadings filed.13

The Court finds no merit in the petition.

The CIR insists that LOA 19734, although it states "the period 1997 and unverified prior years,"
should be understood to mean the fiscal year ending in March 31, 1998.14 The Court cannot agree.

Based on Section 13 of the Tax Code, a Letter of Authority or LOA is the authority given to the
appropriate revenue officer assigned to perform assessment functions. It empowers or enables said
revenue officer to examine the books of account and other accounting records of a taxpayer for the
purpose of collecting the correct amount of tax.15 The very provision of the Tax Code that the CIR
relies on is unequivocal with regard to its power to grant authority to examine and assess a taxpayer.

SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements
for Tax Administration and Enforcement. –

(A)Examination of Returns and Determination of tax Due. – After a return has been filed as required
under the provisions of this Code, the Commissioner or his duly authorized representative may
authorize the examination of any taxpayer and the assessment of the correct amount of
tax: Provided, however, That failure to file a return shall not prevent the Commissioner
from authorizing the examination of any taxpayer. x x x [Emphases supplied]

Clearly, there must be a grant of authority before any revenue officer can conduct an examination or
assessment. Equally important is that the revenue officer so authorized must not go beyond the
authority given. In the absence of such an authority, the assessment or examination is a nullity.

As earlier stated, LOA 19734 covered "the period 1997 and unverified prior years." For said reason,
the CIR acting through its revenue officers went beyond the scope of their authority because the
deficiency VAT assessment they arrived at was based on records from January to March 1998 or
using the fiscal year which ended in March 31, 1998. As pointed out by the CTA-First Division in its
April 28, 2005 Resolution, the CIR knew which period should be covered by the investigation. Thus,
if CIR wanted or intended the investigation to include the year 1998, it should have done so by
including it in the LOA or issuing another LOA.

Upon review, the CTA-EB even added that the coverage of LOA 19734, particularly the phrase "and
unverified prior years," violated Section C of Revenue Memorandum Order No. 43-90 dated
September 20, 1990, the pertinent portion of which reads:
3. A Letter of Authority should cover a taxable period not exceeding one taxable year. The
practice of issuing L/As covering audit of "unverified prior years is hereby prohibited. If the audit of a
taxpayer shall include more than one taxable period, the other periods or years shall be specifically
indicated in the L/A.16 [Emphasis supplied]

On this point alone, the deficiency VAT assessment should have been disallowed. Be that as it may,
the CIR’s argument, that Sony’s advertising expense could not be considered as an input VAT credit
because the same was eventually reimbursed by Sony International Singapore (SIS), is also
erroneous.

The CIR contends that since Sony’s advertising expense was reimbursed by SIS, the former never
incurred any advertising expense. As a result, Sony is not entitled to a tax credit. At most, the CIR
continues, the said advertising expense should be for the account of SIS, and not Sony.17

The Court is not persuaded. As aptly found by the CTA-First Division and later affirmed by the CTA-
EB, Sony’s deficiency VAT assessment stemmed from the CIR’s disallowance of the input VAT
credits that should have been realized from the advertising expense of the latter.18 It is evident under
Section 11019 of the 1997 Tax Code that an advertising expense duly covered by a VAT invoice is a
legitimate business expense. This is confirmed by no less than CIR’s own witness, Revenue Officer
Antonio Aluquin.20 There is also no denying that Sony incurred advertising expense. Aluquin testified
that advertising companies issued invoices in the name of Sony and the latter paid for the
same.21 Indubitably, Sony incurred and paid for advertising expense/ services. Where the money
came from is another matter all together but will definitely not change said fact.

