CASE DIGEST: LA SUERTE CIGAR & CIGARETTE FACTORY, Petitioner, vs.

COURT OF APPEALS and COMMISSIONER OF INTERNAL REVENUE,

Respondents. (G.R. No. 125346; November 11, 2014)

FACTS:
These cases involve the taxability of stemmed leaf tobacco imported and
locally purchased by cigarette manufacturers for use as raw material in the
manufacture of their cigarettes. Under the Tax Code, if it is to be exported or to
be used in the manufacture of cigars, cigarettes, or other tobacco products on
which the excise tax will eventually be paid on the finished product.

La Suerte was assessed by the BIR for excise tax deficiency amounting to more
than 34 million pesos. La Suerte protested invoking the Tax Code which allows
the sale of stemmed leaf tobacco as raw material by one manufacturer directly to
another without payment of the excise tax. However, the CIR insisted that
stemmed leaf tobacco is subject to excise tax "unless there is an express grant of
exemption from [the] payment of tax."

La Suerte petitioned for review before the CTA which cancelled the assessment.
The CIR appealed to the CA which reversed the CTA. The CIR invoked a
revenue regulation (RR) which limits the exemption from payment of specific tax
on stemmed leaf tobacco to sales transactions between manufacturers classified
as L-7 permittees.

ISSUES:
[1] Is stemmed leaf tobacco subject to excise (specific) tax?
[2] Is purchase of stemmed leaf tobacco from manufacturers who are not
classified as L-7 permittees subject to tax?
[3] Is the RR valid?
[4] Is the possessor or owner, or importer or exporter, of stemmed leaf tobacco
liable for the payment of specific tax if such tobacco product is removed from the
place of production without payment of said tax?
[5] Does the imposition of excise tax on stemmed leaf tobacco under Section 141
of the 1986 Tax Code constitute double taxation, considering they are paying the
specific tax on the raw material and on the finished product in which the raw
material was a part?

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HELD:
[1] Yes, excise taxes on domestic products shall be paid by the manufacturer or
producer before[the] removal [of those products] from the place of production." "It
does not matter to what use the article[s] subject to tax is put; the excise taxes
are still due, even though the articles are removed merely for storage in
someother place and are not actually sold or consumed.

When tobacco is harvested and processed either by hand or by machine, all

itsproducts become subject to specific tax. Section 141 reveals the legislative
policy to tax all forms of manufactured tobacco — in contrast to raw tobacco
leaves — including tobacco refuse or all other tobacco which has been cut, split,
twisted, or pressed and is capable of being smoked without further industrial
processing.

Stemmed leaf tobacco is subject to the specific tax under Section 141(b). It is a
partially prepared tobacco. The removal of the stem or midrib from the leaf
tobacco makes the resulting stemmed leaf tobacco a prepared or partially
prepared tobacco.

Despite the differing definitions for "stemmed leaf tobacco" under revenue
regulations, the onus of proving that stemmed leaf tobacco is not subject to the
specific tax lies with the cigarette manufacturers. Taxation is the rule, exemption
is the exception.

[2] Stemmed leaf tobacco transferred in bulk between cigarette manufacturers

are exempt from excise tax under the Tax Code vis-a-vis RRs.

Section 137 authorizes a tax exemption subject to the following: (1) that the
stemmed leaf tobacco is sold in bulk as raw material by one manufacturer
directly to another; and (2) that the sale or transfer has complied with the
conditions prescribed by the Department of Finance.

The conditions under which stemmed leaf tobacco may be transferred from one
factory to another without prepayment of specific tax are as follows: (a) The
transfer shall be under an official L-7 invoice on which shall be entered the exact
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weight of the tobacco at the time of its removal; (b) Entry shall be made in the L-7
register in the place provided on the page for removals; and (c) Corresponding
debit entry shall bemade in the L-7 register book of the factory receiving the
tobacco under the heading, "Refuse, etc.,received from the other factory,"
showing the date of receipt, assessment and invoice numbers, name and
address of the consignor, formin which received, and the weight of the tobacco.

[3] Yes, valid. Under Section 3(h) of RR No. 17-67, entities that were issued by
the Bureau of Internal Revenue with an L-7 permit refer to "manufacturers of
tobacco products." Hence, the transferor and transferee of the stemmed leaf
tobacco must be an L-7 tobacco manufacturer.

The reason behind the tax exemption of stemmed leaf tobacco transferred
between two L-7 manufacturers is that the same had already been previously-
taxed when acquired by the L-7 manufacturer from dealers of tobacco. There is
no new product when stemmed leaf tobacco is transferred between two L-7
permit holders. Thus, there can be no excise tax that will attach. The regulation,
therefore, is reasonable and does not create a new statutory right.

Moreover, although delegation is not allowed as a rule, the power to fill in the
details and manner as to the enforcement and administration of a law may be
delegated to various specialized administrative agencies.

[4] Importation of stemmed leaf tobacco not included in the exemption. The

transaction contemplated in Section 137 does not include importation of
stemmed leaf tobacco for the reason that the law uses the word "sold" to
describe the transaction of transferring the raw materials from one manufacturer
to another.

[5] In this case, there is no double taxation in the prohibited sense because the
specific tax is imposed by explicit provisions of the Tax Code on two different
articles or products: (1) on the stemmed leaf tobacco; and (2) on cigar or
cigarette.
American Tobacco v. Camacho (2008)
G.R. No. 163583 August 20, 2008
YNARES-SANTIAGO, J.

Lessons Applicable:  Court of Tax Appeals Jurisdiction, Regional Trial Court Jurisdiction, Equal
Protection and Uniformity of Taxation (constitutional issue), BIR Power to Conduct Resurvey and

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Reclassification (delegated by express legislation)

Laws Applicable:

FACTS:

 June 2001, petitioner British American Tobacco introduced and sold Lucky Strike, Lucky
Strike Lights and Lucky Strike Menthol Lights cigarettes w/ SRP P 9.90/pack - Initial assessed
excise tax: P 8.96/pack (Sec. 145 [c])
 February 17, 2003: RR 9-2003: Periodic review every 2 years or earlier of the current net
retail price of new brands and variants thereof for the purpose of the establishing and updating
their  tax classification
 March 11, 2003: RMO 6-2003: Guidelines and procedures in establishing current net retail
prices of new brands of cigarettes and alcohol products
 August 8, 2003: RR 22-2003: Implement the revised tax classification of certain new brands
introduced in the market after January 1, 1997 based on the survey of their current net retail
prices.  This increased the excise tax to P13.44 since the average net retail price is above P
10/pack.  This cause petitioner to file before the RTC of Makati a petition for injunction with
prayer for issuance of a Temporary Restraining Order and/or Writ of Preliminary Injunction
sought to enjoin the implementation of Sec. 145 of the NIRC, RR No. 1-97, 9-2003, 22-2003 and
6-2003 on the ground that they discriminate against new brands of cigarettes in violation of the
equal protection and uniformity provisions  of the Constitution 
 RTC: Dismissed
 While petitioner's appeal was pending, RA 9334 amending Sec. 145 of the 1997 NIRC
among other took effect on January 1, 2005 which in effect increased petitioners excise tax to
P25/pack
 Petitioner filed a Motion to Admit attached supplement and a supplement to the petition for
review assailing the constitutionality of RA 9334 and praying a downward classification of Lucky
Strike products at the bracket taxable at P 8.96/pack since existing brands are still taxed based
on their price as of October 1996 eventhough they are equal or higher than petitioner's product
price.   
 Philip Morris Philippines Manufacturing Incorporated, Fortune Tobacco Corp., Mighty Corp.
and JT International Intervened.  
 Fortune Tobacco claimed that the CTA should have the exclusive appellate jurisdiction over
the decision of the BIR in tax disputes
ISSUE:

1. W/N the RTC rather than the CTA has jurisdiction.

2. W/N RA 9334 of the classification freeze provision is unconstitutional for violating the  equal
protection and uniformity provisions  of the Constitution
3. W/N RR Nos. 1-97, 9-2003, 22-2003 and RA 8243 even prior to its amendment by RA 9334
can authorize the BIR to conduct resurvey and reclassification. 
HELD:
1. Yes. The jurisdiction of the CTA id defined in RA 1125 which confers on the CTA jurisdiction to
resolve tax disputes in general.  BUT does NOT include cases where the constitutionality of a law or
rule is challenged which is a judicial power belonging to regular courts.

2. No. In Sison Jr. v. Ancheta, the court held that "xxx It suffices then that the laws operate equally
and uniformly on all persons under similar circumstances or that all persons must be treated in the
same manner, the conditions not being different, both in the privileges conferred and the liabilities
imposed.  If the law be looked upon in tems of burden on charges, those that fall within a class
should be treated in the same fashion, whatever restrictions cast on some in the group equally

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binding on the rest. xxx"  Thus, classification if rational in character is allowable. In Lutz v. Araneta:
"it is inherent in the power to tax that a state be free to select the subjects of taxation, and it has
been repeatedly held that 'inequalities which result from a singling out of one particular class for
taxation, or exemption infringe no constitutional limitation"  SC previously held: "Equality and
uniformity in taxation means that all taxable articles or kinds of property of the same class shall be
taxed at the same rate. The taxing power has the authority to make reasonable and natural
classifications for purposes of taxation"

Under the the rational basis test, a legislative classification, to survive an equal protection challenge,
must be shown to rationally further a legitimate state interest . The classifications must be reasonable
and rest upon some ground of difference having a fair and substantial relation to the object of the
legislation

A legislative classification that is reasonable does not offend the constitutional guaranty of the equal
protection of the laws. The classification is considered valid and reasonable provided that: (1) it rests
on substantial distinctions; (2) it is germane to the purpose of the law; (3) it applies, all things being
equal, to both present and future conditions; and (4) it applies equally to all those belonging to the
same class.

Moreover, petitioner failed to clearly demonstrate the exact extent of such impact as the price is not
the only factor that affects competition.

3. NO. Unless expressly granted to the BIR, the power to reclassify cigarette brands remains a
prerogative of the legislature which cannot be usurped by the former.  These are however modified
by RA 9334.

MARCOS II v. CA
GR No. 120880, June 5, 1997
293 SCRA 77

FACTS: Bongbong Marcos sought for the reversal of the ruling of the Court of Appeals to grant CIR's
petition to levy the properties of the late Pres. Marcos to cover the payment of his tax delinquencies
during the period of his exile in the US. The Marcos family was assessed by the BIR, and notices
were constructively served to the Marcoses, however the assessment were not protested
administratively by Mrs. Marcos and the heirs of the late president so that they became final and
unappealable after the period for filing of opposition has prescribed. Marcos contends that the
properties could not be levied to cover the tax dues because they are still pending probate with the
court, and settlement of tax deficiencies could not be had, unless there is an order by the probate
court or until the probate proceedings are terminated.

ISSUE: Is the contention of Bongbong Marcos correct?

HELD: No. The deficiency income tax assessments and estate tax assessment are already final and
unappealable -and-the subsequent levy of real properties is a tax remedy resorted to by the
government, sanctioned by Section 213 and 218 of the National Internal Revenue Code. This
summary tax remedy is distinct and separate from the other tax remedies (such as Judicial Civil
actions and Criminal actions), and is not affected or precluded by the pendency of any other tax
remedies instituted by the government. 
   The approval of the court, sitting in probate, or as a settlement tribunal over the deceased is not a
mandatory requirement in the collection of estate taxes. It cannot therefore be argued that the Tax
Bureau erred in proceeding with the levying and sale of the properties allegedly owned by the late

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President, on the ground that it was required to seek first the probate court's sanction. There is
nothing in the Tax Code, and in the pertinent remedial laws that implies the necessity of the probate
or estate settlement court's approval of the state's claim for estate taxes, before the same can be
enforced and collected.  On the contrary, under Section 87 of the NIRC, it is the probate or
settlement court which is bidden not to authorize the executor or judicial administrator of the
decedent's estate to deliver any distributive share to any party interested in the estate, unless it is
shown a Certification by the Commissioner of Internal Revenue that the estate taxes have been
paid. This provision disproves the petitioner's contention that it is the probate court which approves
the assessment and collection of the estate tax.

Collector vs. Benipayo GR L-13656, 31 January 1962

Facts:
Alberto Benipayo is the owner of the Lucena Theater in Lucena, Quezon. In 1953, the internal
revenue agent investigated Benipayo’s tax liability for the period of August 1952 to September
1953. The examiner recommended a deficiency tax assessment in the sum of P11,193.45
inclusive of 25% surcharge plus a suggested compromise penalty of P900.00 based on the
conclusion that Benipayo sold 2 tax-free 20c ticletsfraudulently in order to avoid payment of
amusement tax prescribed by Section 260 of the Tax Code (based on a reverse ratio of adult to
children; 3:1 in 1949 to 1951, and 1:3 for period in question; and average attendance for the
past years). Benipayo protested, claiming that the findings of the examiners are mere
presumptions and conclusions, devoid of findings of fact of alleged fraudulent practices by him.

Issue:
Whether there is evidence in the record to show Benipayo committed the alleged act to cheat or
defraud the Government

Ruling:
No. An assessment fixes and determines the tax liability of a taxpayer. In order to stand the test
of judicial scrutiny, the assessment must be based on actual facts. The presumption of
correctness of assessment, being a mere presumption, cannot be made to rest on another
presumption, no matter how reasonable or logical such may be; i.e. that the circumstances in
1952 and 1953 are presumed to be the same as those existing in 1949 to 1951, and July 1955.
There are no substantial facts to support the assessment in question. Neither was there any
proof of the fraud allegedly committed. Fraud is a serious charge, and to be sustained, it must
also be supported by clear and convincing proof. 

Perez vs CTA GR L-10507 – May 30, 1958

Facts:
Petitioner was assessed by the Collector with deficiency tax due to its increase in net worth. In
making the deficiency assessments, the Collector employed what is known as the "net worth"
technique and started by determining the opening net worth of petitioner at the start of the year
1947 which he fixed at P936.72. The Court of Tax Appeals declared the "net worth" method of
determining understated income to have been validly and properly applied; found that the
consistent underdeclaration of income, unexplained acquisition of properties, and the fact of

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petitioner's having claimed fictitious losses evidenced fraudulent intent, and ordered him to pay
deficiency income taxes and surcharges in the sum of P241,547.77.

