U.S.

Supreme Court
Eisner v. Macomber, 252 U.S. 189 (1920)

EISNER V. MACOMBER

No. 318 Argued April 16, 1919 Restored to docket for reargument May 19, 1919 Reargued October 17, 20, 1919 Decided March 8, 1920 252 U.S. 189 Syllabus Congress was not empowered by the Sixteenth Amendment to tax, as income of the stockholder, without apportionment, a stock dividend made lawfully and in good faith against profits accumulated by the corporation since March 1, 1913. P. 252 U. S. 201.Towne v. Eisner, 245 U. S. 418. The Revenue Act of September 8, 1916, c. 463, 39 Stat. 756, plainly evinces the purpose of Congress to impose such taxes, and is to that extent in conflict with Art. I, 2, cl. 3, and Art. I, 9, cl. 4, of the Constitution. Pp. 252 U. S. 199, 252 U. S. 217. These provisions of the Constitution necessarily limit the extension, by construction, of the Sixteenth Amendment. P. 252 U. S. 205. What is or is not "income" within the meaning of the Amendment must be determined in each case according to truth and substance, without regard to form. P. 252 U. S. 206. Income may be defined as the gain derived from capital, from labor, or from both combined, including profit gained through sale or conversion of capital. P. 252 U. S. 207. Mere growth or increment of value in a capital investment is not income; income is essentially a gain or profit, in itself, of exchangeable value, proceeding from capital, severed from it, and derived or received by the taxpayer for his separate use, benefit, and disposal. Id. A stock dividend, evincing merely a transfer of an accumulated surplus to the capital account of the corporation, takes nothing from the property of the corporation and adds nothing to that of the shareholder; a tax on such dividends is a tax an capital increase, and not on income, and, to be valid under the Constitution, such taxes must be apportioned according to population in the several states. P. 252 U. S. 208. Affirmed. Page 252 U. S. 190 The case is stated in the opinion. Page 252 U. S. 199

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U.S. Supreme Court

Graves v. New York ex rel. O'Keefe, 306 U.S. 466 (1939)

salaries of officers or employees of the national or state governments or their instrumentalities. Id. 278 N.Y. 691, 16 N.E.2d 404, reversed. Certiorari, 305 U.S. 592, to review the affirmance of an order, 253 App.Div. 91; 1 N.Y.S.2d 195, setting aside a decision of the Tax Commission of the New York rejecting a claim for refund of a tax. Page 306 U. S. 475 MR. JUSTICE STONE delivered the opinion of the Court. We are asked to decide whether the imposition by the New York of an income tax on the salary of an employee of the Home Owners' Loan Corporation places an unconstitutional burden upon the federal government. Respondent, a resident of New York, was employed during 1934 as an examining attorney for the Home Owners' Loan Corporation at an annual salary of $2,400. In his income tax return for that year, he included his salary as subject to the New York state income tax imposed by Art. 16 of the Tax Law of New York (Consol.Laws, c. 60). Subdivision 2f of 359, since repealed, exempted from the tax "Salaries, wages and other compensation received from the United States of officials or employees thereof, including persons in the military or naval forces of the United States. . . ." Petitioners, Page 306 U. S. 476 New York State Tax Commissioners, rejected respondent's claim for a refund of the tax based on the ground that his salary was constitutionally exempt from state taxation because the Home Owners' Loan Corporation is an instrumentality of the United States Government, and that he, during the taxable year, was an employee of the federal government engaged in the performance of a governmental function. On review by certiorari, the Board's action was set aside by the Appellate Division of the Supreme Court of New York, People ex rel. O'Keefe v. Graves, 253 App.Div. 91, 1 N.Y.S.2d 195, whose order was affirmed by the Court of Appeals. 278 N.Y. 691, 16 N.E.2d 404. Both courts held respondent's salary was free from tax on the authority ofNew York ex rel. Rogers v. Graves, 299 U. S. 401, which sustained the claim that New York could not constitutionally tax the salary of an employee of the Panama Rail Road Company, a wholly owned corporate instrumentality of the United States. We granted certiorari, 305 U.S. 592, the constitutional question presented by the record being of public importance. The Home Owners' Loan Corporation was created pursuant to 4(a) of the Home Owners' Loan Act of 1933, 48 Stat. 128, 12 U.S.C. 1461 et seq., which was enacted to provide emergency relief to home owners, particularly to assist them with respect to home mortgage indebtedness. The corporation, which is authorized to lend money to home owners on

GRAVES V. NEW YORK EX REL. O'KEEFE

No. 478 Argued March 6, 1939 Decided March 27, 1939 306 U.S. 466 CERTIORARI TO THE SUPREME COURT OF NEW YORK Syllabus 1. The receipt of salary by a resident of New York as an examining attorney for the Federal Home Owners' Loan Corporation, is constitutionally subject to nondiscriminatory taxation by a State. P. 306 U. S. 475. 2. For the purposes of this case, it is assumed that the creation of the Home Owners' Loan Corporation was a constitutional exercise of the powers of the Federal Government, and that all activities of the Government constitutionally authorized by Congress are governmental, and stand on a parity with respect to immunity from state taxation. P. 306 U. S. 477. 3. Whether Congress, as an incident to the exercise of specifically granted powers, has power to grant tax exemptions extending beyond the constitutional immunity of federal agencies which courts may imply is a question not determined in this case. P. 306 U. S. 478. Page 306 U. S. 467 4. No purpose of Congress either to grant or to withhold immunity from state taxation of salaries of employees of the Home Owners' Loan Corporation is expressed or implied in the Home Owners' Loan Act of 1933, 48 Stat. 128, or is to be inferred from the silence of Congress. P. 306 U. S. 479. 5. A tax on income is not legally or economically a tax on its source, and there is no basis for the assumption that the economic burden of a nondiscriminatory state income tax on the salary of an employee of the National Government or of a governmental agency is passed on so as to impose a burden on the National Government tantamount to an unconstitutional interference by the one government with the other in the performance of its functions. P. 306 U. S. 480. 6. Assuming that the Home Owners' Loan Corporation is clothed with the same constitutional immunity from state taxation as the Government itself, it cannot be said that the present tax on the income of its employees lays any unconstitutional burden upon it. P. 306 U. S. 486. 7. Collector v. Day, 11 Wall. 113, and New York ex rel. Rogers v. Graves, 299 U. S. 401, are overruled insofar as they recognize an implied constitutional immunity from nondiscriminating income taxation of the

mortgages and to refinance home mortgage loans within the purview of the Act, is declared by 4(a) to be an instrumentality of the United States. Its shares of stock are wholly government-owned. 4(b). Its funds are deposited in the Treasury of the United States, and the compensation of its employees is paid by drafts upon the Treasury. Page 306 U. S. 477 For the purposes of this case, we may assume that the creation of the Home Owners' Loan Corporation was a constitutional exercise of the powers of the federal government. Cf. Kay v. United States, 303 U. S. 1. As that government derives its authority wholly from powers delegated to it by the Constitution, its every action within its constitutional power is governmental action, and, since Congress is made the sole judge of what powers within the constitutional grant are to be exercised, all activities of government constitutionally authorized by Congress must stand on a parity with respect to their constitutional immunity from taxation. McCulloch v. Maryland, 4 Wheat. 316, 17 U. S. 432; Van Brocklin v. Tennessee, 117 U. S. 151, 117 U. S. 158-159;South Carolina v. United States, 199 U. S. 437, 199 U. S. 451-452; Helvering v. Gerhardt, 304 U. S. 405, 304 U. S. 412-415. And when the national government lawfully acts through a corporation which it owns and controls, those activities are governmental functions entitled to whatever tax immunity attaches to those functions when carried on by the government itself through its departments. See McCulloch v. Maryland, supra, 17 U. S. 421-422; Smith v. Kansas City Title Co., 255 U. S. 180, 255 U. S. 208; Federal Land Bank v. Crosland, 261 U. S. 374; New York ex rel. Rogers v. Graves, supra. The single question with which we are now concerned is whether the tax laid by the state upon the salary of respondent, employed by a corporate instrumentality of the federal government, imposes an unconstitutional burden upon that government. The theory of the tax immunity of either government, state or national, and its instrumentalities from taxation by the other has been rested upon an implied limitation on the taxing power of each, such as to forestall undue interference, through the exercise of that power, with the governmental Page 306 U. S. 478 activities of the other. That the two types of immunity may not in all respects stand on a parity has been recognized from the beginning, McCulloch v. Maryland, supra, 17 U. S. 436, and possible differences in application, deriving from differences in the source, nature, and extent of the immunity of the governments and their agencies were pointed out and discussed by this Court in detail during the last term. Helvering v. Gerhardt, supra, 306 U. S. 412-413, 306 U. S. 416. So far as now relevant, those differences have been thought to be traceable to the fact that the federal government is one of delegated powers in the exercise of which Congress is supreme, so that every agency which Congress can constitutionally create is a governmental agency. And since the power to create the agency includes the implied power to do whatever is needful or appropriate, if not expressly prohibited, to protect the agency, there has been attributed to Congress some scope, the limits

of which it is not now necessary to define, for granting or withholding immunity of federal agencies from state taxation. See Van Allen v. Assessors, 3 Wall. 573, 70 U. S. 583-585; Bank of New York v. Supervisors, 7 Wall. 26, 74 U. S. 30-31; Thomson v. Union Pacific Railroad, 9 Wall. 579, 76 U. S. 588-590; New York v. Weaver, 100 U. S. 539, 100 U. S. 543; Mercantile Bank v. New York, 121 U. S. 138, 121 U. S. 154;Owensboro National Bank v. Owensboro, 173 U. S. 664, 173 U. S. 668; Shaw v. Gibson-Zahniser Oil Corp., 276 U. S. 575, 276 U. S. 581; Oklahoma v. Barnsdall Refineries, 296 U. S. 521, 296 U. S. 525526; Baltimore National Bank v. State Tax Comm'n, 297 U. S. 209, 297 U. S. 211-212; British-American Co. v. Board of Equalization, 299 U. S. 159; James v. Dravo Contracting Co., 302 U. S. 134, 302 U. S. 161; Helvering v. Gerhardt, supra, 304 U. S. 411-412, 304 U. S. 417; cf. United States v. Bekins, 304 U. S. 27, 304 U. S. 52. Whether its power to grant tax exemptions as an incident to the exercise of powers specifically granted by the Constitution can ever, in any circumstances, extend beyond the constitutional Page 306 U. S. 479 immunity of federal agencies which courts have implied is a question which need not now be determined. Congress has declared in 4 of the Act that the Home Owners' Loan Corporation is an instrumentality of the United States, and that its bonds are exempt, as to principal and interest, from federal and state taxation except surtaxes, estate, inheritance, and gift taxes. The corporation itself, "including its franchise, its capital, reserves and surplus, and its loans and income," is likewise exempted from taxation; its real property is subject to tax to the same extent as other real property. But Congress has given no intimation of any purpose either to grant or withhold immunity from state taxation of the salary of the corporation's employees, and the Congressional intention is not to be gathered from the statute by implication. Cf. Baltimore National Bank v. State Tax Comm'n, supra. It is true that the silence of Congress, when it has authority to speak, may sometimes give rise to an implication as to the Congressional purpose. The nature and extent of that implication depend upon the nature of the Congressional power and the effect of its exercise. [Footnote 1] But Page 306 U. S. 480 there is little scope for the application of that doctrine to the tax immunity of governmental instrumentalities. The constitutional immunity of either government from taxation by the other where Congress is silent has its source in an implied restriction upon the powers of the taxing government. So far as the implication rests upon the purpose to avoid interference with the functions of the taxed government or the imposition upon it of the economic burden of the tax, it is plain that there is no basis for implying a purpose of Congress to exempt the federal government or its agencies from tax burdens which are unsubstantial or which courts are unable to discern. Silence of Congress implies immunity no more than does the silence of the Constitution. It follows that, when exemption from state taxation is claimed on the ground that the federal government is burdened

by the tax, and Congress has disclosed no intention with respect to the claimed immunity, it is in order to consider the nature and effect of the alleged burden, and if it appears that there is no ground for implying a constitutional immunity, there is equally a want of any ground for assuming any purpose on the part of Congress to create an immunity. The present tax is a nondiscriminatory tax on income applied to salaries at a specified rate. It is not in form or substance a tax upon the Home Owners' Loan Corporation or its property or income, nor is it paid by the corporation or the government from their funds. It is measured by income which becomes the property of the taxpayer when received as compensation for his services, and the tax laid upon the privilege of receiving it is paid from his private funds, and not from the funds of the government, either directly or indirectly. The theory, which once won a qualified approval, that a tax on income is legally or economically a tax on its source, is no longer tenable, New York ex rel. Cohn v. Graves, 300 U. S. 308, 300 U. S. 313-314; Hale v. State Board, 302 U. S. 95, 302 U. S. 108; Helvering Page 306 U. S. 481 v. Gerhardt, supra; cf. Metcalf & Eddy v. Mitchell, 269 U. S. 514; Fox Film Corp. v. Doyal, 286 U. S. 123; James v. Dravo Contracting Co., supra, 302 U. S. 149; Helvering v. Mountain Producers Corp., 303 U. S. 376, and the only possible basis for implying a constitutional immunity from state income tax of the salary of an employee of the national government or of a governmental agency is that the economic burden of the tax is in some way passed on so as to impose a burden on the national government tantamount to an interference by one government with the other in the performance of its functions. In the four cases in which this Court has held that the salary of an officer or employee of one government or its instrumentality was immune from taxation by the other, it was assumed, without discussion, that the immunity of a government or its instrumentality extends to the salaries of its officers and employees. [Footnote 2] This assumption, made with respect to the salary of a governmental officer Page 306 U. S. 482 in Dobbins v. Commissioners of Erie County, 16 Pet. 435, and in Collector v. Day, 11 Wall. 113, was later extended to confer immunity on income derived by a lessee from lands leased to him by a government in the performance of a governmental function,Gillespie v. Oklahoma, 257 U. S. 501; Burnet v. Coronado Oil & Gas Co., 285 U. S. 393, and cases cited, although the claim of a like exemption from tax on the income of a contractor engaged in carrying out a government project was rejected both in the case of a contractor with a state, Metcalf & Eddy v. Page 306 U. S. 483 Mitchell, supra, and of a contractor with the national government, James v. Dravo Contracting Co., supra.

The ultimate repudiation, in Helvering v. Mountain Producers Corp., supra, of the doctrine that a tax on the income of a lessee derived from a lease of government owned or controlled lands is a forbidden interference with the activities of the government concerned led to the reexamination by this Court, in the Gerhardt case, of the theory underlying the asserted immunity from taxation by one government of salaries of employees of the other. It was there pointed out that the implied immunity of one government and its agencies from taxation by the other should, as a principle of constitutional construction, be narrowly restricted. For the expansion of the immunity of the one government correspondingly curtails the sovereign power of the other to tax, and, where that immunity is invoked by the private citizen, it tends to operate for his benefit at the expense of the taxing government and without corresponding benefit to the government in whose name the immunity is claimed. See Metcalf & Eddy v. Mitchell, supra, 269 U. S. 523-524; James v. Dravo Contracting Co., supra, 302 U. S. 156-158. It was further pointed out that, as applied to the taxation of salaries of the employees of one government, the purpose of the immunity was not to confer benefits on the employees by relieving them from contributing their share of the financial support of the other government, whose benefits they enjoy, or to give an advantage to that government by enabling it to engage employees at salaries lower than those paid for like services by other employers, public or private, [Footnote 3] but to Page 306 U. S. 484 prevent undue interference with the one government by imposing on it the tax burdens of the other. In applying these controlling principles in the Gerhardt case, the Court held that the salaries of employees of the New York Port Authority, a state instrumentality created by New York and New Jersey, were not immune from federal income tax even though the Authority be regarded as not subject to federal taxation. It was said that the taxpayers enjoyed the benefit and protection of the laws of the United States, and were under a duty, common to all citizens, to contribute financial support to the government; that the tax laid on their salaries and paid by them could be said to affect or burden their employer, the Port Authority, or the states creating it, only so far as the burden of the tax was economically passed on to the employer; that a nondiscriminatory tax laid on the income of all members of the community could not be assumed to obstruct the function which New York and New Jersey had undertaken no perform, or to cast an economic burden upon them, more than does the general taxation of property and income which, to some extent incapable of measurement by economists, may tend to raise the price level of labor and materials. [Footnote 4] The Court concluded Page 306 U. S. 485 that the claimed immunity would do no more than relieve the taxpayers from the duty of financial support to the national government in order to secure to the state a theoretical advantage, speculative in character and

measurement and too unsubstantial to form the basis of an implied constitutional immunity from taxation. The conclusion reached in the Gerhardt case that, in terms of constitutional tax immunity, a federal income tax on the salary of an employee is not a prohibited burden on the employer makes it imperative that we should consider anew the immunity here claimed for the salary of an employee of a federal instrumentality. As already indicated, such differences as there may be between the implied tax immunity of a state and the corresponding immunity of the national government and its instrumentalities may be traced to the fact that the national government is one of delegated powers, in the exercise of which it is supreme. Whatever scope this may give to the national government to claim immunity from state taxation of all instrumentalities which it may constitutionally create, and whatever authority Congress may possess as incidental to the exercise of its delegated powers to grant or withhold immunity from state taxation, Congress has not sought in this case to exercise such power. Hence, these distinctions between the two types of immunity cannot affect the question with which we are now concerned. The burden on government of a nondiscriminatory income tax applied to the salary of the employee of a government or its instrumentality is the same whether a state or national government is concerned. The determination in the Gerhardt case that the federal income tax imposed on the employees of the Port Authority was not a burden on the Port Authority made it unnecessary to consider whether the Authority itself was immune from federal taxation; the claimed immunity failed because, even if the Port Authority were Page 306 U. S. 486 itself immune from federal income tax, the tax upon the income of its employees case upon it no unconstitutional burden. Assuming, as we do, that the Home Owners' Loan Corporation is clothed with the same immunity from state taxation as the government itself, we cannot say that the present tax on the income of its employees lays any unconstitutional burden upon it. All the reasons for refusing to imply a constitutional prohibition of federal income taxation of salaries of state employees, stated at length in the Gerhardt case, are of equal force when immunity is claimed from state income tax on salaries paid by the national government or its agencies. In this respect, we perceive no basis for a difference in result whether the taxed income be salary or some other form of compensation, or whether the taxpayer be an employee or an officer of either a state or the national government, or of its instrumentalities. In no case is there basis for the assumption that any such tangible or certain economic burden is imposed on the government concerned as would justify a court's declaring that the taxpayer is clothed with the implied constitutional tax immunity of the government by which he is employed. That assumption, made in Collector v. Day, supra, and in New York ex rel. Rogers v. Graves, supra, is contrary to the reasoning and to the conclusions reached in the Gerhardt case and in Metcalf & Eddy v. Mitchell, supra; Group No. 1 Oil Corp. v. Bass, 283 U. S. 279;James v. Dravo Contracting Co., supra; Helvering v. Mountain Producers Corp., supra; McLoughlin v. Commissioner, 303 U. S. 218. In their light, the assumption

can no longer be made. Collector v. Day, supra, and New York ex rel. Rogers v. Graves, supra,are overruled so far as they recognize an implied constitutional immunity from income taxation of the salaries of officers or employees of the national or a state government or their instrumentalities. Page 306 U. S. 487 So much of the burden of a nondiscriminatory general tax upon the incomes of employees of a government, state or national, as may be passed on economically to that government, through the effect of the tax on the price level of labor or materials, is but the normal incident of the organization within the same territory of two governments, each possessing the taxing power. The burden, so far as it can be said to exist or to affect the government in any indirect or incidental way, is one which the Constitution presupposes, and hence it cannot rightly be deemed to be within an implied restriction upon the taxing power of the national and state governments which the Constitution has expressly granted to one and has confirmed to the other. The immunity is not one to be implied from the Constitution, because, if allowed, it would impose to an inadmissible extent a restriction on the taxing power which the Constitution has reserved to the state governments. Reversed. MR. CHIEF JUSTICE HUGHES concurs in the result.
[Footnote 1] The failure of Congress to regulate interstate commerce has generally been taken to signify a Congressional purpose to leave undisturbed the authority of the states to make regulations affecting the commerce in matters of peculiarly local concern, but to withhold from them authority to make regulations affecting those phases of it which, because of the need of a national uniformity, demand that their regulation, if any, be prescribed by a single authority. Cooley v. Board of Wardens, 12 How. 299, 53 U. S. 319; Minnesota Rate Cases, 230 U. S. 352, 230 U. S. 399-400; Kelly v. Washington,302 U. S. 1, 302 U. S. 14; South Carolina State Highway Dept. v. Barnwell Brothers,303 U. S. 177, 303 U. S. 184-185; Milk Control Board v. Eisenberg Farm Products, ante, p. 306 U. S. 346. As to the implications from Congressional silence in the field of state taxation of interstate commerce and its instrumentalities, see Western Live Stock v. Bureau of Revenue, 303 U. S. 250; Gwin, White & Prince, Inc. v. Henneford, 305 U. S. 434. [Footnote 2] In Dobbins v. Commissioners of Erie County, 16 Pet. 435, a Pennsylvania tax, nominally laid upon the office of the captain of a federal revenue cutter, but roughly measured by the salary paid to the officer, was held invalid. The Court seems to have rested its decision in part on the ground that a tax on the emoluments of his office was the equivalent of a tax upon an activity of the national government, and in part on the ground that it was an infringement of the implied superior power of Congress to fix the compensation of government employees without diminution by state taxation. In Collector v. Day, 11 Wall. 113, this Court held that the salary of a state probate judge was constitutionally immune from federal income tax on the grounds that the salary of an officer of a state is exempt from federal taxation if the function he performs as an officer is exempt, citing Dobbins v. Commissioner of Erie County, supra, and that there was an implied constitutional restriction upon the power of the national government to tax a state in the exercise of those functions which were essential to the maintenance of state governments as they were organized at the time when the Constitution was adopted. The possibility that a nondiscriminatory tax upon the income of a state officer did not involve any substantial interference with the functioning of the state government was not discussed either in this or the Dobbins case.

In New York ex rel. Rogers v. Graves, 299 U. S. 401, the question was whether the salary of the general counsel of the Panama Rail Road Company was exempt from state income tax because the railroad company was an instrumentality of the federal government. The sole question raised by the taxing state was whether the railroad company was a government instrumentality. The Court, having found that the railroad company was such an instrumentality, disposed of the matter of tax exemption of the salary of its employees by declaring: "The railroad company being immune from state taxation, it necessarily results that fixed salaries and compensation paid to its officers and employees in their capacity as such are likewise immune." New York ex rel. Rogers v. Graves, supra, 299 U. S. 408. In Brush v. Commissioner, 300 U. S. 352, the applicable treasury regulation upon which the government relied exempted from federal income tax the compensation of "state officers and employees" for "services rendered in connection with the exercise of an essential governmental function of the State." The Court held that the maintenance of the public water system of New York City was an essential governmental function, and, in determining whether the salary of the engineer in charge of that project was subject to federal income tax, the Court declared, citing New York ex rel. Rogers v. Graves, supra, 299 U. S. 408: "The answer depends upon whether the water system of the city was created and is conducted in the exercise of the city's governmental functions. If so, its operations are immune from federal taxation, and, as a necessary corollary, 'fixed salaries and compensation paid to its officers and employees in their capacity as such are likewise immune.' Brush v. Commissioner, supra, 300 U. S. 360." [Footnote 3] The fact that the expenses of the one government might be lessened if all those who deal with it were exempt from taxation by the other was thought not to be an adequate basis for tax immunity in Metcalf & Eddy v. Mitchell, 269 U. S. 514; Group No. 1 Oil Corp. v. Bass, 283 U. S. 279; Burnet v. Jergins Trust, 288 U. S. 508; James v. Dravo Contracting Co., 302 U. S. 134; Helvering v. Mountain Producers Corp., 303 U. S. 376. [Footnote 4] That the economic burden of a tax on salaries is passed on to the employer or that employees will accept a lower government salary because of its tax immunity are formulas which have not won acceptance by economists and cannot be judicially assumed. As to the "passing on" of the economic burden of the tax, see Seligman, Income Tax, VII Encyclopedia of Social Sciences, 626638; Plehn, Public Finance (5th Ed.), p. 320; Buchler, Public Finance, p. 240; Lutz, Public Finance (2d Ed.), p. 336, and see Indian Motorcycle Co. v. United States, 283 U. S. 570, 283 U. S. 581, footnote 1. As to preference for government employment because the salary is tax exempt, seeDickinson, Compensating Industrial Effort (1937), pp. 7-8; Douglas, The Reality of Non-Commercial Incentives in Industrial Life, c. V of The Trend of Economics (1924); Vol. I, Fetter, Economic Principles (1915), p. 203. MR. JUSTICE FRANKFURTER, concurring. I join in the Court's opinion, but deem it appropriate to add a few remarks. The volume of the Court's business has long since made impossible the early healthy practice whereby the Justices gave expression to individual opinions. [Footnote 2/1] But the old tradition still has relevance when an important shift in constitutional doctrine is announced after a reconstruction in the membership of the Court. Such shifts of opinion should not derive from mere private judgment. They must be duly mindful of the necessary demands of continuity in civilized society. Page 306 U. S. 488 A reversal of a long current of decisions can be justified only if rooted in the Constitution itself as an historic document designed for a developing nation. For one hundred and twenty years, this Court has been concerned with claims of immunity from taxes imposed by one authority in our dual system of government because of the taxpayer's relation to the other. The basis for the Court's intervention in this field has not been any explicit provision of the Constitution. The States, after they formed the Union, continued to have the same range of taxing power which they had before, barring only duties affecting exports, imports, and on tonnage. [Footnote 2/2] Congress, on the other hand, to lay taxes in order "to pay the Debts and provide for the common Defence and general Welfare of the United States,"

