I.

General Principles

1. Meaning of Taxation
- it is the act of laying tax wherein the state thru its law-making body raises income to
defray the necessary expenses of the government.
-it is a way of apportioning the cost of the government among those privileged.
-it is an inherent power of the state to demand contributions for public purpose. (Power
to tax)

CIR vs Algue
FACTS: The Philippine Sugar Estate Development Company appointed Algue Inc, as
its agent, authorizing it to sell its land, factories and oil manufacturing process. Pursuant
to such authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith,
O'Farell, and Pablo Sanchez, worked for the formation of the Vegetable Oil Investment
Corporation, inducing other persons to invest in it. Ultimately, after its incorporation
largely through the promotion of the said persons, this new corporation purchased the
PSEDC properties. For this sale, Algue received as agent a commission of
P126,000.00, and from this commission, P75,000.00 promotional fees were paid to the
aforenamed individuals

On January 14, 1965, Algue Inc., a domestic corporation engaged in engineering,

construction and other allied activities, received a letter from BIR assessing it in the total
amount of P83,183.85 as delinquency income taxes for the years 1958 and 1959.

Four days after, Algue flied a letter of protest or request for reconsideration, which letter
was stamp received on the same day in the office of the petitioner.

On March 12, 1965, a warrant of distraint and levy was presented to the private
respondent, through its counsel, Atty. Guevara, who refused to receive it on the ground
of the pending protest. A search of the protest in the dockets of the case proved
fruitless. Atty. Guevara produced his file copy and gave a photostat to BIR, who
deferred service of the warrant.

On April 7, 1965, Atty. Guevara was finally informed that the BIR was not taking any
action on the protest and it was only then that he accepted the warrant of distraint and
levy earlier sought to be served. Sixteen days later, on April 23, 1965, Algue filed a
petition for review of the decision of the Commissioner of Internal Revenue with the
Court of Tax Appeals.

Algue, then, sought to claim a P75,000 deduction, but was denied by the CIR contends
that the claimed deduction is not allowed because it was not an ordinary reasonable or
necessary business expense. The CTA, however, ruled in favor of Algue and allowed
the deduction, stating that the said amount had been legitimately paid by Algue, Inc. as
promotional fees for the work in the formation of Vegetable Oil Investment Corporation
of the Philippines and its subsequent purchase of the properties of the Philippine Sugar
Estate Development Corporation.
ISSUE: Weather the CIR is correctly disallowed the 75,000 deduction claimed by Algue.

RULING: No, the CIR is incorrect.

The Court held that Taxes are the lifeblood of the government and so should be
collected without unnecessary hindrance On the other hand, such collection should be
made in accordance with law as any arbitrariness will negate the very reason for
government itself. It is therefore necessary to reconcile the apparently conflicting
interests of the authorities and the taxpayers so that the real purpose of taxation, which
is the promotion of the common good, may be achieved.

CTA was correct in ruling that the amount of the promotional fees was not excessive.
The amount of P75,000.00 was 60% of the total commission. This was a reasonable
proportion, considering that it was the payees who did practically everything, from the
formation of the Vegetable Oil Investment Corporation to the actual purchase by it of the
Sugar Estate properties. This finding of the respondent court is in accord with Section
30 (a) (1) of the Tax Code and Section 70(1) of the Revenue Regulation 2 which
provides that in computing the net income, certain deductions are allowed such as
ordinary and necessary expenses incurred in carrying out the business including
reasonable allowance, salaries or compensations.

In the case at bar, Algue incurred expenses in the amount of 75,000 as promotional
fees during the establishment of VOIC which is deductible from the computation of the
net income as authorized by law.

2. Purpose and scope of taxation

-to provide funds or property to promote the genwelfare and protection of citizens as
well as attaining social and economic objectives
-rationale is in order to run the government.
-scope covers all which imposes burthen upon persons, property, or property rights

3. Meaning of taxes
-it is the enforced proportional and pecuniary contributions from persons and property
levied by the law-making body in order to support the government and its public needs.

4. Essential characteristics of tax

a. An enforced contribution- not a donation
b. It is proportionate in character- based on ability to pay (salary or status basis)
c. Generally payable in money- legal tender
d. Levied on persons or property- paid only by a person. The property serves as
an ascertainment that the tax will be paid in case of default.
e. Levied by the state who has jurisdiction over the person or property- object to
be taxed must be within the jurisdiction of the taxing state
f. levied by the law-making body of the state- a legislative power but no longer
 vested in the Congress. It is now delegated to the local legislative bodies
g. Levied for public purpose or purposes- for govt support , payment of public
expenses

5. Theory and basis of taxation

a. Existence of government (Necessity theory)- existence is necessity and cant
continue without means to pay its expenses

Necessity Theory:

Phil Guaranty Co, Inc. vs CIR

FACTS: Philippine Guaranty Co., Inc., a domestic insurance company, entered into
reinsurance contracts with foreign insurance companies not doing business in the
Philippines.

The premiums paid by such companies were excluded by the Phil. Guaranty from its
gross income when it filed its income tax return
for 1953 and 1954.

The CIR assessed Phil. Guaranty.