Issue:

1. (1)  Whether the Collector of Internal Revenue is empowered by law toinvestigate

appellant's (petitioner) income tax returns for 1947, 1948, and1949 and to enforce
collection of the alleged deficiency income taxes for saidyears by summary proceedings
of distraint and levy more than three yearsafter the income tax returns covering them
were filed
2. (2)  Whether the use ofthe "net worth" method by the respondent in computing
appellant's netincome is valid

Ruling:

1. (1)  No. Reiteratirg a long line of decisions to the effect that thethree-year prescriptive
period under section 51 (d) of the National InternalRevenue Code constituted a limitation
to the right of the government to enforce the collection of income taxes by summary
proceedings of distraintand levy, though, it could proceed to recover the taxes due by
the institutionof the corresponding civil action. Nevertheless, the appealof the taxpayer
vested jurisdiction on the Court of Tax Appeals to reviewand determine his tax liability for
the aforesaid period.
2. (2)  Yes. This method of proving unreported income, according to the Court of
TaxAppeals, is based upon the general theory that money and other assets inexcess of
liabilities of a taxpayer (after an accurate and proper adjustment ofnon- deductible items)
not accounted for by his income tax returns, leads tothe inference that part of his income
has not been reported (p. 6, B.T.A. 189).There is no question that the application of the
"net worth" method ofdetermining the taxable income of a taxpayer has been an
accepted practice.
In fine, we hold:
That section 38 of our National Internal Revenue Code authorizes the application of the
Net Worth Method in this jurisdiction (Baiter, Fraud Under Fed.Tax Law, sec. 224; Vol. 2,
1951 CCH 386. Oil, Byer Net Worth Technique for Determining Income, supra: Holland
vs. U.S., supra; Estate of Bartley, 22 U.S.Tax Ct. lep. 1230; Hurley, 22 U. S. Tax Ct.
Rep. 1264; S B.T.A. 169).
That no civil cases, the Government need not prove the specific source of income (this is
reasonable on the basic assumption that most assets are derived from a taxable source
and that when this is not true the taxpayer is in a position to explain the discrepancy,
{see Holland case, supra);
That the determination of the tax deficiency by the Government has prima facie validity
and the burden rests upon the taxpayer to overcome this presumption and to show to
the satisfaction of the Tax Court that the determination was not correct (Archer vs.
Commissioner, supra; Thomas vs. Commissioner, supra; Laughinghouse vs.
Commissioner, sutra: William Lias, 24 T.C. No. 23,May 26, 1955, Virginia Law Review,
41 p. 7; Halle, 7 T.C. 245, aff'd 175 F. 2d 500, 339 U.S. 949; Byer, "Net Worth
Technique for Determining Income").
And finally, that no sufficient grounds exist to warrant a reversal of the findings of fraud

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 of the lower court as being "clearly erroneous"; on the contrary, we find them supported
by reason. 

A complaint was filed against the

defendant alleging that the latter
failed to file income tax returns for
1953 and 1954. He filed false and
fraudulent returns for 1951,
1952 and 1955. the lower
court
dismissed the complaint
holding that the action is
barred by prior judgment,
defendant having be

for 1953 and 1954. He filed

false and fraudulent returns

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for 1951, 1952 and 1955. the
lower court
dismissed the complaint
holding that the action is
barred by prior judgment,
defendant having been
acquitted in criminal cases of the
same court, which were
prosecutions for failure to file
income tax returns
and for non-payment of income
taxes
Republic vs Patanao

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COMMISSION OF INTERNAL REVENUE vs. HANTEX TRADING CO., INC
G.R. No. 136975. March 31, 2005

Facts:

Hantex Trading Co is a company organized under the Philippines. It is engaged in the sale of plastic
products, it imports synthetic resin and other chemicals for the manufacture of its products. For this
purpose, it is required to file an Import Entry and Internal Revenue Declaration (Consumption Entry)
with the Bureau of Customs under Section 1301 of the Tariff and Customs Code. Sometime in October
1989, Lt. Vicente Amoto, Acting Chief of Counter-Intelligence Division of the Economic Intelligence and
Investigation Bureau (EIIB), received confidential information that the respondent had imported
synthetic resin amounting to P115,599,018.00 but only declared P45,538,694.57. Thus, Hentex receive
a subpoena to present its books of account which it failed to do. The bureau cannot find any original
copies of the products Hentex imported since the originals were eaten by termites. Thus, the Bureau
relied on the certified copies of the respondent’s Profit and Loss Statement for 1987 and 1988 on file
with the SEC, the machine copies of the Consumption Entries, Series of 1987, submitted by the
informer, as well as excerpts from the entries certified by Tomas and Danganan. The case was
submitted to the CTA which ruled that Hentex have tax deficiency and is ordered to pay, per
investigation of the Bureau. The CA ruled that the income and sales tax deficiency assessments issued by
the petitioner were unlawful and baseless since the copies of the import entries relied upon in
computing the deficiency tax of the respondent were not duly authenticated by the public officer
charged with their custody, nor verified under oath by the EIIB and the BIR investigators.

Issue:

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Whether or not the final assessment of the petitioner against the respondent for deficiency income tax
and sales tax for the latter’s 1987 importation of resins and calcium bicarbonate is based on competent
evidence and the law.

Held:

Central to the second issue is Section 16 of the NIRC of 1977, as amended which provides that the
Commissioner of Internal Revenue has the power to make assessments and prescribe additional
requirements for tax administration and enforcement. Among such powers are those provided in
paragraph (b), which provides that “Failure to submit required returns, statements, reports and other
documents. – When a report required by law as a basis for the assessment of any national internal
revenue tax shall not be forthcoming within the time fixed by law or regulation or when there is reason
to believe that any such report is false, incomplete or erroneous, the Commissioner shall assess the
proper tax on the best evidence obtainable.” This provision applies when the Commissioner of Internal
Revenue undertakes to perform her administrative duty of assessing the proper tax against a taxpayer,
to make a return in case of a taxpayer’s failure to file one, or to amend a return already filed in the BIR.
The “best evidence” envisaged in Section 16 of the 1977 NIRC, as amended, includes the corporate and
accounting records of the taxpayer who is the subject of the assessment process, the accounting records
of other taxpayers engaged in the same line of business, including their gross profit and net profit sales.
Such evidence also includes data, record, paper, document or any evidence gathered by internal
revenue officers from other taxpayers who had personal transactions or from whom the subject
taxpayer received any income; and record, data, document and information secured from government
offices or agencies, such as the SEC, the Central Bank of the Philippines, the Bureau of Customs, and the
Tariff and Customs Commission. However, the best evidence obtainable under Section 16 of the 1977
NIRC, as amended, does not include mere photocopies of records/documents. The petitioner, in
making a preliminary and final tax deficiency assessment against a taxpayer, cannot anchor the said
assessment on mere machine copies of records/documents. Mere photocopies of the Consumption
Entries have no probative weight if offered as proof of the contents thereof. The reason for this is that
such copies are mere scraps of paper and are of no probative value as basis for any deficiency income or
business taxes against a taxpayer.

COMMISSIONER OF INTERNAL REVENUE vs. MARUBENI CORPORATION

G.R. No. 137377. December 18, 2001

FACTS: Respondent Marubeni Corporation is a foreign corporation and is duly registered to engage in
business in the Philippines. Sometime in November 1985, petitioner Commissioner of Internal Revenue
issued a letter of authority to examine the books of accounts of the Manila branch office of Respondent
Corporation.

In the course of the examination, petitioner found respondent to have undeclared income from two (2)
contracts in the Philippines. Petitioner's revenue examiners recommended an assessment for
deficiency income, branch profit remittance, and contractor’s and commercial broker's taxes.
Respondent questioned this assessment. Respondent then received a letter form petitioner assessing

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respondent several deficiency taxes. On September 26, 1986, respondent filed two (2) petitions for
review with the Court of Tax Appeals.

Earlier, on August 2, 1986, Executive Order (E.O.) No. 41 declaring a one-time amnesty covering
unpaid income taxes for the years 1981 to 1985 was issued. Under this E.O., a taxpayer who wished to
avail of the income tax amnesty should comply with certain requirements. In accordance with the terms
of E.O. No. 41, respondent filed its tax amnesty return dated October 30, 1986. On November 17, 1986,
the scope and coverage of E.O. No. 41 was expanded by Executive Order (E.O.) No. 64.

ISSUE:

Whether or not herein respondent's deficiency tax liabilities were extinguished upon respondent's
availment of tax amnesty under Executive Orders Nos. 41 and 64.

RULING:

Section 4 (b) of E.O. No. 41 is very clear and unambiguous. It excepts from income tax amnesty those
taxpayers "with income tax cases already filed in court as of the effectivity hereof." The point of
reference is the date of effectivity of E.O. No. 41. The difficulty lies with respect to the contractor's tax
assessment and respondent's availment of the amnesty under E.O. No. 64 including estate and donor's
taxes and tax on business.

In the instant case, the vagueness in Section 4 (b) brought about by E.O. No. 64 should be construed
strictly against the taxpayer. The term "income tax cases" should be read as to refer to estate and
donor's taxes and taxes on business while the word "hereof," to E.O. No. 64. Since Executive Order No.
64 took effect on November 17, 1986, consequently, insofar as the taxes in E.O. No. 64 are concerned,
the date of effectivity referred to in Section 4 (b) of E.O. No. 41 should be November 17, 1986. There is
nothing in E.O. No. 64 that provides that it should retroact to the date of effectivity of E.O. No. 41, the
original issuance. Neither is it necessarily implied from E.O. No. 64 that it or any of its provisions should
apply retroactively.

Commissioner vs BOAC

149 SCRA 395

Facts:

                British overseas airways corp. (BOAC) a wholly owned British Corporation, is engaged in
international airlines business. From 1959to 1972, it has no loading rights for traffic purposes in the
Philippines but maintained a general sales agent in the Philippines which was responsible for selling,
BOAC  tickets covering passengers and cargoes the CIR assessed deficiency income taxes against.

Issue: Is BOAC liable to pay taxes?

Ruling:

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                Yes. The source of income is the property, activity of service that produces the income. For the
source of income to be considered coming from the Philippines, it is sufficient that the income is derived
from the activity coming from the Philippines. The tax code provides that for revenue to be taxable, it
must constitute income from Philippine sources. In this case, the sale of tickets is the source of income.
The situs of the source of payments is the Philippines.

LORENZO OÑA V CIR

29 JAN

GR No. L -19342 | May 25, 1972 | J. Barredo

Facts:
Julia Buñales died leaving as heirs her surviving spouse, Lorenzo Oña and her five children. A civil
case was instituted for the settlement of her state, in which Oña was appointed administrator and
later on the guardian of the three heirs who were still minors when the project for partition was
approved. This shows that the heirs have undivided ½ interest in 10 parcels of land, 6 houses and
money from the War Damage Commission.

Although the project of partition was approved by the Court, no attempt was made to
divide the properties and they remained under the management of Oña who used said
properties in business by leasing or selling them and investing the income derived
therefrom and the proceeds from the sales thereof in real properties and securities. As
a result, petitioners’ properties and investments gradually increased. Petitioners
returned for income tax purposes their shares in the net income but they did not actually receive
their shares because this left with Oña who invested them.

Based on these facts, CIR decided that petitioners formed an unregistered partnership and therefore,
subject to the corporate income tax, particularly for years 1955 and 1956. Petitioners asked for
reconsideration, which was denied hence this petition for review from CTA’s decision.

Issue:   
W/N there was a co-ownership or an unregistered partnership
W/N the petitioners are liable for the deficiency corporate income tax

Held:
Unregistered partnership. The Tax Court found that instead of actually distributing the estate of
the deceased among themselves pursuant to the project of partition, the heirs allowed their
properties to remain under the management of Oña and let him use their shares as part of the
common fund for their ventures, even as they paid corresponding income taxes on their respective
shares.
Yes. For tax purposes, the co-ownership of inherited properties is automatically
converted into an unregistered partnership the moment the said common properties
and/or the incomes derived therefrom are used as a common fund with intent to
produce profits for the heirs in proportion to their respective shares in the inheritance
as determined in a project partition either duly executed in an extrajudicial settlement
or approved by the court in the corresponding testate or intestate proceeding. The
reason is simple. From the moment of such partition, the heirs are entitled already to their respective

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definite shares of the estate and the incomes thereof, for each of them to manage and dispose of as
exclusively his own without the intervention of the other heirs, and, accordingly, he becomes liable
individually for all taxes in connection therewith. If after such partition, he allows his share to be
held in common with his co-heirs under a single management to be used with the intent of making
profit thereby in proportion to his share, there can be no doubt that, even if no document or
instrument were executed, for the purpose, for tax purposes, at least, an unregistered partnership is
formed.

Pascual and Dragon v. CIR, G.R. No. 78133, October 18, 1988

25MAR

[GANCAYCO, J.]

FACTS:

Petitioners bought two (2) parcels of land and a year after, they bought another three (3) parcels of
land. Petitioners subsequently sold the said lots in 1968 and 1970, and realized net profits. The
corresponding capital gains taxes were paid by petitioners in 1973 and 1974 by availing of the tax
amnesties granted in the said years. However, the Acting BIR Commissioner assessed and required
Petitioners to pay a total amount of P107,101.70 as alleged deficiency corporate income taxes for the
years 1968 and 1970. Petitioners protested the said assessment asserting that they had availed of tax
amnesties way back in 1974. In a reply, respondent Commissioner informed petitioners that in the
years 1968 and 1970, petitioners as co-owners in the real estate transactions formed an unregistered
partnership or joint venture taxable as a corporation under Section 20(b) and its income was subject
to the taxes prescribed under Section 24, both of the National Internal Revenue Code that the
unregistered partnership was subject to corporate income tax as distinguished from profits derived
from the partnership by them which is subject to individual income tax; and that the availment of tax
amnesty under P.D. No. 23, as amended, by petitioners relieved petitioners of their individual income
tax liabilities but did not relieve them from the tax liability of the unregistered partnership. Hence, the
petitioners were required to pay the deficiency income tax assessed.

ISSUE:

Whether the Petitioners should be treated as an unregistered partnership or a co-ownership for the
purposes of income tax.

RULING:

The Petitioners are simply under the regime of co-ownership and not under unregistered partnership.

By the contract of partnership two or more persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the profits among themselves (Art. 1767, Civil
Code of the Philippines). In the present case, there is no evidence that petitioners entered into an
agreement to contribute money, property or industry to a common fund, and that they intended to
divide the profits among themselves. The sharing of returns does not in itself establish a partnership
whether or not the persons sharing therein have a joint or common right or interest in the property.
There must be a clear intent to form a partnership, the existence of a juridical personality different from
the individual partners, and the freedom of each party to transfer or assign the whole property. Hence,

Page 14 of 65
there is no adequate basis to support the proposition that they thereby formed an unregistered
partnership. The two isolated transactions whereby they purchased properties and sold the same a few
years thereafter did not thereby make them partners. They shared in the gross profits as co- owners and
paid their capital gains taxes on their net profits and availed of the tax amnesty thereby. Under the
circumstances, they cannot be considered to have formed an unregistered partnership which is thereby
liable for corporate income tax, as the respondent commissioner proposes.

Obillos v. Commissioner of Internal Revenue

G.R. No. L-68118, 29 October 1985

FACTS:

On March 2, 1973 Jose Obillos, Sr. bought two lots with areas of 1,124 and 963 square metersof
located at Greenhills, San Juan, Rizal. The next day he transferred his rights to his four children,
the petitioners, to enable them to build their residences. The Torrens titles issued to them
showed that they were co-owners of the two lots.

In 1974, or after having held the two lots for more than a year, the petitioners resold them to the
Walled City Securities Corporation and Olga Cruz Canada for the total sum of P313,050. They
derived from the sale a total profit of P134, 341.88 or P33,584 for each of them. They treated the
profit as a capital gain and paid an income tax on one-half thereof or of P16,792.