The CIR further argues that Sony itself admitted that the reimbursement from SIS was income and,
thus, taxable. In support of this, the CIR cited a portion of Sony’s protest filed before it:

The fact that due to adverse economic conditions, Sony-Singapore has granted to our client a
subsidy equivalent to the latter’s advertising expenses will not affect the validity of the input taxes
from such expenses. Thus, at the most, this is an additional income of our client subject to income
tax. We submit further that our client is not subject to VAT on the subsidy income as this was not
derived from the sale of goods or services.22

Insofar as the above-mentioned subsidy may be considered as income and, therefore, subject to
income tax, the Court agrees. However, the Court does not agree that the same subsidy should be
subject to the 10% VAT. To begin with, the said subsidy termed by the CIR as reimbursement was
not even exclusively earmarked for Sony’s advertising expense for it was but an assistance or aid in
view of Sony’s dire or adverse economic conditions, and was only "equivalent to the latter’s (Sony’s)
advertising expenses."

Section 106 of the Tax Code explains when VAT may be imposed or exacted. Thus:

SEC. 106. Value-added Tax on Sale of Goods or Properties. –

(A) Rate and Base of Tax. – There shall be levied, assessed and collected on every sale, barter or
exchange of goods or properties, value-added tax equivalent to ten percent (10%) of the gross
selling price or gross value in money of the goods or properties sold, bartered or exchanged, such
tax to be paid by the seller or transferor.

Thus, there must be a sale, barter or exchange of goods or properties before any VAT may be
levied. Certainly, there was no such sale, barter or exchange in the subsidy given by SIS to Sony. It
was but a dole out by SIS and not in payment for goods or properties sold, bartered or exchanged by
Sony.

In the case of CIR v. Court of Appeals (CA),23 the Court had the occasion to rule that services
rendered for a fee even on reimbursement-on-cost basis only and without realizing profit are also
subject to VAT. The case, however, is not applicable to the present case. In that case,
COMASERCO rendered service to its affiliates and, in turn, the affiliates paid the former
reimbursement-on-cost which means that it was paid the cost or expense that it incurred although
without profit. This is not true in the present case. Sony did not render any service to SIS at all. The
services rendered by the advertising companies, paid for by Sony using SIS dole-out, were for Sony
and not SIS. SIS just gave assistance to Sony in the amount equivalent to the latter’s advertising
expense but never received any goods, properties or service from Sony.

Regarding the deficiency EWT assessment, more particularly Sony’s commission expense, the CIR
insists that said deficiency EWT assessment is subject to the ten percent (10%) rate instead of the
five percent (5%) citing Revenue Regulation No. 2-98 dated April 17, 1998.24 The said revenue
regulation provides that the 10% rate is applied when the recipient of the commission income is a
natural person. According to the CIR, Sony’s schedule of Selling, General and Administrative
expenses shows the commission expense as "commission/dealer salesman incentive," emphasizing
the word salesman.

On the other hand, the application of the five percent (5%) rate by the CTA-First Division is based on
Section 1(g) of Revenue Regulations No. 6-85 which provides:

(g) Amounts paid to certain Brokers and Agents. – On gross payments to customs, insurance, real
estate and commercial brokers and agents of professional entertainers – five per centum (5%).25

In denying the very same argument of the CIR in its motion for reconsideration, the CTA-First
Division, held:

x x x, commission expense is indeed subject to 10% withholding tax but payments made to broker is
subject to 5% withholding tax pursuant to Section 1(g) of Revenue Regulations No. 6-85. While the
commission expense in the schedule of Selling, General and Administrative expenses submitted by
petitioner (SPI) to the BIR is captioned as "commission/dealer salesman incentive" the same does
not justify the automatic imposition of flat 10% rate. As itemized by petitioner, such expense is
composed of "Commission Expense" in the amount of P10,200.00 and ‘Broker Dealer’ of
P2,894,797.00.26

The Court agrees with the CTA-EB when it affirmed the CTA-First Division decision. Indeed, the
applicable rule is Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94,
which was the applicable rule during the subject period of examination and assessment as specified
in the LOA. Revenue Regulations No. 2-98, cited by the CIR, was only adopted in April 1998 and,
therefore, cannot be applied in the present case. Besides, the withholding tax on brokers and agents
was only increased to 10% much later or by the end of July 2001 under Revenue Regulations No. 6-
2001.27 Until then, the rate was only 5%.