Phil Guaranty protested the assessment on the ground that the premiums are not
subject to tax because the premiums did not constitute income from sources within the
Philippines, since the foreign reinsurers did not engage in business in the Philippines.

ISSUE: Whether the reinsurance premiums did not constitute income from sources
within the Philippines because the foreign reinsurers did not engage in business in the
Philippines

RULING: NO. The court held that Section 24 of the Tax Code subjects foreign
corporations to tax on their income from sources within the Philippines.

Section 24 of the Tax Code does not require a foreign corporation to engage in
business in the Philippines in subjecting its income to tax. It suffices that the activity
creating the income is performed or done in the Philippines. What is controlling,
therefore, is not the place of business but the place of activity that created an income.

 The power to tax is an attribute of sovereignty. It is a power emanating

from necessity. It is a necessary burden to preserve the State's sovereignty and
a means to give the citizenry an army to resist an aggression, a navy to defend
its shores from invasion, a corps of civil servants to serve, public improvement
designed for the enjoyment of the citizenry and those which come within the
 State's territory, and facilities and protection which a government is supposed to
provide.

b. Reciprocal duties of state and inhabitants- in return of contribution, taxpayer

receives general advantage and protection which the govt affords the taxpayer
and his property.

Benefits-received Theory
CIR vs Algue

Marcos II vs CA

c. Public purpose requirement for lawful taxation

*all can enjoy privileges whether they can pay or not. It is the right of the
citizens owed by the state.
*tax is not imposed on the basis of a special or peculiar benefit
*

Gomez vs Palomar

FACTS: Benjamin P. Gomez mailed a letter at the post office in Pampanga. However,
the letter did not bear the special anti-TB stamp required by the statute so it was
returned to Gomez.

Due to this, he questioned the constitutionality of RA 1635 which states that no mail
matter shall be accepted unless it bears semi-postal stamps for the period of August 19
to September 30 every year.

The lower court declared the statute and the orders unconstitutional; hence this appeal
by the respondent postal authorities.

ISSUE: Whether the statute is violative of the equal protection clause since it
constitutes mail users into a class for the purpose of the tax while leaving the rest of the
population, untaxed

RULING: NO. The court held that the legislature has the inherent power to select the
subjects of taxation and to grant exemptions.

Consequently, the principle that there must be a reasonable relationship between

classification made by the legislation and its purpose has no application to a measure
whose sole purpose is to raise revenue.
Moreover, the only benefit to which the taxpayer is constitutionally entitled is
that derived from his enjoyment of the privileges of living in an organized society,
established and safeguarded by the devotion of taxes to public purposes.

Lorenzo vs Posadas

FACTS: Thomas Hanley died, leaving a will and a considerable amount of real and
personal property. In his will, Hanley stated that upon his passing, his real properties
are not to be sold or disposed of for a period of ten years and that the said properties
are to be managed by an executor and the proceeds of which shall be given to his
nephews. That after the lapse of ten years, the real properties shall be given to his
brother.
During the incumbency of Lorenzo as trustee, the Collector of Internal Revenue made
an assessment against the estate an inheritance tax including penalties in the amount
of 2,052.74. CIR then filed with CFI a motion to order Lorenzo to pay the taxes which
was then granted.

Lorenzo paid the said amount under protest, notifying CIR that unless the amount was
promptly returned suit would be brought for its recovery. The protest overruled which
prompted Lorenzo to file an appeal.

Lorenzo contends that the real properties did not and could not legally pass to the heirs
until after ten years from the date of Hanley’s death and that the inheritance tax should
only be computed ten years after Hanley’s death

ISSUE Whether the inheritance tax should be computed only after the lapse of ten years
where the subject real property has been passed on to the heirs.

RULING No. the Court held that the heirs succeed immediately to all the property of the
deceased ancestor. The property belongs to the heirs at the moment of the death of the
ancestors as completely as if the ancestor had executed and delivered to them a deed
for the same before his death. A transmission by inheritance is taxable at the time of the
predecessor’s death, notwithstanding the postponement of the actual possession or
enjoyment of the estate by the beneficiary, and the tax measured by the value of the
property transmitted at that time regardless of its appreciation or depreciation.

Further, should the Court hold that the payment of the tax could be postponed or
delayed by the creation of a trust of the type at hand, the result would be plainly
disastrous. Testators may provide, as Thomas Hanley has provided, that their estates
be not delivered to their beneficiaries until after the lapse of a certain period of time. In
the case at bar, the period is ten years. In other cases, the trust may last for fifty years,
or for a longer period which does not offend the rule against petuities. The collection of
the tax would then be left to the will of a private individual.

Finally, The obligation to pay taxes rests not upon the privileges enjoyed by, or
the protection afforded to, a citizen by the government but upon the necessity of
money for the support of the state (Dobbins vs. Erie Country, supra). For this
reason, no one is allowed to object to or resist the payment of taxes solely
because no personal benefit to him can be pointed out.

6. Nature of the power of taxation

7. Aspects of taxation

8. Extent of legislative power to tax

9. Basic Principles of a sound tax system

10. Inherent and constitutional limitations of taxation

11. Requisites of a valid tax