In April, 1980, the Commissioner of Internal Revenue required the four petitioners to
pay corporate income tax on the total profit of P134,336 in addition to individual income tax on
their shares thereof. The petitioners are being held liable for deficiency income taxes and penalties
totalling P127,781.76 on their profit of P134,336, in addition to the tax on capital gains already paid
by them.

The Commissioner acted on the theory that the four petitioners had formed an unregistered
partnership or joint venture The petitioners contested the assessments. Two Judges of the Tax
Court sustained the same. Hence, the instant appeal.

ISSUE:

Whether or not the petitioners had indeed formed a partnership or joint venture and thus liable for
corporate tax.

RULING:

NO. As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and
simple. To consider them as partners would obliterate the distinction between a co-ownership and a
partnership. The petitioners were not engaged in any joint venture by reason of that isolated
transaction.

The Supreme Court held that the petitioners should not be considered to have formed a partnership
just because they allegedly contributed P178,708.12 to buy the two lots, resold the same and

Page 15 of 65
divided the profit among themselves. To regard so would result in oppressive taxation and confirm
the dictum that the power to tax involves the power to destroy. That eventuality should be obviated.

The division of the profit was merely incidental to the dissolution of the co-ownership which was in
the nature of things a temporary state. It had to be terminated sooner or later. They did not
contribute or invest additional ‘ capital to increase or expand the properties, nor was there an
unmistakable.

CIR vs. St. Luke, G.R. No. 195909

1. Luke’s Medical Center, Inc. is a hospital organized as a non-stock and non-

profit corporation.
2. The BIR assessed St. Luke’s deficiency taxes amounting to P76,063,116.06
for 1998, comprised of deficiency income tax, VAT, withholding tax on
compensation and expanded withholding tax.
3. Luke’s filed an administrative protest with the BIR against the deficiency tax
assessments.
4. The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a
10% preferential tax rate on the income of proprietary non-profit hospitals, should be
applicable to St. Luke’
5. The BIR claimed that St. Luke’s was actually operating for profit in 1998 because
only 13% of its revenues came from charitable purposes. Moreover, the hospital’s
board of trustees, officers and employees directly benefit from its profits and assets.
St. Luke’s had total revenues of P1,730,367,965 or approximately P1.73 billion from
patient services in 1998.
6. Luke’s contended that the BIR should not consider its total revenues, because its
free services to patients was P218,187,498 or 65.20% of its 1998 operating income
of P334,642,615. St. Luke’s also claimed that its income does not inure to the
benefit of any individual.
7. Luke’s maintained that it is a non-stock and non-profit institution for
charitable and social welfare purposes under Section 30(E) and (G) of the
NIRC. It argued that the making of profit per se does not destroy its income tax
exemption.

Issue: Whether St. Luke’s is liable for deficiency income tax in 1998 under Section 27(B) of the
NIRC, which imposes a preferential tax rate of 10% on the income of proprietary non-profit
hospitals.

Ruling:

The issue raised by the BIR is a purely legal one. It involves the effect of the
introduction of Section 27(B) in the NIRC of 1997 vis-à-vis Section 30(E) and (G) on the
income tax exemption of charitable and social welfare institutions. The 10% income tax

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rate under Section 27(B) specifically pertains to proprietary educational institutions and
proprietary non-profit hospitals.

Section 27(B) of the NIRC does not remove the income tax exemption of proprietary
non-profit hospitals under Section 30(E) and (G). Section 27(B) on one hand, and
Section 30(E) and (G) on the other hand, can be construed together without the removal
of such tax exemption.

The effect of the introduction of Section 27(B) is to subject the taxable income of two
specific institutions, namely, proprietary non-profit educational institutions and
proprietary non-profit hospitals, among the institutions covered by Section 30, to the
10% preferential rate under Section 27(B) instead of the ordinary 30% corporate rate
under the last paragraph of Section 30 in relation to Section 27(A)(1).

The only qualifications for hospitals are that they must be proprietary and non-profit.
“Proprietary” means private, following the definition of a “proprietary educational
institution” as “any private school maintained and administered by private individuals or
groups” with a government permit. “Non-profit” means no net income or asset accrues
to or benefits any member or specific person, with all the net income or asset devoted to
the institution’s purposes and all its activities conducted not for profit.

“Non-profit” does not necessarily mean “charitable.”

The Court defined “charity” in Lung Center of the Philippines v. Quezon City as “a gift,
to be applied consistently with existing laws, for the benefit of an indefinite number of
persons, either by bringing their minds and hearts under the influence of education or
religion, by assisting them to establish themselves in life or by otherwise lessening the
burden of government.”

To be a charitable institution, however, an organization must meet the substantive test

of charity in Lung Center. The issue in Lung Center concerns exemption from real
property tax and not income tax. However, it provides for the test of charity in our
jurisdiction.

Page 17 of 65
In other words, charitable institutions provide for free goods and services to the public
which would otherwise fall on the shoulders of government. Thus, as a matter of
efficiency, the government forgoes taxes which should have been spent to address
public needs, because certain private entities already assume a part of the burden. This
is the rationale for the tax exemption of charitable institutions.

Charitable institutions, however, are not ipso facto entitled to a tax exemption. The
requirements for a tax exemption are specified by the law granting it. The requirements
for a tax exemption are strictly construed against the taxpayer because an exemption
restricts the collection of taxes necessary for the existence of the government.

The Court in Lung Center declared that the Lung Center of the Philippines is a
charitable institution for the purpose of exemption from real property taxes. This ruling
uses the same premise as Hospital de San Juan and Jesus Sacred Heart College which
says that receiving income from paying patients does not destroy the charitable nature
of a hospital.

For real property taxes, the incidental generation of income is permissible because the
test of exemption is the use of the property. The test of exemption is not strictly a
requirement on the intrinsic nature or character of the institution. The test requires that
the institution use the property in a certain way, i.e. for a charitable purpose. Thus, the
Court held that the Lung Center of the Philippines did not lose its charitable character
when it used a portion of its lot for commercial purposes. The effect of failing to meet
the use requirement is simply to remove from the tax exemption that portion of the
property not devoted to charity.

In the NIRC, Congress decided to extend the exemption to income taxes. However, the
way Congress crafted Section 30(E) of the NIRC is materially different from Section
28(3), Article VI of the Constitution. Section 30(E) of the NIRC defines the corporation or
association that is exempt from income tax. On the other hand, Section 28(3), Article VI
of the Constitution does not define a charitable institution, but requires that the
institution “actually, directly and exclusively” use the property for a charitable purpose.

Section 30(E) of the NIRC provides that a charitable institution must be:

Page 18 of 65
 A non-stock corporation or association;
 Organized exclusively for charitable purposes;
 Operated exclusively for charitable purposes;
 No part of its net income or asset shall belong to or inure to the benefit of any
member, organizer, officer or any specific person.

Thus, both the organization and operations of the charitable institution must be

devoted “exclusively” for charitable purposes. The organization of the institution
refers to its corporate form, as shown by its articles of incorporation, by-laws and other
constitutive documents.

Section 30(E) of the NIRC specifically requires that the corporation or association
be non-stock, which is defined by the Corporation Code as “one where no part of its
income is distributable as dividends to its members, trustees, or officers” and that any
profit “obtained as an incident to its operations shall, whenever necessary or proper, be
used for the furtherance of the purpose or purposes for which the corporation was
organized.”

However, the last paragraph of Section 30 of the NIRC qualifies the words “organized
and operated exclusively” by providing that: Notwithstanding the provisions in the
preceding paragraphs, the income of whatever kind and character of the foregoing
organizations from any of their properties, real or personal, or from any of their activities
conducted for profit regardless of the disposition made of such income, shall be subject
to tax imposed under this Code.

In 1998, St. Luke’s had total revenues of P1,730,367,965 from services to paying
patients. It cannot be disputed that a hospital which receives approximately P1.73 billion
from paying patients is not an institution “operated exclusively” for charitable purposes.
Clearly, revenues from paying patients are income received from “activities conducted
for profit.” Indeed, St. Luke’s admits that it derived profits from its paying patients. St.
Luke’s declared P1,730,367,965 as “Revenues from Services to Patients” in contrast to
its “Free Services” expenditure of P218,187,498.

Services to paying patients are activities conducted for profit. They cannot be
considered any other way. There is a “purpose to make profit over and above the
cost” of services. The P1.73 billion total revenues from paying patients is not

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even incidental to St. Luke’s charity expenditure of P218,187,498 for non-paying
patients.

The Court finds that St. Luke’s is a corporation that is not “operated exclusively”
for charitable or social welfare purposes insofar as its revenues from paying
patients are concerned. This ruling is based not only on a strict interpretation of a
provision granting tax exemption, but also on the clear and plain text of Section
30(E) and (G). Section 30(E) and (G) of the NIRC requires that an institution be
“operated exclusively” for charitable or social welfare purposes to be completely
exempt from income tax.

Commissioner of Internal Revenue vs. St Luke's Medical

Center
Facts:
St. Luke’s Medical Center, Inc. (St. Luke’s) is a hospital organized as a non-stock and non-profit
corporation. St. Luke’s accepts both paying and non-paying patients. The BIR assessed St. Luke’s
deficiency taxes for 1998 comprised of deficiency income tax, value-added tax, and withholding tax.
The BIR claimed that St. Luke’s should be liable for income tax at a preferential rate of 10% as
provided for by Section 27(B). Further, the BIR claimed that St. Luke’s was actually operating for profit
in 1998 because only 13% of its  revenues  came from  charitable purposes. Moreover, the hospital’s
board of trustees, officers and employees directly benefit  from  its  profits  and  assets.
On the other hand, St. Luke’s maintained that it is a non-stock and non-profit institution for
charitable and social welfare purposes exempt from income tax under Section 30(E) and (G) of the
NIRC. It argued that the making of profit per se does not destroy its income tax exemption.
Issue:
            The sole issue is whether St. Luke’s is liable for deficiency income tax in 1998 under Section
27(B) of the NIRC, which imposes a preferential tax rate of 10^ on the income of proprietary non-profit
hospitals.
Ruling:
            Section 27(B) of the NIRC does not remove the income tax exemption of proprietary non-profit
hospitals under Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) on  the
other  hand,  can  be  construed  together without  the  removal  of  such  tax exemption.
Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income  of  (1) 
proprietary  non-profit  educational  institutions and (2) proprietary non-profit hospitals. The only
qualifications for hospitals are that they must be proprietary and non-profit. “Proprietary” means
private, following the definition of a “proprietary educational institution” as “any private school 
maintained  and  administered  by  private individuals  or groups” with a government permit. “Non-
profit” means no net income or asset accrues to or benefits any member or specific person, with
all the net income or asset devoted to the institution’s purposes and all its activities conducted not for
profit.
“Non-profit” does not necessarily mean “charitable.” In Collector of Internal Revenue v. Club
Filipino Inc. de Cebu, this Court considered as non-profit a sports club organized for recreation and
entertainment of its stockholders and members. The club was primarily funded by membership fees
and dues. If it had profits, they were used for overhead expenses and improving its golf course. The
club was non-profit because of its purpose and  there  was  no  evidence  that  it was  engaged  in  a 
profit-making enterprise.
The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not charitable. The 
Court  defined  “charity”  in  Lung  Center  of  the Philippines  v. Quezon  City as  “a  gift,  to  be 
applied  consistently  with existing laws, for the benefit of an indefinite number of persons, either by

Page 20 of 65
bringing their minds and hearts under the influence of education or religion, by assisting them to
establish themselves in life or [by] otherwise lessening the  burden  of  government.” However, despite
its being a tax exempt institution, any income such institution earns from activities conducted for
profit is taxable, as expressly provided in the last paragraph of Sec. 30.
To be a charitable institution, however, an organization must meet the substantive  test  of 
charity  in  Lung  Center.  The   issue  in  Lung  Center concerns exemption from real property tax and
not income tax. However, it provides for the test of charity in our jurisdiction. Charity is essentially a
gift to an indefinite number of persons which lessens the burden of government. In  other  words, 
charitable  institutions  provide  for  free  goods  and services to the public which would otherwise
fall on the shoulders of government. Thus, as a matter of efficiency, the government forgoes taxes
which  should  have  been  spent  to  address  public  needs,  because  certain private entities already
assume a part of the burden. This is the rationale for the  tax  exemption  of  charitable  institutions.
The  loss  of  taxes  by  the government is compensated by its relief from doing public works which
would have been funded by appropriations from the Treasury
The Constitution exempts charitable institutions only from real property taxes. In the NIRC,
Congress decided to extend the exemption to income taxes. However, the way Congress crafted
Section 30(E) of the NIRC is materially different from Section 28(3), Article VI of the Constitution. 
Section 30(E) of the NIRC defines the corporation or association that is exempt from income
tax. On the other hand, Section 28(3), Article VI of the Constitution does not define a charitable
institution, but requires that the institution “actually, directly and exclusively” use the property for a
charitable purpose.
To be exempt from real property taxes, Section 28(3), Article VI of the Constitution requires
that a charitable institution use the property “actually, directly and exclusively” for charitable
purposes.
To be exempt from income taxes, Section 30(E) of the NIRC requires  that  a  charitable 
institution  must  be  “organized  and  operated exclusively” for charitable purposes.  Likewise, to be
exempt from income taxes, Section 30(G) of the NIRC requires that the institution be “operated
exclusively” for social welfare.
However, the last paragraph of Section 30 of the NIRC qualifies the words “organized and
operated exclusively” by providing that:
Notwithstanding the provisions in the preceding paragraphs, the income of whatever
kind and character of the foregoing organizations from any of their  properties,  real  or 
personal,  or  from  any  of  their  activities conducted  for  profit  regardless  of  the 
disposition  made  of  such income, shall be subject to tax imposed under this Code.  
In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution
conducts “any” activity for profit, such activity is not tax  exempt  even  as  its  not-for-profit
activities  remain  tax  exempt.
Thus, even if the charitable institution must be “organized and operated exclusively” for
charitable purposes, it is nevertheless allowed to engage in “activities conducted for profit” without
losing its tax exempt status for its not-for-profit activities. The only consequence is that the “income 
of  whatever  kind  and  character” of  a  charitable  institution “from  any  of  its  activities 
conducted  for  profit,  regardless  of  the disposition made of such income, shall be subject to tax.” 
Prior to the introduction of Section 27(B), the tax rate on such income from for-profit activities was
the ordinary corporate rate under Section 27(A).  With the introduction of Section 27(B), the tax rate is
now 10%.
The Court finds that St. Luke’s is a corporation that is not “operated exclusively” for charitable
or social welfare purposes insofar as its revenues from paying patients are concerned. This ruling is
based not only on a strict interpretation of a provision granting tax exemption, but also on the clear
and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an institution be
“operated exclusively” for charitable or social welfare purposes to be completely exempt from income
tax. An institution under Section 30(E) or (G) does not lose its tax exemption if it earns income
from its for-profit activities. Such income from for-profit activities, under the last paragraph of
Section 30, is merely subject to income tax, previously at the ordinary corporate rate but now at the
preferential 10% rate pursuant to Section 27(B). 