The Court also affirms the findings of both the CTA-First Division and the CTA-EB on the deficiency
EWT assessment on the rental deposit. According to their findings, Sony incurred the subject rental
deposit in the amount of ₱10,523,821.99 only from January to March 1998. As stated earlier, in the
absence of the appropriate LOA specifying the coverage, the CIR’s deficiency EWT assessment
from January to March 1998, is not valid and must be disallowed.
Finally, the Court now proceeds to the third ground relied upon by the CIR.

The CIR initially assessed Sony to be liable for penalties for belated remittance of its FWT on
royalties (i) as of December 1997; and (ii) for the period from January to March 1998. Again, the
Court agrees with the CTA-First Division when it upheld the CIR with respect to the royalties for
December 1997 but cancelled that from January to March 1998.

The CIR insists that under Section 328 of Revenue Regulations No. 5-82 and Sections 2.57.4 and
2.58(A)(2)(a)29 of Revenue Regulations No. 2-98, Sony should also be made liable for the FWT on
royalties from January to March of 1998. At the same time, it downplays the relevance of the
Manufacturing License Agreement (MLA) between Sony and Sony-Japan, particularly in the
payment of royalties.

The above revenue regulations provide the manner of withholding remittance as well as the payment
of final tax on royalty. Based on the same, Sony is required to deduct and withhold final taxes on
royalty payments when the royalty is paid or is payable. After which, the corresponding return and
remittance must be made within 10 days after the end of each month. The question now is when
does the royalty become payable?

Under Article X(5) of the MLA between Sony and Sony-Japan, the following terms of royalty
payments were agreed upon:

(5)Within two (2) months following each semi-annual period ending June 30 and December 31, the
LICENSEE shall furnish to the LICENSOR a statement, certified by an officer of the LICENSEE,
showing quantities of the MODELS sold, leased or otherwise disposed of by the LICENSEE during
such respective semi-annual period and amount of royalty due pursuant this ARTICLE X therefore,
and the LICENSEE shall pay the royalty hereunder to the LICENSOR concurrently with the
furnishing of the above statement.30

Withal, Sony was to pay Sony-Japan royalty within two (2) months after every semi-annual period
which ends in June 30 and December 31. However, the CTA-First Division found that there was
accrual of royalty by the end of December 1997 as well as by the end of June 1998. Given this, the
FWTs should have been paid or remitted by Sony to the CIR on January 10, 1998 and July 10,
1998. Thus, it was correct for the CTA-First Division and the CTA-EB in ruling that the FWT for the
royalty from January to March 1998 was seasonably filed. Although the royalty from January to
March 1998 was well within the semi-annual period ending June 30, which meant that the royalty
may be payable until August 1998 pursuant to the MLA, the FWT for said royalty had to be paid on
or before July 10, 1998 or 10 days from its accrual at the end of June 1998. Thus, when Sony
remitted the same on July 8, 1998, it was not yet late.

In view of the foregoing, the Court finds no reason to disturb the findings of the CTA-EB.

WHEREFORE, the petition is DENIED.

SO ORDERED.

GENERAL PRINCIPLES OF TAXATION

FUNDAMENTAL PRINCIPLES IN TAXATION
Taxation
  Taxation is the inherent power of the sovereign, exercised through the legislature, to impose
burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues to carry out
the legitimate objects of government.

 It is also defined as the act of levying a tax, i.e. the process or means by which the sovereign,
through its law-making body, raises income to defray the necessary expenses of government. It is a
method of apportioning the cost of government among those who, in some measure, are privileged to
enjoy its benefits and must therefore bear its burdens.