Art. 1, 8, can reach every person and every dollar in the land with due regard to Constitutional limitations as to the method of laying taxes. But, as is true of other great activities of the state and national governments, the fact that we are a federalism raises problems regarding these vital powers of taxation. Since two governments have authority within the same territory, neither through its power to tax can be allowed to cripple the operations of the other. Therefore, state and federal governments must avoid exactions which discriminate against each other or obviously interfere with one another's operations. These were the determining considerations that led the great Chief Justice to strike down the Maryland statute as an unambiguous measure of discrimination against the use by the United States of the Bank of the United States as one of its instruments of government. The arguments upon which McCulloch v. Maryland, 4 Wheat. 316, rested had their roots in actuality. But they have been distorted by sterile refinements unrelated Page 306 U. S. 489 to affairs. These refinements derived authority from an unfortunate remark in the opinion in McCulloch v. Maryland. Partly as a flourish of rhetoric, and partly because the intellectual fashion of the times indulged a free use of absolutes, Chief Justice Marshall gave currency to the phrase that "the power to tax involves the power to destroy." Id.at 17 U. S. 431. This dictum was treated as though it were a constitutional mandate. But not without protest. One of the most trenchant minds on the Marshall court, Justice William Johnson, early analyzed the dangerous inroads upon the political freedom of the States and the Union within their respective orbits resulting from a doctrinaire application of the generalities uttered in the course of the opinion inMcCulloch v. Maryland. [Footnote 2/3] The seductive cliche that the power to tax involves the power to destroy was fused with another assumption, likewise not to be found in the Constitution itself -- namely, the doctrine that the immunities are correlative -- because the existence of the national government implies immunities from state taxation, the existence of state governments implies equivalent immunities from federal taxation. When this doctrine was first applied, Mr. Justice Bradley registered a powerful dissent, [Footnote 2/4] the force of which gathered, rather than lost, strength with time. Collector v. Day, 11 Wall. 113, 78 U. S. 128. Page 306 U. S. 490 All these doctrines of intergovernmental immunity have, until recently, been moving in the realm of what Lincoln called "pernicious abstractions." The web of unreality spun from Marshall's famous dictum was brushed away by one stroke of Mr. Justice Holmes' pen: "The power to tax is not the power to destroy while this Court sits." Panhandle Oil Co. v. Mississippi, 277 U. S. 218, 277 U. S. 223 (dissent). Failure to exempt public functionaries from the universal duties of citizenship to pay for the costs of government was hypothetically transmuted into hostile action of one government against the other. A succession of decisions thereby withdrew from the taxing power of the States and Nation a very considerable range of wealth without regard to the actual workings of our federalism, [Footnote 2/5] and this too when the financial needs of all governments began steadily to mount. These decisions have encountered increasing dissent. [Footnote 2/6] In view of the powerful pull of our decisions upon the courts charged with maintaining the constitutional equilibrium of the two other great English federalisms, the Canadian and the Australian courts were at first inclined to follow the earlier doctrines of this Court regarding intergovernmental immunity. [Footnote 2/7] Page 306 U. S. 491 Both the Supreme Court of Canada and the High Court of Australia, on fuller consideration -and, for present purposes, the British North America Act, 30 & 31 Vict., c. 3, and the Australia Constitution Act, 63 & 64 Vict., c. 12, raise the same legal issues as does our Constitution [Footnote 2/8] -- have completely rejected the doctrine of intergovernmental immunity. [Footnote 2/9] In this Court, dissents have gradually become majority opinions, and, even before the present decision, the rationale of the doctrine had been undermined. [Footnote 2/10] The judicial history of this doctrine of immunity is a striking illustration of an occasional tendency to encrust unwarranted interpretations upon the Constitution, and thereafter to consider merely what has been judicially said about the Constitution, rather than to be primarily controlled by a fair conception of the Constitution. Judicial exegesis is unavoidable with reference to an organic act like our Constitution, drawn in many particulars with purposed vagueness so as to leave room for the unfolding future. But the ultimate touchstone of constitutionality is the Constitution itself, and not what we Page 306 U. S. 492

have said about it. [Footnote 2/11] Neither Dobbins v. Commissioners of Erie County,16 Pet. 435, and its offspring, nor Collector v. Day, supra, and its, can stand appeal to the Constitution and its historic purposes. Since both are the starting points of an interdependent doctrine, both should be, as I assume them to be, overruled this day. Whether Congress may, by express legislation, relieve its functionaries from their civic obligations to pay for the benefits of the State governments under which they live is matter for another day. [Footnote 2/1] The state of the docket of the High Court of Australia and that of the Supreme Court of Canada still permits them to continue the classic practice of seriatim opinions. [Footnote 2/2] Article 1, 10, U.S.Constitution. [Footnote 2/3] Weston v. City Council of Charleston, 2 Pet. 449, 27 U. S. 472-473. [Footnote 2/4] "I dissent from the opinion of the Court in this case because it seems to me that the General Government has the same power of taxing the income of officers of the state governments as it has of taxing that of its own officers. . . . In my judgment, the limitation of the power of taxation in the General Government which the present decision establishes will be found very difficult to control. Where are we to stop in enumerating the functions of the state governments which will be interfered with by Federal taxation? . . . How can we now tell what the effect of this decision will be? I cannot but regard it as founded on a fallacy, and that it will lead to mischievous consequences." 78 U. S. 11 Wall. 113, 78 U. S. 128-129. [Footnote 2/5] E.g., Gillespie v. Oklahoma, 257 U. S. 501; Panhandle Oil Co. v. Mississippi, 277 U. S. 218; Macallen Co. v. Massachusetts, 279 U. S. 620; Indian Motocycle Co. v. United States, 283 U. S. 570; Burnet v. Coronado Oil & Gas Co., 285 U. S. 393; New York ex rel. Rogers v. Graves, 299 U. S. 401; Brush v. Commissioner, 300 U. S. 352. [Footnote 2/6] E.g., Mr. Justice Brandeis, dissenting in Jaybird Mining Co. v. Weir, 271 U. S. 609, 271 U. S. 615; Justice Holmes, dissenting in Panhandle Oil Co. v. Mississippi, 277 U. S. 218,277 U. S. 222; Mr. Justice Stone, dissenting in Indian Motocycle Co. v. United States,283 U. S. 570, 283 U. S. 580; Mr. Justice Roberts, dissenting, in Brush v. Commissioner, 300 U. S. 352, 300 U. S. 374. See also Mr. Justice Black, concurring inHelvering v. Gerhardt, 304 U. S. 405, 304 U. S. 424. [Footnote 2/7] Bank of Toronto v. Lambe, 12 App.Cas. 575; D'Emden v. Pedder 1 C.L.R. 91. [Footnote 2/8] Especially is this true of the Australian Constitution. One of its framers, who afterwards became one of the most distinguished of Australian judges, Mr. Justice Higgins, characterized it as having followed our Constitution with "pedantic imitation."Australasian Temperance and General Mutual Life Assurance Co., Ltd. v. Howe, 31 C.L.R. 290, 330. [Footnote 2/9] Abbott v. City of St. John, 40 Can.Sup.Ct. 597; Caron v. The King, (1924) A.C. 999;Amalgamated Society of Engineers v. Adelaide Steamship Co., Ltd., 28 C.L.R. 129;West v. Commissioner of Taxation, 56 C.L.R. 657. [Footnote 2/10] E.g., James v. Dravo Contracting Co., 302 U. S. 134; Helvering v. Mountain Producers Corp., 303 U. S. 376; Helvering v. Gerhardt, 304 U. S. 405. [Footnote 2/11]

Compare Taney, C.J., in Passenger Cases, 7 How. 283, 48 U. S. 470: "I . . . am quite willing that it be regarded as the law of this Court that its opinion upon the construction of the Constitution is always open to discussion when it is supposed to have been founded in error, and that its judicial authority should hereafter depend altogether on the force of the reasoning by which it is supported." MR. JUSTICE BUTLER, dissenting. MR. JUSTICE McREYNOLDS and I are of opinion that the Home Owners' Loan Corporation, being an instrumentality of the United States heretofore deemed immune from state taxation, "it necessarily results," as held in New York ex rel. Rogers v. Graves, 299 U. S. 401, "that fixed salaries and compensation paid to its officers and employees in their capacity as such are likewise immune," and that the judgment of the state court, unquestionably required by that decision, should be affirmed. From the decision just announced, it is clear that the Court has overruled Dobbins v. Commissioners of Erie County, 16 Pet. 435; Collector v. Day, 11 Wall. 113; New York ex rel. Rogers v. Graves, supra, and Brush v. Commissioner, 300 U. S. 352. Thus, now it appears that the United States has always had power to tax salaries of state officers and employees, and that Page 306 U. S. 493 similarly free have been the States to tax salaries of officers and employees of the United States. The compensation for past, as well as for future, service to be taxed and the rates prescribed in the exertion of the newly disclosed power depend on legislative discretion not subject to judicial revision. Futile indeed are the vague intimations that this Court may protect against excessive or destructive taxation. Where the power to tax exists, legislatures may exert it to destroy, to discourage, to protect, or exclusively for the purpose of raising revenue. See, e.g., 75 U. S. Fenno, 8 Wall. 533, 75 U. S. 548; McCray v. United States, 195 U. S. 27, 195 U. S. 53 et seq.; Magnano Co. v. Hamilton, 292 U. S. 40, 292 U. S. 44 et seq.; Cincinnati Soap Co. v. United States,301 U. S. 308. Appraisal of lurking or apparent implications of the Court's opinion can serve no useful end, for, should occasion arise, they may be ignored or given direction differing from that at first seemingly intended . But safely it may be said that presently marked for destruction is the doctrine of reciprocal immunity that, by recent decisions here, has been so much impaired.

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G.R. No. 166408

October 6, 2008

QUEZON CITY and THE CITY TREASURER OF QUEZON CITY, petitioners,

vs.

ABS-CBN BROADCASTING CORPORATION, respondent.

DECISION REYES, R.T., J.: CLAIMS for tax exemption must be based on language in law too plain to be mistaken. It cannot be made out of inference or implication. The principle is relevant in this petition for review on certiorari of the Decision1 of the Court of Appeals (CA) and that2 of the Regional Trial Court (RTC) ordering the refund and declaring invalid the imposition and collection of local franchise tax by the City Treasurer of Quezon City on ABS-CBN Broadcasting Corporation (ABS-CBN). The Facts Petitioner City Government of Quezon City is a local government unit duly organized and existing by virtue of Republic Act (R.A.) No. 537, otherwise known as the Revised Charter of Quezon City. Petitioner City Treasurer of Quezon City is primarily responsible for the imposition and collection of taxes within the territorial jurisdiction of Quezon City. Under Section 31, Article 13 of the Quezon City Revenue Code of 1993,3 a franchise tax was imposed on businesses operating within its jurisdiction. The provision states: Section 31. Imposition of Tax. - Any provision of special laws or grant of tax exemption to the contrary notwithstanding, any person, corporation, partnership or association enjoying a franchise whether issued by the national government or local government and, doing business in Quezon City, shall pay a franchise tax at the rate of ten percent (10%) of one percent (1%) for 1993-1994, twenty percent (20%) of one percent (1%) for 1995, and thirty percent (30%) of one percent (1%) for 1996 and the succeeding years thereafter, of gross receipts and sales derived from the operation of the business in Quezon City during the preceding calendar year. On May 3, 1995, ABS-CBN was granted the franchise to install and operate radio and television broadcasting stations in the Philippines under R.A. No. 7966.4 Section 8 of R.A. No. 7966 provides the tax liabilities of ABS-CBN which reads: Section 8. Tax Provisions. - The grantee, its successors or assigns, shall be liable to pay the same taxes on their real estate, buildings and personal property, exclusive of this franchise, as other persons

or corporations are now hereafter may be required by law to pay. In addition thereto, the grantee, its successors or assigns, shall pay a franchise tax equivalent to three percent (3%) of all gross receipts of the radio/television business transacted under this franchise by the grantee, its successors or assigns, and the said percentage tax shall be in lieu of all taxes on this franchise or earnings thereof; Provided that the grantee, its successors or assigns shall continue to be liable for income taxes under Title II of the National Internal Revenue Code pursuant to Section 2 of Executive No. 72 unless the latter enactment is amended or repealed, in which case the amendment or repeal shall be applicable thereto. (Emphasis added) ABS-CBN had been paying local franchise tax imposed by Quezon City. However, in view of the above provision in R.A. No. 9766 that it "shall pay a franchise tax x x x in lieu of all taxes," the corporation developed the opinion that it is not liable to pay the local franchise tax imposed by Quezon City. Consequently, ABS-CBN paid under protest the local franchise tax imposed by Quezon City on the dates, in the amounts and under the official receipts as follows:
O.R. No. 2464274 2484651 2536134 8354906 48756 67352 Total Date 7/18/1995 10/20/1995 1/22/1996 1/23/1997 1/23/1997 4/3/1997 Amount Paid P 1,489,977.28 1,489,977.28 2,880,975.65 8,621,470.83 2,731,135.81 2,731,135.81 P19,944,672.665

On January 29, 1997, ABS-CBN filed a written claim for refund for local franchise tax paid to Quezon City for 1996 and for the first quarter of 1997 in the total amount of Fourteen Million Two Hundred Thirty-Three Thousand Five Hundred Eighty-Two and 29/100 centavos (P14,233,582.29) broken down as follows:
O.R. No. 2536134 8354906 0048756 Total Date 1-22-96 1-23-97 1-23-97 Amount Paid P 2,880,975.65 8,621,470.83 2,731,135.81 P14,233,582.296

In a letter dated March 3, 1997 to the Quezon City Treasurer, ABS-CBN reiterated its claim for refund of local franchise taxes paid.

On June 25, 1997, for failure to obtain any response from the Quezon City Treasurer, ABS-CBN filed a complaint before the RTC in Quezon City seeking the declaration of nullity of the imposition of local franchise tax by the City Government of Quezon City for being unconstitutional. It likewise prayed for the refund of local franchise tax in the amount of Nineteen Million Nine Hundred Forty-Four Thousand Six Hundred Seventy-Two and 66/100 centavos (P19,944,672.66) broken down as follows:
O.R. No. 2464274 2484651 2536134 8354906 0048756 0067352 Total Date 7-18-95 10-20-95 1-22-96 1-23-97 1-23-97 4-03-97 Amount Paid P 1,489,977.28 1,489,977.28 2,880,975.65 8,621,470.83 2,731,135.81 2,731,135.81 P19,944,672.667

On January 20, 1999, the RTC rendered judgment declaring as invalid the imposition on and collection from ABS-CBN of local franchise tax paid pursuant to Quezon City Ordinance No. SP-91, S-93, after the enactment of R.A. No. 7966, and ordered the refund of all payments made. The dispositive portion of the RTC decision reads:
WHEREFORE, judgment is hereby rendered declaring the imposition on and collection from plaintiff ABS-CBN BROADCASTING CORPORATION of local franchise taxes pursuant to Quezon City Ordinance No. SP-91, S-93 after the enactment of Republic Act No. 7966 to be invalid, and, accordingly, the Court hereby orders the defendants to refund all its payments made after the effectivity of its legislative franchise on May 3, 1995. SO ORDERED.9

Quezon City argued that the "in lieu of all taxes" provision in R.A. No. 9766 could not have been intended to prevail over a constitutional mandate which ensures the viability and self-sufficiency of local government units. Further, that taxes collectible by and payable to the local government were distinct from taxes collectible by and payable to the national government, considering that the Constitution specifically declared that the taxes imposed by local government units "shall accrue exclusively to the local governments." Lastly, the City contended that the exemption claimed by ABS-CBN under R.A. No. 7966 was withdrawn by Congress when the Local Government Code (LGC) was passed.8 Section 193 of the LGC provides: Section 193. Withdrawal of Tax Exemption Privileges. - Unless otherwise provided in this Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including government-owned or -controlled corporations, except local water districts, cooperatives duly registered under R.A. 6938, non-stock and nonprofit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code. (Emphasis added) On August 13, 1997, ABS-CBN filed a supplemental complaint adding to its claim for refund the local franchise tax paid for the third quarter of 1997 in the amount of Two Million Seven Hundred Thirty-One Thousand One Hundred Thirty-Five and 81/100 centavos (P2,731,135.81) and of other amounts of local franchise tax as may have been and will be paid by ABSCBN until the resolution of the case. Quezon City insisted that the claim for refund must fail because of the absence of a prior written claim for it. RTC and CA Dispositions

In its decision, the RTC ruled that the "in lieu of all taxes" provision contained in Section 8 of R.A. No. 7966 absolutely excused ABS-CBN from the payment of local franchise tax imposed under Quezon City Ordinance No. SP-91, S-93. The intent of the legislature to excuse ABS-CBN from payment of local franchise tax could be discerned from the usage of the "in lieu of all taxes" provision and from the absence of any qualification except income taxes. Had Congress intended to exclude taxes imposed from the exemption, it would have expressly mentioned so in a fashion similar to the proviso on income taxes. The RTC also based its ruling on the 1990 case of Province of Misamis Oriental v. Cagayan Electric Power and Light Company, Inc. (CEPALCO).10 In said case, the exemption of respondent electric company CEPALCO from payment of provincial franchise tax was upheld on the ground that the franchise of CEPALCO was a special law, while the Local Tax Code, on which the provincial ordinance imposing the local franchise tax was based, was a general law. Further, it was held that whenever there is a conflict between two laws, one special and particular and the other general, the special law must be taken as intended to constitute an exception to the general act. The RTC noted that the legislative franchise of ABS-CBN was granted years after the effectivity of the LGC. Thus, it was unavoidable to conclude that Section 8 of R.A. No. 7966 was an exception since the legislature ought to be presumed to have enacted it with the knowledge and awareness of the existence and prior enactment of Section 13711 of the LGC. In addition, the RTC, again citing the case of Province of Misamis Oriental v. Cagayan Electric Power and Light Company, Inc. (CEPALCO),12 ruled that the imposition of the local franchise tax was an impairment of ABS-CBN's contract with the government. The imposition of another franchise on the corporation by the local authority would constitute an impairment of the former's charter, which is in the nature of a private contract between it and the government. As to the amounts to be refunded, the RTC rejected Quezon City's position that a written claim for refund pursuant to Section 196 of the LGC was a condition sine qua non before filing the case in court. The RTC ruled that although Fourteen Million Two Hundred Thirty-Three Thousand Five Hundred Eighty-Two and 29/100 centavos (P14,233,582.29) was the only

amount stated in the letter to the Quezon City Treasurer claiming refund, ABS-CBN should nonetheless be also refunded of all payments made after the effectivity of R.A. No. 7966. The inaction of the City Treasurer on the claim for refund of ABS-CBN legally rendered any further claims for refund on the part of plaintiff absurd and futile in relation to the succeeding payments. The City of Quezon and its Treasurer filed a motion for reconsideration which was subsequently denied by the RTC. Thus, appeal was made to the CA. On September 1, 2004, the CA dismissed the petition of Quezon City and its Treasurer. According to the appellate court, the issues raised were purely legal questions cognizable only by the Supreme Court. The CA ratiocinated:
For another, the issues which appellants submit for this Court's consideration are more of legal query necessitating a legal opinion rather than a call for adjudication on the matter in dispute. xxxx The first issue has earlier been categorized in Province of Misamis Oriental v. Cagayan Electric and Power Co., Inc. to be a legal one. There is no more argument to this. The next issue although it may need the reexamination of the pertinent provisions of the local franchise and the legislative franchise given to appellee, also needs no evaluation of facts. It suffices that there may be a conflict which may need to be reconciled, without regard to the factual backdrop of the case. The last issue deals with a legal question, because whether or not there is a prior written claim for refund is no longer in dispute. Rather, the question revolves on whether the said requirement may be dispensed with, which obviously is not a factual issue.13

I. The dismissal by the CA of petitioners' appeal is in order because it raised purely legal issues, namely:
1) Whether appellee, whose franchise expressly provides that its payment of franchise tax shall be in lieu of all taxes in this franchise or earnings thereof, is absolutely excused from paying the franchise tax imposed by appellants; 2) Whether appellants' imposition of local franchise tax is a violation of appellee's legislative franchise; and 3) Whether one can do away with the requirement on prior written claim for refund.15

Obviously, these are purely legal questions, cognizable by this Court, to the exclusion of all other courts. There is a question of law when the doubt or difference arises as to what the law is pertaining to a certain state of facts.16 Section 2, Rule 50 of the Rules of Court provides that an appeal taken to the CA under Rule 41 raising only questions of law is erroneous and shall be dismissed, issues of pure law not being within its jurisdiction.17Consequently, the dismissal by the CA of petitioners' appeal was in order. In the recent case of Sevilleno v. Carilo,18 this Court ruled that the dismissal of the appeal of petitioner was valid, considering the issues raised there were pure questions of law, viz.:
Petitioners interposed an appeal to the Court of Appeals but it was dismissed for being the wrong mode of appeal. The appellate court held that since the issue being raised is whether the RTC has jurisdiction over the subject matter of the case, which is a question of law, the appeal should have been elevated to the Supreme Court under Rule 45 of the 1997 Rules of Civil Procedure, as amended. Section 2, Rule 41 of the same Rules which governs appeals from judgments and final orders of the RTC to the Court of Appeals, provides:

On September 23, 2004, petitioner moved for reconsideration. The motion was, however, denied by the CA in its Resolution dated December 16, 2004. Hence, the present recourse. Issues Petitioner submits the following issues for resolution: I. Whether or not the phrase "in lieu of all taxes" indicated in the franchise of the respondent appellee (Section 8 of RA 7966) serves to exempt it from the payment of the local franchise tax imposed by the petitioners-appellants. II. Whether or not the petitioners-appellants raised factual and legal issues before the Honorable Court of Appeals.14 Our Ruling The second issue, being procedural in nature, shall be dealt with immediately. But there are other resultant issues linked to the first.

SEC. 2. Modes of appeal. (a) Ordinary appeal. - The appeal to the Court of Appeals in cases decided by the Regional Trial Court in the exercise of its original jurisdiction shall be taken by filing a notice of appeal with the court which rendered the judgment or final order appealed from and serving a copy thereof upon the adverse party. No record on appeal shall be required except in special proceedings and other cases of multiple or separate appeals where the law or these Rules so require. In such cases, the record on appeal shall be filed and served in like manner. (b) Petition for review. - The appeal to the Court of Appeals in cases decided by the Regional Trial Court in the exercise of its appellate jurisdiction shall be by petition for review in accordance with Rule 42. (c) Appeal by certiorari. - In all cases where only questions of law are raised or involved, the appeal shall be to the Supreme Court by petition for review on certiorari in accordance with Rule 45.

In Macawili Gold Mining and Development Co., Inc. v. Court of Appeals, we summarized the rule on appeals as follows:
(1) In all cases decided by the RTC in the exercise of its original jurisdiction, appeal may be made to the Court of Appeals by mere notice of appeal where the appellant raises questions of fact or mixed questions of fact and law; (2) In all cases decided by the RTC in the exercise of its original jurisdiction where the appellant raises only questions of law, the appeal must be taken to the Supreme Court on a petition for review on certiorari under Rule 45; (3) All appeals from judgments rendered by the RTC in the exercise of its appellate jurisdiction, regardless of whether the appellant raises questions of fact, questions of law, or mixed questions of fact and law, shall be brought to the Court of Appeals by filing a petition for review under Rule 42.

It is not disputed that the issue brought by petitioners to the Court of Appeals involves the jurisdiction of the RTC over the subject matter of the case. We have a long standing rule that a court's jurisdiction over the subject matter of an action is conferred only by the Constitution or by statute. Otherwise put, jurisdiction of a court over the subject matter of the action is a matter of law. Consequently, issues which deal with the jurisdiction of a court over the subject matter of a case are pure questions of law. As petitioners' appeal solely involves a question of law, they should have directly taken their appeal to this Court by filing a petition for review on certiorari under Rule 45, not an ordinary appeal with the Court of Appeals under Rule 41. Clearly, the appellate court did not err in holding that petitioners pursued the wrong mode of appeal. Indeed, the Court of Appeals did not err in dismissing petitioners' appeal. Section 2, Rule 50 of the same Rules provides that an appeal from the RTC to the Court of Appeals raising only questions of law shall be dismissed; and that an appeal erroneously taken to the Court of Appeals shall be dismissed outright, x x x.19 (Emphasis added) However, to serve the demands of substantial justice and equity, the Court opts to relax procedural rules and rule upon on the merits of the case. In Ong Lim Sing Jr. v. FEB Leasing and Finance Corporation,20 this Court stated:
Courts have the prerogative to relax procedural rules of even the most mandatory character, mindful of the duty to reconcile both the need to speedily put an end to litigation and the parties' right to due process. In numerous cases, this Court has allowed liberal construction of the rules when to do so would serve the demands of substantial justice and equity. In Aguam v. Court of Appeals, the Court explained: "The court has the discretion to dismiss or not to dismiss an appellant's appeal. It is a power conferred on the court, not a duty. The "discretion must be a sound one, to be exercised in accordance with the tenets of justice and fair play, having in mind the circumstances obtaining in each case." Technicalities,

however, must be avoided. The law abhors technicalities that impede the cause of justice. The court's primary duty is to render or dispense justice. "A litigation is not a game of technicalities." "Lawsuits unlike duels are not to be won by a rapier's thrust. Technicality, when it deserts its proper office as an aid to justice and becomes its great hindrance and chief enemy, deserves scant consideration from courts." Litigations must be decided on their merits and not on technicality. Every party litigant must be afforded the amplest opportunity for the proper and just determination of his cause, free from the unacceptable plea of technicalities. Thus, dismissal of appeals purely on technical grounds is frowned upon where the policy of the court is to encourage hearings of appeals on their merits and the rules of procedure ought not to be applied in a very rigid, technical sense; rules of procedure are used only to help secure, not override substantial justice. It is a far better and more prudent course of action for the court to excuse a technical lapse and afford the parties a review of the case on appeal to attain the ends of justice rather than dispose of the case on technicality and cause a grave injustice to the parties, giving a false impression of speedy disposal of cases while actually resulting in more delay, if not a miscarriage of justice.21

II. The "in lieu of all taxes" provision in its franchise does not exempt ABS-CBN from payment of local franchise tax. A. The present controversy essentially boils down to a dispute between the inherent taxing power of Congress and the delegated authority to tax of local governments under the 1987 Constitution and effected under the LGC of 1991. The power of the local government of Quezon City to impose franchise tax is based on Section 151 in relation to Section 137 of the LGC, to wit:
Section 137. Franchise Tax. - Notwithstanding any exemption granted by any law or other special law, the province may impose a tax on businesses enjoying a franchise, at the rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on the incoming receipt, or realized within its territorial jurisdiction. x xx xxxx Section 151. Scope of Taxing Powers. - Except as otherwise provided in this Code, the city may levy the taxes, fees and charges which the province or municipality may impose: Provided, however, That the taxes, fees and charges levied and collected by highly urbanized and component cities shall accrue to them and distributed in accordance with the provisions of this Code. The rates of taxes that the city may levy may exceed the maximum rates allowed for the province or municipality by not more than fifty percent (50%) except the rates of professional and amusement taxes. (Emphasis supplied)

Such taxing power by the local government, however, is limited in the sense that Congress can enact legislation granting exemptions. This principle was upheld in City Government of Quezon City, et al. v. Bayan Telecommunications, Inc.22 Said this Court:

This thus raises the question of whether or not the City's Revenue Code pursuant to which the city treasurer of Quezon City levied real property taxes against Bayantel's real properties located within the City effectively withdrew the tax exemption enjoyed by Bayantel under its franchise, as amended. Bayantel answers the poser in the negative arguing that once again it is only "liable to pay the same taxes, as any other persons or corporations on all its real or personal properties, exclusive of its franchise." Bayantel's posture is well-taken. While the system of local government taxation has changed with the onset of the 1987 Constitution, the power of local government units to tax is still limited. As we explained in Mactan Cebu International Airport Authority: "The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be exercised by local legislative bodies, no longer merely be virtue of a valid delegation as before, but pursuant to direct authority conferred by Section 5, Article X of the Constitution. Under the latter, the exercise of the power may be subject to such guidelines and limitations as the Congress may provide which, however, must be consistent with the basic policy of local autonomy. x x x" Clearly then, while a new slant on the subject of local taxation now prevails in the sense that the former doctrine of local government units' delegated power to tax had been effectively modified with Article X, Section 5 of the 1987 Constitution now in place, the basic doctrine on local taxation remains essentially the same. For as the Court stressed in Mactan, "the power to tax is [still] primarily vested in the Congress." This new perspective is best articulated by Fr. Joaquin G. Bernas, S.J., himself a Commissioner of the 1986 Constitutional Commission which crafted the 1987 Constitution, thus: "What is the effect of Section 5 on the fiscal position of municipal corporations? Section 5 does not change the doctrine that municipal corporations do not possess inherent powers of taxation. What it does is to confer municipal corporations a general power to levy taxes and otherwise create sources of revenue. They no longer have to wait for a statutory grant of these powers. The power of the legislative authority relative to the fiscal powers of local governments has been reduced to the authority to impose limitations on municipal powers. Moreover, these limitations must be "consistent with the basic policy of local autonomy." The important legal effect of Section 5 is thus to reverse the principle that doubts are resolved against municipal corporations. Henceforth, in interpreting statutory provisions on municipal fiscal powers, doubts will be resolved in favor of municipal corporations. It is understood, however, that taxes imposed by local government must be for a public purpose, uniform within a locality, must not be confiscatory, and must be within the jurisdiction of the local unit to pass." In net effect, the controversy presently before the Court involves, at bottom, a clash between the inherent taxing power of the legislature, which necessarily includes the power to exempt, and the local government's delegated power to tax under the aegis of the 1987 Constitution.