Page 21 of 65
 St. Luke’s fails to meet the requirements under Section 30(E) and (G) of the NIRC to
be completely tax exempt from all its income. However, it remains a proprietary non-profit hospital
under Section 27(B) of the NIRC as long as it does not distribute any of its profits to its members and
such profits are reinvested pursuant to its corporate purposes. St. Luke’s, as a proprietary non-profit
hospital, is entitled to the preferential tax rate of 10% on its net income from its for-profit activities.
St. Luke’s is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC.
However, St. Luke’s has good reasons to rely on the letter dated 6 June 1990 by the BIR, which opined
that St. Luke’s is “a corporation for purely charitable and social welfare purposes” and thus exempt
from income tax.
In Michael J. Lhuillier, Inc. v. Commissioner of Internal Revenue, the Court said that “good
faith and honest belief that one is not subject to tax on the basis of previous interpretation of
government agencies tasked to implement the tax law, are sufficient justification to delete the
imposition of surcharges and interest.”
WHEREFORE,  St. Luke’s Medical Center,  Inc.  is ORDERED TO  PAY  the  deficiency  income  tax  in
1998  based  on the  10%  preferential  income tax rate  under Section 27(8) of the National  Internal
Revenue Code.  However, it  is  not liable for surcharges and  interest  on  such  deficiency  income 
tax  under  Sections  248  and  249  of the  National  Internal  Revenue  Code.  All  other  parts  of the 
Decision  and Resolution of the Court of Tax Appeals are AFFIRMED.

CIR vs. PAL, G.R. No. 180066, July 2009

FACTS:

PHILIPPINE AIRLINES, INC. had zero taxable income for 2000 but would have been
liable for Minimum Corporate Income Tax based on its gross income. However,
PHILIPPINE AIRLINES, INC. did not pay the Minimum Corporate Income Tax using as
basis its franchise which exempts it from “all other taxes” upon payment of whichever is
lower of either (a) the basic corporate income tax based on the net taxable income or
(b) a franchise tax of 2%.

ISSUE:

Is PAL liable for Minimum Corporate Income Tax?

HELD:

NO. PHILIPPINE AIRLINES, INC.’s franchise clearly refers to "basic corporate

income tax" which refers to the general rate of 35% (now 30%). In addition, there
is an apparent distinction under the Tax Code between taxable income, which is
the basis for basic corporate income tax under Sec. 27 (A) and gross income,
which is the basis for the Minimum Corporate Income Tax under Section 27 (E).
The two terms have their respective technical meanings and cannot be used
interchangeably. Not being covered by the Charter which makes PAL liable only for

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basic corporate income tax, then Minimum Corporate Income Tax is included in "all
other taxes" from which PHILIPPINE AIRLINES, INC. is exempted.

The CIR also can not point to the “Substitution Theory” which states that Respondent
may not invoke the “in lieu of all other taxes” provision if it did not pay anything at all as
basic corporate income tax or franchise tax. The Court ruled that it is not the fact tax
payment that exempts Respondent but the exercise of its option. The Court even
pointed out the fallacy of the argument in that a measly sum of one peso would suffice
to exempt PAL from other taxes while a zero liability would not and said that there is
really no substantial distinction between a zero tax and a one-peso tax liability. Lastly,
the Revenue Memorandum Circular stating the applicability of the MCIT to PAL does
more than just clarify a previous regulation and goes beyond mere internal
administration and thus cannot be given effect without previous notice or publication to
those who will be affected thereby.

Manila Bank vs. CIR, G.R. No. 168118, August 28, 2006
Facts:

• 1961- Manila Banking Corp was incorporated. It engaged in the banking industry til
1987.
• May 1987- Monetary Board of Bangko Sentral ng Pilipinas (BSP) issued Resolution #
505 {pursuant to the Central Bank Act (RA 265)} prohibiting Manila Bank from engaging
in business by reason of insolvency. So, Manila Bank ceased operations and its assets
and liabilities were placed under charge of a gov.- appointed receiver.
• 1998- Comprehensive Tax Reform Act (RA8424) imposed a minimum corporate
income tax on domestic and resident foreign corporations.
     o Implementing law: Revenue Regulation # 9-98 stating that the law allows a 4year
period from the time the corporations were registered with the BIR during which the
minimum corporate income tax should not be imposed.
• June 23, 1999- BSP authorized Manila Bank to operate as a thrift bank.
     o NOTE: June 15, 1999 Revenue Regulation #4-95 (pursuant to Thrift Bank Act of

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1995) provides that the date of commencement of operations shall be understood to
mean the date when the thrift bank was registered with SEC or when Certificate of
Authority to Operate was issued by the Monetary Board, whichever comes LATER.

• Dec 1999- Manila Bank wrote to BIR requesting a ruling on whether it is entitled to the 4 year
grace period under RR 9-98.
• April 2000- Manila bank filed with BIR annual income tax return for taxable year 1999 and
paid 33M.
• Feb 2001- BIR issued BIR Ruling 7-2001 stating that Manila Bank is entitled to the 4year
grace period. Since it reopened in 1999, the min. corporate income tax may be imposed not
earlier than 2002. It stressed that although it had been registered with the BIR before 1994,
but it ceased operations 1987-1999 due to involuntary closure.
     o Manila Bank, then, filed with BIR for the refund. • Due to the inaction of BIR on the
claim, it filed with CTA for a petition for review, which was denied and found that Manila
Bank’s payment of 33M is correct, since its operations were merely interrupted during
1987-1999. CA affirmed CTA.

Issue:
Whether or not Manila Bank is entitled to a refund of its minimum
corporate income tax paid to BIR for 1999.

Held: Yes.

• CIR’s contensions are without merit. He contended that based on RR# 9-98, Manila
Bank should pay the min. corporate income tax beg. 1998 as it did not close its
operations in 1987 but merely suspended it. Even if placed under suspended
receivership, its corporate existence was never affected. Thus falling under the category
of a existing corporation recommencing its banking business operations
** Sec. 27 E of the Tax Code provides the Minimum Corporate Income Tax (mcit) on
Domestic Corporations.

o (1) Imposition of Tax- MCIT of 2% of gross income as of the end of the taxable year,
as defined here in, is hereby imposed on a corporation taxable under this title,

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beginning on the 4th taxable year immediately following the year in which such corp
commenced its business operations, when the mcit is greater than the tax computed
under Subsec. A of this section for the taxable year.

o (2) Any excess in the mcit over the normal income tax… shall be carried forward and
credited against the normal income tax for the 3 succeeding taxable years.

• Let it be stressed that RR 9-98 imposed the mcit on corps, the date when
business operations commence is the year in which the domestic corporation
registered with the BIR. But under RR 4-95, the date of commencement of
operations of thrift banks, is the date of issuance of certificate by Monetary Board
or registration with SEC, whichever comes later. Clearly then, RR 4-95 applies to
Manila banks, being a thrift bank. 4-year period= counted from June 1999.

Share

G.R.No.160756 : March 9, 2010

CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATIONS, INC.,

Petitioner, v. THE HON. EXECUTIVE SECRETARY ALBERTO
ROMULO, THE HON. ACTING SECRETARY OF FINANCE JUANITA D.
AMATONG, and THE HON. COMMISSIONER OF INTERNAL
REVENUE GUILLERMO PARAYNO, JR., Respondents.

CORONA, J.:

FACTS:

Petitioner is an association of real estate developers and builders in the

Philippines.It impleaded former Executive Secretary Alberto Romulo, then acting
Secretary of Finance Juanita D. Amatong and then Commissioner of Internal
Revenue Guillermo Parayno, Jr. as respondents.

Petitioner assails the validity of the imposition of minimum corporate income tax
(MCIT) on corporations and creditable withholding tax (CWT) on sales of real

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properties classified as ordinary assets.

Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is

implemented by RR 9-98.Petitioner argues that the MCIT violates the due
process clause because it levies income tax even if there is no realized gain.
Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR
6-2001) and 2.58.2 of RR 2-98, and Section 4(a)(ii) and (c)(ii) of RR 7-
2003, all of which prescribe the rules and procedures for the
collection of CWT on the sale of real properties categorized as
ordinary assets.Petitioner contends that these revenue regulations
are contrary to law for two reasons:first, they ignore the different
treatment by RA 8424 of ordinary assets and capital assets
andsecond, respondent Secretary of Finance has no authority to
collect CWT, much less, to base the CWT on the gross selling price or
fair market value of the real properties classified as ordinary assets.
Petitioner also asserts that the enumerated provisions of the subject
revenue regulations violate the due process clause because, like the
MCIT, the government collects income tax even when the net income
has not yet been determined. They contravene the equal protection
clause as well because the CWT is being levied upon real estate
enterprises but not on other business enterprises, more particularly
those in the manufacturing sector.

ISSUES:

Whether or not the imposition of the MCIT on domestic corporations

is unconstitutional?

Whether or not the imposition of CWT on income from sales of real

properties classified as ordinary assets under RRs 2-98, 6-2001 and
7-2003, is unconstitutional?

Whether or not this Court should take cognizance of the present

case?

HELD:

The petition is dismissed.

Page 26 of 65
Petitioner claims that the MCIT under Section 27(E) of RA 8424 is
unconstitutional because it is highly oppressive, arbitrary and
confiscatory which amounts to deprivation of property without due
process of law.It explains that gross income as defined under said
provision only considers the cost of goods sold and other direct
expenses; other major expenditures, such as administrative and
interest expenses which are equally necessary to produce gross
income, were not taken into account.[31]Thus, pegging the tax base of
the MCIT to a corporations gross income is tantamount to a
confiscation of capital because gross income, unlike net income, is not
realized gain. The Court disagress.

Taxes are the lifeblood of the government.Without taxes, the

government can neither exist nor endure. The exercise of taxing
power derives its source from the very existence of the State whose
social contract with its citizens obliges it to promote public interest
and the common good.
Taxation is an inherent attribute of sovereignty.It is a power that is
purely legislative.Essentially, this means that in the legislature
primarily lies the discretion to determine the nature (kind), object
(purpose), extent (rate), coverage (subjects) and situs (place) of
taxation.It has the authority to prescribe a certain tax at a specific
rate for a particular public purpose on persons or things within its
jurisdiction.In other words, the legislature wields the power to define
what tax shall be imposed, why it should be imposed, how much tax
shall be imposed, against whom (or what) it shall be imposed and
where it shall be imposed.

As a general rule, the power to tax is plenary and unlimited in its

range, acknowledging in its very nature no limits, so that the principal
check against its abuse is to be found only in the responsibility of the
legislature (which imposes the tax) to its constituency who are to pay
it.Nevertheless, it is circumscribed by constitutional limitations.At
the same time, like any other statute, tax legislation carries a
presumption of constitutionality.

The constitutional safeguard of due process is embodied in the fiat

[no] person shall be deprived of life, liberty or property without due
process of law.

Income means all the wealth which flows into the taxpayer other than

Page 27 of 65
a mere return on capital.Capital is a fund or property existing at one
distinct point in time while income denotes a flow of wealth during a
definite period of time.Income is gain derived and severed from
capital. For income to be taxable, the following requisites must exist:
(1) there must be gain; (2) the gain must be realized or received and
(3)the gain must not be excluded by law or treaty from taxation.

Certainly, an income tax is arbitrary and confiscatory if it taxes

capital because capital is not income.In other words, it is income, not
capital, which is subject to income tax.However, the MCIT is not a tax
on capital.

The MCIT is imposed on gross income which is arrived at by

deducting the capital spent by a corporation in the sale of its
goods,i.e., the cost of goodsand other direct expenses from gross
sales.Clearly, the capital is not being taxed.

Furthermore, the MCIT is not an additional tax imposition. It is

imposedin lieuofthe normal net income tax, and only if the normal
income tax is suspiciously low.The MCIT merely approximates the
amount of net income tax due from a corporation, pegging the rate at
a very much reduced 2% and uses as the base the corporations gross
income.

The United States has a similar alternative minimum tax (AMT)

system which is generally characterized by a lower tax rate but a
broader tax base.Since our income tax laws are of American origin,
interpretations by American courts of our parallel tax laws have
persuasive effect on the interpretation of these laws.Although our
MCIT is not exactly the same as the AMT, the policy behind them and
the procedure of their implementation are comparable. American
courts have also emphasized that Congress has the power to
condition, limit or deny deductions from gross income in order to
arrive at the net that it chooses to tax.This is because deductions are a
matter of legislative grace.

Absent any other valid objection, the assignment of gross income,

instead of net income, as the tax base of the MCIT, taken with the
reduction of the tax rate from 32% to 2%, is not constitutionally
objectionable.

Moreover, petitioner does not cite any actual, specific and concrete
negative experiences of its members nor does it present empirical

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data to show that the implementation of the MCIT resulted in the
confiscation of their property.

In sum, petitioner failed to support, by any factual or legal basis, its

allegation that the MCIT is arbitrary and confiscatory.The Court
cannot strike down a law as unconstitutional simply because of its
yokes. Taxation is necessarily burdensome because, by its nature, it
adversely affects property rights. The party alleging the laws
unconstitutionality has the burden to demonstrate the supposed
violations in understandable terms.

On the other hand, RR 9-98, in declaring that MCIT should be

imposed whenever such corporation has zero or negative taxable
income, merely defines the coverage of Section 27(E).This means that
even if a corporation incurs a net loss in its business operations or
reports zero income after deducting its expenses, it is still subject to
an MCIT of 2% of its gross income.This is consistent with the law
which imposes the MCIT on gross income notwithstanding the
amount of the net income.But the law also states that the MCIT is to
be paid only if it is greater than the normal net income.Obviously, it
may well be the case that the MCIT would be less than the net income
of the corporation which posts a zero or negative taxable income.

The withholding tax system is a procedure through which taxes

(including income taxes) are collected. Under Section 57 of RA 8424,
the types of income subject to withholding tax are divided into three
categories: (a) withholding of final tax on certain incomes; (b)
withholding of creditable tax at source and (c) tax-free covenant
bonds.

TAXATION LAW: authority of the secretary f finance

The Secretary of Finance is granted, under Section 244 of RA 8424,

the authority to promulgate the necessary rules and regulations for
the effective enforcement of the provisions of the law.Such authority
is subject to the limitation that the rules and regulations must not
override, but must remain consistent and in harmony with, the law
they seek to apply and implement. It is well-settled that an
administrative agency cannot amend an act of Congress.

It has been recognized that the method of withholding tax at source is

a procedure of collecting income tax which is sanctioned by our tax
laws.The withholding tax system was devised for three primary

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reasons: first, to provide the taxpayer a convenient manner to meet
his probable income tax liability; second, to ensure the collection of
income tax which can otherwise be lost or substantially reduced
through failure to file the corresponding returns and third, to
improve the governments cash flow.This results in administrative
savings, prompt and efficient collection of taxes, prevention of
delinquencies and reduction of governmental effort to collect taxes
through more complicated means and remedies.