 It is a mode of raising revenue for public purposes, [Cooley]

Taxes

 Taxes are the enforced proportional contributions from persons and property levied by the law-
making body of the State by virtue of its sovereignty for the support of the government and all public
needs, [Cooley]

 They are not arbitrary exactions but contributions levied by authority of law, and by some rule of
proportion which is intended to ensure uniformity of contribution and a just apportionment of the
burdens of government.

Thus:

a.     Taxes are enforced contributions

Taxes are obligations created by law. [Vera v. Fernandez, L-31364, March,30, 1979]. Taxes are
never founded on contract or agreement, and are not dependent for their validity upon the individual
consent of the person taxed.

b.     Taxes are proportional in character, since taxes are based on one’s ability to pay.

c.     Taxes are levied by authority of law.

            The power to impose taxes is a legislative power; it cannot be imposed by the executive department
nor by the courts.

d.   Taxes are for the support of the government and all its public needs.

ESSENTIAL ELEMENTS OF A TAX

1.             It is an enforced contribution.

2.             It is generally payable in money.

3.             It is proportionate in character.

4.             It is levied on persons, property, or the exercise of a right or privilege (Excise tax).

5.             It is levied by the State which has jurisdiction over the subject or object of taxation.

6.             It is levied by the law-making body of the State.

7.             It is levied for public purpose or purposes.

PURPOSES OF TAXATION

1.             Revenue of fiscal:  The primary purpose of taxation on the part of the government is to provide funds or
property with which to promote the general welfare and the protection of its citizens and to enable it to
finance its multifarious activities.

2.             Non-revenue or regulatory:  Taxation may also be employed for purposes of regulation or control. e.g.:

a)    Imposition of tariffs on imported goods to protect local industries.

b)    The adoption of progressively higher tax rates to reduce inequalities in wealth and income.

c)     The increase or decrease of taxes to prevent inflation or ward off depression.

PAL v. Edu, 164 SCRA 320     

The legislative intent and purpose behind the law requiring owners of vehicles to pay for their
registration is mainly to raise funds for the construction and maintenance of highways and, to a much
lesser degree, pay for the operating expenses of the administering agency. It is possible for an exaction
to be both a tax and a regulation. License fees are charges, looked to as a source of revenues as well as
means of regulation. The fees may properly be regarded as taxes even though they also   serve as an
instrument of regulation. If the purpose is primarily revenue, or if revenue is at least one of the real and
substantial purposes, then the exaction is properly called a tax.

Tio v. Videogram, 151 SCRA 208

PD 1987 which created the Videogram Regulatory Board also imposed a 30% tax on the gross
receipts payable to the local government. SC upheld the validity of the law ruling that the tax imposed is
not only a regulatory but also a revenue measure prompted by the realizations that earnings of
videogram establishments of around P600 million annually have not been subject to tax, thereby
depriving the government of an additional source of revenue. It is a user tax imposed on retailers for
every video they make available for public viewing. The 30% tax also served a regulatory purpose: to
answer the need for regulating the video industry, particularly the rampant film piracy, the flagrant
violation of intellectual property rights, and the proliferation of pornographic video tapes.

Caltex v. Commissioner, 208 SCRA 755

Taxation is no longer a measure merely to raise revenue to support the existence of government.
Taxes may be levied with a regulatory purpose to provide means for the rehabilitation and stabilization of
a threatened industry which is affected with public interest as to be within the police power of the State.
The oil industry is greatly imbued with public interest as it vitally affects the general welfare.

SUMPTUARY PURPOSE OF TAXATION

 More popularly known as the non-revenue or regulatory purpose of taxation. While the primary
purpose of taxation is to raise revenue for the support of the government, taxation is often employed as
a devise for regulation by means of which certain effects or conditions envisioned by the government
may be achieved.

 For example, government may provide tax incentives to protect and promote new and pioneer
industries. The imposition of special duties, like dumping duty, marking duty, retaliatory duty, and
countervailing duty, promote the non-revenue or sumptuary purpose of taxation.