Now to go back to the Quezon City Revenue Code which imposed real estate taxes on all real properties within the city's territory and removed exemptions theretofore "previously granted to, or presently enjoyed by all persons, whether natural or juridical [x x x]" there can really be no dispute that the power of the Quezon City Government to tax is limited by Section 232 of the LGC which expressly provides that "a province or city or municipality within the Metropolitan Manila Area may levy an annual ad valorem tax on real property such as land, building, machinery, and other improvement not hereinafter specifically exempted." Under this law, the Legislature highlighted its power to thereafter exempt certain realties from the taxing power of local government units. An interpretation denying Congress such power to exempt would reduce the phrase "not hereinafter specifically exempted" as a pure jargon, without meaning whatsoever. Needless to state, such absurd situation is unacceptable. For sure, in Philippine Long Distance Telephone Company, Inc. (PLDT) vs. City of Davao, this Court has upheld the power of Congress to grant exemptions over the power of local government units to impose taxes. There, the Court wrote: "Indeed, the grant of taxing powers to local government units under the Constitution and the LGC does not affect the power of Congress to grant exemptions to certain persons, pursuant to a declared national policy. The legal effect of the constitutional grant to local governments simply means that in interpreting statutory provisions on municipal taxing powers, doubts must be resolved in favor of municipal corporations."23 (Emphasis supplied)

In the case under review, the Philippine Congress enacted R.A. No. 7966 on March 30, 1995, subsequent to the effectivity of the LGC on January 1, 1992. Under it, ABS-CBN was granted the franchise to install and operate radio and television broadcasting stations in the Philippines. Likewise, Section 8 imposed on ABS-CBN the duty of paying 3% franchise tax. It bears stressing, however, that payment of the percentage franchise tax shall be "in lieu of all taxes" on the said franchise.24 Congress has the inherent power to tax, which includes the power to grant tax exemptions. On the other hand, the power of Quezon City to tax is prescribed by Section 151 in relation to Section 137 of the LGC which expressly provides that notwithstanding any exemption granted by any law or other special law, the City may impose a franchise tax. It must be noted that Section 137 of the LGC does not prohibit grant of future exemptions. As earlier discussed, this Court in City Government of Quezon City v. Bayan Telecommunications, Inc.25 sustained the power of Congress to grant tax exemptions over and above the power of the local government's delegated power to tax. B. The more pertinent issue now to consider is whether or not by passing R.A. No. 7966, which contains the "in lieu of all taxes" provision, Congress intended to exempt ABS-CBN from local franchise tax. Petitioners argue that the "in lieu of all taxes" provision in ABS-CBN's franchise does not expressly exempt it from payment of local franchise tax. They contend that a tax exemption cannot be created by mere implication and that one who claims tax exemptions must be able to justify his claim by clearest grant of organic law or statute.

Taxes are what civilized people pay for civilized society. They are the lifeblood of the nation. Thus, statutes granting tax exemptions are construed stricissimi juris against the taxpayer and liberally in favor of the taxing authority. A claim of tax exemption must be clearly shown and based on language in law too plain to be mistaken. Otherwise stated, taxation is the rule, exemption is the exception. 26 The burden of proof rests upon the party claiming the exemption to prove that it is in fact covered by the exemption so claimed.27 The basis for the rule on strict construction to statutory provisions granting tax exemptions or deductions is to minimize differential treatment and foster impartiality, fairness and equality of treatment among taxpayers.28 He who claims an exemption from his share of common burden must justify his claim that the legislature intended to exempt him by unmistakable terms. For exemptions from taxation are not favored in law, nor are they presumed. They must be expressed in the clearest and most unambiguous language and not left to mere implications. It has been held that "exemptions are never presumed, the burden is on the claimant to establish clearly his right to exemption and cannot be made out of inference or implications but must be laid beyond reasonable doubt. In other words, since taxation is the rule and exemption the exception, the intention to make an exemption ought to be expressed in clear and unambiguous terms.29 Section 8 of R.A. No. 7966 imposes on ABS-CBN a franchise tax equivalent to three (3) percent of all gross receipts of the radio/television business transacted under the franchise and the franchise tax shall be "in lieu of all taxes" on the franchise or earnings thereof. The "in lieu of all taxes" provision in the franchise of ABS-CBN does not expressly provide what kind of taxes ABS-CBN is exempted from. It is not clear whether the exemption would include both local, whether municipal, city or provincial, and national tax. What is clear is that ABS-CBN shall be liable to pay three (3) percent franchise tax and income taxes under Title II of the NIRC. But whether the "in lieu of all taxes provision" would include exemption from local tax is not unequivocal. As adverted to earlier, the right to exemption from local franchise tax must be clearly established and cannot be made out of inference or implications but must be laid beyond reasonable doubt. Verily, the uncertainty in the "in lieu of all taxes" provision should be construed against ABS-CBN. ABSCBN has the burden to prove that it is in fact covered by the exemption so claimed. ABS-CBN miserably failed in this regard. ABS-CBN cites the cases Carcar Electric & Ice Plant v. Collector of Internal Revenue,30 Manila Railroad v. Rafferty,31 Philippine Railway Co. v. Collector of Internal Revenue,32 and Visayan Electric Co. v. David33 to support its claim that that the "in lieu of all taxes" clause includes exemption from all taxes. However, a review of the foregoing case law reveals that the grantees' respective franchises expressly exempt them from municipal and provincial taxes. Said the Court in Manila Railroad v. Rafferty:34

On the 7th day of July 1906, by an Act of the Philippine Legislature, a special charter was granted to the Manila Railroad Company. Subsection 12 of Section 1 of said Act (No. 1510) provides that: "In consideration of the premises and of the granting of this concession or franchise, there shall be paid by the grantee to the Philippine Government, annually, for the period of thirty (30) years from the date hereof, an amount equal to one-half (1/2) of one per cent of the gross earnings of the grantee in respect of the lines covered hereby for the preceding year; after said period of thirty (30) years, and for the fifty (50) years thereafter, the amount so to be paid annually shall be an amount equal to one and one-half (1 1/2) per cent of such gross earnings for the preceding year; and after such period of eighty (80) years, the percentage and amount so to be paid annually by the grantee shall be fixed by the Philippine Government. Such annual payments, when promptly and fully made by the grantee, shall be in lieu of all taxes of every name and nature municipal, provincial or central - upon its capital stock, franchises, right of way, earnings, and all other property owned or operated by the grantee under this concession or franchise."35 (Underscoring supplied)

In the case under review, ABS-CBN's franchise did not embody an exemption similar to those in Carcar, Manila Railroad, Philippine Railway, and Visayan Electric. Too, the franchise failed to specify the taxing authority from whose jurisdiction the taxing power is withheld, whether municipal, provincial, or national. In fine, since ABS-CBN failed to justify its claim for exemption from local franchise tax, by a grant expressed in terms "too plain to be mistaken" its claim for exemption for local franchise tax must fail. C. The "in lieu of all taxes" clause in the franchise of ABS-CBN has become functus officio with the abolition of the franchise tax on broadcasting companies with yearly gross receipts exceeding Ten Million Pesos. In its decision dated January 20, 1999, the RTC held that pursuant to the "in lieu of all taxes" provision contained in Section 8 of R.A. No. 7966, ABSCBN is exempt from the payment of the local franchise tax. The RTC further pronounced that ABS-CBN shall instead be liable to pay a franchise tax of 3% of all gross receipts in lieu of all other taxes. On this score, the RTC ruling is flawed. In keeping with the laws that have been passed since the grant of ABS-CBN's franchise, the corporation should now be subject to VAT, instead of the 3% franchise tax. At the time of the enactment of its franchise on May 3, 1995, ABS-CBN was subject to 3% franchise tax under Section 117(b) of the 1977 National Internal Revenue Code (NIRC), as amended, viz.:
SECTION 117. Tax on franchises. - Any provision of general or special laws to the contrary notwithstanding, there shall be levied, assessed and collected in respect to all franchise, upon the gross receipts from the business covered by the law granting the franchise, a tax in accordance with the schedule prescribed hereunder:

(a) On electric utilities, city gas, and water supplies Two (2%) percent (b) On telephone and/or telegraph systems, broadcasting stations Three (3%) percent radio and/or

(c) On other franchises Five (5%) percent. (Emphasis supplied)

On January 1, 1996, R.A. No. 7716, otherwise known as the Expanded Value Added Tax Law,36 took effect and subjected to VAT those services rendered by radio and/or broadcasting stations. Section 3 of R.A. No. 7716 provides:
Section 3. Section 102 of the National Internal Revenue Code, as amended is hereby further amended to read as follows: SEC. 102. Value-added tax on sale of services and use or lease of properties. - (a) Rate and base of tax. - There shall be levied, assessed and collected, as value-added tax equivalent to 10% of gross receipts derived from the sale or exchange of services, including the use or lease of properties. The phrase "sale or exchange of services" means the performance of all kinds of services in the Philippines, for others for a fee, remuneration or consideration, including those performed or rendered by construction and service contractors; x x x services of franchise grantees of telephone and telegraph, radio and television broadcasting and all other franchise grantees except those under Section 117 of this Code; x x x (Emphasis supplied)

"Sec. 117. Tax on franchise. - Any provision of general or special law to the contrary, notwithstanding,there shall be levied, assessed and collected in respect to all franchises on radio and/or television broadcasting companies whose annual gross receipts of the preceding year does not exceed Ten million pesos (P10,000,000.00), subject to Section 107(d) of this Code, a tax of three percent (3%)and on electric, gas and water utilities, a tax of two percent (2%) on the gross receipts derived from the business covered by the law granting the franchise: Provided, however, That radio and television broadcasting companies referred to in this section, shall have an option to be registered as a value-added tax payer and pay the tax due thereon: Provided, further, That once the option is exercised, it shall not be revoked. (Emphasis supplied)

On the other hand, radio and/or television companies with yearly gross receipts exceeding P10,000,000.00 were subject to 10% VAT, pursuant to Section 102 of the NIRC. On January 1, 1998, R.A. No. 842439 was passed confirming the 10% VAT liability of radio and/or television companies with yearly gross receipts exceeding P10,000,000.00. R.A. No. 9337 was subsequently enacted and became effective on July 1, 2005. The said law further amended the NIRC by increasing the rate of VAT to 12%. The effectivity of the imposition of the 12% VAT was later moved from January 1, 2006 to February 1, 2006. In consonance with the above survey of pertinent laws on the matter, ABSCBN is subject to the payment of VAT. It does not have the option to choose between the payment of franchise tax or VAT since it is a broadcasting company with yearly gross receipts exceeding Ten Million Pesos (P10,000,000.00). VAT is a percentage tax imposed on any person whether or not a franchise grantee, who in the course of trade or business, sells, barters, exchanges, leases, goods or properties, renders services. It is also levied on every importation of goods whether or not in the course of trade or business. The tax base of the VAT is limited only to the value added to such goods, properties, or services by the seller, transferor or lessor. Further, the VAT is an indirect tax and can be passed on to the buyer. The franchise tax, on the other hand, is a percentage tax imposed only on franchise holders. It is imposed under Section 119 of the Tax Code and is a direct liability of the franchise grantee. The clause "in lieu of all taxes" does not pertain to VAT or any other tax. It cannot apply when what is paid is a tax other than a franchise tax. Since the franchise tax on the broadcasting companies with yearly gross receipts exceeding ten million pesos has been abolished, the "in lieu of all taxes" clause has now become functus officio, rendered inoperative. In sum, ABS-CBN's claims for exemption must fail on twin grounds. First, the "in lieu of all taxes" clause in its franchise failed to specify the taxes the company is sought to be exempted from. Neither did it particularize the jurisdiction from which the taxing power is withheld. Second, the

Notably, under the same law, "telephone and/or telegraph systems, broadcasting stations and other franchise grantees" were omitted from the list of entities subject to franchise tax. The impression was that these entities were subject to 10% VAT but not to franchise tax. Only the franchise tax on "electric, gas and water utilities" remained. Section 12 of R.A. No. 7716 provides:
Section 12. Section 117 of the National Internal Revenue Code, as amended, is hereby further amended to read as follows: SEC. 117. Tax on Franchises. - Any provision of general or special law to the contrary notwithstanding there shall be levied, assessed and collected in respect to all franchises on electric, gas and water utilities a tax of two percent (2%) on the gross receipts derived from the business covered by the law granting the franchise. (Emphasis added)

Subsequently, R.A. No. 824137 took effect on January 1, 199738 containing more amendments to the NIRC. Radio and/or television companies whose annual gross receipts do not exceed P10,000,000.00 were granted the option to choose between paying 3% national franchise tax or 10% VAT. Section 9 of R.A. No. 8241 provides: SECTION 9. Section 12 of Republic Act No. 7716 is hereby amended to read as follows:
"Sec. 12. Section 117 of the National Internal Revenue Code, as amended, is hereby further amended to read as follows:

clause has become functus officio because as the law now stands, ABSCBN is no longer subject to a franchise tax. It is now liable for VAT. WHEREFORE, the petition is GRANTED and the appealed Decision REVERSED AND SET ASIDE. The petition in the trial court for refund of local franchise tax is DISMISSED. SO ORDERED. RUBEN T. REYES Associate Justice

The Solicitor General espouses the position taken by public respondents. G.R. No. 109289 October 3, 1994

RUFINO R. TAN, petitioner,

vs.

The Court has given due course to both petitions. The parties, in compliance with the Court's directive, have filed their respective memoranda. G.R. No. 109289 Petitioner contends that the title of House Bill No. 34314, progenitor of Republic Act No. 7496, is a misnomer or, at least, deficient for being merely entitled, "Simplified Net Income Taxation Scheme for the SelfEmployed and Professionals Engaged in the Practice of their Profession" (Petition in G.R. No. 109289). The full text of the title actually reads:
An Act Adopting the Simplified Net Income Taxation Scheme For The Self-Employed and Professionals Engaged In The Practice of Their Profession, Amending Sections 21 and 29 of the National Internal Revenue Code, as Amended.

RAMON R. DEL ROSARIO, JR., as SECRETARY OF

FINANCE & JOSE U. ONG, as COMMISSIONER OF INTERNAL REVENUE, respondents. G.R. No. 109446 October 3, 1994 CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES, CARLO A. CARAG, MANUELITO O. CABALLES, ELPIDIO C. JAMORA, JR. and BENJAMIN A. SOMERA, JR., petitioners, vs. RAMON R. DEL ROSARIO, in his capacity as SECRETARY OF FINANCE and JOSE U. ONG, in his capacity as COMMISSIONER OF INTERNAL REVENUE, respondents. Rufino R. Tan for and in his own behalf. Carag, Caballes, Jamora & Zomera Law Offices for petitioners in G.R. 109446.

The pertinent provisions of Sections 21 and 29, so referred to, of the National Internal Revenue Code, as now amended, provide:
Sec. 21. Tax on citizens or residents. xxx xxx xxx (f) Simplified Net Income Tax for the Self-Employed and/or Professionals Engaged in the Practice of Profession. A tax is hereby imposed upon the taxable net income as determined in Section 27 received during each taxable year from all sources, other than income covered by paragraphs (b), (c), (d) and (e) of this section by every individual whether a citizen of the Philippines or an alien residing in the Philippines who is self-employed or practices his profession herein, determined in accordance with the following schedule: Not over P10,000 3% Over P10,000 P300 + 9% but not over P30,000 of excess over P10,000 Over P30,000 P2,100 + 15% but not over P120,00 of excess over P30,000 Over P120,000 P15,600 + 20% but not over P350,000 of excess over P120,000 Over P350,000 P61,600 + 30% of excess over P350,000 Sec. 29. Deductions from gross income. In computing taxable income subject to tax under Sections 21(a), 24(a), (b) and (c); and 25 (a)(1), there shall be allowed as deductions the items specified in paragraphs (a) to (i) of this section: Provided, however, That in computing taxable income subject to tax under Section 21 (f) in the case of individuals engaged in business or practice of profession, only the following direct costs shall be allowed as deductions: (a) Raw materials, supplies and direct labor;

VITUG, J.: These two consolidated special civil actions for prohibition challenge, in G.R. No. 109289, the constitutionality of Republic Act No. 7496, also commonly known as the Simplified Net Income Taxation Scheme ("SNIT"), amending certain provisions of the National Internal Revenue Code and, in G.R. No. 109446, the validity of Section 6, Revenue Regulations No. 2-93, promulgated by public respondents pursuant to said law. Petitioners claim to be taxpayers adversely affected by the continued implementation of the amendatory legislation. In G.R. No. 109289, it is asserted that the enactment of Republic Act No. 7496 violates the following provisions of the Constitution:
Article VI, Section 26(1) Every bill passed by the Congress shall embrace only one subject which shall be expressed in the title thereof. Article VI, Section 28(1) The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation. Article III, Section 1 No person shall be deprived of . . . property without due process of law, nor shall any person be denied the equal protection of the laws.

In G.R. No. 109446, petitioners, assailing Section 6 of Revenue Regulations No. 2-93, argue that public respondents have exceeded their rule-making authority in applying SNIT to general professional partnerships.

(b) Salaries of employees directly engaged in activities in the course of or pursuant to the business or practice of their profession; (c) Telecommunications, electricity, fuel, light and water; (d) Business rentals; (e) Depreciation; (f) Contributions made to the Government and accredited relief organizations for the rehabilitation of calamity stricken areas declared by the President; and (g) Interest paid or accrued within a taxable year on loans contracted from accredited financial institutions which must be proven to have been incurred in connection with the conduct of a taxpayer's profession, trade or business. For individuals whose cost of goods sold and direct costs are difficult to determine, a maximum of forty per cent (40%) of their gross receipts shall be allowed as deductions to answer for business or professional expenses as the case may be.

as: (1) the standards that are used therefor are substantial and not arbitrary, (2) the categorization is germane to achieve the legislative purpose, (3) the law applies, all things being equal, to both present and future conditions, and (4) the classification applies equally well to all those belonging to the same class (Pepsi Cola vs. City of Butuan, 24 SCRA 3; Basco vs. PAGCOR, 197 SCRA 52). What may instead be perceived to be apparent from the amendatory law is the legislative intent to increasingly shift the income tax system towards the schedular approach 2 in the income taxation of individual taxpayers and to maintain, by and large, the present global treatment 3 on taxable corporations. We certainly do not view this classification to be arbitrary and inappropriate. Petitioner gives a fairly extensive discussion on the merits of the law, illustrating, in the process, what he believes to be an imbalance between the tax liabilities of those covered by the amendatory law and those who are not. With the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation. This court cannot freely delve into those matters which, by constitutional fiat, rightly rest on legislative judgment. Of course, where a tax measure becomes so unconscionable and unjust as to amount to confiscation of property, courts will not hesitate to strike it down, for, despite all its plenitude, the power to tax cannot override constitutional proscriptions. This stage, however, has not been demonstrated to have been reached within any appreciable distance in this controversy before us. Having arrived at this conclusion, the plea of petitioner to have the law declared unconstitutional for being violative of due process must perforce fail. The due process clause may correctly be invoked only when there is a clear contravention of inherent or constitutional limitations in the exercise of the tax power. No such transgression is so evident to us. G.R. No. 109446 The several propositions advanced by petitioners revolve around the question of whether or not public respondents have exceeded their authority in promulgating Section 6, Revenue Regulations No. 2-93, to carry out Republic Act No. 7496. The questioned regulation reads:
Sec. 6. General Professional Partnership The general professional partnership (GPP) and the partners comprising the GPP are covered by R. A. No. 7496. Thus, in determining the net profit of the partnership, only the direct costs mentioned in said law are to be deducted from partnership income. Also, the expenses paid or incurred by partners in their individual capacities in the practice of their profession which are not reimbursed or paid by the partnership but are not considered as direct cost, are not deductible from his gross income.

On the basis of the above language of the law, it would be difficult to accept petitioner's view that the amendatory law should be considered as having now adopted a gross income, instead of as having still retained the netincome, taxation scheme. The allowance for deductible items, it is true, may have significantly been reduced by the questioned law in comparison with that which has prevailed prior to the amendment; limiting, however, allowable deductions from gross income is neither discordant with, nor opposed to, the net income tax concept. The fact of the matter is still that various deductions, which are by no means inconsequential, continue to be well provided under the new law. Article VI, Section 26(1), of the Constitution has been envisioned so as (a) to prevent log-rolling legislation intended to unite the members of the legislature who favor any one of unrelated subjects in support of the whole act, (b) to avoid surprises or even fraud upon the legislature, and (c) to fairly apprise the people, through such publications of its proceedings as are usually made, of the subjects of legislation. 1 The above objectives of the fundamental law appear to us to have been sufficiently met. Anything else would be to require a virtual compendium of the law which could not have been the intendment of the constitutional mandate. Petitioner intimates that Republic Act No. 7496 desecrates the constitutional requirement that taxation "shall be uniform and equitable" in that the law would now attempt to tax single proprietorships and professionals differently from the manner it imposes the tax on corporations and partnerships. The contention clearly forgets, however, that such a system of income taxation has long been the prevailing rule even prior to Republic Act No. 7496. Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects or objects of taxation, similarly situated, are to be treated alike both in privileges and liabilities (Juan Luna Subdivision vs. Sarmiento, 91 Phil. 371). Uniformity does not forfend classification as long

The real objection of petitioners is focused on the administrative interpretation of public respondents that would apply SNIT to partners in

general professional partnerships. Petitioners cite the pertinent deliberations in Congress during its enactment of Republic Act No. 7496, also quoted by the Honorable Hernando B. Perez, minority floor leader of the House of Representatives, in the latter's privilege speech by way of commenting on the questioned implementing regulation of public respondents following the effectivity of the law, thusly:
MR. ALBANO, Now Mr. Speaker, I would like to get the correct impression of this bill. Do we speak here of individuals who are earning, I mean, who earn through business enterprises and therefore, should file an income tax return? MR. PEREZ. That is correct, Mr. Speaker. This does not apply to corporations. It applies only to individuals. (See Deliberations on H. B. No. 34314, August 6, 1991, 6:15 P.M.; Emphasis ours). Other deliberations support this position, to wit: MR. ABAYA . . . Now, Mr. Speaker, did I hear the Gentleman from Batangas say that this bill is intended to increase collections as far as individuals are concerned and to make collection of taxes equitable? MR. PEREZ. That is correct, Mr. Speaker. (Id. at 6:40 P.M.; Emphasis ours). In fact, in the sponsorship speech of Senator Mamintal Tamano on the Senate version of the SNITS, it is categorically stated, thus: This bill, Mr. President, is not applicable to business corporations or to partnerships; it is only with respect to individuals and professionals. (Emphasis ours)

entitled whether distributed or otherwise, shall be returned for taxation and the tax paid in accordance with the provisions of this Title. (b) In determining his distributive share in the net income of the partnership, each partner (1) Shall take into account separately his distributive share of the partnership's income, gain, loss, deduction, or credit to the extent provided by the pertinent provisions of this Code, and (2) Shall be deemed to have elected the itemized deductions, unless he declares his distributive share of the gross income undiminished by his share of the deductions.

There is, then and now, no distinction in income tax liability between a person who practices his profession alone or individually and one who does it through partnership (whether registered or not) with others in the exercise of a common profession. Indeed, outside of the gross compensation income tax and the final tax on passive investment income, under the present income tax system all individuals deriving income from any source whatsoever are treated in almost invariably the same manner and under a common set of rules. We can well appreciate the concern taken by petitioners if perhaps we were to consider Republic Act No. 7496 as an entirely independent, not merely as an amendatory, piece of legislation. The view can easily become myopic, however, when the law is understood, as it should be, as only forming part of, and subject to, the whole income tax concept and precepts long obtaining under the National Internal Revenue Code. To elaborate a little, the phrase "income taxpayers" is an all embracing term used in the Tax Code, and it practically covers all persons who derive taxable income. The law, in levying the tax, adopts the most comprehensive tax situs of nationality and residence of the taxpayer (that renders citizens, regardless of residence, and resident aliens subject to income tax liability on their income from all sources) and of the generally accepted and internationally recognized income taxable base (that can subject non-resident aliens and foreign corporations to income tax on their income from Philippine sources). In the process, the Code classifies taxpayers into four main groups, namely: (1) Individuals, (2) Corporations, (3) Estates under Judicial Settlement and (4) Irrevocable Trusts (irrevocable both as to corpus and as to income). Partnerships are, under the Code, either "taxable partnerships" or "exempt partnerships." Ordinarily, partnerships, no matter how created or organized, are subject to income tax (and thus alluded to as "taxable partnerships") which, for purposes of the above categorization, are by law assimilated to be within the context of, and so legally contemplated as, corporations. Except for few variances, such as in the application of the "constructive receipt rule" in the derivation of income, the income tax approach is alike to both juridical persons. Obviously, SNIT is not intended or envisioned, as so correctly pointed out in the discussions in Congress

The Court, first of all, should like to correct the apparent misconception that general professional partnerships are subject to the payment of income tax or that there is a difference in the tax treatment between individuals engaged in business or in the practice of their respective professions and partners in general professional partnerships. The fact of the matter is that a general professional partnership, unlike an ordinary business partnership (which is treated as a corporation for income tax purposes and so subject to the corporate income tax), is not itself an income taxpayer. The income tax is imposed not on the professional partnership, which is tax exempt, but on the partners themselves in their individual capacity computed on their distributive shares of partnership profits. Section 23 of the Tax Code, which has not been amended at all by Republic Act 7496, is explicit:
Sec. 23. Tax liability of members of general professional partnerships. (a) Persons exercising a common profession in general partnership shall be liable for income tax only in their individual capacity, and the share in the net profits of the general professional partnership to which any taxable partner would be

during its deliberations on Republic Act 7496, aforequoted, to cover corporations and partnerships which are independently subject to the payment of income tax. "Exempt partnerships," upon the other hand, are not similarly identified as corporations nor even considered as independent taxable entities for income tax purposes. A general professional partnership is such an example. 4Here, the partners themselves, not the partnership (although it is still obligated to file an income tax return [mainly for administration and data]), are liable for the payment of income tax in their individual capacity computed on their respective and distributive shares of profits. In the determination of the tax liability, a partner does so as anindividual, and there is no choice on the matter. In fine, under the Tax Code on income taxation, the general professional partnership is deemed to be no more than a mere mechanism or a flow-through entity in the generation of income by, and the ultimate distribution of such income to, respectively, each of the individual partners. Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the above standing rule as now so modified by Republic Act No. 7496 on basically the extent of allowable deductions applicable to all individual income taxpayers on their non-compensation income. There is no evident intention of the law, either before or after the amendatory legislation, to place in an unequal footing or in significant variance the income tax treatment of professionals who practice their respective professions individually and of those who do it through a general professional partnership. WHEREFORE, the petitions are DISMISSED. No special pronouncement on costs. SO ORDERED. Narvasa, C.J., Cruz, Feliciano, Regalado, Davide, Jr., Romero, Bellosillo, Melo, Quiason, Puno, Kapunan and Mendoza, JJ., concur. Padilla and Bidin, JJ., are on leave.