Respondent Secretary has the authority to require the withholding of

a tax on items of income payable to any person, national or juridical,
residing in the Philippines.Such authority is derived from Section
57(B) of RA 8424

The questioned provisions of RR 2-98, as amended, are well within

the authority given by Section 57(B) to the Secretary,i.e., the
graduated rate of 1.5%-5% is between the 1%-32% range; the
withholding tax is imposed on the income payable and the tax is
creditable against the income tax liability of the taxpayer for the
taxable year.

POLITICAL LAW: constitutionality of RR 2-98 as amended

Under RR 2-98, the tax base of the income tax from the sale of real
property classified as ordinary assets remains to be the entitys net
income imposed under Section 24 (resident individuals) or Section 27
(domestic corporations) in relation to Section 31 of RA 8424,i.e.gross
income less allowable deductions.The CWT is to be deducted from the
net income tax payable by the taxpayer at the end of the taxable
year.Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-2003 reiterate that
the tax base for the sale of real property classified as ordinary assets
remains to be the net taxable income

Accordingly, at the end of the year, the taxpayer/seller shall file its
income tax return and credit the taxes withheld (by the withholding
agent/buyer) against its tax due.If the tax due is greater than the tax
withheld, then the taxpayer shall pay the difference.If, on the other
hand, the tax due is less than the tax withheld, the taxpayer will be
entitled to a refund or tax credit.Undoubtedly, the taxpayer is taxed
on its net income.

The use of the GSP/FMV as basis to determine the withholding taxes

is evidently for purposes of practicality and convenience.Obviously,

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the withholding agent/buyer who is obligated to withhold the tax does
not know, nor is he privy to, how much the taxpayer/seller will have
as its net income at the end of the taxable year.Instead, said
withholding agents knowledge and privity are limited only to the
particular transaction in which he is a party.In such a case, his basis
can only be the GSP or FMV as these are the only factors reasonably
known or knowable by him in connection with the performance of his
duties as a withholding agent.

RR 2-98 imposes a graduated CWT on income based on the GSP or

FMV of the real property categorized as ordinary assets. On the other
hand, Section 27(D)(5) of RA 8424 imposes a final tax and flat rate of
6% on the gain presumed to be realized from the sale of a capital asset
based on its GSP or FMV.This final tax is also withheld at source.

As previously stated, FWT is imposed on the sale of capital assets. On

the other hand, CWT is imposed on the sale of ordinary assets.The
inherent and substantial differences between FWT and CWT disprove
petitioners contention that ordinary assets are being lumped together
with, and treated similarly as, capital assets in contravention of the
pertinent provisions of RA 8424.

The fact that the tax is withheld at source does not automatically
mean that it is treated exactly the same way as capital gains.As
aforementioned, the mechanics of the FWT are distinct from those of
the CWT. The withholding agent/buyers act of collecting the tax at the
time of the transaction by withholding the tax due from the income
payable is the essence of the withholding tax method of tax collection.

Section 57(A) expressly states that final tax can be imposed on certain
kinds of income and enumerates these as passive income.

Passive income generated by the taxpayers assets. These assets can be

in the form of real properties that return rental income, shares of
stock in a corporation that earn dividends or interest income received
from savings.

On the other hand, Section 57(B) provides that the Secretary can
require a CWT on income payable to natural or juridical persons,
residing in the Philippines.There is no requirement that this income
be passive income.If that were the intent of Congress, it could have
easily said so.

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Indeed, Section 57(A) and (B) are distinct.Section 57(A) refers to FWT
while Section 57(B) pertains to CWT.The former covers the kinds of
passive income enumerated therein and the latter encompassesany
income other than those listed in 57(A).Since the law itself makes
distinctions, it is wrong to regard 57(A) and 57(B) in the same way.

To repeat, the assailed provisions of RR 2-98, as amended, do not

modify or deviate from the text of Section 57(B).RR 2-98 merely
implements the law by specifying what income is subject to CWT.It
has been held that, where a statute does not require any particular
procedure to be followed by an administrative agency, the agency may
adopt any reasonable method to carry out its functions.Similarly,
considering that the law uses the general term income, the Secretary
and CIR may specify the kinds of income the rules will apply to based
on what is feasible.In addition, administrative rules and regulations
ordinarily deserve to be given weight and respect by the courts in view
of the rule-making authority given to those who formulate them and
their specific expertise in their respective fields.

Bank of America vs. CA, 234 SCRA 302

In the 15% remittance tax, the law specifies its own tax base to be on the “profit
remitted abroad.” There is absolutely nothing equivocal or uncertain about the language
of the provision. The tax is imposed on the amount sent abroad, and the law calls for
nothing further.

FACTS:

1. Bank of America is a foreign corporation licensed to engage in business in the

Philippines through a branch in Makati.
2. Bank of America paid 15% branch profit remittance tax amounting to PhP7.5M from
its REGULAR UNIT OPERATIONS and another 405K PhP from its FOREIGN
CURRENCY DEPOSIT OPERATIONS
3. The tax was based on net profits after income tax without deducting the amount
corresponding to the 15% tax.

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4. Bank of America thereafter filed a claim for refund with the BIR for the portion
the corresponds with the 15% branch profit remittance tax. BOA’s claim: “BIR
should tax us based on the profits actually remitted (45M), and NOT on the
amount before profit remittance tax (53M)... The basis should be the amount
actually remitted abroad.”
5. CIR contends otherwise and holds that in computing the 15% remittance tax, the tax
should be inclusive of the sum deemed remitted.

ISSUES: Whether or not the branch profit remittance tax should be base
on the amount actually remitted?

HELD: YES.

1. It should be based on the amount actually committed, NOT what was applied for.
2. There is nothing in Section 24which indicates that the 15% tax/branch profit
remittance is on the total amount of profit; where the law does NOT qualify that the tax
is imposed and collected at source, the qualification should not be read into law.

CYANAMID PHIL., INC. V CA GR No. 108067, January 20,

2000
Sunday, January 25, 2009 Posted by Coffeeholic Writes
Labels: Case Digests, Taxation

Facts: Petitioner, Cyanamid Philippines, Inc., a corporation organized under

Philippine laws, is a wholly owned subsidiary of American Cyanamid Co. based
in Maine, USA. It is engaged in the manufacture of pharmaceutical products and
chemicals, a wholesaler of imported finished goods, and an importer/indenter.

February 7, 1985, the CIR sent an assessment letter to petitioner and

demanded the payment of deficiency in come tax of P119,817 for
taxable year 1981 which the petitioner on March 4, 1985, protested

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particularly (1) 25% surtax assessment of P3,774,867.50; (2) 1981
deficiency income tax assessment of P119,817; (3) 1981 deficiency
percentage assessment of P3,346.72. CIR refused to allow the
cancellation of the assessment notices.

During the pendency of the case on appeal to the CTA, both parties agreed to
compromise the 1981 deficiency income assessment of P119,817 and reduced
to P26,577 as compromise settlement. But the surtax on improperly
accumulated profits remained unresolved. Petitioner claimed that the
assessment representing the 25% surtax had no legal basis for the following
reasons: (a) petitioner accumulated its earnings and profits for reasonable
business requirements to meet working capital needs and retirement of
indebtedness, (b) petitioner is wholly owned subsidiary of American Cyanamid
Co., a corporation organized under the laws of the State of Maine, in the USA,
whose shares of stock are listed and traded in New York Stock Exchange. This
being the case, no individual shareholder of petitioner could have evaded or
prevented the imposition of individual income taxes by petitioner’s accumulation
of earnings and profits, instead contribution of the same.

CTA denied said petition.

Issue: Whether petitioner is liable for the accumulated earnings tax for the
year 1981.

Held: The amendatory provision of Sec. 25 of the 1977 NIRC, which

was PD1739, enumerated the corporations exempt from the imposition
of improperly accumulated tax: (a) banks, (b) non-bank financial
intermediaries; (c) insurance companies; and (d) corporations
organized primarily and authorized by the Central Bank to hold shares
of stocks of banks. Petitioner does not fall among those exempt classes.
Besides, the laws granting exemption form tax are construed strictissimi juris

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against the taxpayer and liberally in favor of the taxing power. Taxation is the
rule and exemption is the exception. The burden of proof rests upon the party
claiming the exemption to prove that it is, in fact, covered by the exemption so
claimed; a burden which petitioner here has failed to discharge.

Unless rebutted, all presumptions generally are indulged in favor of the

correctness of the CIR’s assessment against the taxpayer. With petitioner’s
failure to prove the CIR incorrect, clearly and conclusively, this court is
constrained to uphold the correctness of tax court’s ruling as affirmed by the
CA.

[CASE DIGEST] CIR v. COURT OF APPEALS and YMCA (G.R.

No. 124043, 298 SCRA 83)
 October 14, 1998

Ponente: Panganiban, J.

FACTS

Young Men’s Christian Association of the Philippines (YMCA) is a non-stock, non-profit institution, which
conducts various programs and activities that are beneficial to the public, especially the young people,
pursuant to its religious, educational and charitable objectives. In 1980, YMCA earned, among others,
an income from leasing out a portion of its premises to small shop owners, like restaurants and canteen
operators, and from parking fees collected from non-members.

In July 1984, the CIR issued an assessment to YMCA, in the total amount of P415,615.01 including
surcharge and interest, for deficiency income tax, deficiency expanded withholding taxes on rentals
and professional fees and deficiency withholding tax on wages. Both CTA and CA ruled that it is
reasonably necessary for YMCA to make the most out of its existing facilities to earn some income;
further stating that the rental from small shops and parking fees do not result in the loss of the
exemption under Sec. 27 of the NIRC.  

RULING

SC held for the CIR.

A claim of statutory exemption from taxation should be manifest. and unmistakable from the language
of the law on which it is based. In the instant case, the exemption claimed by the YMCA is expressly
disallowed by the very wording of the last paragraph of then Section 27 of the NIRC which mandates
that the income of exempt organizations from any of their properties, real or personal, be subject to
the tax imposed by the same Code.

Because the last paragraph of said section unequivocally subjects to tax the rent income of the YMCA

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from its real property, the Court is duty-bound to abide strictly by its literal meaning and to refrain
from resorting to any convoluted attempt at construction.

CIR v CA & YMCA (1998)

Digest #1

CIR v CA & YMCA

GR No 124043, October 14, 1998

FACTS:
In 1980, YMCA earned an income of 676,829.80 from leasing out a portion of its premises to small shop owners, like
restaurants and canteen operators and 44,259 from parking fees collected from non-members. On July 2, 1984, the
CIR issued an assessment to YMCA for deficiency taxes which included the income from lease of YMCA’s real
property. YMCA formally protested the assessment but the CIR denied the claims of YMCA. On appeal, the CTA
ruled in favor of YMCA and excluded income from lease to small shop owners and parking fees. However, the CA
reversed the CTA but affirmed the CTA upon motion for reconsideration.

ISSUE:
Whether the rental income of YMCA is taxable

RULING:
Yes. The exemption claimed by YMCA is expressly disallowed by the very wording of then Section 27 of the NIRC
which mandates that the income of exempt organizations (such as the YMCA) from any of their properties, real or
personal, be subject to the tax imposed by the same Code. While the income received by the organizations
enumerated in Section 26 of the NIRC is, as a rule, exempted from the payment of tax in respect to income received
by them as such, the exemption does not apply to income derived from any of their properties, real or personal or
from any of their activities conducted for profit, regardless of the disposition made of such income. 

Digest #2

Facts:
The main question in this case is: “is the income derived from rentals of real property owned by Young Men’s
Christian Association of the Philippines (YMCA) – established as “a welfare, educational and charitable non-profit
corporation” – subject to income tax under the NIRC and the Constitution? In 1980, YMCA earned an income of
P676,829 from leasing out a portion of its premises to small shop owners, like restaurants and canteen operators and
P44k form parking fees.

Issue:
Whether or not the rental income of the YMCA taxable

Ruling:
Yes. The exemption claimed by the YMCA is expressly disallowed by the very wording of the last paragraph of then
Sec. 27 of the NIRC; court is duty-bound to abide strictly by its literal meaning and to refrain from resorting to any
convoluted attempt at construction. The said provision mandates that the income of exempt organizations (such as

Page 36 of 65
 YMCA) from any of their properties, real or personal, be subject to the tax imposed by the same Code. Private
respondent is exempt from the payment of property tax, but nit income tax on rentals from its property. 
Posted by Victor Morvis 

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CIR V DLSU G.R. 196596 Nov. 9 2016

Facts
In 2004, the Bureau of Internal Revenue (BIR) issued a letter
authorizing it’s revenue officers to examine the book of accounts of
and records for the year 2003 De La Salle University (DLSU) and later
on issued a demand letter to demand payment of tax deficiencies for:

1. Income tax on rental earnings from restaurants/canteens and

bookstores operating within the campus;
2. Value-added tax (VAT) on business income; and
3. Documentary stamp tax (DST) on loans and lease contracts for
the years 2001,2002, and 2003, amounting to  P17,303,001.12.

DLSU protested the assessment that was however not acted upon, and
later on filed a petition for review with the Court of Tax Appeals(CTA).
DLSU argues that as a non-stock, non-profit educational institution, it
is exempt from paying taxes according to Article XIV, Section 4 (3) of
the Constitution (All revenues and assets of non-stock, non-profit
educational institutions used actually, directly, and exclusively for
educational purposes shall be exempt from taxes and duties.)

The CTA only granted the removal of assessment on the load

transactions. Both CIR and DLSU moved for reconsideration, the
motion of the CIR was denied. The CIR appealed to the CTA en banc
arguing that DLSU’s use of its revenues and assets for non-educational

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 or commercial purposes removed these items from the exemption,
that a tax-exempt organization like DLSU is exempt only from property
tax but not from income tax on the rentals earned from
property. Thus, DLSU’s income from the leases of its real properties is
not exempt from taxation even if the income would be used for
educational purposes.
DLSU on the other hand offered supplemental pieces of documentary
evidence to prove that its rental income was used actually, directly and
exclusively for educational purposes and no objection was made by
the CIR.

Thereafter, DLSU filed a separate petition for review with the CTA En

Banc on the following grounds:

1. The entire assessment should have been cancelled because it

was based on an invalid LOA;
2. Assuming the LOA was valid, the CTA Division should still have
cancelled the entire assessment because DLSU submitted evidence
similar to those submitted by Ateneo De Manila University (Ateneo) in
a separate case where the CTA cancelled Ateneo’s tax assessment; and
3. The CTA Division erred in finding that a portion of DLSU’s rental
income was not proved to have been used actually, directly and
exclusively for educational purposes.
4. That under RMO No.43-90, LOA should cover only 1 year, the
LOA issued by CIR is invalid for covering the years 2001-2003

The CTA en banc ruled that the case of Ateneo is not applicable
because it involved different parties, factual settings, bases of
assessments, sets of evidence, and defenses, it however further
reduced the liability of DLSU to P2,554,825.47

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CIR argued that the rental income is taxable regardless of how such
income is derived, used or disposed of. DLSU’s operations of canteens
and bookstores within its campus even though exclusively serving the
university community do not negate income tax liability. Article XIV,
Section 4 (3) of the Constitution must be harmonized with Section 30
(H) of the Tax Code, which states among others, that the income of
whatever kind and character of [a non-stock and non-profit
educational institution] from any of [its] properties, real or personal, or
from any of (its] activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax imposed by
this Code.
that a tax-exempt organization like DLSU is exempt only from property
tax but not from income tax on the rentals earned from property.
Thus, DLSU’s income from the leases of its real properties is not
exempt from taxation even if the income would be used for
educational purposes.