THEORY AND BASIS OF TAXATION

 The power of taxation proceeds upon the theory that the existence of government is a necessity;
that it cannot continue without means to pay its expenses; and that for these means, it has a right to
compel all its citizens property within its limits to contribute.

 The basis of taxation is found in the reciprocal duties of protection and support between the
State and its inhabitants. In return for his contribution, the taxpayer received benefits and protection
from the government. This is the so called “ Benefits received principle”.

 Taxation has been defined as the power by which the sovereign raises revenue to defray the
necessary expenses of government. It is a way of apportioning the cost of government among those who
in some measure are privileged to enjoy the benefits and must therefore bear its burden, [ 51 Am. Jur.
34].

 The power of taxation is essential because the government can neither exist nor endure without
taxation. “Taxes are the lifeblood of the government and their prompt and certain availability is an
imperious need”,  [Bull v.  United States, 295  U.S. 247, 15 APTR 1069, 1073].  The collection of
taxes must be made without any hindrance if the state is to maintain its orderly existence.
  Government projects and infrastructures are made possible through the availability of funds
provided through taxation. The government’s ability to serve and protect the people depends largely
upon taxes. Taxes are what we pay for a civilized society, [Commissioner v. Algue, 158 SCRA 9].

LIFEBLOOD DOCTRINCE

 The lifeblood theory constitutes the theory of taxation, which provides that the existence of
government is a necessity; that government cannot continue without means to pay its expenses; and
that for these means it has a right to compel its citizens and property within its limits to contribute.

 In Commissioner v. Algue,  the Supreme Court said that taxes are the lifeblood of the
government and should be collected without necessary hindrance. They are what we pay for a civilized
society. Without taxes, the government would be paralyzed for lack of motive power to activate and
operate it. The government, for its part, is expected to respond in the form of tangible and intangible
benefits intended to improve the lives of the people and enhance their moral and material values.

 By enforcing the tax lien, the BIR availed itself of the most expeditious way to collect the
tax. Taxes are the lifeblood of the government and their prompt and certain availability is an imperious
need, [CIR v. Pineda, 21 SCRA 105].

 The government is not bound by the errors committed by its agents. In the performance of its
governmental functions, the State cannot be estopped by the neglect of its agents and officers. Taxes are
the lifeblood of the nation through which the government agencies continue to operate and with which
the state effects its functions fro the welfare of its constituents. The errors of certain administrative
officers should never be allowed to jeopardize the government’s financial position, [CIR v. CTA, 234
SCRA 348].

 The BIR is authorized to collect estate tax deficiency through the summary remedy of levying
upon the sale of real properties of a decision without the cognition and authority of the court sitting in
probate over the supposed will of the decedent, because the collection of the estate tax is executive in
character. As such, the estate tax is exempted from the application of the statute on non-claims, and this
is justified by the necessity of government funding, immortalized in the maxim “ Taxes are the lifeblood of
the government and should be made in accordance with law, as any arbitrariness will negate the very
reason for government itself,  [Marcos II v. CA, 273 SCRA 47].

 Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance.  Philex’s claim that it had no obligation to pay the excise tax liabilities within the prescribed
period since it still has pending claims for VAT input credit/refund with the BIR is untenable, [Philex
Mining Corporation v. CIR, 294 SCRA 687]

Illustrations of Lifeblood theory

1.             Collection of taxes cannot be enjoined by injunction.

2.             Taxes could not be the subject of compensation or set off.

3.             A valid tax may result in the destruction of the taxpayer’s property.

4.             Taxation is an unlimited and plenary power.

NECESSITY THEORY

 Taxation as stated in the case of Phil. Guaranty Co., Inc. v. Commissioner [13 SCRA
775],  is a power predicated upon necessity. It is a necessary burden to preserve the State’s sovereignty
and a means to give the citizenry an army to resist aggression, a navy to defend its shores from invasion,
a corps of civil servants to serve, public improvements for the enjoyment of the citizenry, and those
which come within the State’s territory and facilities and protection which a government is supposed to
provide.