G.R. No. 153793 August 29, 2006

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.

On petition with the Court of Appeals, the latter reversed the Decision of the CTA, holding that respondent received the commissions as sales agent of JUBANITEX and not as President thereof. And since the "source" of income means the activity or service that produce the income, the sales commission received by respondent is not taxable in the Philippines because it arose from the marketing activities performed by respondent in Germany. The dispositive portion of the appellate courts Decision, reads:
WHEREFORE, premises considered, the assailed decision of the Court of Tax Appeals dated June 28, 2000 is hereby REVERSED and SET ASIDE and the respondent court is hereby directed to grant petitioner a tax refund in the amount of Php 170,777.26. SO ORDERED.8

JULIANE BAIER-NICKEL, as represented by Marina Q.

Guzman (Attorney-in-fact) Respondent. DECISION YNARES-SANTIAGO, J.: Petitioner Commissioner of Internal Revenue (CIR) appeals from the January 18, 2002 Decision1 of the Court of Appeals in CA-G.R. SP No. 59794, which granted the tax refund of respondent Juliane Baier-Nickel and reversed the June 28, 2000 Decision2 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 5633. Petitioner also assails the May 8, 2002 Resolution 3 of the Court of Appeals denying its motion for reconsideration. The facts show that respondent Juliane Baier-Nickel, a non-resident German citizen, is the President of JUBANITEX, Inc., a domestic corporation engaged in "[m]anufacturing, marketing on wholesale only, buying or otherwise acquiring, holding, importing and exporting, selling and disposing embroidered textile products."4Through JUBANITEXs General Manager, Marina Q. Guzman, the corporation appointed and engaged the services of respondent as commission agent. It was agreed that respondent will receive 10% sales commission on all sales actually concluded and collected through her efforts.5 In 1995, respondent received the amount of P1,707,772.64, representing her sales commission income from which JUBANITEX withheld the corresponding 10% withholding tax amounting to P170,777.26, and remitted the same to the Bureau of Internal Revenue (BIR). On October 17, 1997, respondent filed her 1995 income tax return reporting a taxable income of P1,707,772.64 and a tax due of P170,777.26.6 On April 14, 1998, respondent filed a claim to refund the amount of P170,777.26 alleged to have been mistakenly withheld and remitted by JUBANITEX to the BIR. Respondent contended that her sales commission income is not taxable in the Philippines because the same was a compensation for her services rendered in Germany and therefore considered as income from sources outside the Philippines. The next day, April 15, 1998, she filed a petition for review with the CTA contending that no action was taken by the BIR on her claim for refund.7 On June 28, 2000, the CTA rendered a decision denying her claim. It held that the commissions received by respondent were actually her remuneration in the performance of her duties as President of JUBANITEX and not as a mere sales agent thereof. The income derived by respondent is therefore an income taxable in the Philippines because JUBANITEX is a domestic corporation.

Petitioner filed a motion for reconsideration but was denied. 9 Hence, the instant recourse. Petitioner maintains that the income earned by respondent is taxable in the Philippines because the source thereof is JUBANITEX, a domestic corporation located in the City of Makati. It thus implied that source of income means the physical source where the income came from. It further argued that since respondent is the President of JUBANITEX, any remuneration she received from said corporation should be construed as payment of her overall managerial services to the company and should not be interpreted as a compensation for a distinct and separate service as a sales commission agent. Respondent, on the other hand, claims that the income she received was payment for her marketing services. She contended that income of nonresident aliens like her is subject to tax only if the source of the income is within the Philippines. Source, according to respondent is the situs of the activity which produced the income. And since the source of her income were her marketing activities in Germany, the income she derived from said activities is not subject to Philippine income taxation. The issue here is whether respondents sales commission income is taxable in the Philippines. Pertinent portion of the National Internal Revenue Code (NIRC), states:
SEC. 25. Tax on Nonresident Alien Individual. (A) Nonresident Alien Engaged in Trade or Business Within the Philippines. (1) In General. A nonresident alien individual engaged in trade or business in the Philippines shall be subject to an income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines. A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed a nonresident alien doing business in the Philippines, Section 22(G) of this Code notwithstanding. xxxx (B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. There shall be levied, collected and paid for each taxable

year upon the entire income received from all sources within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippines x x x a tax equal to twenty-five percent (25%) of such income. x x x

The following discussions on sourcing of income under the Internal Revenue Code of the U.S., are instructive: The Supreme Court has said, in a definition much quoted but often debated, that income may be derived from three possible sources only: (1) capital and/or (2) labor; and/or (3) the sale of capital assets. While the three elements of this attempt at definition need not be accepted as allinclusive, they serve as useful guides in any inquiry into whether a particular item is from "sources within the United States" and suggest an investigation into the nature and location of the activities or property which produce the income. 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. Much confusion will be avoided by regarding the term "source" in this fundamental light. It 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. The intention of Congress in the 1916 and subsequent statutes was to discard the 1909 and 1913 basis of taxing nonresident aliens and foreign corporations and to make the test of taxability the "source," or situs of the activities or property which produce the income. The result is that, on the one hand, nonresident aliens and nonresident foreign corporations are prevented from deriving income from the United States free from tax, and, on the other hand, there is no undue imposition of a tax when the activities do not take place in, and the property producing income is not employed in, this country. Thus, if income is to be taxed, the recipient thereof must be resident within the jurisdiction, or the property or activities out of which the income issues or is derived must be situated within the jurisdiction so that the source of the income may be said to have a situs in this country. The underlying theory is that the consideration for taxation is protection of life and property and that the income rightly to be levied upon to defray the burdens of the United States Government is that income which is created by activities and property protected by this Government or obtained by persons enjoying that protection. 16 The important factor therefore which determines the source of income of personal services is not the residence of the payor, or the place where the contract for service is entered into, or the place of payment, but the place where the services were actually rendered.17 In Alexander Howden & Co., Ltd. v. Collector of Internal Revenue, 18 the Court addressed the issue on the applicable source rule relating to reinsurance premiums paid by a local insurance company to a foreign insurance company in respect of risks located in the Philippines. It was held

Pursuant to the foregoing provisions of the NIRC, non-resident aliens, whether or not engaged in trade or business, are subject to Philippine income taxation on their income received from all sources within the Philippines. Thus, the keyword in determining the taxability of non-resident aliens is the incomes "source." In construing the meaning of "source" in Section 25 of the NIRC, resort must be had on the origin of the provision. The first Philippine income tax law enacted by the Philippine Legislature was Act No. 2833,10 which took effect on January 1, 1920.11 Under Section 1 thereof, nonresident aliens are likewise subject to tax on income "from all sources within the Philippine Islands," thus
SECTION 1. (a) There shall be levied, assessed, collected, and paid annually upon the entire net income received in the preceding calendar year from all sources by every individual, a citizen or resident of the Philippine Islands, a tax of two per centum upon such income; and a like tax shall be levied, assessed, collected, and paid annually upon the entire net income received in the preceding calendar year from all sources within the Philippine Islands by every individual, a nonresident alien, including interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise.

Act No. 2833 substantially reproduced the United States (U.S.) Revenue Law of 1916 as amended by U.S. Revenue Law of 1917. 12 Being a law of American origin, the authoritative decisions of the official charged with enforcing it in the U.S. have peculiar persuasive force in the Philippines.13 The Internal Revenue Code of the U.S. enumerates specific types of income to be treated as from sources within the U.S. and specifies when similar types of income are to be treated as from sources outside the U.S. 14 Under the said Code, compensation for labor and personal services performed in the U.S., is generally treated as income from U.S. sources; while compensation for said services performed outside the U.S., is treated as income from sources outside the U.S.15 A similar provision is found in Section 42 of our NIRC, thus:
SEC. 42. x x x (A) Gross Income From Sources Within the Philippines. x x x xxxx (3) Services. Compensation for labor or personal services performed in the Philippines; xxxx (C) Gross Income From Sources Without the Philippines. x x x xxxx (3) Compensation for labor or personal services performed without the Philippines;

therein that the undertaking of the foreign insurance company to indemnify the local insurance company is the activity that produced the income. Since the activity took place in the Philippines, the income derived therefrom is taxable in our jurisdiction. Citing Mertens, The Law of Federal Income Taxation, the Court emphasized that the technical meaning of source of income is the property, activity or service that produced the same. Thus: The source of an income is the property, activity or service that produced the income. The reinsurance premiums remitted to appellants by virtue of the reinsurance contracts, accordingly, had for their source the undertaking to indemnify Commonwealth Insurance Co. against liability. Said undertaking is the activity that produced the reinsurance premiums, and the same took place in the Philippines. x x x the reinsured, the liabilities insured and the risk originally underwritten by Commonwealth Insurance Co., upon which the reinsurance premiums and indemnity were based, were all situated in the Philippines. x x x19 In Commissioner of Internal Revenue v. British Overseas Airways Corporation (BOAC),20 the issue was whether BOAC, a foreign airline company which does not maintain any flight to and from the Philippines is liable for Philippine income taxation in respect of sales of air tickets in the Philippines, through a general sales agent relating to the carriage of passengers and cargo between two points both outside the Philippines. Ruling in the affirmative, the Court applied the case of Alexander Howden & Co., Ltd. v. Collector of Internal Revenue, and reiterated the rule that the source of income is that "activity" which produced the income. It was held that the "sale of tickets" in the Philippines is the "activity" that produced the income and therefore BOAC should pay income tax in the Philippines because it undertook an income producing activity in the country. Both the petitioner and respondent cited the case of Commissioner of Internal Revenue v. British Overseas Airways Corporation in support of their arguments, but the correct interpretation of the said case favors the theory of respondent that it is the situs of the activity that determines whether such income is taxable in the Philippines. The conflict between the majority and the dissenting opinion in the said case has nothing to do with the underlying principle of the law on sourcing of income. In fact, both applied the case of Alexander Howden & Co., Ltd. v. Collector of Internal Revenue. The divergence in opinion centered on whether the sale of tickets in the Philippines is to be construed as the "activity" that produced the income, as viewed by the majority, or merely the physical source of the income, as ratiocinated by Justice Florentino P. Feliciano in his dissent. The majority, through Justice Ameurfina Melencio-Herrera, as ponente, interpreted the sale of tickets as a business activity that gave rise to the income of BOAC. Petitioner cannot therefore invoke said case to support its view that source of income is the physical source of the money earned. If such was the interpretation of the majority, the Court would have simply stated that source of income is not the business activity of BOAC but the place where the person or entity disbursing the income is located or where BOAC physically received the same. But such was not the import of the ruling of the Court. It even explained in detail the business

activity undertaken by BOAC in the Philippines to pinpoint the taxable activity and to justify its conclusion that BOAC is subject to Philippine income taxation. Thus BOAC, during the periods covered by the subject assessments, maintained a general sales agent in the Philippines. That general sales agent, from 1959 to 1971, "was engaged in (1) selling and issuing tickets; (2) breaking down the whole trip into series of trips each trip in the series corresponding to a different airline company; (3) receiving the fare from the whole trip; and (4) consequently allocating to the various airline companies on the basis of their participation in the services rendered through the mode of interline settlement as prescribed by Article VI of the Resolution No. 850 of the IATA Agreement." Those activities were in exercise of the functions which are normally incident to, and are in progressive pursuit of, the purpose and object of its organization as an international air carrier. In fact, the regular sale of tickets, its main activity, is the very lifeblood of the airline business, the generation of sales being the paramount objective. There should be no doubt then that BOAC was "engaged in" business in the Philippines through a local agent during the period covered by the assessments. x x x21 xxxx 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. In BOAC's case, the sale of tickets in the Philippines is the activity that produces the income. The tickets exchanged hands here and payments for fares were also made here in Philippine currency. The situs of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying the protection accorded by the Philippine government. In consideration of such protection, the flow of wealth should share the burden of supporting the government. A transportation ticket is not a mere piece of paper. When issued by a common carrier, it constitutes the contract between the ticket-holder and the carrier. It gives rise to the obligation of the purchaser of the ticket to pay the fare and the corresponding obligation of the carrier to transport the passenger upon the terms and conditions set forth thereon. The ordinary ticket issued to members of the traveling public in general embraces within its terms all the elements to constitute it a valid contract, binding upon the parties entering into the relationship.22 The Court reiterates the rule that "source of income" relates to the property, activity or service that produced the income. With respect to rendition of labor or personal service, as in the instant case, it is the place where the labor or service was performed that determines the source of the income. There is therefore no merit in petitioners interpretation which equates source of income in labor or personal service with the residence of the payor or the place of payment of the income. Having disposed of the doctrine applicable in this case, we will now determine whether respondent was able to establish the factual

circumstances showing that her income is exempt from Philippine income taxation. The decisive factual consideration here is not the capacity in which respondent received the income, but the sufficiency of evidence to prove that the services she rendered were performed in Germany. Though not raised as an issue, the Court is clothed with authority to address the same because the resolution thereof will settle the vital question posed in this controversy.23 The settled rule is that tax refunds are in the nature of tax exemptions and are to be construed strictissimi jurisagainst the taxpayer.24 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, the appointment letter of respondent as agent of JUBANITEX stipulated that the activity or the service which would entitle her to 10% commission income, are "sales actually concluded and collected through [her] efforts."25 What she presented as evidence to prove that she performed income producing activities abroad, were copies of documents she allegedly faxed to JUBANITEX and bearing instructions as to the sizes of, or designs and fabrics to be used in the finished products as well as samples of sales orders purportedly relayed to her by clients. However, these documents do not show whether the instructions or orders faxed ripened into concluded or collected sales in Germany. At the very least, these pieces of evidence show that while respondent was in Germany, she sent instructions/orders to JUBANITEX. As to whether these instructions/orders gave rise to consummated sales and whether these sales were truly concluded in Germany, respondent presented no such evidence. Neither did she establish reasonable connection between the orders/instructions faxed and the reported monthly sales purported to have transpired in Germany. The paucity of respondents evidence was even noted by Atty. Minerva Pacheco, petitioners counsel at the hearing before the Court of Tax Appeals. She pointed out that respondent presented no contracts or orders signed by the customers in Germany to prove the sale transactions therein.26 Likewise, in her Comment to the Formal Offer of respondents evidence, she objected to the admission of the faxed documents bearing instruction/orders marked as Exhibits "R,"27 "V," "W", and "X,"28 for being self serving.29 The concern raised by petitioners counsel as to the absence of substantial evidence that would constitute proof that the sale transactions for which respondent was paid commission actually transpired outside the Philippines, is relevant because respondent stayed in the Philippines for 89 days in 1995. Except for the months of July and September 1995, respondent was in the Philippines in the months of March, May, June, and August 1995,30 the same months when she earned commission income for services allegedly performed abroad. Furthermore, respondent presented no evidence to prove that JUBANITEX does not sell embroidered products in the Philippines and that her appointment as commission agent is exclusively for Germany and other European markets.

In sum, we find that the faxed documents presented by respondent did not constitute substantial evidence, or that relevant evidence that a reasonable mind might accept as adequate to support the conclusion 31 that it was in Germany where she performed the income producing service which gave rise to the reported monthly sales in the months of March and May to September of 1995. She thus failed to discharge the burden of proving that her income was from sources outside the Philippines and exempt from the application of our income tax law. Hence, the claim for tax refund should be denied. The Court notes that in Commissioner of Internal Revenue v. BaierNickel,32 a previous case for refund of income withheld from respondents remunerations for services rendered abroad, the Court in a Minute Resolution dated February 17, 2003,33 sustained the ruling of the Court of Appeals that respondent is entitled to refund the sum withheld from her sales commission income for the year 1994. This ruling has no bearing in the instant controversy because the subject matter thereof is the income of respondent for the year 1994 while, the instant case deals with her income in 1995. Otherwise, stated, res judicata has no application here. Its elements are: (1) there must be a final judgment or order; (2) the court that rendered the judgment must have jurisdiction over the subject matter and the parties; (3) it must be a judgment on the merits; (4) there must be between the two cases identity of parties, of subject matter, and of causes of action. 34 The instant case, however, did not satisfy the fourth requisite because there is no identity as to the subject matter of the previous and present case of respondent which deals with income earned and activities performed for different taxable years. WHEREFORE, the petition is GRANTED and the January 18, 2002 Decision and May 8, 2002 Resolution of the Court of Appeals in CA-G.R. SP No. 59794, are REVERSED and SET ASIDE. The June 28, 2000 Decision of the Court of Tax Appeals in C.T.A. Case No. 5633, which denied respondents claim for refund of income tax paid for the year 1995 is REINSTATED. SO ORDERED. CONSUELO YNARES-SANTIAGO

G.R. No. L-2947

January 11, 1951

nothing, of course, to stop stable owners from shifting the tax to the horse owners in the form of increased rents or fees, which is generally the case. It is also plain from the text of the whole ordinance that the number of horses is used in the assessment purely as a method of fixing an equitable and practical distribution of the burden imposed by the measure. Far from being obnoxious, the method is fair and just. It is but fair and just that for a boarding stable where only one horse is maintained proportionately less amount should be exacted than for a stable where more horses are kept and from which greater income is derived. We do not share plaintiff's opinion, apropos the second proposition, that the ordinance in question is discriminatory and savors of class legislation. In taxing only boarding stables for race horses, we do not believe that the ordinance, makes arbitrary classification. In the case of Eastern Theatrical Co. Inc., vs. Alfonso, 46 Off. Gaz. Supp. to No. 11, p. 303, * it was said there is equality and uniformity in taxation if all articles or kinds of property of the same class are taxed at the same rate. Thus, it was held in that case, that "the fact that some places of amusement are not taxed while others, such as cinematographs, theaters, vaudeville companies, theatrical shows, and boxing exhibitions and other kinds of amusements or places of amusement are taxed, is not argument at all against the equality and uniformity of tax imposition." Applying this criterion to the present case, there would be discrimination if some boarding stables of the same class used for the same number of horses were not taxed or were made to pay less or more than others. From the viewpoint of economics and public policy the taxing of boarding stables for race horses to the exclusion of boarding stables for horses dedicated to other purposes is not indefensible. The owners of boarding stables for race horses and, for that matter, the race horse owners themselves, who in the scheme of shifting may carry the taxation burden, are a class by themselves and appropriately taxed where owners of other kinds of horses are taxed less or not at all, considering that equity in taxation is generally conceived in terms of ability to pay in relation to the benefits received by the taxpayer and by the public from the business or property taxed. Race horses are devoted to gambling if legalized, their owners derive fat income and the public hardly any profit from horse racing, and this business demands relatively heavy police supervision. Taking everything into account, the differentiation against which the plaintiffs complain conforms to the practical dictates of justice and equity and is not discrimatory within the meaning of the Constitution. One ground of attack in the court below on the constitutionality of the ordinance variance between the title and the subject matter apparently has been abandoned. In its place a new question is brought up on the appeal in the third and last assignment of error. It is now contended, for the first time, that "the Municipal Board of Manila (is) without power to enact ordinance taxing private stables for race horses," and that the lower court erred in not so declaring. This assignment of error has reference to Class B or the second sub-paragraph of section 1 of the ordinance.

MANILA RACE HORSE TRAINERS ASSOCIATION, INC., and JUAN T. SORDAN, plaintiffsappellants, vs.

MANUEL DE LA FUENTE, defendant-appellee.

Soriano, Garde and Cervania for appellants. City Fiscal Eugenio Angeles and Assistant Fiscal Arsenio Naawa for appellee. TUASON, J.: This action was instituted for a declaratory relief by the Manila Race Horses Trainers Association, Inc., a non-stock corporation duly organized and existing under and by virtue of the laws of the Philippines, who allege that they are owners of boarding stables for race horses and that their rights as such are affected by Ordinance No. 3065 of the City of Manila approved on July 1, 1947.1 They made the Mayor of Manila defendant and prayed that said ordinance be declared invalid as violative of the Philippine Constitution. The case was submitted on the pleadings, and the decision was that the ordinance in question "is constitutional and valid and has been enacted in accordance with the powers of the Municipal Board granted by the Charter of the City of Manila." On appeal, the plaintiffs as appellants make three assignments of error, the first two of which are discussed jointly in their brief under two separate topics. First, it is maintained that the ordinance under consideration is a tax on race horses as distinct from boarding stables. It is argued that by section 2 the basis of the license fees "is the number of race horses kept or maintained in the boarding stables to be paid by the maintainers at the rate of P10.00 a year for each race horse;" that "the fee is increased correspondingly P10 for each additional race horse maintained or fed in the stable;" and that "by the same token, an empty stable for race horse pays no license fee at all." The spirit, rather than the letter, of an ordinance determines the construction thereof, and the court looks less to its words and more to the context, subject matter, consequence and effect. Accordingly, what is within the spirit is within the ordinance although it is not within the letter thereof, while that which is in the letter, although not within the spirit, is not within the ordinance. (62 C. J. S., 845.) From the context of Ordinance No. 3065, the intent to tax or license stables and not horses is clearly manifest. The tax is assessed not on the owners of the horses but on the owners of the stables, as counsel admit in their brief, although there is

Not having been raised in the pleading, this question was properly ignored, not to say that even it had been raised it would not have been available as basis for a declaration of nullity of the ordinance. The clause of the ordinance taxing or licensing boarding stables for race horses does not prejudice the plaintiffs in any material way, and it is well settled that a person who is not adversely affected by a licensing ordinance may not attack its validity. Stated differently, he may not complain that a licensing ordinance is invalid as against a class other than that to which he belongs. (62 C. J. S.830, 831.) By analogy, where a municipal ordinance is valid in some of its parts and invalid as to others and the valid parts are separable from the invalid ones in which latter case the valid provisions stand as operative the plaintiff may contest the validity of the provisions that injure his interest but not those that do not. We are of the opinion that the trial court committed no error and the judgment is affirmed with costs against the plaintiff-appellants. Moran, C.J., Paras, Feria, Pablo, Bengzon, Padilla, Montemayor, Reyes, Jugo and Bautista Angelo, JJ., concur.

G.R. No. L-43314

December 19, 1935

part hereof. This stipulation does not, however, cover the respective values of said properties for the purpose of the inheritance tax. VII. That on July 22, 1931, the Bureau of Internal Revenue prepared for the estate of the late Arthur Graydon Moody an inheritance tax return, certified copy of which marked Exhibit HH is hereto attached and made a part, hereof. VIII. That on September 9, 1931, an income tax return for the fractional period from January 1, 1931 to June 30, 1931, certified copy of which marked Exhibit 11 is hereto attached and made a part hereof, was also prepared by the Bureau of Internal Revenue for the estate of the said deceased Arthur Graydon Moody.
1awphil.net

A.L. VELILLA, administrator of the estate of Arthur Graydon

Moody, plaintiff -appellant, vs.

JUAN POSADAS, JR., Collector of Internal

Revenue, defendant-appellee. Ohnick and Opisso for appellant. Office of the Solicitor-General Hilado for appellee.

BUTTE, J.: This is an appeal from a judgment of the Court of First Instant of manila in an action to recover from the defendant-appellee as Collector of Internal Revenue the sum of P77,018.39 as inheritance taxes and P13,001.41 as income taxes assessed against the estate of Arthur G. Moody, deceased. The parties submitted to the court an agreed statement of facts as follows:
I. That Arthur Graydon Moody died in Calcutta, India, on February 18, 1931. II. That Arthur Graydon Moody executed in the Philippine Islands a will, certified copy of which marked Exhibit AA is hereto attached and made a part hereof, by virtue of which will, he bequeathed all his property to his only sister, Ida M. Palmer, who then was and still is a citizen and resident of the State of New York, United States of America. III. That on February 24,1931, a petition for appointment of special administrator of the estate of the deceased Arthur Graydon Moody was filed by W. Maxwell Thebaut with the Court of First Instance of Manila, the same being designated as case No. 39113 of said court. Copy of said petition marked Exhibit BB is hereto attached and made a part hereof. IV. That subsequently or on April 10, 1931, a petition will of the deceased Arthur Graydon Moody, and the same was, after hearing, duly probated by the court in a decree dated May 5, 1931. Copies of the petition and of the decree marked Exhibits CC and DD, respectively, are hereto attached and made parts hereof. V. That on July 14, 1931, Ida M. Palmer was declared to be the sole and only heiress of the deceased Arthur Graydon Moody by virtue of an order issued by the court in said case No. 39113, copy of which marked Exhibit EE is hereto attached and made a part hereof; and that during the hearing for the declaration of heirs, Ida M. Palmer presented as evidence a letter dated February 28, 1925, and addressed to her by Arthur Graydon Moody, copy of which marked Exhibit FF hereto attached and made part hereof. VI. That the property left by the late Arthur Graydon Moody consisted principally of bonds and shares of stock of corporations organized under the laws of the Philippine Islands, bank deposits and other personal properties, as are more fully shown in the inventory of April 17, 1931, filed by the special administrator with the court in said case No. 39113, certified copy of which inventory marked Exhibit GG is hereto attached and made a

IX. That on December 3, 1931, the committee on claims and appraisals filed with the court its report, certified copy of which marked Exhibit KK is hereto attached and made a part hereof. X. That on September 15, 1931, the Bureau of Internal Revenue addressed to the attorney for the administratrix Ida M. Palmer a letter, copy of which marked Exhibit LL is hereto attached and made a part hereof. XI. That on October 15, 1931, the attorney for Ida M. Palmer answered the letter of the Collector of Internal Revenue referred to in the preceding paragraph. Said answer marked Exhibit MM is hereto attached and made a part hereof. XII. That on November 4, 1931, and in answer to the letter mentioned in the preceding paragraph, the Bureau of Internal Revenue addressed to the attorney for Ida M. Palmer another letter, copy of which marked Exhibit NN is hereto attached and made a part hereof. XIII. That on December 7, 1931, the attorney for Ida M. Palmer again replied in a letter, marked Exhibit OO, hereto attached and made a part hereof. XIV. That the estate of the late Arthur Graydon Moody paid under protest the sum of P50,000 on July 22, 1931, and the other sum of P40,019.75 on January 19, 1932, making assessment for inheritance tax and the sum of P13,001.41 covers the assessment for income tax against said estate. XV. That on January 21, 1932, the Collector of Internal Revenue overruled the protest made by Ida M. Palmer through her attorney. XVI. The parties reserve their right to introduce additional evidence at the hearing of the present case. Manila, August 15, 1933.