DLSU argued that Article XIV, Section 4 (3) of the Constitution is clear
that all assets and revenues of non-stock, non-profit educational
institutions used actually, directly and exclusively for educational
purposes are exempt from taxes and duties. Under the doctrine of
constitutional supremacy, which renders any subsequent law that is
contrary to the Constitution void and without any force and
effect. Section 30 (H) of the 1997 Tax Code insofar as it subjects to tax
the income of whatever kind and character of a non-stock and non-
profit educational institution from any of its properties, real or
personal, or from any of its activities conducted for profit regardless of
the disposition made of such income, should be declared without
force and effect in view of the constitutionally granted tax exemption
on “all revenues and assets of non-stock, non-profit educational
institutions used actually, directly, and exclusively for educational
purposes.“
Page 39 of 65
 that it complied with the requirements for the application of Article
XIV, Section 4 (3) of the Constitution.

Issue:

1. Whether DLSU is taxable as a non-stock, non-profit educational

institution whose income have been used actually, directly and
exclusively for educational purposes.
2. Whether the entire assessment should be void because of the
defective LOA

Held:

1. First issue:
1. A plain reading of the Constitution would show that Article
XIV, Section 4 (3) does not require that the revenues and income must
have also been sourced from educational activities or activities related
to the purposes of an educational institution. The phrase all
revenues is unqualified by any reference to the source of revenues.
Thus, so long as the revenues and income are used actually, directly
and exclusively for educational purposes, then said revenues and
income shall be exempt from taxes and duties.
2. Revenues consist of the amounts earned by a person or
entity from the conduct of business operations. It may refer to the sale
of goods, rendition of services, or the return of an investment.
Revenue is a component of the tax base in income tax, VAT, and local
business tax (LBT). Assets, on the other hand, are the tangible and
intangible properties owned by a person or entity. It may refer to real
estate, cash deposit in a bank, investment in the stocks of a
corporation, inventory of goods, or any property from which the
person or entity may derive income or use to generate the same. In

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 Philippine taxation, the fair market value of real property is a
component of the tax base in real property tax (RPT). Also, the landed
cost of imported goods is a component of the tax base in VAT on
importation and tariff duties. Thus, when a non-stock, non-profit
educational institution proves that it uses its revenues actually,
directly, and exclusively for educational purposes, it shall be exempted
from income tax, VAT, and LBT. On the other hand, when it also shows
that it uses its assets in the form of real property for educational
purposes, it shall be exempted from RPT.
3. The last paragraph of Section 30 of the Tax Code without
force and effect for being contrary to the Constitution insofar as it
subjects to tax the income and revenues of non-stock, non-profit
educational institutions used actually, directly and exclusively for
educational purpose. We make this declaration in the exercise of and
consistent with our duty to uphold the primacy of the Constitution.
2. Second Issue:
1. No.“A Letter of Authority LOA should cover a taxable period
not exceeding one taxable year. The practice of issuing LOAs 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 LOA.”
2. The requirement to specify the taxable period covered by
the LOA is simply to inform the taxpayer of the extent of the audit and
the scope of the revenue officer’s authority. Without this rule, a
revenue officer can unduly burden the taxpayer by demanding
random accounting records from random unverified years, which may
include documents from as far back as ten years in cases
of fraud audit.
3. The assessment for taxable year 2003 is valid because this
taxable period is specified in the LOA. DLSU was fully apprised that it
was being audited for taxable year 2003. While the assessments for

Page 41 of 65
taxable years 2001 and 2002 are void for having been unspecified on
separate LOAs as required under RMO No. 43-90.

CONWI vs CTA 213 SCRA 83

Facts:
Petitioners are employees of Procter and Gamble (Philippine Manufacturing Corporation, subsidiary of Procter &
Gamble, a foreign corporation).During the years 1970 and 1971, petitioners were assigned to other subsidiaries of
Procter & Gamble outside the Philippines, for which petitioners were paid US dollars as compensation.
Petitioners filed their ITRs for 1970 and 1971, computing tax due by applying the dollar-to-peso conversion based on
the floating rate under BIR Ruling No. 70-027. In 1973, petitioners filed amened ITRs for 1970 and 1971, this time
using the par value of the peso as basis. This resulted in the alleged overpayments, refund and/or tax credit, for
which claims for refund were filed.
CTA held that the proper conversion rate for the purpose of reporting and paying the Philippine income tax on the
dollar earnings of petitioners are the rates prescribed under Revenue Memorandum Circulars Nos. 7-71 and 41-71.
The refund claims were denied.

Issue:
Whether or not petitioners' dollar earnings are receipts derived from foreign exchange transactions

Ruling:
No. For the proper resolution of income tax cases, income may be defined as an amount of money coming to a
person or corporation within a specified time, whether as payment for services, interest or profit from investment.
Unless otherwise specified, it means cash or its equivalent. Income can also be thought of as flow of the fruits of
one's labor.
Petitioners are correct as to their claim that their dollar earnings are not receipts derived from foreign exchange
transactions. For a foreign exchange transaction is simply that — a transaction in foreign exchange, foreign
exchange being "the conversion of an amount of money or currency of one country into an equivalent amount of
money or currency of another." When petitioners were assigned to the foreign subsidiaries of Procter & Gamble, they
were earning in their assigned nation's currency and were ALSO spending in said currency. There was no
conversion, therefore, from one currency to another.
The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of Procter & Gamble. It was a
definite amount of money which came to them within a specified period of time of two years as payment for their
services. 
Posted by Victor Morvis 

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Labels: taxation

Madrigal v. Rafferty, 38 Phil. 414

Page 42 of 65
The essential difference between capital and income is that capital is a fund; income is
a flow. A fund of property existing at an instant of time is called capital. A flow of
services rendered by that capital by the payment of money from it or any other benefit
rendered by a fund of capital in relation to such fund through a period of time is called
income. Capital is wealth, while income is the service of wealth.

FACTS:

• Vicente Madrigal and Susana Paterno were legally married prior to Januray 1,
1914. The marriage was contracted under the provisions of law concerning
conjugal partnership
• On 1915, Madrigal filed a declaration of his net income for year 1914, the sum of
P296,302.73
• Vicente Madrigal was contending that the said declared income does not
represent his income for the year 1914 as it was the income of his conjugal
partnership with Paterno. He said that in computing for his additional income tax,
the amount declared should be divided by 2.
• The revenue officer was not satisfied with Madrigal’s explanation and ultimately, the
United States Commissioner of Internal Revenue decided against the claim of Madrigal.

• Madrigal paid under protest, and the couple decided to recover the sum of P3,786.08
alleged to have been wrongfully and illegally assessed and collected by the CIR.

ISSUE: Whether or not the income reported by Madrigal on 1915 should

be divided into 2 in computing for the additional income tax.

HELD:

• No! The point of view of the CIR is that the Income Tax Law, as the name implies,
taxes upon income and not upon capital and property.
• The essential difference between capital and income is that capital is a fund; income is
a flow. A fund of property existing at an instant of time is called capital. A flow of
services rendered by that capital by the payment of money from it or any other benefit
rendered by a fund of capital in relation to such fund through a period of time is called
income. Capital is wealth, while income is the service of wealth.

Page 43 of 65
• As Paterno has no estate and income, actually and legally vested in her and entirely
distinct from her husband’s property, the income cannot properly be considered the
separate income of the wife for the purposes of the additional tax.
• To recapitulate, Vicente wants to half his declared income in computing for his tax
since he is arguing that he has a conjugal partnership with his wife. However, the court
ruled that the one that should be taxed is the income which is the flow of the capital,
thus it should not be divided into 2.
Fisher v. Trinidad

G.R. No. L-17518 October 30, 1922

Corporation Law Case Digest by John Paul C. Ladiao (15 March 2016)

(Topic: Right to bring action, acquire and possess property --- relate with Art. 46 of NCC)

FACTS:

That during the year 1919 the Philippine American Drug Company was a corporation duly organized and
existing under the laws of the Philippine Islands, doing business in the City of Manila; that he appellant
was a stockholder in said corporation; that said corporation, as result of the business for that year,
declared a "stock dividend"; that the proportionate share of said stock divided of the appellant was
P24,800; that the stock dividend for that amount was issued to the appellant; that thereafter, in the
month of March, 1920, the appellant, upon demand of the appellee, paid under protest, and voluntarily,
unto the appellee the sum of P889.91 as income tax on said stock dividend. For the recovery of that sum
(P889.91) the present action was instituted. The defendant demurred to the petition upon the ground
that it did not state facts sufficient to constitute cause of action. The demurrer was sustained and the
plaintiff appealed.

ISSUE:

Whether or not the income received as dividends is taxable as an income?

HELD:

No.

Generally speaking, stock dividends represent undistributed increase in the capital of corporations or
firms, joint stock companies, etc., etc., for a particular period. They are used to show the increased
interest or proportional shares in the capital of each stockholder. In other words, the inventory of the
property of the corporation, etc., for particular period shows an increase in its capital, so that the
stock theretofore issued does not show the real value of the stockholder's interest, and additional
stock is issued showing the increase in the actual capital, or property, or assets of the corporation, etc.

Page 44 of 65
Having reached the conclusion, supported by the great weight of the authority, that "stock dividends"
are not "income," the same cannot be taxes under that provision of Act No. 2833 which provides for a
tax upon income. Under the guise of an income tax, property which is not an income cannot be taxed.
When the assets of a corporation have increased so as to justify the issuance of a stock dividend, the
increase of the assets should be taken account of the Government in the ordinary tax duplicates for the
purposes of assessment and collection of an additional tax.

Blas Gutierrez v. Collector, 101 Phil. 713

It appears then 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" "disposition of property", and the
proceeds from said transaction clearly fall within the definition of gross income laid
down by Section 29 of the Tax Code of the Philippines.

FACTS:

1. Maria Morales, married to Gutierrez(spouses), was the owner of an agricultural land.

The U.S. Gov(pursuant to Military Bases Agreement) wanted to expropriate the land of
Morales to expand the Clark Field Air Base.

2. The Republic was the plaintiff, and deposited a sum of Php 152k to be able to take
immediate possession. The spouses wanted consequential damages but instead settled
with a compromise agreement. In the compromise agreement, the parties agreed to
keep the value of Php 2,500 per hectare, except to some particular lot which would be
at Php 3,000 per hectare.

3. In an assessment notice, CIR demanded payment of Php 8k for deficiency of income

tax for the year 1950.

4. The spouses contend that the expropriation was not taxable because it is not "income
derived from sale, dealing or disposition of property" as defined in Sec. 29 of the Tax
Code. The spouses further contend that they did not realize any profit in the said
transaction. CIR did not agree.

5. The spouses appealed to the CTA. The Solicitor General, in representation of the
respondent Collector of Internal Revenue, filed an answer that the profit realized by
petitioners from the sale of the land in question was subject to income tax, that the full
compensation received by petitioners should be included in the income received in

Page 45 of 65
1950, same having been paid in 1950 by the Government. CTA favored SolGen but
disregarded the penalty charged.

6. Both parties appealed to the SC.

ISSUES:

1. Whether or not that for income tax purposes, the expropriation should be deemed as
income from sale and any profit derived therefrom is subject to income taxes capital
gain?

2. Whether or not there was profit or gain to be taxed?

HELD: Yes to both. CTA decision affirmed. It is subject to income tax.

RATIO 1: It is to be remembered that said property was acquired by the Government
through condemnation proceedings and appellants' stand is, therefore, that same
cannot be considered as sale as said acquisition was by force, there being practically
no meeting of the minds between the parties. U.S jurisprudence has held that the
transfer of property through condemnation proceedings is a sale or exchange within the
meaning of section 117 (a) of the 1936 Revenue Act and profit from the transaction
constitutes capital gain" "The taking of property by condemnation and the, payment of
just compensation therefore is a "sale" or "exchange" within the meaning of section 117
(a) of the Revenue Act of 1936, and profits from that transaction is capital gain.

SEC. 29. GROSS INCOME. — (a) General definition. — "Gross income" includes gains,
profits, and income derived from salaries, wages, or compensation for personal service
of 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 ownership or use of or interest in such property; also from interests, rents,
dividends, securities, or the transactions of any business carried on for gain or profit, or
gains, profits, and income derived from any source whatsoever.

SEC. 37. INCOME FROM SOURCES WITHIN THE PHILIPPINES.

—
Page 46 of 65
(a) Gross income from sources within the Philippines. — The following items of gross
income shall be treated as gross income from sources within the Philippines:
xxxxxxxxx
(5) SALE OF REAL PROPERTY. — Gains, profits, and income from the sale of real
property located in the Philippines;
xxxxxxxxx
It appears then 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" "disposition of property", and the
proceeds from said transaction clearly fall within the definition of gross income laid
down by Section 29 of the Tax Code of the Philippines.

RATIO 2: As to appellant taxpayers' proposition that the profit, derived by them from the
expropriation of their property is merely nominal and not subject to income tax, We find
Section 35 of the Tax Code illuminating. Said section reads as follows:

SEC. 35. DETERMINATION OF GAIN OR LOSS FROM THE SALE OR OTHER

DISPOSITION OF PROPERTY. —The gain derived or loss sustained from the sale or
other disposition of property, real or personal, or mixed, shall be determined in
accordance with the following schedule:
(a) xxx xxx xxx
(b) In the case of property acquired on or after March first, nineteen hundred and
thirteen, the cost thereof if such property was acquired by purchase or the fair market
price or value as of the date of the acquisition if the same was acquired by gratuitous
title.
xxxxxxxxx

The records show that the property in question was adjudicated to Maria Morales by
order of the Court of First Instance of Pampanga on March 23, 1929, and in accordance
with the aforequoted section of the National Internal Revenue Code, only the fair market
price or value of the property as of the date of the acquisition thereof should be
considered in determining the gain or loss sustained by the property owner when the
property was disposed, without taking into account the purchasing power of the
currency used in the transaction. The records placed the value of the said property at
the time of its acquisition by appellant Maria Morales P28,291.73 and it is a fact that

Page 47 of 65
same was compensated with P94,305.75 when it was expropriated. The resulting
difference is surely a capital gain and should be correspondingly taxed.

That the circumstances are such that the method does not reflect the taxpayer ’ s
income with reasonable accuracy and certainty and proper and just additions of
personal expenses and other non-deductible expenditures were made and correct , fair
and equitable credit adjustments were given by way of eliminating non- taxable items.