BENEFITS RECEIVED PRINCIPLE

 This theory bases the power of the State to demand and receive taxes on the reciprocal duties of
support and protection. The citizen supports the State by paying the portion from his property that is
demanded in order that he may, by means thereof, be secured in the enjoyment of the benefits of an
organized society. Thus, the taxpayer cannot question the validity of the tax law on the ground that
payment of such tax will render him impoverished, or lessen his financial or social standing, because the
obligation to pay taxes is involuntary and compulsory, in exchange for the protection and benefits one
receives from the government.

 In return for his contribution, the taxpayer receives the general advantages and protection which
the government affords the taxpayer and his property. One is compensation or consideration for the
other; protection for support and support for protection.

 However, it does not mean that only those who are able to and do pay taxes can enjoy the
privileges and protection given to a citizen by the government.

 In fact, from the contribution received, the government renders no special or commensurate
benefit to any particular property or person. The only benefit to which the taxpayer is entitled is that
derived from the enjoyment of the privilege of living in an organized society established and safeguarded
by the devotion of taxes to public purpose. The government promises nothing to the person taxed
beyond what may be anticipated from an administration of the laws for the general good,  [Lorenzo
v.  Posadas].

 Taxes are essential to the existence of the government. The obligation to pay taxes rests not
upon the privileges enjoyed by or the protection afforded to the citizen by the government, but upon the
necessity of money for the support of the State. For this reason, no one is allowed to object to or resist
payment of taxes solely because no personal benefit to him can be pointed out as arising from the tax,
[Lorenzo v.  Posadas].
DOCTRINE OF SYMBIOTIC RELATIONSHIP
 This doctrine is enunciated in CIR v. Algue, Inc. [158 SCRA 9],  which states that “Taxes are
what we pay for civilized society. Without taxes, the government would be paralyzed for lack of the
motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one’s
hard-earned income to the taxing authorities, every person who is able must contribute his share in the
burden of running the government. The government for its part, is expected to respond in the form of
tangible and intangible benefits intended to improve the lives of the people and enhance their material
and moral values.”

What is the scope of the power to tax?

            The power of taxation is the most absolute of all powers of the government [Sison v. Ancheta
130 SCRA 654]. It has the broadest scope of all the powers of government because in the absence of
limitations, it is considered as unlimited, plenary, comprehensive and supreme.

            However, the power of taxation should be exercised with caution to minimize injury to the
proprietary rights of the taxpayer. It must be exercised fairly, equally, and uniformly, lest the tax collector
kill “the hen that lays the golden egg” [Roxas v. CTA, 23 SCRA 276].

When is taxation considered as an implement of police power?

            In Walter Lutz v. J. Antonio Araneta, 98 Phil 148 , the SC upheld the validity of the tax law
increasing the existing tax on the manufacture of sugar. “The protection and promotion of the sugar
industry is a matter of public concern; the legislature may determine within reasonable bounds what is
necessary for its protection and expedient for its promotion. If objective and methods alike are
constitutionally valid, there is no reason why the state may not levy taxes to raise funds for their
prosecution and attainment. Taxation may be made the implement of the state’s police power.”

            In Tio v. Videogram Regulatory Board, 151 SCRA  208,  the levy of a 30% tax under
PD1987, was imposed primarily for answering the need for regulating the video industry, particularly the
rampant film piracy, the flagrant violation of intellectual property rights, and the proliferation of
pornographic videotapes, and is therefore valid. While the direct beneficiaries of the said decree is the
movie industry, the citizens are held to be its indirect beneficiaries.

What is the concept of fiscal adequacy?

                   That the sources of revenues must be adequate to meet government expenditures,

[Chavez v. Ongpin, 186 SCRA 331].