In addition to the foregoing agreed statement of facts, both parties introduced oral and documentary evidence from which it appears that Arthur G. Moody, an American citizen, came to the Philippine Islands in 1902 or 1903 and engaged actively in business in these Islands up to the time of his death in Calcutta, India, on February 18, 1931. He had no business elsewhere and at the time of his death left an estate consisting principally of bonds and shares of stock of corporations organized under the laws of the Philippine Islands, bank deposits and other intangibles and personal property valued by the commissioners of appraisal and claims at P609,767.58 and by the Collector of Internal Revenue for the purposes of inheritance tax at P653,657.47. All of said property at the time of his death was located and had its situs within the Philippine Islands. So far as this

record shows, he left no property of any kind located anywhere else. In his will, Exhibit AA, executed without date in Manila in accordance with the formalities of the Philippine law, in which he bequeathed all his property to his sister, Ida M. Palmer, he stated:
I, Arthur G. Moody, a citizen of the United States of America, residing in the Philippine Islands, hereby publish and declare the following as my last Will and Testament . . ..

the action shall be based upon the same grounds, and only such, as were presented in the protest had been waived by the collector. In the case before us no copy of the taxpayer's protest is included in the record and we have no means of knowing its contents. We think, therefore, the preliminary objection made on behalf of the appellee does not lie. We proceed, therefore, to the consideration of the question on the merits as to whether Arthur G. Moody was legally domiciled in the Philippine Islands on the day of his death. Moody was never married and there is no doubt that he had his legal domicile in the Philippine Islands from 1902 or 1903 forward during which time he accumulated a fortune from his business in the Philippine Islands He lived in the Elks' Club in Manila for many years and was living there up to the date he left Manila the latter part of February, 1928, under the following circumstances: He was afflicted with leprosy in an advanced stage and been informed by Dr. Wade that he would be reported to the Philippine authorities for confinement in the Culion Leper Colony as required by the law. Distressed at the thought of being thus segregated and in violation of his promise to Dr. Wade that he would voluntarily go to Culion, he surreptitiously left the Islands the latter part of February, 1928, under cover of night, on a freighter, without ticket, passport or tax clearance certificate. The record does not show where Moody was during the remainder of the year 1928. He lived with a friend in Paris, France, during the months of March and April of the year 1929 where he was receiving treatment for leprosy at the Pasteur Institute. The record does not show where Moody was in the interval between April, 1929, and November 26, 1930, on which latter date he wrote a letter, Exhibit B, to Harry Wendt of Manila, offering to sell him mis interest in the Camera Supply Company, a Philippine corporation, in which Moody owned 599 out of 603 shares. In this letter, among other things, he states: "Certainly I'll never return there to live or enter business again." In this same letter he says: I wish to know as soon as now (as to the purchase) for I have very recently decided either to sell or put in a line of school or office supplies ... before I go to the necessary investments placing any side lines, I concluded to get your definite reply to this ... I have given our New York buying agent a conditional order not to be executed until March and this will give you plenty of time ... anything that kills a business is to have it peddled around as being for sale and this is what I wish to avoid. He wrote letters dated December 12, 1930, and January 3, 1931, along the same line to Wendt. As Moody died of leprosy less than two months after these letters were written, there can be no doubt that he would have been immediately segregated in the Culion Leper Colony had he returned to the Philippine Islands. He was, therefore, a fugitive, not from justice, but from confinement in the Culion Leper Colony in accordance with the law of the Philippine Islands. There is no statement of Moody, oral or written, in the record that he had adopted a new domicile while he was absent from Manila. Though he was physically present for some months in Calcutta prior to the date of his death there, the appellant does not claim that Moody had a domicile there although it was precisely from Calcutta that he wrote and cabled that he

The substance of the plaintiff's cause of action is stated in paragraph 7 of his complaint as follows:
That there is no valid law or regulation of the Government of the Philippine Islands under or by virtue of which any inheritance tax may be levied, assessed or collected upon transfer, by death and succession, of intangible personal properties of a person not domiciled in the Philippine Islands, and the levy and collection by defendant of inheritance tax computed upon the value of said stocks, bonds, credits and other intangible properties as aforesaid constituted and constitutes the taking and deprivation of property without due process of law contrary to the Bill of Rights and organic law of the Philippine Islands.

Section 1536 of the Revised Administrative Code (as amended) provides as follows:
SEC. 1536. Conditions and rate of taxation. Every transmission by virtue of inheritance, devise, bequest, gift mortis causa or advance in anticipation of inheritance. devise, or bequest of real property located in the Philippine Islands and real rights in such property; of any franchise which must be exercised in the Philippine Islands, of any shares, obligations, or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippine Islands in accordance with its laws; of any shares or rights in any partnership, business or any personal property located in the Philippine Islands shall be subject to the following tax:

It is alleged in the complaint that at the time of his death, Arthur G. Moody was a "non-resident of the Philippine Islands". The answer, besides the general denial, sets up as a special defense "Arthur G. Moody, now deceased, was and prior to the date of his death, a resident in the City of Manila, Philippine Islands, where he was engaged actively in business." Issue was thus joined on the question: Where was the legal domicile of Arthur G. Moody at the time of his death? The Solicitor-General raises a preliminary objection to the consideration of any evidence that Moody's domicile was elsewhere than in Manila at the time of his death based on the proposition that as no such objection was made before the Collector of Internal Revenue as one of the grounds of the protest against the payment of the tax, this objection cannot be considered in a suit against the Collector to recover the taxes paid under protest. He relies upon the decision in the case of W.C. Tucker vs. A.C. Alexander, Collector (15 Fed. [21, 356). We call attention, however, to the fact that this decision was reversed in 275 U.S., 232; 72 Law. ed., 256, and the case remanded for trial on the merits on the ground that the requirement that

wished to sell his business in Manila and that he had no intention to live there again. Much less plausible, it seems to us, is the claim that he established a legal domicile in Paris in February, 1929. The record contains no writing whatever of Moody from Paris. There is no evidence as to where in Paris he had any fixed abode that he intended to be his permanent home. There is no evidence that he acquired any property in Paris or engaged in any settled business on his own account there. There is no evidence of any affirmative factors that prove the establishment of a legal domicile there. The negative evidence that he told Cooley that he did not intend to return to Manila does not prove that he had established a domicile in Paris. His short stay of three months in Paris is entirely consistent with the view that he was a transient in Paris for the purpose of receiving treatments at the Pasteur Institute. The evidence in the record indicates clearly that Moody's continued absence from his legal domicile in the Philippines was due to and reasonably accounted for by the same motive that caused his surreptitious departure, namely, to evade confinement in the Cullion Leper Colony for he doubtless knew that on his return he would be immediately confined, because his affliction became graver to us while he was absent than it was on the day of his precipitous departure and he could not conceal himself in the Philippines where he was well known, as he might do in foreign parts. Our Civil Code (art. 40) defines the domicile of natural persons as "the place of their usual residence". The record before us leaves no doubt in our minds that the "usual residence" of this unfortunate man, whom appellant describes as a "fugitive" and "outcast", was in Manila where he had lived and toiled for more than a quarter of a century, rather than in any foreign country he visited during his wanderings up to the date of his death in Calcutta. To effect the abandonment of one's domicile, there must be a deliberate and provable choice of a new domicile, coupled with actual residence in the place chosen, with a declared or provable intent that it should be one's fixed and permanent place of abode, one's home. There is a complete dearth of evidence in the record that Moody ever established a new domicile in a foreign country. The contention under the appellant's third assignment of error that the defendant collector illegally assessed an income tax of P13,001.41 against the Moody estate is, in our opinion, untenable. The grounds for this assessment, stated by the Collector of Internal Revenue in his letter, Exhibit NN, appear to us to be sound. That the amount of P59,986.69 was received by the estate of Moody as dividends declared out of surplus by the Camera Supply Company is clearly established by the evidence. The appellant contends that this assessment in taxation: First, because the corporation paid income tax on the same amount during the years it was accumulated as surplus; second, that an inheritance tax on the same amount was assessed against the estate, and third, the same amount is assessed as income of the estate. As to the first, it appears from the collector's assessment, Exhibit 11, to the collector allowed the estate a deduction of the normal income tax on said amount because it had already been paid at the source by the Camera Supply Company. The only income tax assessed against the estate was the additional tax or surtax that had not been paid by the Camera Supply Company for which the estate, having

actually received the income, is clearly liable. As to the second alleged double taxation, it is clear that the inheritance tax and the additional income tax in question are entirely distinct. They are assessed under different statutes and we are not convinced by the appellant's argument that the estate which received these dividends should not be held liable for the payment of the income tax thereon because the operation was simply the conversion of the surplus of the corporation into the property of the individual stockholders. (Cf. U.S. vs.Phellis, 257 U.S., 171, and Taft vs. Bowers, 278 U.S., 460.) Section 4 of Act No. 2833 as amended, which is relied on by the appellant, plainly provides that the income from exempt property shall be included as income subject to tax. Finding no merit in any of the assignments of error of the appellant, we affirm the judgment of the trial court, first, because the property in the estate of Arthur G. Moody at the time of his death was located and had its situs within the Philippine Islands and, second, because his legal domicile up to the time of his death was within the Philippine Islands. Costs against the appellant. Malcolm, Villa-Real, and Imperial, JJ., concur.

G.R. No. L-12287

August 7, 1918

VICENTE MADRIGAL and his wife, SUSANA

PATERNO, plaintiffs-appellants, vs.

P5,842.18 instead of P9,668.21, erroneously and unlawfully collected from the plaintiff Vicente Madrigal, with the result that plaintiff Madrigal has paid as income tax for the year 1914, P3,786.08, in excess of the sum lawfully due and payable. The answer of the defendants, together with an analysis of the tax declaration, the pleadings, and the stipulation, sets forth the basis of defendants' stand in the following way: The income of Vicente Madrigal and his wife Susana Paterno of the year 1914 was made up of three items: (1) P362,407.67, the profits made by Vicente Madrigal in his coal and shipping business; (2) P4,086.50, the profits made by Susana Paterno in her embroidery business; (3) P16,687.80, the profits made by Vicente Madrigal in a pawnshop company. The sum of these three items is P383,181.97, the gross income of Vicente Madrigal and Susana Paterno for the year 1914. General deductions were claimed and allowed in the sum of P86,879.24. The resulting net income was P296,302.73. For the purpose of assessing the normal tax of one per cent on the net income there were allowed as specific deductions the following: (1) P16,687.80, the tax upon which was to be paid at source, and (2) P8,000, the specific exemption granted to Vicente Madrigal and Susana Paterno, husband and wife. The remainder, P271,614.93 was the sum upon which the normal tax of one per cent was assessed. The normal tax thus arrived at was P2,716.15. The dispute between the plaintiffs and the defendants concerned the additional tax provided for in the Income Tax Law. The trial court in an exhausted decision found in favor of defendants, without costs. ISSUES. The contentions of plaintiffs and appellants having to do solely with the additional income tax, is that is should be divided into two equal parts, because of the conjugal partnership existing between them. The learned argument of counsel is mostly based upon the provisions of the Civil Code establishing the sociedad de gananciales. The counter contentions of appellees are that the taxes imposed by the Income Tax Law are as the name implies taxes upon income tax and not upon capital and property; that the fact that Madrigal was a married man, and his marriage contracted under the provisions governing the conjugal partnership, has no bearing on income considered as income, and that the distinction must be drawn between the ordinary form of commercial partnership and the conjugal partnership of spouses resulting from the relation of marriage. DECISION. From the point of view of test of faculty in taxation, no less than five answers have been given the course of history. The final stage has been the selection of income as the norm of taxation. (See Seligman, "The Income Tax," Introduction.) The Income Tax Law of the United States, extended to the Philippine Islands, is the result of an effect on the part of the legislators to put into statutory form this canon of taxation and of social reform. The aim has been to mitigate the evils arising from inequalities of wealth by a progressive scheme of taxation, which places the burden on those best able to pay. To carry out this idea, public considerations have demanded an exemption roughly equivalent to the

JAMES J. RAFFERTY, Collector of Internal Revenue, and

VENANCIO CONCEPCION, Deputy Collector of Internal Revenue, defendants-appellees. Gregorio Araneta for appellants. Assistant Attorney Round for appellees. MALCOLM, J.: This appeal calls for consideration of the Income Tax Law, a law of American origin, with reference to the Civil Code, a law of Spanish origin. STATEMENT OF THE CASE. Vicente Madrigal and Susana Paterno were legally married prior to January 1, 1914. The marriage was contracted under the provisions of law concerning conjugal partnerships (sociedad de gananciales). On February 25, 1915, Vicente Madrigal filed sworn declaration on the prescribed form with the Collector of Internal Revenue, showing, as his total net income for the year 1914, the sum of P296,302.73. Subsequently Madrigal submitted the claim that the said P296,302.73 did not represent his income for the year 1914, but was in fact the income of the conjugal partnership existing between himself and his wife Susana Paterno, and that in computing and assessing the additional income tax provided by the Act of Congress of October 3, 1913, the income declared by Vicente Madrigal should be divided into two equal parts, one-half to be considered the income of Vicente Madrigal and the other half of Susana Paterno. The general question had in the meantime been submitted to the Attorney-General of the Philippine Islands who in an opinion dated March 17, 1915, held with the petitioner Madrigal. The revenue officers being still unsatisfied, the correspondence together with this opinion was forwarded to Washington for a decision by the United States Treasury Department. The United States Commissioner of Internal Revenue reversed the opinion of the Attorney-General, and thus decided against the claim of Madrigal. After payment under protest, and after the protest of Madrigal had been decided adversely by the Collector of Internal Revenue, action was begun by Vicente Madrigal and his wife Susana Paterno in the Court of First Instance of the city of Manila against Collector of Internal Revenue and the Deputy Collector of Internal Revenue for the recovery of the sum of P3,786.08, alleged to have been wrongfully and illegally collected by the defendants from the plaintiff, Vicente Madrigal, under the provisions of the Act of Congress known as the Income Tax Law. The burden of the complaint was that if the income tax for the year 1914 had been correctly and lawfully computed there would have been due payable by each of the plaintiffs the sum of P2,921.09, which taken together amounts of a total of

minimum of subsistence. With these exceptions, the income tax is supposed to reach the earnings of the entire non-governmental property of the country. Such is the background of the Income Tax Law. Income as contrasted with capital or property is to be the test. 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 an income. Capital is wealth, while income is the service of wealth. (See Fisher, "The Nature of Capital and Income.") The Supreme Court of Georgia expresses the thought in the following figurative language: "The fact is that property is a tree, income is the fruit; labor is a tree, income the fruit; capital is a tree, income the fruit." (Waring vs. City of Savannah [1878], 60 Ga., 93.) A tax on income is not a tax on property. "Income," as here used, can be defined as "profits or gains." (London County Council vs. Attorney-General [1901], A. C., 26; 70 L. J. K. B. N. S., 77; 83 L. T. N. S., 605; 49 Week. Rep., 686; 4 Tax Cas., 265. See further Foster's Income Tax, second edition [1915], Chapter IV; Black on Income Taxes, second edition [1915], Chapter VIII; Gibbons vs. Mahon [1890], 136 U.S., 549; and Towne vs. Eisner, decided by the United States Supreme Court, January 7, 1918.) A regulation of the United States Treasury Department relative to returns by the husband and wife not living apart, contains the following: The husband, as the head and legal representative of the household and general custodian of its income, should make and render the return of the aggregate income of himself and wife, and for the purpose of levying the income tax it is assumed that he can ascertain the total amount of said income. If a wife has a separate estate managed by herself as her own separate property, and receives an income of more than $3,000, she may make return of her own income, and if the husband has other net income, making the aggregate of both incomes more than $4,000, the wife's return should be attached to the return of her husband, or his income should be included in her return, in order that a deduction of $4,000 may be made from the aggregate of both incomes. The tax in such case, however, will be imposed only upon so much of the aggregate income of both shall exceed $4,000. If either husband or wife separately has an income equal to or in excess of $3,000, a return of annual net income is required under the law, and such return must include the income of both, and in such case the return must be made even though the combined income of both be less than $4,000. If the aggregate net income of both exceeds $4,000, an annual return of their combined incomes must be made in the manner stated, although neither one separately has an income of $3,000 per annum. They are jointly and separately liable for such return and for the payment of the tax. The single or married status of the person claiming the specific exemption shall be determined as one of the time of claiming such exemption which return is made, otherwise the status at the close of the year." With these general observations relative to the Income Tax Law in force in the Philippine Islands, we turn for a moment to consider the provisions of

the Civil Code dealing with the conjugal partnership. Recently in two elaborate decisions in which a long line of Spanish authorities were cited, this court in speaking of the conjugal partnership, decided that "prior to the liquidation the interest of the wife and in case of her death, of her heirs, is an interest inchoate, a mere expectancy, which constitutes neither a legal nor an equitable estate, and does not ripen into title until there appears that there are assets in the community as a result of the liquidation and settlement." (Nable Jose vs. Nable Jose [1916], 15 Off. Gaz., 871; Manuel and Laxamana vs. Losano [1918], 16 Off. Gaz., 1265.) Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the property of her husband Vicente Madrigal during the life of the conjugal partnership. She has an interest in the ultimate property rights and in the ultimate ownership of property acquired as income after such income has become capital. Susana Paterno has no absolute right to one-half the income of the conjugal partnership. Not being seized of a separate estate, Susana Paterno cannot make a separate return in order to receive the benefit of the exemption which would arise by reason of the additional tax. As she 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. Moreover, the Income Tax Law does not look on the spouses as individual partners in an ordinary partnership. The husband and wife are only entitled to the exemption of P8,000 specifically granted by the law. The higher schedules of the additional tax directed at the incomes of the wealthy may not be partially defeated by reliance on provisions in our Civil Code dealing with the conjugal partnership and having no application to the Income Tax Law. The aims and purposes of the Income Tax Law must be given effect. The point we are discussing has heretofore been considered by the Attorney-General of the Philippine Islands and the United States Treasury Department. The decision of the latter overruling the opinion of the Attorney-General is as follows: TREASURY DEPARTMENT, Washington.
Income Tax. FRANK MCINTYRE, Chief, Bureau of Insular Affairs, War Department, Washington, D. C. SIR: This office is in receipt of your letter of June 22, 1915, transmitting copy of correspondence "from the Philippine authorities relative to the method of submission of income tax returns by marred person." You advise that "The Governor-General, in forwarding the papers to the Bureau, advises that the Insular Auditor has been authorized to suspend action on the warrants in question until an authoritative decision on the points raised can be secured from the Treasury Department." From the correspondence it appears that Gregorio Araneta, married and living with his wife, had an income of an amount sufficient to require the imposition of the net income was properly computed and then both income

and deductions and the specific exemption were divided in half and two returns made, one return for each half in the names respectively of the husband and wife, so that under the returns as filed there would be an escape from the additional tax; that Araneta claims the returns are correct on the ground under the Philippine law his wife is entitled to half of his earnings; that Araneta has dominion over the income and under the Philippine law, the right to determine its use and disposition; that in this case the wife has no "separate estate" within the contemplation of the Act of October 3, 1913, levying an income tax. It appears further from the correspondence that upon the foregoing explanation, tax was assessed against the entire net income against Gregorio Araneta; that the tax was paid and an application for refund made, and that the application for refund was rejected, whereupon the matter was submitted to the Attorney-General of the Islands who holds that the returns were correctly rendered, and that the refund should be allowed; and thereupon the question at issue is submitted through the GovernorGeneral of the Islands and Bureau of Insular Affairs for the advisory opinion of this office. By paragraph M of the statute, its provisions are extended to the Philippine Islands, to be administered as in the United States but by the appropriate internal-revenue officers of the Philippine Government. You are therefore advised that upon the facts as stated, this office holds that for the Federal Income Tax (Act of October 3, 1913), the entire net income in this case was taxable to Gregorio Araneta, both for the normal and additional tax, and that the application for refund was properly rejected. The separate estate of a married woman within the contemplation of the Income Tax Law is that which belongs to her solely and separate and apart from her husband, and over which her husband has no right in equity. It may consist of lands or chattels. The statute and the regulations promulgated in accordance therewith provide that each person of lawful age (not excused from so doing) having a net income of $3,000 or over for the taxable year shall make a return showing the facts; that from the net income so shown there shall be deducted $3,000 where the person making the return is a single person, or married and not living with consort, and $1,000 additional where the person making the return is married and living with consort; but that where the husband and wife both make returns (they living together), the amount of deduction from the aggregate of their several incomes shall not exceed $4,000. The only occasion for a wife making a return is where she has income from a sole and separate estate in excess of $3,000, but together they have an income in excess of $4,000, in which the latter event either the husband or wife may make the return but not both. In all instances the income of husband and wife whether from separate estates or not, is taken as a whole for the purpose of the normal tax. Where the wife has income from a separate estate makes return made by her husband, while the incomes are added together for the purpose of the normal tax they are taken separately for the purpose of the additional tax. In this case, however, the wife has no separate income within the contemplation of the Income Tax Law. Respectfully, DAVID A. GATES.

Acting Commissioner.

In connection with the decision above quoted, it is well to recall a few basic ideas. The Income Tax Law was drafted by the Congress of the United States and has been by the Congress extended to the Philippine Islands. Being thus a law of American origin and being peculiarly intricate in its provisions, the authoritative decision of the official who is charged with enforcing it has peculiar force for the Philippines. It has come to be a wellsettled rule that great weight should be given to the construction placed upon a revenue law, whose meaning is doubtful, by the department charged with its execution. (U.S. vs. Cerecedo Hermanos y Cia. [1907], 209 U.S., 338; In re Allen [1903], 2 Phil., 630; Government of the Philippine Islands vs. Municipality of Binalonan, and Roman Catholic Bishop of Nueva Segovia [1915], 32 Phil., 634.) We conclude that the judgment should be as it is hereby affirmed with costs against appellants. So ordered. Torres, Johnson, Carson, Street and Fisher, JJ., concur.

U.S. Supreme Court

Samuel H. Levy argued the cause for William Goldman Theatres, Inc., respondent. With him on the brief was Bernard Wolfman. MR. CHIEF JUSTICE WARREN delivered the opinion of the Court. This litigation involves two cases with independent factual backgrounds yet presenting the identical issue. The two cases were consolidated for argument before the Court of Appeals for the Third Circuit and were heard en banc. The common question is whether money received as exemplary damages for fraud or as the punitive two-thirds portion of a treble-damage antitrust recovery must be reported by a taxpayer as gross income under 22 (a) of the Internal Revenue Code of 1939. 1 In a single opinion, 211 F.2d 928, the Court of Appeals affirmed the Tax Court's separate rulings in favor of the taxpayers. 18 T. C. 860; 19 T. C. 637. Because of the frequent recurrence of the question and differing interpretations by the lower courts of this Court's decisions bearing upon the problem, we granted the Commissioner of Internal Revenue's ensuing petition for certiorari. 348 U.S. 813 . The facts of the cases were largely stipulated and are not in dispute. So far as pertinent they are as follows: Commissioner v. Glenshaw Glass Co. - The Glenshaw Glass Company, a Pennsylvania corporation, manufactures glass bottles and containers. It was engaged in protracted litigation with the Hartford-Empire Company, which manufactures machinery of a character used by Glenshaw. Among the claims advanced by Glenshaw [348 U.S. 426, 428] were demands for exemplary damages for fraud 2 and treble damages for injury to its business by reason of Hartford's violation of the federal antitrust laws. 3In December, 1947, the parties concluded a settlement of all pending litigation, by which Hartford paid Glenshaw approximately $800,000. Through a method of allocation which was approved by the Tax Court, 18 T. C. 860, 870-872, and which is no longer in issue, it was ultimately determined that, of the total settlement, $324,529.94 represented payment of punitive damages for fraud and antitrust violations. Glenshaw did not report this portion of the settlement as income for the tax year involved. The Commissioner determined a deficiency claiming as taxable the entire sum less only deductible legal fees. As previously noted, the Tax Court and the Court of Appeals upheld the taxpayer. Commissioner v. William Goldman Theatres, Inc. - William Goldman Theatres, Inc., a Delaware corporation operating motion picture houses in Pennsylvania, sued Loew's, Inc., alleging a violation of the federal antitrust laws and seeking treble damages. After a holding that a violation had occurred, William Goldman Theatres, Inc. v. Loew's, Inc., 150 F.2d 738, the case was remanded to the trial court for a determination of damages. It was found that Goldman had suffered a loss of profits equal to $125,000 and was entitled to treble damages in the sum of $375,000. William Goldman Theatres, Inc. v. Loew's, Inc., 69 F. Supp. 103, aff'd, 164 F.2d 1021, cert. denied, 334 U.S. 811 . Goldman reported only $125,000 of the recovery as gross income and claimed that the $250,000 [348 U.S. 426, 429] balance constituted punitive damages and as such was not taxable.

COMMISSIONER v. GLENSHAW GLASS CO.,

348 U.S. 426 (1955)
348 U.S. 426 COMMISSIONER OF INTERNAL REVENUE v. GLENSHAW GLASS CO. CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT.* No. 199. Argued February 28, 1955. Decided March 28, 1955.

Money received as exemplary damages for fraud or as the punitive twothirds portion of a treble-damage antitrust recovery must be reported by a taxpayer as "gross income" under 22 (a) of the Internal Revenue Code of 1939. Pp. 427-433. (a) In determining what constitutes "gross income" as defined in 22 (a), effect must be given to the catchall language "gains or profits and income derived from any source whatever." Pp. 429-430.

(b) Eisner v. Macomber, 252 U.S. 189 , distinguished. Pp. 430-431.

(c) The mere fact that such payments are extracted from the wrongdoers as punishment for unlawful conduct cannot detract from their character as taxable income to the recipients. P. 431. (d) A different result is not required by the fact that 22 (a) was reenacted without change after the Board of Tax Appeals had held punitive damages nontaxable in Highland Farms Corp., 42 B. T. A. 1314. Pp. 431-432. (e) The legislative history of the Internal Revenue Code of 1954 does not require a different result. The definition of gross income was simplified, but no effect upon its present broad scope was intended. P. 432. (f) Punitive damages cannot be classified as gifts, nor do they come under any other exemption in the Code. P. 432. 211 F.2d 928, reversed. [ Footnote * ] Together with Commissioner of Internal Revenue v. William Goldman Theatres. Inc., which was a separate case decided by the Court of Appeals in the same opinion. Solicitor General Sobeloff argued the cause for petitioner. With him on the brief were Assistant Attorney General Holland, Charles F. Barber, Ellis N. Slack and Melva M. Graney. [348 U.S. 426, 427] Max Swiren argued the cause for the Glenshaw Glass Company, respondent. With him on the brief were Sidney B. Gambill and Joseph D. Block.