FERNANDEZ HERMANOS, INC.

VS. CIR- ALLOWABLE TAX
DEDUCTIONS
FACTS:

• Four cases involve two decisions of the Court of Tax Appeal s determining the
taxpayer ' s income tax liability for the years 1950 to 1954 and for the year 1957. Both
the taxpayer and the Commissioner of Internal Revenue, as petitioner and respondent
in the cases a quo respectively , appealed from the Tax Court's decisions , insofar as
their respective contentions on particular tax items were therein resolved against them.
Since the issues raised are inter related, the Court resolves the four appeals in this joint
decision.
• The taxpayer , Fernandez Hermanos, Inc. , is a domestic corporation organized for the
principal purpose of engaging in business as an " investment company " wi th main
office at Manila. Upon verification of the taxpayer's income tax returns for the period in
quest ion, the Commissioner of Internal Revenue assessed against the taxpayer the
sums of P13,414.00, P119,613.00, P11,698.00, P6,887.00 and P14,451.00 as alleged
deficiency income taxes for the year s 1950, 1951, 1952, 1953 and 1954, respectively.
Said assessments were the result of alleged discrepancies found upon the examination

Page 48 of 65
and verification of the taxpayer's income tax returns for the said years, summarized by
the Tax Court in its decision of June 10, 1963 in CTA Case No. 787, as follows:

ISSUE: The correctness of the Tax Court's rulings with respect to the
disputed items of disallowances enumerated in the Tax Court's
summary reproduced

HELD:

That the circumstances are such that the method does not reflect the taxpayer’s income
with reasonable accuracy and certainty and proper and just additions of personal
expenses and other non-deductible expenditures were made and correct , fair and
equitable credit adjustments were given by way of eliminating non-taxable items.

Proper adjustments to conform to the income tax laws. Proper adjustments for non-
deductible items must be made. The following non-deductibles , as the case may be,
must be
added to the increase of decrease in the net worth:

1. Personal living or family expenses

2. Premiums paid on any life insurance policy
3. Losses from sales or exchanges of property between members of the family
4. Income taxes paid
5. Other non-deductible taxes
6. Election expenses and other expense against public policy
7. Non-deductible contributions
8. Gifts to others
9. Estate inheritance and gift taxes
10. Net Capital Loss

On the other hand, non- taxable items should be deducted therefrom. These items are
necessary adjustments to avoid the inclusion of what otherwise are non-taxable
receipts. They are:
1. inheritance gifts and bequests received

Page 49 of 65
2. non- taxable gains
3. compensation for injuries or sickness
4. proceeds of life insurance policies
5. sweepstakes
6. winnings
7. interest on government securities and increase in net worth are not taxable if they are
shown not to be the result of unreported income but to be the result of the correction of
errors in the taxpayer’s entries in the books relating to indebtedness

Jaime N. Soriano, et al. vs. Secretary of Finance and The Commissioner of Internal
Revenue

G.R. No. 184450, January 24, 2017

Sereno, C.J.

FACTS:

On 17 June 2008, R.A. 9504 entitled “An Act Amending Sections 22, 24, 34, 35, 51, and 79 of
Republic Act No. 8424, as Amended, Otherwise Known as the National Internal Revenue Code
of 1997,” was approved and signed into law by President Arroyo. On 24 September 2008, the
Bureau of Internal Revenue (BIR) issued RR 10-2008, dated 08 July 2008, implementing the
provisions of R.A. 9504.

Petitioners assail the subject RR as an unauthorized departure from the legislative intent of R.A.
9504. The regulation allegedly restricts the implementation of the minimum wage earners’
(MWE) income tax exemption only to the period starting from 6 July 2008, instead of applying
the exemption to the entire year 2008. They further challenge the BIR’s adoption of the prorated
application of the new set of personal and additional exemptions for taxable year 2008. They also
contest the validity of the RR’s alleged imposition of a condition for the availment by MWEs of
the exemption provided by R.A. 9504. Supposedly, in the event they receive other benefits in
excess of P30,000, they can no longer avail themselves of that exemption. Petitioners contend
that the law provides for the unconditional exemption of MWEs from income tax and, thus, pray
that the RR be nullified.

ISSUES:

1) Whether or not the increased personal and additional exemptions provided by R.A. 9504
should be applied to the entire taxable year 2008

Page 50 of 65
2)Whether or not  Sections 1 and 3 of RR 10-2008 are consistent with the law in providing that
an MWE who receives other benefits in excess of the statutory limit of P30,00019 is no longer
entitled to the exemption provided by R.A. 9504

HELD:

1) Yes. R.A. 9504 as a piece of social legislation clearly intended to afford immediate tax relief
to individual taxpayers, particularly low-income compensation earners. Indeed, if R.A. 9504 was
to take effect beginning taxable year 2009 or half of the year 2008 only, then the intent of
Congress to address the increase in the cost of living in 2008 would have been negated. In one
case, the test is whether the new set of personal and additional exemptions was available at the
time of the filing of the income tax return. In other words, while the status of the individual
taxpayers is determined at the close of the taxable year, their personal and additional exemptions
– and consequently the computation of their taxable income – are reckoned when the tax
becomes due, and not while the income is being earned or received.

In the present case, the increased exemptions were already available much earlier than the
required time of filing of the return on 15 April 2009. R.A. 9504 came into law on 6 July 2008,
more than nine months before the deadline for the filing of the income tax return for taxable year
2008. Hence, individual taxpayers were entitled to claim the increased amounts for the entire
year 2008. This was true despite the fact that incomes were already earned or received prior to
the law’s effectivity on 6 July 2008.

2) Yes. To be exempt, one must be an MWE, a term that is clearly defined. Section 22(HH) of
Republic Act No. 8424 says he/she must be one who is paid the statutory minimum wage if
he/she works in the private sector, or not more than the statutory minimum wage in the non-
agricultural sector where he/she is assigned, if he/she is a government employee. R.A. 9504 is
explicit as to the coverage of the exemption: the wages that are not in excess of the minimum
wage as determined by the wage boards, including the corresponding holiday, overtime, night
differential and hazard pays. In other words, the law exempts from income taxation the most
basic compensation an employee receives – the amount afforded to the lowest paid employees by
the mandate of law. In a way, the legislature grants to these lowest paid employees additional
income by no longer demanding from them a contribution for the operations of government.

An administrative agency may not enlarge, alter or restrict a provision of law. The Court is not
persuaded that RR 10-2008 merely clarifies the law. The treatment of bonuses and other benefits
that an employee receives from the employer in excess of the P30,000 ceiling cannot but be the
same as the prevailing treatment prior to R.A. 9504 – anything in excess of P30,000 is taxable;
no more, no less.

The treatment of this excess cannot operate to disenfranchise the MWE from enjoying the
exemption explicitly granted by R.A. 9504. Moreover, RR 10-2008 does not withdraw the MWE
exemption from those who are earning other income outside of their employer employee
relationship. Section 2.78.1 (B) of RR 10-2008 provides that: MWEs receiving other income,
such as income from the conduct of trade, business, or practice of profession, except income

Page 51 of 65
subject to final tax, in addition to compensation income are not exempted from income tax on
their entire income earned during the taxable year. This rule, notwithstanding, the SMW,
Holiday pay, overtime pay, night shift differential pay and hazard pay shall still be exempt from
withholding tax.

In sum, the proper interpretation of R.A. 9504 is that it imposes taxes only on the taxable income
received in excess of the minimum wage, but the MWEs will not lose their exemption as such.
Workers who receive the statutory minimum wage their basic pay remain MWEs. The receipt of
any other income during the year does not disqualify them as MWEs. They remain MWEs,
entitled to exemption as such, but the taxable income they receive other than as MWEs may be
subjected to appropriate taxes.

CaseDig: Asia Int'l. Auctioneers vs Parayno

G.R. No. 163445, 18 December 2007
Posted by: Vincent Albien V. Arnado on 31 July 2018

FACTS:

Congress enacted Republic Act (R.A.) No. 7227 creating the Subic Special
Economic Zone (SSEZ) and extending a number of economic or tax incentives
therein. Section 12 of the law provides:

(a) Within the framework and subject to the mandate and limitations of the
Constitution and the pertinent provisions of the Local Government Code, the
[SSEZ] shall be developed into a self-sustaining, industrial, commercial, financial
and investment center to generate employment opportunities in and around the
zone and to attract and promote productive foreign investments;

(b) The [SSEZ] shall be operated and managed as a separate customs territory
ensuring free flow or movement of goods and capital within, into and exported
out of the [SSEZ], as well as provide incentives such as tax and duty-free
importations of raw materials, capital and equipment. However, exportation or
removal of goods from the territory of the [SSEZ] to the other parts of the
Philippine territory shall be subject to customs duties and taxes under the
Customs and Tariff Code and other relevant tax laws of the Philippines;

(c) The provision of existing laws, rules and regulations to the contrary

Page 52 of 65
notwithstanding, no taxes, local and national, shall be imposed within the
[SSEZ]. In lieu of paying taxes, three percent (3%) of the gross income earned by
all businesses and enterprise within the [SSEZ] shall be remitted to the National
Government, one percent (1%) each to the local government units affected by the
declaration of the zone in proportion to their population area, and other factors.
In addition, there is hereby established a development fund of one percent (1%)
of the gross income earned by all business and enterprise within the [SSEZ] to be
utilized for the development of municipalities outside the City of Olongapo and
the Municipality of Subic, and other municipalities contiguous to the base areas.

In case of conflict between national and local laws with respect to tax exemption
privileges in the [SSEZ], the same shall be resolved in favor of the latter;

(d) No exchange control policy shall be applied and free markets for foreign
exchange, gold, securities and future shall be allowed and maintained in the
[SSEZ]

On June 3, 2003, then CIR Guillermo L. Parayno, Jr. issued Revenue

Memorandum Circular (RMC) No. 31-2003 setting the "Uniform Guidelines on
the Taxation of Imported Motor Vehicles through the Subic Free Port Zone and
Other Freeport Zones that are Sold at Public Auction.

Petitioners Asia International Auctioneers, Inc. (AIAI) and Subic Bay Motors
Corporation are corporations organized under Philippine laws with principal
place of business within the SSEZ. They are engaged in the importation of mainly
secondhand or used motor vehicles and heavy transportation or construction
equipment which they sell to the public through auction.

Petitioners filed a complaint before the RTC of Olongapo City, praying for the
nullification of RMC No. 31-2003 for being unconstitutional and an ultra vires
act.

RTC granted the petitioners' application for the issuance of a writ of preliminary
injunction.

Court of Appeals Regional Trial Court, On March 31, 2004,said that Branch 74, of
Olongapo City is hereby declared bereft of jurisdiction to take cognizance of Civil
Case.

Page 53 of 65
ISSUE:

Whether or not a petition for certiorari under Rule 65 of the New Rules is proper
where the issue raised therein has not yet been resolved at the first instance by
the Court where the original action was filed, and, necessarily, without first filing
a motion for reconsideration; and

Which Court- the regular courts of justice established under Batas Pambansa Blg.
129 or the Court of Tax Appeals – is the proper court of jurisdiction to hear a case
to declare Revenue Memorandum Circulars unconstitutional and against an
existing law where the challenge does not involve the rate and figures of the
imposed taxes?

HELD:

The arguments are unmeritorious.

Jurisdiction is defined as the power and authority of a court to hear, try and
decide a case.23 The issue is so basic that it may be raised at any stage of the
proceedings, even on appeal.24 In fact, courts may take cognizance of the issue
even if not raised by the parties themselves.25 There is thus no reason to
preclude the CA from ruling on this issue even if allegedly, the same has not yet
been resolved by the trial court.

As to the second issue, petitioners' arguments do not sway. R.A. No. 1125, as
amended, states:

Sec. 7. Jurisdiction.—The Court of Tax Appeals shall exercise exclusive appellate

jurisdiction to review by appeal, as herein provided—

(1) Decisions of the Commissioner of Internal Revenue in cases involving

disputed assessments, refunds of internal revenue taxes, fees or other charges,
penalties imposed in relation thereto, or other matters arising under the National
Internal Revenue Code or other laws or part of law administered by the Bureau of
Internal Revenue; x x x (emphases supplied)

We have held that RMCs are considered administrative rulings which are issued
from time to time by the CIR. In the case at bar, the assailed revenue regulations
and revenue memorandum circulars are actually rulings or opinions of the CIR

Page 54 of 65
on the tax treatment of motor vehicles sold at public auction within the SSEZ to
implement Section 12 of R.A. No. 7227 which provides that "exportation or
removal of goods from the territory of the [SSEZ] to the other parts of the
Philippine territory shall be subject to customs duties and taxes under the
Customs and Tariff Code and other relevant tax laws of the Philippines." They
were issued pursuant to the power of the CIR under Section 4 of the National
Internal Revenue Code.

Petitioners' insistence for this Court to rule on the merits of the case would only
prove futile. Having declared the court a quo without jurisdiction over the subject
matter of the instant case, any further disquisition would be obiter dictum.IN
VIEW WHEREOF, the petition is DENIED.

Basilan Estates, Inc. vs. Commissioner, G.R. No. L-22492, Sept. 5, 1967

Page 55 of 65
 CIR vs. BAIER-NICKEL

11 FEB

GR No. 153793 | August 29, 2006 | J. Ynares-Santiago

 
Facts:
CIR appeals the CA decision, which granted the tax refund of respondent and reversed that of the
CTA. Juliane Baier-Nickel, a non-resident German, is the president of Jubanitex, a domestic
corporation engaged in the manufacturing, marketing and selling of embroidered textile products.
Through Jubanitex’s general manager, Marina Guzman, the company appointed respondent as
commission agent with 10% sales commission on all sales actually concluded and collected through
her efforts.

Page 56 of 65
In 1995, respondent received P1, 707, 772. 64 as sales commission from w/c Jubanitex deducted the
10% withholding tax of P170, 777.26 and remitted to BIR. Respondent filed her income tax return
but then claimed a refund from BIR for the P170K, alleging this was mistakenly withheld by
Jubanitex and that her sales commission income was compensation for services rendered in
Germany not Philippines and thus not taxable here.

She filed a petition for review with CTA for alleged non-action by BIR. CTA denied her claim but
decision was reversed by CA on appeal, holding that the commission was received as sales agent not
as President and that the “source” of income arose from marketing activities in Germany.

Issue: W/N respondent is entitled to refund

Held:
No. Pursuant to Sec 25 of NIRC, non-resident aliens, whether or not engaged in trade or business,
are subject to the Philippine income taxation on their income received from all sources in the
Philippines. In determining the meaning of “source”, the Court resorted to origin of Act 2833 (the
first Philippine income tax law), the US Revenue Law of 1916, as amended in 1917.
US SC has said that income may be derived from three possible sources only: (1) capital and/or (2)
labor; and/or (3) the sale of capital assets. If the income is from labor, the place where the labor is
done should be decisive; if it is done in this country, the income should be from “sources within the
United States.” If the income is from capital, the place where the capital is employed should be
decisive; if it is employed in this country, the income should be from “sources within the United
States.” If the income is from the sale of capital assets, the place where the sale is made should be
likewise decisive. “Source” is not a place, it is an activity or property. As such, it has a situs or
location, and if that situs or location is within the United States the resulting income is taxable to
nonresident aliens and foreign corporations.