The Tax Court agreed, 19 T. C. 637, and the Court of Appeals, hearing this with the Glenshaw case, affirmed. 211 F.2d 928. It is conceded by the respondents that there is no constitutional barrier to the imposition of a tax on punitive damages. Our question is one of statutory construction: are these payments comprehended by 22 (a)? The sweeping scope of the controverted statute is readily apparent:
"SEC. 22. 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, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. . . ." (Emphasis added.) 4

questions. Helvering v. Bruun, supra, at 468-469; United States v. Kirby Lumber Co., supra, at 3. Here we have instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion. The mere fact that the payments were extracted from the wrongdoers as punishment for unlawful conduct cannot detract from their character as taxable income to the recipients. Respondents concede, as they must, that the recoveries are taxable to the extent that they compensate for damages actually incurred. It would be an anomaly that could not be justified in the absence of clear congressional intent to say that a recovery for actual damages is taxable but not the additional amount extracted as punishment for the same conduct which caused the injury. And we find no such evidence of intent to exempt these payments. It is urged that re-enactment of 22 (a) without change since the Board of Tax Appeals held punitive damages nontaxable in Highland Farms Corp., 42 B. T. A. 1314, indicates congressional satisfaction with that holding. Reenactment - particularly without the slightest affirmative indication that Congress ever had the Highland Farms decision before it - is an unreliable indicium at best. Helvering v. Wilshire Oil Co., 308 U.S. 90, 100 -101; Koshland v. Helvering, 298 U.S. 441, 447 . Moreover, the Commissioner promptly published his nonacquiescence in this portion of the Highland Farms holding7 and has, [348 U.S. 426, 432] before and since, consistently maintained the position that these receipts are taxable. 8 It therefore cannot be said with certitude that Congress intended to carve an exception out of 22 (a)'s pervasive coverage. Nor does the 1954 Code's 9 legislative history, with its reiteration of the proposition that statutory gross income is "all-inclusive," 10 give support to respondent's position. The definition of gross income has been simplified, but no effect upon its present broad scope was intended. 11 Certainly punitive damages cannot reasonably be classified as gifts, cf. Commissioner v. Jacobson, 336 U.S. 28, 47 -52, nor do they come under any other exemption provision in the Code. We would do violence to the plain meaning of the statute and restrict a clear legislative attempt to [348 U.S. 426, 433] bring the taxing power to bear upon all receipts constitutionally taxable were we to say that the payments in question here are not gross income. See Helvering v. Midland Mutual Life Ins. Co., supra, at 223. Reversed. MR. JUSTICE DOUGLAS dissents. MR. JUSTICE HARLAN took no part in the consideration or decision of this case.

This Court has frequently stated that this language was used by Congress to exert in this field "the full measure of its taxing power." Helvering v. Clifford, 309 U.S. 331, 334 ; Helvering v. Midland Mutual Life Ins. Co., 300 U.S. 216, 223 ; Douglas v. Willcuts, 296 U.S. 1, 9 ; Irwin v. Gavit, 268 U.S. 161, 166 . Respondents contend that punitive damages, characterized as "windfalls" flowing from the culpable conduct of third parties, are not within the scope of the section. But Congress applied no limitations as to the source of taxable receipts, nor restrictive [348 U.S. 426, 430] labels as to their nature. And the Court has given a liberal construction to this broad phraseology in recognition of the intention of Congress to tax all gains except those specifically exempted. Commissioner v. Jacobson, 336 U.S. 28, 49 ; Helvering v. Stockholms Enskilda Bank, 293 U.S. 84, 87 -91. Thus, the fortuitous gain accruing to a lessor by reason of the forfeiture of a lessee's improvements on the rented property was taxed in Helvering v. Bruun, 309 U.S. 461 . Cf. Robertson v. United States, 343 U.S. 711 ; Rutkin v. United States, 343 U.S. 130 ; United States v. Kirby Lumber Co., 284 U.S. 1 . Such decisions demonstrate that we cannot but ascribe content to the catchall provision of 22 (a), "gains or profits and income derived from any source whatever." The importance of that phrase has been too frequently recognized since its first appearance in the Revenue Act of 1913 5 to say now that it adds nothing to the meaning of "gross income." Nor can we accept respondent's contention that a narrower reading of 22 (a) is required by the Court's characterization of income in Eisner v. Macomber, 252 U.S. 189, 207 , as "the gain derived from capital, from labor, or from both combined." 6 The Court was there endeavoring to determine whether the distribution of a corporate stock dividend constituted a realized gain to the shareholder, or changed "only the form, not the essence," of [348 U.S. 426, 431] his capital investment. Id., at 210. It was held that the taxpayer had "received nothing out of the company's assets for his separate use and benefit." Id., at 211. The distribution, therefore, was held not a taxable event. In that context distinguishing gain from capital - the definition served a useful purpose. But it was not meant to provide a touchstone to all future gross income

U.S. Supreme Court

language of the statute was sufficient to justify the action of the city authorities, if the statute was within the constitutional competency of the legislature. The single question, therefore, for consideration raised by the demurrer was the authority of the legislature of the State of Kansas to enact this part of the statute. The court below denied the authority, placing the denial on two grounds:
1st. That this part of the statute violated the fifth section of Article XII of the constitution of the State of Kansas; a section in these words: 'SECTION 5. Provision shall be made by general law for the organization of cities, towns, and villages; and their power of taxation, assessment, borrowing money, contracting debts, and [87 U.S. 655, 658] loaning their credit, shall be so restricted as to prevent the abuse of such power.' [The argument here was that the section of the act of February 29th, 1872, conferring the power to issue bonds contained no restriction as to the amount which the city might issue to aid manufacturing enterprises, and that the failure of the legislature to limit and restrict the power so as to prevent abuse, violated the fifth section of Article XII of the constitution above referred to.] 2d. That the act authorized the towns and other municipalities to which it applied, by issuing bonds or lending its credit, to take the property of the citizen under the guise of taxation to pay these bonds, and use it in aid of the enterprises of others which were not of a public character; that this was a perversion of the right of taxation, which could only be exercised for a public use, to the aid of individual interests and personal purposes of profit and gain.

CITIZENS' SAVINGS & LOAN ASS'N v. CITY OF TOPEKA, 87 U.S. 655 (1874)
87 U.S. 655 (Wall.) LOAN ASSOCIATION v. TOPEKA. October Term, 1874

[87 U.S. 655, 656] ERROR to the Circuit Court for the District of Kansas. The Citizens' Savings and Loan Association of Cleveland brought their action in the court below, against the city of Topeka, on coupons for interest attached to bonds of the city of Topeka. The bonds on their face purported to be payable to the King Wrought- Iron Bridge Manufacturing and Iron-Works Company, of Topeka, to aid and encourage that company in establishing and operating bridge shops in said city of Topeka, under and in pursuance of section twenty-six of an act of the legislature of the State of Kansas, entitled 'An act to incorporate cities of the second class,' approved February 29th, 1872; and also of another 'Act to authorize cities and counties to issue bonds for the purpose of building bridges, aiding railroads, water-power, or other works of internal improvement,' approved March 2d, 1872 The city issued one hundred of these bonds for $1000 each, as a donation (and so it was stated in the declaration), to encourage that company in its design of establishing a manufactory of iron bridges in that city. The declaration also alleged that the interest coupons first due were paid out of a fund raised by taxation for that purpose, [87 U.S. 655, 657] and that after this payment the plaintiff became the purchaser of the bonds and the coupons on which suit was brought, for value. A demurrer was interposed by the city of Topeka to this declaration. The section of the act of February 29th, on which the main reliance was placed for the authority to issue these bonds, reads as follows:
'SECTION 76. The council shall have power to encourage the establishment of manufactories and such other enterprises as may tend to develop and improve such city, either by direct appropriation from the general fund or by the issuance of bonds of such city in such amounts as the council may determine; Provided, That no greater amount than one thousand dollars shall be granted for any one purpose, unless a majority of the votes cast at an election called for that purpose shall authorize the same. The bonds thus issued shall be made payable at any time within twenty years, and bear interest not exceeding ten per cent. per annum.'

The court below accordingly, sustaining the demurrer, gave judgment in favor of the defendant, the city of Topeka; and to its judgment this writ of error was taken. Mr. Alfred Ennis, for the plaintiff in error; Messrs. Ross, Burns, and A. L. Williams, contra. Mr. Justice MILLER delivered the opinion of the court. Two grounds are taken in the opinion of the circuit judge and in the argument of counsel for defendant, on which it is insisted that the section of the statute of February 29th, 1872, on which the main reliance is placed to issue the bonds, is unconstitutional. The first of these is, that by section five of article twelve of the constitution of that State it is declared that provision shall be made by general law for the organization of cities, towns, and villages; and their power of taxation, assessment, borrowing money, contracting debts, and loaning their credit, shall be so restricted as to prevent the abuse of such power. The argument is that the statute in question is void because [87 U.S. 655, 659] it authorizes cities and towns to contract debts, and does not contain any restriction on the power so conferred. But whether the statute which confers power to contract debts should always contain some limitation or restriction, or whether a general restriction applicable to all

It was conceded that the steps required by this act prerequisite as to issuing the bonds were regular, as were also the other details, and that the

cases should be passed, and whether in the absence of both the grant of power to contract is wholly void, are questions whose solution we prefer to remit to the State courts, as in this case we find ample reason to sustain the demurrer on the second ground on which it is argued by counsel and sustained by the Circuit Court. That proposition is that the act authorizes the towns and other municipalities to which it applies, by issuing bonds or loaning their credit, to take the property of the citizen under the guise of taxation to pay these bonds, and use it in aid of the enterprises of others which are not of a public character, thus perverting the right of taxation, which can only be exercised for a public use, to the aid of individual interests and personal purposes of profit and gain. The proposition as thus broadly stated is not new, nor is the question which it raises difficult of solution. If these municipal corporations, which are in fact subdivisions of the State, and which for many reasons are vested with quasi legislative powers, have a fund or other property out of which they can pay the debts which they contract, without resort to taxation, it may be within the power of the legislature of the State to authorize them to use it in aid of projects strictly private or personal, but which would in a secondary manner contribute to the public good; or where there is property or money vested in a corporation of the kind for a particular use, as public worship or charity, the legislature may pass laws authorizing them to make contracts in reference to this property, and incur debts payable from that source. But such instances are few and exceptional, and the proposition is a very broad one, that debts contracted by municipal corporations must be paid, if paid at all, out of taxes which they may lawfully levy, and that all contracts creating [87 U.S. 655, 660] debts to be paid in future, not limited to payment from some other source, imply an obligation to pay by taxation. It follows that in this class of cases the right to contract must be limited by the right to tax, and if in the given case no tax can lawfully be levied to pay the debt, the contract itself is void for want of authority to make it. If this were not so, these corporations could make valid promises, which they have no means of fulfilling, and on which even the legislature that created them can confer no such power. The validity of a contract which can only be fulfilled by a resort to taxation, depends on the power to levy the tax for that purpose. 1 It is, therefore, to be inferred that when the legislature of the State authorizes a county or city to contract a debt by bond, it intends to authorize it to levy such taxes as are necessary to pay the debt, unless there is in the act itself, or in some general statute, a limitation upon the power of taxation which repels such an inference. With these remarks and with the reference to the authorities which support them, we assume that unless the legislature of Kansas had the right to authorize the counties and towns in that State to levy taxes to be used in

aid of manufacturing enterprises, conducted by individuals, or private corporations, for purposes of gain, the law is void, and the bonds issued under it are also void. We proceed to the inquiry whether such a power exists in the legislature of the State of Kansas. We have already said the question is not new. The subject of the aid voted to railroads by counties and towns has been brought to the attention of the courts of almost every State in the Union. It has been thoroughly discussed and is still the subject of discussion in those courts. It is quite true that a decided preponderance of authority is to be found in favor of the proposition that the legislatures of the States,[87 U.S. 655, 661] unless restricted by some special provisions of their constitutions, may confer upon these municipal bodies the right to take stock in corporations created to build railroads, and to lend their credit to such corporations. Also to levy the necessary taxes on the inhabitants, and on property within their limits subject to general taxation, to enable them to pay the debts thus incurred. But very few of these courts have decided this without a division among the judges of which they were composed, while others have decided against the existence of the power altogether. 2 In all these cases, however, the decision has turned upon the question whether the taxation by which this aid was afforded to the building of railroads was for a public purpose. Those who came to the conclusion that it was, held the laws for that purpose valid. Those who could not reach that conclusion held them void. In all the controversy this has been the turningpoint of the judgments of the courts. And it is safe to say that no court has held debts created in aid of railroad companies, by counties or towns, valid on any other ground than that the purpose for which the taxes were levied was a public use, a purpose or object which it was the right and the duty of State governments to assist by money raised from the people by taxation. The argument in opposition to this power has been, that railroads built by corporations organized mainly for purposes of gain-the roads which they built being under their control, and not that of the State-were private and not public roads, and the tax assessed on the people went to swell the profits of individuals and not to the good of the State, or the benefit of the public, except in a remote and collateral way. On the other hand it was said that roads, canals, bridges, navigable streams, and all other highways had in all times been matter of public concern. That such channels of travel and of the carrying business had always been established, improved, regulated by the State, and that the railroad had [87 U.S. 655, 662] not lost this character because constructed by individual enterprise, aggregated into a corporation. We are not prepared to say that the latter view of it is not the true one, especially as there are other characteristics of a public nature conferred on these corporations, such as the power to obtain right of way, their subjection to the laws which govern common carriers, and the like which seem to justify the proposition. Of the disastrous consequences which have followed its recognition by the courts and which were predicted when it was first established there can be no doubt. We have referred to this history of the contest over aid to railroads by taxation, to show that the strongest advocates for the validity of these

laws never placed it on the ground of the unlimited power in the State legislature to tax the people, but conceded that where the purpose for which the tax was to be issued could no longer be justly claimed to have this public character, but was purely in aid of private or personal objects, the law authorizing it was beyond the legislative power, and was an unauthorized invasion of private right. 3 It must be conceded that there are such rights in every free government beyond the control of the State. A government which recognized no such rights, which held the lives, the liberty, and the property of its citizens subject at all times to the absolute disposition and unlimited control of even the most democratic depository of power, is after all but a despotism. It is true it is a despotism of the many, of the majority, if you choose to call it so, but it is none the less a despotism. It may well be doubted if a man is to hold all that he is accustomed to call his own, all in which he has placed his happiness, and the security of which is essential to that happiness, under the unlimited dominion of others, whether it is not wiser that this power should be exercised by one man than by many. [87 U.S. 655, 663] The theory of our governments, State and National, is opposed to the deposit of unlimited power anywhere. The executive, the legislative, and the judicial branches of these governments are all of limited and defined powers. There are limitations on such power which grow out of the essential nature of all free governments. Implied reservations of individual rights, without which the social compact could not exist, and which are respected by all governments entitled to the name. No court, for instance, would hesitate to declare void a statute which enacted that A. and B. who were husband and wife to each other should be so no longer, but that A. should thereafter be the husband of C., and B. the wife of D. Or which should enact that the homestead now owned by A. should no longer be his, but should henceforth be the property of B. 4 Of all the powers conferred upon government that of taxation is most liable to abuse. Given a purpose or object for which taxation may be lawfully used and the extent of its exercise is in its very nature unlimited. It is true that express limitation on the amount of tax to levied or the things to be taxed may be imposed by constitution or statute, but in most instances for which taxes are levied, as the support of government, the prosecution of war, the National defence, any limitation is unsafe. The entire resources of the people should in some instances be at the disposal of the government. The power to tax is, therefore, the strongest, the most pervading of all the powers of government, reaching directly or indirectly to all classes of the people. It was said by Chief Justice Marshall, in the case of McCulloch v. The State of Maryland,5 that the power to tax is the power to destroy. A striking instance of the truth of the proposition is seen in the fact that the existing tax of ten per cent. imposed by the United States on the circulation of all other banks than the National banks, drove out of existence every [87 U.S. 655, 664] State bank of circulation within a year or two after its passage. This power can as readily be employed against one class of individuals and in favor of another, so as to ruin the one class

and give unlimited wealth and prosperity to the other, if there is no implied limitation of the uses for which the power may be exercised. To lay with one hand the power of the government on the property of the citizen, and with the other to bestow it upon favored individuals to aid private enterprises and build up private fortunes, is none the less a robbery because it is done under the forms of law and is called taxation. This is not legislation. It is a decree under legislative forms. Nor is it taxation. A 'tax,' says Webster's Dictionary, 'is a rate or sum of money assessed on the person or property of a citizen by government for the use of the nation or state.' 'Taxes are burdens or charges imposed by the legislature upon persons or property to raise money for public purposes.' 6 Coulter, J., in Northern Liberties v. St. John's Church,7 says, very forcibly, 'I think the common mind has everywhere taken in the understanding that taxes are a public imposition, levied by authority of the government for the purpose of carrying on the government in all its machinery and operationsthat they are imposed for a public purpose.' We have established, we think, beyond cavil that there can be no lawful tax which is not laid for a public purpose. It may not be easy to draw the line in all cases so as to decide what is a public purpose in this sense and what is not. It is undoubtedly the duty of the legislature which imposes or authorizes municipalities to impose a tax to see that it is not to be used for purposes of private interest instead of a public use, and the courts can only be justified in interposing when a violation of this principle is clear and the [87 U.S. 655, 665] reason for interference cogent. And in deciding whether, in the given case, the object for which the taxes are assessed falls upon the one side or the other of this line, they must be governed mainly by the course and usage of the government, the objects for which taxes have been customarily and by long course of legislation levied, what objects or purposes have been considered necessary to the support and for the proper use of the government, whether State or municipal. Whatever lawfully pertains to this and is sanctioned by time and the acquiescence of the people may well be held to belong to the public use, and proper for the maintenance of good government, though this may not be the only criterion of rightful taxation. But in the case before us, in which the towns are authorized to contribute aid by way of taxation to any class of manufacturers, there is no difficulty in holding that this is not such a public purpose as we have been considering. If it be said that a benefit results to the local public of a town by establishing manufactures, the same may be said of any other business or pursuit which employs capital or labor. The merchant, the mechanic, the innkeeper, the banker, the builder, the steamboat owner are equally promoters of the public good, and equally deserving the aid of the citizens by forced contributions. No line can be drawn in favor of the manufacturer which would not open the coffers of the public treasury to the importunities of two-thirds of the business men of the city or town.

A reference to one or two cases adjudicated by courts of the highest character will be sufficient, if any authority were needed, to sustain us in this proposition. In the case of Allen v. The Inhabitants of Jay,8 the town meeting had voted to loan their credit to the amount of $10,000, to Hutchins and Lane, if they would invest $12,000 in a steam saw-mill, grist-mill, and box- factory machinery, to be built in that town by them. There was a provision to secure the town by mortgage on the mill, and the selectmen [87 U.S. 655, 666] were authorized to issue town bonds for the amount of the aid so voted. Ten of the taxable inhabitants of the town filed a bill to enjoin the selectmen from issuing the bonds. The Supreme Judicial Court of Maine, in an able opinion by Chief Justice Appleton, held that this was not a public purpose, and that the town could levy no taxes on the inhabitants in aid of the enterprise, and could, therefore, issue no bonds, though a special act of the legislature had ratified the vote of the town, and they granted the injunction as prayed for. Shortly after the disastrous fire in Boston, in 1872, which laid an important part of that city in ashes, the governor of the State convened the legislative body of Massachusetts, called the General Court, for the express purpose of affording some relief to the city and its people from the sufferings consequent on this great calamity. A statute was passed, among others, which authorized the city to issue its bonds to an amount not exceeding twenty millions of dollars, which bonds were to be loaned, under proper guards for securing the city from loss, to the owners of the ground whose buildings had been destroyed by fire, to aid them in rebuilding. In the case of Lowell v. The City of Boston, in the Supreme Judicial Court of Massachusetts, the validity of this act was considered. We have been furnished a copy of the opinion, though it is not yet reported in the regular series of that court. The American Law Review for July, 1873, says that the question was elaborately and ably argued. The court, in an able and exhaustive opinion, decided that the law was unconstitutional, as giving a right to tax for other than a public purpose. The same court had previously decided, in the case of Jenkins v. Anderson,9 that a statute authorizing the town authorities to aid by taxation a school established by the will of a citizen, and governed by trustees selected by the will, [87 U.S. 655, 667] was void because the school was not under the control of the town officers, and was not, therefore, a public purpose for which taxes could be levied on the inhabitants. The same principle precisely was decided by the State court of Wisconsin in the case of Curtis v. Whipple. 10 In that case a special statute which authorized the town to aid the Jefferson Liberal Institute was declared void because, though a school of learning, it was a private enterprise not under the control of the town authorities. In the subsequent case of Whiting v. Fond du Lac, already cited, the principle is fully considered and reaffirmed. These cases are clearly in point, and they assert a principle which meets our cordial approval.

We do not attach any importance to the fact that the town authorities paid one instalment of interest on these bonds. Such a payment works no estoppel. If the legislature was without power to authorize the issue of these bonds, and its statute attempting to confer such authority is void, the mere payment of interest, which was equally unauthorized, cannot create of itself a power to levy taxes, resting on no other foundation than the fact that they have once been illegally levied for that purpose. The act of March 2d, 1872, concerning internal improvements, can give no assistance to these bonds. If we could hold that the corporation for manufacturing wrought-iron bridges was within the meaning of the statute, which seems very difficult to do, it would still be liable to the objection that money raised to assist the company was not for a public purpose, as we have already demonstrated. JUDGMENT AFFIRMED.

Mr. Justice CLIFFORD, dissenting: Unable to concur either in the opinion or judgment in this case, I will proceed to state, in very brief terms, the reasons which compel me to withhold my concurrence. [87 U.S. 655, 668] Corporations of a municipal character are created by the legislature, and the legislature, as the trustee or guardian of the public interest, has the exclusive and unrestrained control over such a franchise, and may enlarge, diminish, alter, change, or abolish the same at pleasure. Where the grantees of a franchise, as well as the grantors, are public bodies and the franchise is created solely for municipal objects, the grant is at all times within the control of the legislature, and consequently the charter is subject to amendment or repeal at the will of the granting power. 11 Errors of indiscretion which the legislature may commit in the exercise of the power it possesses cannot be corrected by the courts, for the reason that the courts cannot adjudge an act of the legislature void unless it is in violation of the Federal or State constitution. 12 State constitutions may undoubtedly restrict the power of the legislature to pass laws, and it is plain that any law passed in violation of such a prohibition is void, but the better opinion is that where the constitution of the State contains no prohibition upon the subject, express or implied, neither the State nor Federal courts can declare a statute of the State void as unwise, unjust, or inexpedient, nor for any other cause, unless it be repugnant to the Federal Constitution. Except where the Constitution has imposed limits upon the legislative power the rule of law appears to be that the power of legislation must be considered as practically absolute, whether the law operates according to natural justice or not in any particular case, for the reason that courts are not the guardians of the rights of the people of the State, save where those rights are secured by some constitutional provision which comes within judicial cognizance; or, in the language of Marshall, C. J., 'The interest, wisdom, and justice of the representative body furnish the only security [87 U.S. 655, 669] in a large class of cases not regulated by any constitutional provision.' 13

Courts cannot nullify an act of the State legislature on the vague ground that they think it opposed to a general latent spirit supposed to pervade or underlie the constitution, where neither the terms nor the implications of the instrument disclose any such restriction. 14 Such a power is denied to the courts, because to concede it would be to make the courts sovereign over both the constitution and the people, and convert the government into a judicial despotism. 15 Subject to the Federal Constitution the legislature of the State possesses the whole legislative power of the people, except so far as the power is limited by the State constitution. 16 Our own decisions are to the same effect, as appears by one of very recent date, in which the court say that 'the legislative power of a State extends to everything within the sphere of such power, except as it is restricted by the Federal Constitution or that of the State.' 17 Apply those principles to the cases before the court and it follows, as it seems to me, that the judgment in each case should be reversed for the following reasons: (1.) Because the demurrer to the declaration in each case should have been overruled. (2.) Because the bonds to which the coupons sued on were attached were issued in pursuance of the express authority of the legislature vesting that power in the corporation defendants. (3.) Because the constitution of the State does not in any manner prohibit the passage of such a law as that under which the bonds were issued. (4.) Because it is not competent for a Federal court to adjudge a State statute void which does not conflict in any respect with the Constitution of the United States or that of the State whose legislature enacted the statute. [87 U.S. 655, 670] Unwise laws and such as are highly inexpedient and unjust are frequently passed by legislative bodies, but there is no power vested in a Circuit Court nor in this court, to determine that any law passed by a State legislature is void if it is not repugnant to their own constitution nor the Constitution of the United States. Vague apprehensions seem to be entertained that unless such a power is claimed and exercised inequitable consequences may result from unnecessary taxation, but in my judgment there is much more to be dreaded from judicial decisions which may have the effect to sanction the fraudulent repudiation of honest debts, than from any statutes passed by the State to enable municipal corporations to meet and discharge their just pecuniary obligations.

U.S. Supreme Court

UNITED STATES V. GENERAL DYNAMICS CORP., 415 U.S. 486 (1974)

United States v. General Dynamics Corp. No. 72-402 Argued December 5, 1973 Decided March 19, 1974 415 U.S. 486 Syllabus Material Service Corp., a deep mining coal producer, and its successor, appellee General Dynamics Corp., acquired, through stock purchases, control of appellee United Electric Coal Companies, a strip-mining coal producer. The Government brought suit alleging that this acquisition violated 7 of the Clayton Act. The District Court found no violation on the ground, inter alia, that the Government's evidence -- consisting principally of past production statistics showing that, within certain geographic markets, the coal industry was concentrated among a small number of large producers, that this concentration was increasing, and that the acquisition here would materially enlarge the acquiring company's market share and thereby contribute to the concentration trend -- did not support the Government's contention that the acquisition substantially lessened competition in the production and sale of coal in either or both of two specified geographic markets. This conclusion was primarily based on a determination that United Electric's coal reserves were so low that its potential to compete with other producers in the future was far weaker than the aggregate production statistics relied on by the Government might otherwise have indicated, virtually all of United Electric's proved reserves being either depleted or already committed by long-term contracts with large customers, so that its power to affect the price of coal was severely limited and steadily diminishing. Held: 1. While the Government's statistical showing might have been sufficient to support a finding of "undue concentration" in the absence of other considerations, the District Court was justified in finding that other pertinent factors affecting the coal industry and appellees' business mandated a conclusion that no substantial lessening of competition occurred or was threatened by the acquisition. Ample evidence showed that United Electric does not have sufficient reserves, which are a key factor in measuring Page 415 U. S. 487

a coal producer's market strength, to make it a significant competitive force. Thus, in terms of probable future ability to compete, rather than in terms of past production on which the Government relied, the court was warranted in concluding that the merger did not violate 7 of the Act. Pp. 415 U. S. 494-504. 2. The District Court was justified in considering post-acquisition evidence relating to changes in the patterns and structure of the coal industry and in United Electric's reserve situation, since (unlike evidence showing only that no lessening of competition has yet occurred) the demonstration of weak coal resources necessarily implied that United Electric was not merely disinclined, but unable, to compete effectively for future contracts, such evidence going directly to the question whether future lessening of competition was probable. Pp. 415 U. S. 504-506. 3. United Electric's weak reserves position, rather than establishing a "failing company" defense by showing that the company would have gone out of business but for the merger, went to the heart of the Government's statistical prima facie case and substantiated the District Court's conclusion that United Electric, even if it remained in the market, did not have sufficient reserves to compete effectively for long-term contracts, and therefore appellees' failure to meet the prerequisites of a failing company defense did not detract from the validity of the District Court's analysis. Pp. 415 U. S. 506-508. 4. Under the "clearly erroneous" standard of Fed.Rule Civ.Proc. 52(a), which governs as fully on direct appeal to this Court as on review by a court of appeals, the District Court's findings and conclusions are supported by the evidence, and are not clearly erroneous. P. 415 U. S. 508. 5. The District Court found new strip reserves unavailable, and the mere possibility that United Electric could some day acquire expertise to mine deep reserves does not depreciate the validity of the conclusion that United Electric, at the time of trial, did not have the power to compete effectively for long-term contracts, nor does it give the production statistics relied on by the Government more significance than the District Court ascribed to them. Pp. 415 U. S. 508-510. 341 F.Supp. 534, affirmed. STEWART, J., delivered the opinion of the Court, in which BURGER, C.J., and BLACKMUN, POWELL, and REHNQUIST, JJ., joined. DOUGLAS, Page 415 U. S. 488 J., filed a dissenting opinion in which BRENNAN, WHITE, and MARSHALL, JJ., joined,post, p. 415 U. S. 511.

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G.R. No. L-18994 Revenue, petitioner, vs.

June 29, 1963

MELECIO R. DOMINGO, as Commissioner of Internal HON. LORENZO C. GARLITOS, in his capacity as

Judge of the Court of First Instance of Leyte, and SIMEONA K. PRICE, as Administratrix of the Intestate Estate of the late Walter Scott Price,respondents. Office of the Solicitor General and Atty. G. H. Mantolino for petitioner. Benedicto and Martinez for respondents. LABRADOR, J.: This is a petition for certiorari and mandamus against the Judge of the Court of First Instance of Leyte, Ron. Lorenzo C. Garlitos, presiding, seeking to annul certain orders of the court and for an order in this Court directing the respondent court below to execute the judgment in favor of the Government against the estate of Walter Scott Price for internal revenue taxes. It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No. L-14674, January 30, 1960, this Court declared as final and executory the order for the payment by the estate of the estate and inheritance taxes, charges and penalties, amounting to P40,058.55, issued by the Court of First Instance of Leyte in, special proceedings No. 14 entitled "In the matter of the Intestate Estate of the Late Walter Scott Price." In order to enforce the claims against the estate the fiscal presented a petition dated June 21, 1961, to the court below for the execution of the judgment. The petition was, however, denied by the court which held that the execution is not justifiable as the Government is indebted to the estate under administration in the amount of P262,200. The orders of the court below dated August 20, 1960 and September 28, 1960, respectively, are as follows:
Atty. Benedicto submitted a copy of the contract between Mrs. Simeona K. Price, Administratrix of the estate of her late husband Walter Scott Price and Director Zoilo Castrillo of the Bureau of Lands dated September 19, 1956 and acknowledged before Notary Public Salvador V. Esguerra, legal adviser in Malacaang to Executive Secretary De Leon dated December 14, 1956, the note of His Excellency, Pres. Carlos P. Garcia, to Director Castrillo dated August 2, 1958, directing the latter to pay to Mrs. Price the sum ofP368,140.00, and an extract of page 765 of Republic Act No. 2700 appropriating the sum of P262.200.00 for the payment to the Leyte Cadastral Survey, Inc., represented by the administratrix Simeona K. Price, as directed in the above note of the President. Considering these facts, the Court orders that the payment of inheritance taxes in the sum of P40,058.55 due the Collector of Internal Revenue as ordered paid by this Court on July 5, 1960 in accordance with the order of the Supreme Court promulgated July 30, 1960 in G.R. No. L-14674, be deducted from the amount of P262,200.00 due and payable to the Administratrix Simeona K. Price, in this estate, the balance to be paid by the Government to her without further delay. (Order of August 20, 1960)

The Court has nothing further to add to its order dated August 20, 1960 and it orders that the payment of the claim of the Collector of Internal Revenue be deferred until the Government shall have paid its accounts to the administratrix herein amounting to P262,200.00. It may not be amiss to repeat that it is only fair for the Government, as a debtor, to its accounts to its citizens-creditors before it can insist in the prompt payment of the latter's account to it, specially taking into consideration that the amount due to the Government draws interests while the credit due to the present state does not accrue any interest. (Order of September 28, 1960)

The petition to set aside the above orders of the court below and for the execution of the claim of the Government against the estate must be denied for lack of merit. The ordinary procedure by which to settle claims of indebtedness against the estate of a deceased person, as an inheritance tax, is for the claimant to present a claim before the probate court so that said court may order the administrator to pay the amount thereof. To such effect is the decision of this Court in Aldamiz vs. Judge of the Court of First Instance of Mindoro, G.R. No. L-2360, Dec. 29, 1949, thus:
. . . a writ of execution is not the proper procedure allowed by the Rules of Court for the payment of debts and expenses of administration. The proper procedure is for the court to order the sale of personal estate or the sale or mortgage of real property of the deceased and all debts or expenses of administrator and with the written notice to all the heirs legatees and devisees residing in the Philippines, according to Rule 89, section 3, and Rule 90, section 2. And when sale or mortgage of real estate is to be made, the regulations contained in Rule 90, section 7, should be complied with.
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Execution may issue only where the devisees, legatees or heirs have entered into possession of their respective portions in the estate prior to settlement and payment of the debts and expenses of administration and it is later ascertained that there are such debts and expenses to be paid, in which case "the court having jurisdiction of the estate may, by order for that purpose, after hearing, settle the amount of their several liabilities, and order how much and in what manner each person shall contribute, and mayissue execution if circumstances require" (Rule 89, section 6; see also Rule 74, Section 4; Emphasis supplied.) And this is not the instant case.

The legal basis for such a procedure is the fact that in the testate or intestate proceedings to settle the estate of a deceased person, the properties belonging to the estate are under the jurisdiction of the court and such jurisdiction continues until said properties have been distributed among the heirs entitled thereto. During the pendency of the proceedings all the estate is in custodia legis and the proper procedure is not to allow the sheriff, in case of the court judgment, to seize the properties but to ask the court for an order to require the administrator to pay the amount due from the estate and required to be paid. Another ground for denying the petition of the provincial fiscal is the fact that the court having jurisdiction of the estate had found that the claim of the estate against the Government has been recognized and an amount of P262,200 has already been appropriated for the purpose by a corresponding law (Rep. Act No. 2700). Under the above circumstances, both the claim of the Government for inheritance taxes and the claim of the intestate for services rendered have already become overdue and demandable is well as fully liquidated. Compensation, therefore, takes place by operation of law, in accordance with the provisions of Articles 1279 and 1290 of the Civil Code, and both debts are extinguished to the concurrent amount, thus:

ART. 1200. When all the requisites mentioned in article 1279 are present, compensation takes effect by operation of law, and extinguished both debts to the concurrent amount, eventhough the creditors and debtors are not aware of the compensation.

It is clear, therefore, that the petitioner has no clear right to execute the judgment for taxes against the estate of the deceased Walter Scott Price. Furthermore, the petition for certiorari and mandamus is not the proper remedy for the petitioner. Appeal is the remedy.
The petition is, therefore, dismissed, without costs. Padilla, Bautista Angelo, Concepcion, Barrera, Paredes, Dizon, Regala and Makalintal, JJ., concur. Bengzon, C.J., took no part.

G.R. No. 147188

September 14, 2004

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.

On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for P12.5 million, as evidenced by a Deed of Sale of Shares of Stocks.9 Three and a half years later, or on 16 January 1994, Toda died. On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an assessment notice10 and demand letter to the CIC for deficiency income tax for the year 1989 in the amount of P79,099,999.22. The new CIC asked for a reconsideration, asserting that the assessment should be directed against the old CIC, and not against the new CIC, which is owned by an entirely different set of stockholders; moreover, Toda had undertaken to hold the buyer of his stockholdings and the CIC free from all tax liabilities for the fiscal years 1987-1989.11 On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by special co-administrators Lorna Kapunan and Mario Luza Bautista, received a Notice of Assessment12 dated 9 January 1995 from the Commissioner of Internal Revenue for deficiency income tax for the year 1989 in the amount of P79,099,999.22, computed as follows:
Income Tax 1989 Net Income per return Add: Additional gain on sale of real property taxable under ordinary corporate income but were substituted with individual capital gains(P200M 100M) Total Net Taxable Income per investigation Tax Due thereof at 35% Less: Payment already made 1. Per return 2. Thru Capital Gains Tax made by R.A. Altonaga P26,595,704.00 10,000,000.00 36,595,704.00 Balance of tax due P 61,595,703.75 P75,987,725.00 100,000,000.00

THE ESTATE OF BENIGNO P. TODA, JR.,

Represented by Special Co-administrators Lorna Kapunan and Mario Luza Bautista, respondents. DECISION DAVIDE, JR., C.J.: This Court is called upon to determine in this case whether the tax planning scheme adopted by a corporation constitutes tax evasion that would justify an assessment of deficiency income tax. The petitioner seeks the reversal of the Decision 1 of the Court of Appeals of 31 January 2001 in CA-G.R. SP No. 57799 affirming the 3 January 2000 Decision2 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 5328, 3 which held that the respondent Estate of Benigno P. Toda, Jr. is not liable for the deficiency income tax of Cibeles Insurance Corporation (CIC) in the amount of P79,099,999.22 for the year 1989, and ordered the cancellation and setting aside of the assessment issued by Commissioner of Internal Revenue Liwayway Vinzons-Chato on 9 January 1995. The case at bar stemmed from a Notice of Assessment sent to CIC by the Commissioner of Internal Revenue for deficiency income tax arising from an alleged simulated sale of a 16-storey commercial building known as Cibeles Building, situated on two parcels of land on Ayala Avenue, Makati City. On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of its issued and outstanding capital stock, to sell the Cibeles Building and the two parcels of land on which the building stands for an amount of not less than P90 million.4 On 30 August 1989, Toda purportedly sold the property for P100 million to Rafael A. Altonaga, who, in turn, sold the same property on the same day to Royal Match Inc. (RMI) for P200 million. These two transactions were evidenced by Deeds of Absolute Sale notarized on the same day by the same notary public.5 For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of P10 million.6 On 16 April 1990, CIC filed its corporate annual income tax return7 for the year 1989, declaring, among other things, its gain from the sale of real property in the amount of P75,728.021. After crediting withholding taxes ofP254,497.00, it paid P26,341,2078 for its net taxable income of P75,987,725.

P175,987,725.00

P 24,999,999.75 Add: 50% Surcharge 25% Surcharge Total Add: Interest 20% from 4/16/90-4/30/94 (.808) 35,349,999.65 P 79,099,999.22 =========== 12,499,999.88 6,249,999.94 P 43,749,999.57

TOTAL AMT. DUE & COLLECTIBLE

===

The Estate thereafter filed a letter of protest.

13

Hence, the CTA declared that the Estate is not liable for deficiency income tax of P79,099,999.22 and, accordingly, cancelled and set aside the assessment issued by the Commissioner on 9 January 1995. In its motion for reconsideration,19 the Commissioner insisted that the sale of the property owned by CIC was the result of the connivance between Toda and Altonaga. She further alleged that the latter was a representative, dummy, and a close business associate of the former, having held his office in a property owned by CIC and derived his salary from a foreign corporation (Aerobin, Inc.) duly owned by Toda for representation services rendered. The CTA denied 20 the motion for reconsideration, prompting the Commissioner to file a petition for review21 with the Court of Appeals. In its challenged Decision of 31 January 2001, the Court of Appeals affirmed the decision of the CTA, reasoning that the CTA, being more advantageously situated and having the necessary expertise in matters of taxation, is "better situated to determine the correctness, propriety, and legality of the income tax assessments assailed by the Toda Estate."22 Unsatisfied with the decision of the Court of Appeals, the Commissioner filed the present petition invoking the following grounds: I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT COMMITTED NO FRAUD WITH INTENT TO EVADE THE TAX ON THE SALE OF THE PROPERTIES OF CIBELES INSURANCE CORPORATION. II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE SEPARATE CORPORATE PERSONALITY OF CIBELES INSURANCE CORPORATION. III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF PETITIONER TO ASSESS RESPONDENT FOR DEFICIENCY INCOME TAX FOR THE YEAR 1989 HAD PRESCRIBED. The Commissioner reiterates her arguments in her previous pleadings and insists that the sale by CIC of the Cibeles property was in connivance with its dummy Rafael Altonaga, who was financially incapable of purchasing it. She further points out that the documents themselves prove the fact of fraud in that (1) the two sales were done simultaneously on the same date, 30 August 1989; (2) the Deed of Absolute Sale between Altonaga and RMI was notarized ahead of the alleged sale between CIC and Altonaga, with the former registered in the Notarial Register of Jocelyn H. Arreza Pabelana as Doc. 91, Page 20, Book I, Series of 1989; and the latter, as Doc. No. 92, Page 20, Book I, Series of 1989, of the same Notary Public; (3) as early as 4 May 1989, CIC received P40 million from RMI, and not from Altonaga. The said amount was debited by RMI in its trial balance as of 30 June 1989 as investment in Cibeles Building. The substantial portion of P40 million was withdrawn by Toda through the declaration of cash dividends to all its stockholders. For its part, respondent Estate asserts that the Commissioner failed to present the income tax return of Altonaga to prove that the latter is financially incapable of purchasing the Cibeles property.

In the letter dated 19 October 1995,14 the Commissioner dismissed the protest, stating that a fraudulent scheme was deliberately perpetuated by the CIC wholly owned and controlled by Toda by covering up the additional gain of P100 million, which resulted in the change in the income structure of the proceeds of the sale of the two parcels of land and the building thereon to an individual capital gains, thus evading the higher corporate income tax rate of 35%. On 15 February 1996, the Estate filed a petition for review 15 with the CTA alleging that the Commissioner erred in holding the Estate liable for income tax deficiency; that the inference of fraud of the sale of the properties is unreasonable and unsupported; and that the right of the Commissioner to assess CIC had already prescribed. In his Answer16 and Amended Answer,17 the Commissioner argued that the two transactions actually constituted a single sale of the property by CIC to RMI, and that Altonaga was neither the buyer of the property from CIC nor the seller of the same property to RMI. The additional gain of P100 million (the difference between the second simulated sale for P200 million and the first simulated sale for P100 million) realized by CIC was taxed at the rate of only 5% purportedly as capital gains tax of Altonaga, instead of at the rate of 35% as corporate income tax of CIC. The income tax return filed by CIC for 1989 with intent to evade payment of the tax was thus false or fraudulent. Since such falsity or fraud was discovered by the BIR only on 8 March 1991, the assessment issued on 9 January 1995 was well within the prescriptive period prescribed by Section 223 (a) of the National Internal Revenue Code of 1986, which provides that tax may be assessed within ten years from the discovery of the falsity or fraud. With the sale being tainted with fraud, the separate corporate personality of CIC should be disregarded. Toda, being the registered owner of the 99.991% shares of stock of CIC and the beneficial owner of the remaining 0.009% shares registered in the name of the individual directors of CIC, should be held liable for the deficiency income tax, especially because the gains realized from the sale were withdrawn by him as cash advances or paid to him as cash dividends. Since he is already dead, his estate shall answer for his liability. In its decision18 of 3 January 2000, the CTA held that the Commissioner failed to prove that CIC committed fraud to deprive the government of the taxes due it. It ruled that even assuming that a pre-conceived scheme was adopted by CIC, the same constituted mere tax avoidance, and not tax evasion. There being no proof of fraudulent transaction, the applicable period for the BIR to assess CIC is that prescribed in Section 203 of the NIRC of 1986, which is three years after the last day prescribed by law for the filing of the return. Thus, the governments right to assess CIC prescribed on 15 April 1993. The assessment issued on 9 January 1995 was, therefore, no longer valid. The CTA also ruled that the mere ownership by Toda of 99.991% of the capital stock of CIC was not in itself sufficient ground for piercing the separate corporate personality of CIC.

To resolve the grounds raised by the Commissioner, the following questions are pertinent: 1. Is this a case of tax evasion or tax avoidance? 2. Has the period for assessment of deficiency income tax for the year 1989 prescribed? and 3. Can respondent Estate be held liable for the deficiency income tax of CIC for the year 1989, if any? We shall discuss these questions in seriatim. Is this a case of tax evasion or tax avoidance? Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation. Tax avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayer in good faith and at arms length. Tax evasion, on the other hand, is a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities.23 Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; (2) an accompanying state of mind which is described as being "evil," in "bad faith," "willfull," or "deliberate and not accidental"; and (3) a course of action or failure of action which is unlawful.24 All these factors are present in the instant case. It is significant to note that as early as 4 May 1989, prior to the purported sale of the Cibeles property by CIC to Altonaga on 30 August 1989, CIC received P40 million from RMI,25 and not from Altonaga. That P40 million was debited by RMI and reflected in its trial balance26 as "other inv. Cibeles Bldg." Also, as of 31 July 1989, another P40 million was debited and reflected in RMIs trial balance as "other inv. Cibeles Bldg." This would show that the real buyer of the properties was RMI, and not the intermediary Altonaga.
lavvphi1.net

transfers of property for stock, changing the structure of the property and the tax to be paid. As long as it is done legally, changing the structure of a transaction to achieve a lower tax is not against the law. It is absolutely allowed. Tax planning is by definition to reduce, if not eliminate altogether, a tax. Surely petitioner [sic] cannot be faulted for wanting to reduce the tax from 35% to 5%.29 [Underscoring supplied].

The scheme resorted to by CIC in making it appear that there were two sales of the subject properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot be considered a legitimate tax planning. Such scheme is tainted with fraud. Fraud in its general sense, "is deemed to comprise anything calculated to deceive, including all acts, omissions, and concealment involving a breach of legal or equitable duty, trust or confidence justly reposed, resulting in the damage to another, or by which an undue and unconscionable advantage is taken of another."30 Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid especially that the transfer from him to RMI would then subject the income to only 5% individual capital gains tax, and not the 35% corporate income tax. Altonagas sole purpose of acquiring and transferring title of the subject properties on the same day was to create a tax shelter. Altonaga never controlled the property and did not enjoy the normal benefits and burdens of ownership. The sale to him was merely a tax ploy, a sham, and without business purpose and economic substance. Doubtless, the execution of the two sales was calculated to mislead the BIR with the end in view of reducing the consequent income tax liability.
lavvphi1.net

In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was prompted more on the mitigation of tax liabilities than for legitimate business purposes constitutes one of tax evasion.31 Generally, a sale or exchange of assets will have an income tax incidence only when it is consummated.32 The incidence of taxation depends upon the substance of a transaction. The tax consequences arising from gains from a sale of property are not finally to be determined solely by the means employed to transfer legal title. Rather, the transaction must be viewed as a whole, and each step from the commencement of negotiations to the consummation of the sale is relevant. A sale by one person cannot be transformed for tax purposes into a sale by another by using the latter as a conduit through which to pass title. To permit the true nature of the transaction to be disguised by mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective administration of the tax policies of Congress.33 To allow a taxpayer to deny tax liability on the ground that the sale was made through another and distinct entity when it is proved that the latter was merely a conduit is to sanction a circumvention of our tax laws. Hence, the sale to Altonaga should be disregarded for income tax purposes.34 The two sale transactions should be treated as a single direct sale by CIC to RMI.

The investigation conducted by the BIR disclosed that Altonaga was a close business associate and one of the many trusted corporate executives of Toda. This information was revealed by Mr. Boy Prieto, the assistant accountant of CIC and an old timer in the company. 27 But Mr. Prieto did not testify on this matter, hence, that information remains to be hearsay and is thus inadmissible in evidence. It was not verified either, since the letterrequest for investigation of Altonaga was unserved,28 Altonaga having left for the United States of America in January 1990. Nevertheless, that Altonaga was a mere conduit finds support in the admission of respondent Estate that the sale to him was part of the tax planning scheme of CIC. That admission is borne by the records. In its Memorandum, respondent Estate declared:
Petitioner, however, claims there was a "change of structure" of the proceeds of sale. Admitted one hundred percent. But isnt this precisely the definition of tax planning? Change the structure of the funds and pay a lower tax. Precisely, Sec. 40 (2) of the Tax Code exists, allowing tax free

Accordingly, the tax liability of CIC is governed by then Section 24 of the NIRC of 1986, as amended (now 27 (A) of the Tax Reform Act of 1997), which stated as follows: Sec. 24. Rates of tax on corporations. (a) Tax on domestic corporations.- A tax is hereby imposed upon the taxable net income
received during each taxable year from all sources by every corporation organized in, or existing under the laws of the Philippines, and partnerships, no matter how created or organized but not including general professional partnerships, in accordance with the following: Twenty-five percent upon the amount by which the taxable net income does not exceed one hundred thousand pesos; and Thirty-five percent upon the amount by which the taxable net income exceeds one hundred thousand pesos.

return was filed on 15 April 1990, and the falsity thereof was claimed to have been discovered only on 8 March 1991.37 The assessment for the 1989 deficiency income tax of CIC was issued on 9 January 1995. Clearly, the issuance of the correct assessment for deficiency income tax was well within the prescriptive period. Is respondent Estate liable for the 1989 deficiency income tax of Cibeles Insurance Corporation? A corporation has a juridical personality distinct and separate from the persons owning or composing it. Thus, the owners or stockholders of a corporation may not generally be made to answer for the liabilities of a corporation and vice versa. There are, however, certain instances in which personal liability may arise. It has been held in a number of cases that personal liability of a corporate director, trustee, or officer along, albeit not necessarily, with the corporation may validly attach when:
1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross negligence in directing its affairs, or (c) conflict of interest, resulting in damages to the corporation, its stockholders, or other persons; 2. He consents to the issuance of watered down stocks or, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; 3. He agrees to hold himself personally and solidarily liable with the corporation; or 4. He is made, by specific provision of law, to personally answer for his corporate action.38

CIC is therefore liable to pay a 35% corporate tax for its taxable net income in 1989. The 5% individual capital gains tax provided for in Section 34 (h) of the NIRC of 198635 (now 6% under Section 24 (D) (1) of the Tax Reform Act of 1997) is inapplicable. Hence, the assessment for the deficiency income tax issued by the BIR must be upheld. Has the period of assessment prescribed? No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform Act of 1997) read:
Sec. 269. Exceptions as to period of limitation of assessment and collection of taxes.-(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding in court after the collection of such tax may be begun without assessment, at any time within ten years after the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for collection thereof .

It is worth noting that when the late Toda sold his shares of stock to Le Hun T. Choa, he knowingly and voluntarily held himself personally liable for all the tax liabilities of CIC and the buyer for the years 1987, 1988, and 1989. Paragraph g of the Deed of Sale of Shares of Stocks specifically provides: g. Except for transactions occurring in the ordinary course of business, Cibeles has no liabilities or obligations, contingent or otherwise, for taxes, sums of money or insurance claims other than those reported in its audited financial statement as of December 31, 1989, attached hereto as "Annex B" and made a part hereof. The business of Cibeles has at all times been conducted in full compliance with all applicable laws, rules and regulations. SELLER undertakes and agrees to hold the BUYER and Cibeles free from any and all income tax liabilities of Cibeles for the fiscal years 1987, 1988 and 1989.39 [Underscoring Supplied]. When the late Toda undertook and agreed "to hold the BUYER and Cibeles free from any all income tax liabilities of Cibeles for the fiscal years 1987, 1988, and 1989," he thereby voluntarily held himself personally liable therefor. Respondent estate cannot, therefore, deny liability for CICs deficiency income tax for the year 1989 by invoking the separate corporate personality of CIC, since its obligation arose from Todas contractual undertaking, as contained in the Deed of Sale of Shares of Stock.

Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3) failure to file a return, the period within which to assess tax is ten years from discovery of the fraud, falsification or omission, as the case may be. It is true that in a query dated 24 August 1989, Altonaga, through his counsel, asked the Opinion of the BIR on the tax consequence of the two sale transactions.36 Thus, the BIR was amply informed of the transactions even prior to the execution of the necessary documents to effect the transfer. Subsequently, the two sales were openly made with the execution of public documents and the declaration of taxes for 1989. However, these circumstances do not negate the existence of fraud. As earlier discussed those two transactions were tainted with fraud. And even assuming arguendo that there was no fraud, we find that the income tax return filed by CIC for the year 1989 was false. It did not reflect the true or actual amount gained from the sale of the Cibeles property. Obviously, such was done with intent to evade or reduce tax liability. As stated above, the prescriptive period to assess the correct taxes in case of false returns is ten years from the discovery of the falsity. The false

WHEREFORE, in view of all the foregoing, the petition is hereby GRANTED. The decision of the Court of Appeals of 31 January 2001 in CA-G.R. SP No. 57799 is REVERSED and SET ASIDE, and another one is hereby rendered ordering respondent Estate of Benigno P. Toda Jr. to pay P79,099,999.22 as deficiency income tax of Cibeles Insurance Corporation for the year 1989, plus legal interest from 1 May 1994 until the amount is fully paid. Costs against respondent. SO ORDERED. Quisumbing, Ynares-Santiago, Carpio, and Azcuna, JJ., concur.

G.R. No. L-7859

December 22, 1955

WALTER LUTZ, as Judicial Administrator of the Intestate

Estate of the deceased Antonio Jayme Ledesma, plaintiff-appellant, vs.