ADVERTISEMENT

REPORT THIS AD

The source of an income is the property, activity or service that produced the income. For the source
of income to be considered as coming from the Philippines, it is sufficient that the income is derived
from activity within the Philippines.

The settled rule is that tax refunds are in the nature of tax exemptions and are to be
construed strictissimi juris against the taxpayer. To those therefore, who claim a refund rest the
burden of proving that the transaction subjected to tax is actually exempt from taxation.
In the instant case, respondent failed to give substantial evidence to prove that she performed the
incoming producing service in Germany, which would have entitled her to a tax exemption for
income from sources outside the Philippines. Petition granted.

Fitness By Design V. CIR (2008)

FACTS:

 March 17, 2004: CIR assessed Fitness by Design Inc. for deficiency Income Taxes for the
year of 1995 for P 10,647, 529.69

Page 57 of 65
 February 1, 2005: CIR issued a warrant of distraint and levy against petitioner which
prompted petitioner to file a Petition for Review before the CTA where he alleged his defense
of prescription based on Sec. 203 of the Tax Code. 
 CIR answer: Tax return was false and fraudulent for deliberately failing to declare its true
sales of P 7,156,336.08 and failure to file a VAT return for it.  Since petitioner  failed to file a
protest, it is subject to either distraint or levy.  Moreover, it cited Sec. 222 (a) of 1997 Tax Code
where false and fraudulent return with intent to evade tax or failure to file a return prescribe 10
years after the discovery of the falsity, fraud or omission.  
 March 10, 2005: BIR filed a criminal complaint before the DOJ against the officers and
accountant of petitioner for violation against the 1977 NIRC.
 During the preliminary hearing on the issue of prescription, petitioner's former bookkeeper
attested that his former colleague, CPA Sablan, illegally took custody of accounting records and
turned them over to the BIR. 
 Petitioner then requested a subpoena ad testificandum for Sablan who failed to
appear.
 CTA: Denied the motion for issuance of subpoena and disallowed the submission of written
interrogatories to Sablan who is NOT a party to the case nor was his testimony relevant.  It also
violates Section 2 of Republic Act No. 2338, as implemented by Section 12 of Finance
Department Order No. 46-66, proscribing the revelation of identities of informers of violations of
internal revenue laws, except when the information is proven to be malicious or false.  Moreover,
the subpoena is NOT needed to obtain affidavit of the informer.
ISSUE: W/N BIR can use the information without petitioner's consent

HELD: YES.

 Sec. 5 of the tax code provides that the BIR is authorized to obtain from any person other
than the person whose internal revenue tax liability is subject to audit or investigation and can
even summon any person having possession, custody or care of the books of accountants and
other accounting records containing entries relating to the business of the person liable for tax. 
This includes even those which cannot be admitted in a judicial proceeding where the Rules of
Court are strictly observed.  CTA case is not a criminal prosecution where he can cross examine
the witness against him.  CTA can enforce its order by citing them for indirect contempt.

GR No. 215427

PAGCOR vs Bureau of Internal Revenue

GR No. 215427

Facts:

PAGCOR has been excluded from the enumeration of government-owned or controlled corporations
that are exempted from the liability for corporate income tax. This has been observed with the RA No
9337 as it amends Section 27 (c) of RA No. 8424 otherwise known as the National Internal Revenue Code
(NIRC).

Page 58 of 65
Issue:

Whether or not PAGCOR is liable for the corporate income tax that the conflicting statutes implement.

Held:

There is no conflict between PD 1869 and RA No 9337.The former lays down the taxes imposable upon
petitioner, as follows: (1) a five percent (5%) franchise tax of the gross revenues or earnings derived
from its operations conducted under the Franchise, which shall be due and payable in lieu of all kinds of
taxes, levies, fees or assessments of any kind, nature or description, levied, established or collected by
any municipal, provincial or national government authority;15 (2) income tax for income realized from
other necessary and related services, shows and entertainment of petitioner.16 With the enactment of
R.A. No. 9337, which withdrew the income tax exemption under R.A. No. 8424, petitioner’s tax liability
on income from other related services was merely reinstated.

It is a rule that every effort must be exerted to avoid a conflict between statutes; so that if reasonable
construction is possible, the laws must be reconciled in that manner. Also, it shall also be borne in mind
that it is a canon of statutory construction that a special law prevails over a general law — regardless of
their dates of passage — and the special is to be considered as remaining an exception to the general.

Hilado vs Collector

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Page 60 of 65
 Vera v. Cuevas
Full Text: http://www.lawphil.net/judjuris/juri1979/may1979/gr_l_33693_1979.html

Facts:
Private respondents herein, are engaged in the manufacture, sale and distribution of filled milk products
throughout the Philippines. The products of private respondent, Consolidated Philippines Inc. are
marketed and sold under the brand Darigold whereas those of private respondent, General Milk Company
(Phil.), Inc., under the brand "Liberty;" and those of private respondent, Milk Industries Inc., under the
brand "Dutch Baby." Private respondent, Institute of Evaporated Filled Milk Manufacturers of the
Philippines, is a corporation organized for the principal purpose of upholding and maintaining at its
highest the standards of local filled milk industry, of which all the other private respondents are members.
CIR required the respondents to withdraw from the market all of their filled milk products which do not
bear the inscription required by Section 169 of the Tax Code within fifteen (15) days from receipt of the
order. Failure to comply will result to penalties. Section 169 talks of the inscription to be placed in
skimmed milk wherein all condensed skimmed milk and all milk in whatever form, from which the fatty part
has been removed totally or in part, sold or put on sale in the Philippines shall be clearly and legibly
marked on its immediate containers, and in all the language in which such containers are marked, with
the words, "This milk is not suitable for nourishment for infants less than one year of age," or with other
equivalent words.
The CFI Manila ordered the CIR to perpetually restrain from requiring the respondents to print on the
labels of their product the words "This milk is not suitable for nourishment for infants less than one year of
age.". Also, it ordered the Fair Trade Board to perpetually restrain from investigating the respondents
related to the manufacture/sale of their filled milk products.

Issue:
Whether or not skimmed milk is included in the scope of Section 169 of the Tax Code.

Held:

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No, Section 169 of the Tax Code is not applicable to filled milk. The use of specific and qualifying terms
"skimmed milk" in the headnote and "condensed skimmed milk" in the text of the cited section,  would
restrict the scope of the general clause "all milk, in whatever form, from which the fatty pat has been
removed totally or in part." In other words, the general clause is restricted by the specific term "skimmed
milk" under the familiar rule of ejusdem generis that general and unlimited terms are restrained and
limited by the particular terms they follow in the statute.
The difference, therefore, between skimmed milk and filled milk is that in the former, the fatty part has
been removed while in the latter, the fatty part is likewise removed but is substituted with refined coconut
oil or corn oil or both. It cannot then be readily or safely assumed that Section 169 applies both to
skimmed milk and filled milk. It cannot then be readily or safely assumed that Section 169 applies both to
skimmed milk and filled milk. Also, it has been found out that "the filled milk products of the petitioners
(now private respondents) are safe, nutritious, wholesome and suitable for feeding infants of all ages" (p.
44, Rollo) and that "up to the present, Filipino infants fed since birth with filled milk have not suffered any
defects, illness or disease attributable to their having been fed with filled milk."
Hence, applying Section 169 to it would cause a deprivation of property without due process of law.

Philippine Rabbit Bus Lines, Inc. (PRBL) vs. People, 427

SCRA 526 (2004) Digest
Civil Liability Arising from Felony
42. Philippine Rabbit Bus Lines, Inc. (PRBL) vs. People, 427 SCRA 526 (2004)

Facts:
                In May 16, 1995, PRBL Bus, driven by petitioner Pleyto, was traveling along MacArthur Highway in Gerona,
Tarlac bound for Vigan, Ilocos Sur. It was drizzling that morning and the macadam road was wet. Right in front of
the bus, headed north, was the tricycle owned and driven by one Rodolfo Esguerra.
                According to RollyOrpilla, a witness and one of the bus passengers, Pleyto tried to overtake Esguerra’s
tricycle but hit it instead. Pleyto then swerved into the left opposite lane. Coming down the lane, some fifty meters
away, was a southbound Mitsubishi Lancer car, driven by Arnulfo Asuncion. In the car seated beside Arnulfo was
his brother-in-law, Ricardo Lomboy, while in the back seat were Ricardo’s 18-year old daughter Carmela and her
friend, one Rhino Daba. PRBL Bus smashed head-on the car, killing Arnulfo and Ricardo instantly. Carmela and
Rhino suffered injuries, but only Carmela required hospitalization.

Issue:
                THE COURT OF APPEALS DISREGARDED THE DOCTRINE LAID DOWN IN VILLA REY
TRANSIT, INC. v. COURT OF APPEALS, WHEN IT ARBITRARILY PEGGED THE MONTHLY LIVING
EXPENSES AT 50% OF GROSS EARNINGS.

Held:
                No.

Ratio:

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                Petitioners, in the Supreme Court view, misread the Villa Rey Transit case. In considering
the earning capacity of the victim as an element of damages, the net earnings, which is computed by deducting
necessary expenses from the gross earnings, and not the gross earnings, is to be utilized in the computation. Note
that in the present case, both the Court of Appeals and the trial court used net earnings, not gross earnings in
computing loss of earning capacity. The amount of net earnings was arrived at after deducting the necessary
expenses (pegged at 50% of gross income) from the gross annual income. This computation is in accord with
settled jurisprudence, including the Villa Rey case.

PBCom v. CIR
Philippine Bank of Communications vs. Commissioner of Internal Revenue
G.R. No. 112024, January 28, 1999
FACTS:
Philippine Bank of Communications (PBCom), settled its total income tax returns for the first
and second quarters of 1985 by applying its tax credit memos. However, it incurred losses so it
declared no tax payable for the year when it filed its year-end Annual Income Tax Returns.
Nevertheless in 1985 and 1986, PBCom earned rental income from leased properties in which
the lessees withheld and remitted to the BIR withholding creditable taxes
On August 7, 1987, petitioner requested the CIR for a tax credit for the overpayment of taxes in
the first and second quarters of 1985. Thereafter, on July 25, 1988, petitioner filed a claim for
refund of creditable taxes withheld by their lessees from property rentals in 1985 and 1986.
Pending the investigation, petitioner filed a petition for review with the CTA which denied the
claims of the petitioner for tax refund and tax credits for 1985 for filing beyond the two-year
reglementary period. CTA also denied the claim for refund for 1986 on the speculation that
petitioner had automatically credited against its tax payment in the succeeding year. CA affirmed
CTA’s decision. Hence, this petition for review.
Petitioner’s argument: that its claims for refund and tax credits are not yet barred by prescription
relying on the applicability of Revenue Memorandum Circular No. 7-85 issued on April 1, 1985.
The circular states that overpaid income taxes are not covered by the two-year prescriptive
period under the tax Code and that taxpayers may claim refund or tax credits for the excess
quarterly income tax with the BIR within ten (10) years under Article 1144 of the Civil Code.
ISSUES:
1. Whether or not the prescription for the claim of tax refund or tax credit is covered by
Revenue Memorandum Circular No. 7-85 and not by the two-year prescriptive period
under the tax Code.
2. Whether or not CA erred in affirming CTA’s decision denying its claim for refund of tax
overpaid in 1986, based on mere speculation, without proof, that PBCom availed of the
automatic tax credit in 1987.
RULING:
1. It is the Tax Code which provides for the prescription for claims for refund or tax credit. RMC
7-85 changed the prescriptive period of two years to ten years on claims of excess quarterly
income tax payments. This circular is inconsistent with the provision of Sec 230, NIRC of 1977.
The BIR, in issuing said circular did not simply interpret the law; rather it legislated guidelines

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contrary to the statute passed by Congress. Rules and regulations issued by the administrative
officials to implement a law cannot go beyond the terms and provisions of the latter. Since RMC
7-85 issued by the BIR is an administrative interpretation which is contrary to the provision of
the statte, it cannot be given weight and the State cannot be put in estoppel by the mistakes or
errors of its officials or agents.
2. Sec. 69 of the 1977 NIRC 29 (now Sec. 76 of the 1997 NIRC) provides that any excess of the
total quarterly payments over the actual income tax computed in the adjustment or final
corporate income tax return, shall either(a) be refunded to the corporation, or (b) may be credited
against the estimated quarterly income tax liabilities for the quarters of the succeeding taxable
year.
The corporation must signify in its annual corporate adjustment return (by marking the option
box provided in the BIR form) its intention, whether to request for a refund or claim for an
automatic tax credit for the succeeding taxable year. To ease the administration of tax collection,
these remedies are in the alternative, and the choice of one precludes the other.
The CTA examined the adjusted final corporate annual income tax return for taxable year 1986
and found out that petitioner opted to apply for automatic tax credit. This was the basis used
together with the fact that the 1987 annual corporate tax return was not offered by the petitioner
as evidence by the CTA in concluding that petitioner had indeed availed of and applied the
automatic tax credit to the succeeding year, hence it can no longer ask for refund, as the two
remedies of refund and tax credit are alternative.

NOTES:
Basic is the principle that taxes are the lifeblood of the nation. The primary purpose is to
generate funds for the State to finance the needs of the citizenry and to advance the common
weal. Due process of law under the Constitution does not require judicial proceedings in tax
cases. This must necessarily be so because it is upon taxation that the government chiefly relies
to obtain the means to carry on its operations and it is of utmost importance that the modes
adopted to enforce the collection of taxes levied should be summary and interfered with as little
as possible.

COMMISSIONER OF INTERNAL REVENUE VS.

FILINVEST DEVELOPMENT CORPORATION-
Theoretical Interest

Filinvest Development Corporation extended advances in favor of its affiliates and

supported the same with instructional letters and cash and journal vouchers. The BIR
assessed Filinvest for deficiency income tax by imputing an “arm’s length” interest rate
on its advances to affiliates. Filinvest disputed this by saying that the CIR lacks the

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authority to impute theoretical interest and that the rule is that interests cannot be
demanded in the absence of a stipulation to the effect.

ISSUE:

Can the CIR impute theoretical interest on the advances made by Filinvest to its
affiliates?

HELD:

NO. Despite the seemingly broad power of the CIR to distribute, apportion and allocate
gross income under (now) Section 50 of the Tax Code, the same does not include the
power to impute theoretical interests even with regard to controlled taxpayers’
transactions. This is true even if the CIR is able to prove that interest expense (on its
own loans) was in fact claimed by the lending entity. The term in the definition of gross
income that even those income “from whatever source derived” is covered still requires
that there must be actual or at least probable receipt or realization of the item of gross
income sought to be apportioned, distributed, or allocated. Finally, the rule under the
Civil Code that “no interest shall be due unless expressly stipulated in writing” was also
applied in this case.

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