Second, to readjust the benefits derived from the sugar industry by all of the component elements thereof the mill, the landowner, the planter of the sugar cane, and the laborers in the factory and in the field so that all might continue profitably to engage therein;lawphi1.net Third, to limit the production of sugar to areas more economically suited to the production thereof; and Fourth, to afford labor employed in the industry a living wage and to improve their living and working conditions: Provided, That the President of the Philippines may, until the adjourment of the next regular session of the National Assembly, make the necessary disbursements from the fund herein created (1) for the establishment and operation of sugar experiment station or stations and the undertaking of researchers (a) to increase the recoveries of the centrifugal sugar factories with the view of reducing manufacturing costs, (b) to produce and propagate higher yielding varieties of sugar cane more adaptable to different district conditions in the Philippines, (c) to lower the costs of raising sugar cane, (d) to improve the buying quality of denatured alcohol from molasses for motor fuel, (e) to determine the possibility of utilizing the other by-products of the industry, (f) to determine what crop or crops are suitable for rotation and for the utilization of excess cane lands, and (g) on other problems the solution of which would help rehabilitate and stabilize the industry, and (2) for the improvement of living and working conditions in sugar mills and sugar plantations, authorizing him to organize the necessary agency or agencies to take charge of the expenditure and allocation of said funds to carry out the purpose hereinbefore enumerated, and, likewise, authorizing the disbursement from the fund herein created of the necessary amount or amounts needed for salaries, wages, travelling expenses, equipment, and other sundry expenses of said agency or agencies. Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate of Antonio Jayme Ledesma, seeks to recover from the Collector of Internal Revenue the sum of P14,666.40 paid by the estate as taxes, under section 3 of the Act, for the crop years 1948-1949 and 19491950; alleging that such tax is unconstitutional and void, being levied for the aid and support of the sugar industry exclusively, which in plaintiff's opinion is not a public purpose for which a tax may be constitutioally levied. The action having been dismissed by the Court of First Instance, the plaintifs appealed the case directly to this Court (Judiciary Act, section 17). The basic defect in the plaintiff's position is his assumption that the tax provided for in Commonwealth Act No. 567 is a pure exercise of the taxing power. Analysis of the Act, and particularly of section 6 (heretofore quoted in full), will show that the tax is levied with a regulatory purpose, to provide means for the rehabilitation and stabilization of the threatened sugar industry. In other words, the act is primarily an exercise of the police power.

J. ANTONIO ARANETA, as the Collector of Internal

Revenue, defendant-appellee.

Ernesto J. Gonzaga for appellant. Office of the Solicitor General Ambrosio Padilla, First Assistant Solicitor General Guillermo E. Torres and Solicitor Felicisimo R. Rosete for appellee.

REYES, J.B L., J.: This case was initiated in the Court of First Instance of Negros Occidental to test the legality of the taxes imposed by Commonwealth Act No. 567, otherwise known as the Sugar Adjustment Act. Promulgated in 1940, the law in question opens (section 1) with a declaration of emergency, due to the threat to our industry by the imminent imposition of export taxes upon sugar as provided in the Tydings-McDuffe Act, and the "eventual loss of its preferential position in the United States market"; wherefore, the national policy was expressed "to obtain a readjustment of the benefits derived from the sugar industry by the component elements thereof" and "to stabilize the sugar industry so as to prepare it for the eventuality of the loss of its preferential position in the United States market and the imposition of the export taxes." In section 2, Commonwealth Act 567 provides for an increase of the existing tax on the manufacture of sugar, on a graduated basis, on each picul of sugar manufactured; while section 3 levies on owners or persons in control of lands devoted to the cultivation of sugar cane and ceded to others for a consideration, on lease or otherwise a tax equivalent to the difference between the money value of the rental or consideration collected and the amount representing 12 per centum of the assessed value of such land. According to section 6 of the law SEC. 6. All collections made under this Act shall accrue to a special fund in the Philippine Treasury, to be known as the 'Sugar Adjustment and Stabilization Fund,' and shall be paid out only for any or all of the following purposes or to attain any or all of the following objectives, as may be provided by law. First, to place the sugar industry in a position to maintain itself, despite the gradual loss of the preferntial position of the Philippine sugar in the United States market, and ultimately to insure its continued existence notwithstanding the loss of that market and the consequent necessity of meeting competition in the free markets of the world;

This Court can take judicial notice of the fact that sugar production is one of the great industries of our nation, sugar occupying a leading position among its export products; that it gives employment to thousands of laborers in fields and factories; that it is a great source of the state's wealth, is one of the important sources of foreign exchange needed by our government, and is thus pivotal in the plans of a regime committed to a policy of currency stability. Its promotion, protection and advancement, therefore redounds greatly to the general welfare. Hence it was competent for the legislature to find that the general welfare demanded that the sugar industry should be stabilized in turn; and in the wide field of its police power, the lawmaking body could provide that the distribution of benefits therefrom be readjusted among its components to enable it to resist the added strain of the increase in taxes that it had to sustain (Sligh vs. Kirkwood, 237 U. S. 52, 59 L. Ed. 835; Johnson vs. State ex rel. Marey, 99 Fla. 1311, 128 So. 853; Maxcy Inc. vs. Mayo, 103 Fla. 552, 139 So. 121). As stated in Johnson vs. State ex rel. Marey, with reference to the citrus industry in Florida The protection of a large industry constituting one of the great sources of the state's wealth and therefore directly or indirectly affecting the welfare of so great a portion of the population of the State is affected to such an extent by public interests as to be within the police power of the sovereign. (128 Sp. 857). Once it is conceded, as it must, that the protection and promotion of the sugar industry is a matter of public concern, it follows that the Legislature may determine within reasonable bounds what is necessary for its protection and expedient for its promotion. Here, the legislative discretion must be allowed fully play, subject only to the test of reasonableness; and it is not contended that the means provided in section 6 of the law (above quoted) bear no relation to the objective pursued or are oppressive in character. If objective and methods are alike constitutionally valid, no reason is seen why the state may not levy taxes to raise funds for their prosecution and attainment. Taxation may be made the implement of the state's police power (Great Atl. & Pac. Tea Co. vs. Grosjean, 301 U. S. 412, 81 L. Ed. 1193; U. S. vs. Butler, 297 U. S. 1, 80 L. Ed. 477; M'Culloch vs. Maryland, 4 Wheat. 316, 4 L. Ed. 579). That the tax to be levied should burden the sugar producers themselves can hardly be a ground of complaint; indeed, it appears rational that the tax be obtained precisely from those who are to be benefited from the expenditure of the funds derived from it. At any rate, 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" (Carmichael vs. Southern Coal & Coke Co., 301 U. S. 495, 81 L. Ed. 1245, citing numerous authorities, at p. 1251). From the point of view we have taken it appears of no moment that the funds raised under the Sugar Stabilization Act, now in question, should be exclusively spent in aid of the sugar industry, since it is that very enterprise that is being protected. It may be that other industries are also

in need of similar protection; that the legislature is not required by the Constitution to adhere to a policy of "all or none." As ruled in Minnesota ex rel. Pearson vs. Probate Court, 309 U. S. 270, 84 L. Ed. 744, "if the law presumably hits the evil where it is most felt, it is not to be overthrown because there are other instances to which it might have been applied;" and that "the legislative authority, exerted within its proper field, need not embrace all the evils within its reach" (N. L. R. B. vs. Jones & Laughlin Steel Corp. 301 U. S. 1, 81 L. Ed. 893). Even from the standpoint that the Act is a pure tax measure, it cannot be said that the devotion of tax money to experimental stations to seek increase of efficiency in sugar production, utilization of by-products and solution of allied problems, as well as to the improvements of living and working conditions in sugar mills or plantations, without any part of such money being channeled directly to private persons, constitutes expenditure of tax money for private purposes, (compare Everson vs. Board of Education, 91 L. Ed. 472, 168 ALR 1392, 1400). The decision appealed from is affirmed, with costs against appellant. So ordered. Paras, C. J., Bengzon, Padilla, Reyes, A., Jugo, Bautista Angelo, Labrador, and Concepcion, JJ., concur.

G.R. Nos. 167274-75

July 21, 2008

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.

FORTUNE TOBACCO CORPORATION, Respondent.

DECISION TINGA, J.: Simple and uncomplicated is the central issue involved, yet whopping is the amount at stake in this case. After much wrangling in the Court of Tax Appeals (CTA) and the Court of Appeals, Fortune Tobacco Corporation (Fortune Tobacco) was granted a tax refund or tax credit representing specific taxes erroneously collected from its tobacco products. The tax refund is being re-claimed by the Commissioner of Internal Revenue (Commissioner) in this petition. The following undisputed facts, summarized by the Court of Appeals, are quoted in the assailed Decision1 dated 28 September 2004: CAG.R. SP No. 80675 xxxx Petitioner2 is a domestic corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, with principal address at Fortune Avenue, Parang, Marikina City. Petitioner is the manufacturer/producer of, among others, the following cigarette brands, with tax rate classification based on net retail price prescribed by Annex "D" to R.A. No. 4280, to wit: Brand Champion M 100 Salem M 100 Salem M King Camel F King Camel Lights Box 20s Camel Filters Box 20s Winston F Kings Winston Lights Tax Rate P1.00 P1.00 P1.00 P1.00 P1.00 P1.00 P5.00 P5.00

Immediately prior to January 1, 1997, the above-mentioned cigarette brands were subject to ad valorem tax pursuant to then Section 142 of the Tax Code of 1977, as amended. However, on January 1, 1997, R.A. No. 8240 took effect whereby a shift from the ad valorem tax (AVT) system to the specific tax system was made and subjecting the aforesaid cigarette brands to specific tax under [S]ection 142 thereof, now renumbered as Sec. 145 of the Tax Code of 1997, pertinent provisions of which are quoted thus: Section 145. Cigars and Cigarettes(A) Cigars. There shall be levied, assessed and collected on cigars a tax of One peso (P1.00) per cigar. "(B) Cigarettes packed by hand. There shall be levied, assessesed and collected on cigarettes packed by hand a tax of Forty centavos (P0.40) per pack. (C) Cigarettes packed by machine. There shall be levied, assessed and collected on cigarettes packed by machine a tax at the rates prescribed below: (1) If the net retail price (excluding the excise tax and the valueadded tax) is above Ten pesos (P10.00) per pack, the tax shall be Twelve (P12.00) per pack; (2) If the net retail price (excluding the excise tax and the value added tax) exceeds Six pesos and Fifty centavos (P6.50) but does not exceed Ten pesos (P10.00) per pack, the tax shall be Eight Pesos (P8.00) per pack. (3) If the net retail price (excluding the excise tax and the valueadded tax) is Five pesos (P5.00) but does not exceed Six Pesos and fifty centavos (P6.50) per pack, the tax shall be Five pesos (P5.00) per pack; (4) If the net retail price (excluding the excise tax and the valueadded tax) is below Five pesos (P5.00) per pack, the tax shall be One peso (P1.00) per pack;

"Variants of existing brands of cigarettes which are introduced in the domestic market after the effectivity of R.A. No. 8240 shall be taxed under the highest classification of any variant of that brand. The excise tax from any brand of cigarettes within the next three (3) years from the effectivity of R.A. No. 8240 shall not be lower than the tax, which is due from each brand on October 1, 1996. Provided, however, that in cases were (sic) the excise tax rate imposed in paragraphs (1), (2), (3) and (4) hereinabove will result in an increase in excise tax of more than seventy percent (70%), for a brand of cigarette, the increase shall take effect in two tranches: fifty percent (50%) of the increase shall be effective in 1997 and one hundred percent (100%) of the increase shall be effective in 1998. Duly registered or existing brands of cigarettes or new brands thereof packed by machine shall only be packed in twenties.

The rates of excise tax on cigars and cigarettes under paragraphs (1), (2) (3) and (4) hereof, shall be increased by twelve percent (12%) on January 1, 2000. (Emphasis supplied) New brands shall be classified according to their current net retail price. For the above purpose, net retail price shall mean the price at which the cigarette is sold on retail in twenty (20) major supermarkets in Metro Manila (for brands of cigarettes marketed nationally), excluding the amount intended to cover the applicable excise tax and value-added tax. For brands which are marketed only outside Metro [M]anila, the net retail price shall mean the price at which the cigarette is sold in five (5) major supermarkets in the region excluding the amount intended to cover the applicable excise tax and the value-added tax. The classification of each brand of cigarettes based on its average retail price as of October 1, 1996, as set forth in Annex "D," shall remain in force until revised by Congress. Variant of a brand shall refer to a brand on which a modifier is prefixed and/or suffixed to the root name of the brand and/or a different brand which carries the same logo or design of the existing brand. To implement the provisions for a twelve percent (12%) increase of excise tax on, among others, cigars and cigarettes packed by machines by January 1, 2000, the Secretary of Finance, upon recommendation of the respondent Commissioner of Internal Revenue, issued Revenue Regulations No. 17-99, dated December 16, 1999, which provides the increase on the applicable tax rates on cigar and cigarettes as follows: SECTI ON ARTICLES PRESENT SPECIFIC TAX RATE PRIOR TO JAN. 1, 2000 P1.00/cigar NEW SPECIFIC TAX RATE EFFECTIVE JAN. 1, 2000 P1.12/cigar

per pack Revenue Regulations No. 17-99 likewise provides in the last paragraph of Section 1 thereof, "(t)hat the new specific tax rate for any existing brand of cigars, cigarettes packed by machine, distilled spirits, wines and fermented liquor shall not be lower than the excise tax that is actually being paid prior to January 1, 2000." For the period covering January 1-31, 2000, petitioner allegedly paid specific taxes on all brands manufactured and removed in the total amounts of P585,705,250.00. On February 7, 2000, petitioner filed with respondents Appellate Division a claim for refund or tax credit of its purportedly overpaid excise tax for the month of January 2000 in the amount of P35,651,410.00 On June 21, 2001, petitioner filed with respondents Legal Service a letter dated June 20, 2001 reiterating all the claims for refund/tax credit of its overpaid excise taxes filed on various dates, including the present claim for the month of January 2000 in the amount of P35,651,410.00. As there was no action on the part of the respondent, petitioner filed the instant petition for review with this Court on December 11, 2001, in order to comply with the two-year period for filing a claim for refund. In his answer filed on January 16, 2002, respondent raised the following Special and Affirmative Defenses;
4. Petitioners alleged claim for refund is subject to administrative routinary investigation/examination by the Bureau; 5. The amount of P35,651,410 being claimed by petitioner as alleged overpaid excise tax for the month of January 2000 was not properly documented. 6. In an action for tax refund, the burden of proof is on the taxpayer to establish its right to refund, and failure to sustain the burden is fatal to its claim for refund/credit. 7. Petitioner must show that it has complied with the provisions of Section 204(C) in relation [to] Section 229 of the Tax Code on the prescriptive period for claiming tax refund/credit; 8. Claims for refund are construed strictly against the claimant for the same partake of tax exemption from taxation; and 9. The last paragraph of Section 1 of Revenue Regulation[s] [No.]17-99 is a valid implementing regulation which has the force and effect of law."

145

(A) (B)Cigarettes packed by machine (1) Net retail price (excluding VAT and excise) exceeds P10.00 per pack (2) Exceeds P10.00 per pack (3) Net retail price (excluding VAT and excise) is P5.00 to P6.50 per pack (4) Net Retail Price (excluding VAT and excise) is below P5.00

P12.00/pack

P13.44/ pack

P8.00/pack P5.00/pack

P8.96/pack P5.60/pack

CA G.R. SP No. 83165 The petition contains essentially similar facts, except that the said case questions the CTAs December 4, 2003 decision in CTA Case No. 6612 granting respondents3 claim for refund of the amount of P355,385,920.00 representing erroneously or illegally collected specific taxes covering the period January 1, 2002 to December 31, 2002, as well as its March 17, 2004 Resolution denying a reconsideration thereof. xxxx

P1.00/pack

P1.12/pack

In both CTA Case Nos. 6365 & 6383 and CTA No. 6612, the Court of Tax Appeals reduced the issues to be resolved into two as stipulated by the parties, to wit: (1) Whether or not the last paragraph of Section 1 of Revenue Regulation[s] [No.] 17-99 is in accordance with the pertinent provisions of Republic Act [No.] 8240, now incorporated in Section 145 of the Tax Code of 1997; and (2) Whether or not petitioner is entitled to a refund ofP35,651,410.00 as alleged overpaid excise tax for the month of January 2000. xxxx Hence, the respondent CTA in its assailed October 21, 2002 [twin] Decisions[s] disposed in CTA Case Nos. 6365 & 6383: WHEREFORE, in view of the foregoing, the court finds the instant petition meritorious and in accordance with law. Accordingly, respondent is hereby ORDERED to REFUND to petitioner the amount of P35,651.410.00 representing erroneously paid excise taxes for the period January 1 to January 31, 2000. SO ORDERED. Herein petitioner sought reconsideration of the above-quoted decision. In [twin] resolution[s] [both] dated July 15, 2003, the Tax Court, in an apparent change of heart, granted the petitioners consolidated motions for reconsideration, thereby denying the respondents claim for refund. However, on consolidated motions for reconsideration filed by the respondent in CTA Case Nos. 6363 and 6383, the July 15, 2002 resolution was set aside, and the Tax Court ruled, this time with a semblance of finality, that the respondent is entitled to the refund claimed. Hence, in a resolution dated November 4, 2003, the tax court reinstated its December 21, 2002 Decision and disposed as follows:
WHEREFORE, our Decisions in CTA Case Nos. 6365 and 6383 are hereby REINSTATED. Accordingly, respondent is hereby ORDERED to REFUND petitioner the total amount of P680,387,025.00 representing erroneously paid excise taxes for the period January 1, 2000 to January 31, 2000 and February 1, 2000 to December 31, 2001. SO ORDERED.

Petitioner sought reconsideration of the decision, but the same was denied in a Resolution dated March 17, 2004.4 (Emphasis supplied) (Citations omitted) The Commissioner appealed the aforesaid decisions of the CTA. The petition questioning the grant of refund in the amount of P680,387,025.00 was docketed as CA-G.R. SP No. 80675, whereas that assailing the grant of refund in the amount of P355,385,920.00 was docketed as CA-G.R. SP No. 83165. The petitions were consolidated and eventually denied by the Court of Appeals. The appellate court also denied reconsideration in its Resolution5 dated 1 March 2005. In its Memorandum6 22 dated November 2006, filed on behalf of the Commissioner, the Office of the Solicitor General (OSG) seeks to convince the Court that the literal interpretation given by the CTA and the Court of Appeals of Section 145 of the Tax Code of 1997 (Tax Code) would lead to a lower tax imposable on 1 January 2000 than that imposable during the transition period. Instead of an increase of 12% in the tax rate effective on 1 January 2000 as allegedly mandated by the Tax Code, the appellate courts ruling would result in a significant decrease in the tax rate by as much as 66%. The OSG argues that Section 145 of the Tax Code admits of several interpretations, such as:
1. That by January 1, 2000, the excise tax on cigarettes should be the higher tax imposed under the specific tax system and the tax imposed under the ad valorem tax system plus the 12% increase imposed by par. 5, Sec. 145 of the Tax Code; 2. The increase of 12% starting on January 1, 2000 does not apply to the brands of cigarettes listed under Annex "D" referred to in par. 8, Sec. 145 of the Tax Code; 3. The 12% increment shall be computed based on the net retail price as indicated in par. C, sub-par. (1)-(4), Sec. 145 of the Tax Code even if the resulting figure will be lower than the amount already being paid at the end of the transition period. This is the interpretation followed by both the CTA and the Court of Appeals.7

Meanwhile, on December 4, 2003, the Court of Tax Appeals rendered decision in CTA Case No. 6612 granting the prayer for the refund of the amount of P355,385,920.00 representing overpaid excise tax for the period covering January 1, 2002 to December 31, 2002. The tax court disposed of the case as follows:
IN VIEW OF THE FOREGOING, the Petition for Review is GRANTED. Accordingly, respondent is hereby ORDERED to REFUND to petitioner the amount of P355,385,920.00 representing overpaid excise tax for the period covering January 1, 2002 to December 31, 2002. SO ORDERED.

This being so, the interpretation which will give life to the legislative intent to raise revenue should govern, the OSG stresses. Finally, the OSG asserts that a tax refund is in the nature of a tax exemption and must, therefore, be construed strictly against the taxpayer, such as Fortune Tobacco. In its Memorandum8 dated 10 November 2006, Fortune Tobacco argues that the CTA and the Court of Appeals merely followed the letter of the law when they ruled that the basis for the 12% increase in the tax rate should be the net retail price of the cigarettes in the market as outlined in paragraph C, sub paragraphs (1)-(4), Section 145 of the Tax Code. The Commissioner allegedly has gone beyond his delegated rule-making power when he promulgated, enforced and implemented Revenue Regulation No. 17-99, which effectively created a separate classification for cigarettes based on the excise tax "actually being paid prior to January 1, 2000."9

It should be mentioned at the outset that there is no dispute between the fact of payment of the taxes sought to be refunded and the receipt thereof by the Bureau of Internal Revenue (BIR). There is also no question about the mathematical accuracy of Fortune Tobaccos claim since the documentary evidence in support of the refund has not been controverted by the revenue agency. Likewise, the claims have been made and the actions have been filed within the two (2)-year prescriptive period provided under Section 229 of the Tax Code. The power to tax is inherent in the State, such power being inherently legislative, based on the principle that taxes are a grant of the people who are taxed, and the grant must be made by the immediate representatives of the people; and where the people have laid the power, there it must remain and be exercised.10 This entire controversy revolves around the interplay between Section 145 of the Tax Code and Revenue Regulation 17-99. The main issue is an inquiry into whether the revenue regulation has exceeded the allowable limits of legislative delegation. For ease of reference, Section 145 of the Tax Code is again reproduced in full as follows:
Section 145. Cigars and Cigarettes(A) Cigars.There shall be levied, assessed and collected on cigars a tax of One peso (P1.00) per cigar. (B). Cigarettes packed by hand.There shall be levied, assessed and collected on cigarettes packed by hand a tax of Forty centavos (P0.40) per pack. (C) Cigarettes packed by machine.There shall be levied, assessed and collected on cigarettes packed by machine a tax at the rates prescribed below: (1) If the net retail price (excluding the excise tax and the valueadded tax) is above Ten pesos (P10.00) per pack, the tax shall be Twelve pesos (P12.00) per pack; (2) If the net retail price (excluding the excise tax and the value added tax) exceeds Six pesos and Fifty centavos (P6.50) but does not exceed Ten pesos (P10.00) per pack, the tax shall be Eight Pesos (P8.00) per pack. (3) If the net retail price (excluding the excise tax and the valueadded tax) is Five pesos (P5.00) but does not exceed Six Pesos and fifty centavos (P6.50) per pack, the tax shall be Five pesos (P5.00) per pack; (4) If the net retail price (excluding the excise tax and the valueadded tax) is below Five pesos (P5.00) per pack, the tax shall be One peso (P1.00) per pack;

The excise tax from any brand of cigarettes within the next three (3) years from the effectivity of R.A. No. 8240 shall not be lower than the tax, which is due from each brand on October 1, 1996. Provided, however, That in cases where the excise tax rates imposed in paragraphs (1), (2), (3) and (4) hereinabove will result in an increase in excise tax of more than seventy percent (70%), for a brand of cigarette, the increase shall take effect in two tranches: fifty percent (50%) of the increase shall be effective in 1997 and one hundred percent (100%) of the increase shall be effective in 1998. Duly registered or existing brands of cigarettes or new brands thereof packed by machine shall only be packed in twenties. The rates of excise tax on cigars and cigarettes under paragraphs (1), (2) (3) and (4) hereof, shall be increased by twelve percent (12%) on January 1, 2000. New brands shall be classified according to their current net retail price. For the above purpose, net retail price shall mean the price at which the cigarette is sold on retail in twenty (20) major supermarkets in Metro Manila (for brands of cigarettes marketed nationally), excluding the amount intended to cover the applicable excise tax and value-added tax. For brands which are marketed only outside Metro Manila, the net retail price shall mean the price at which the cigarette is sold in five (5) major intended to cover the applicable excise tax and the value-added tax. The classification of each brand of cigarettes based on its average retail price as of October 1, 1996, as set forth in Annex "D," shall remain in force until revised by Congress. Variant of a brand shall refer to a brand on which a modifier is prefixed and/or suffixed to the root name of the brand and/or a different brand which carries the same logo or design of the existing brand.11 (Emphasis supplied) Revenue Regulation 17-99, which was issued pursuant to the unquestioned authority of the Secretary of Finance to promulgate rules and regulations for the effective implementation of the Tax Code, 12 interprets the abovequoted provision and reflects the 12% increase in excise taxes in the following manner: SECTI ON DESCRIPTION OF ARTICLES PRESENT SPECIFIC TAX RATES PRIOR TO JAN. 1, 2000 P1.00/cigar NEW SPECIFIC TAX RATE Effective Jan.. 1, 2000 P1.12/cigar

145

(A) (B)Cigarettes packed by Machine (1) Net Retail Price (excluding VAT and Excise) exceeds P10.00

Variants of existing brands of cigarettes which are introduced in the domestic market after the effectivity of R.A. No. 8240 shall be taxed under the highest classification of any variant of that brand.

P12.00/pack

P13.44/pack

per pack (2) Net Retail Price (excluding VAT and Excise) is P6.51 up to P10.00 per pack (3) Net Retail Price (excluding VAT and excise) is P5.00 to P6.50 per pack (4) Net Retail Price (excluding VAT and excise) is below P5.00 per pack) P8.00/pack P8.96/pack

on the old provision of the law. The Court held that in case of discrepancy between the law as amended and the implementing regulation based on the old law, the former necessarily prevails. The law must still be followed, even though the existing tax regulation at that time provided for a different procedure.15 In Commissioner of Internal Revenue v. Central Luzon Drug Corporation,16 the tax authorities gave the term "tax credit" in Sections 2(i) and 4 of Revenue Regulation 2-94 a meaning utterly disparate from what R.A. No. 7432 provides. Their interpretation muddled up the intent of Congress to grant a mere discount privilege and not a sales discount. The Court, striking down the revenue regulation, held that an administrative agency issuing regulations may not enlarge, alter or restrict the provisions of the law it administers, and it cannot engraft additional requirements not contemplated by the legislature. The Court emphasized that tax administrators are not allowed to expand or contract the legislative mandate and that the "plain meaning rule" or verba legis in statutory construction should be applied such that where the words of a statute are clear, plain and free from ambiguity, it must be given its literal meaning and applied without attempted interpretation. As we have previously declared, rule-making power must be confined to details for regulating the mode or proceedings in order to carry into effect the law as it has been enacted, and it cannot be extended to amend or expand the statutory requirements or to embrace matters not covered by the statute. Administrative regulations must always be in harmony with the provisions of the law because any resulting discrepancy between the two will always be resolved in favor of the basic law.17 In Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc.,18 Commissioner Jose Ong issued Revenue Memorandum Order (RMO) No. 15-91, as well as the clarificatory Revenue Memorandum Circular (RMC) 43-91, imposing a 5% lending investors tax under the 1977 Tax Code, as amended by Executive Order (E.O.) No. 273, on pawnshops. The Commissioner anchored the imposition on the definition of lending investors provided in the 1977 Tax Code which, according to him, was broad enough to include pawnshop operators. However, the Court noted that pawnshops and lending investors were subjected to different tax treatments under the Tax Code prior to its amendment by the executive order; that Congress never intended to treat pawnshops in the same way as lending investors; and that the particularly involved section of the Tax Code explicitly subjected lending investors and dealers in securities only to percentage tax. And so the Court affirmed the invalidity of the challenged circulars, stressing that "administrative issuances must not override, supplant or modify the law, but must remain consistent with the law they intend to carry out."19 In Philippine Bank of Communications v. Commissioner of Internal Revenue,20 the then acting Commissioner issued RMC 7-85, changing the prescriptive period of two years to ten years for claims of excess quarterly income tax payments, thereby creating a clear inconsistency with the provision of Section 230 of the 1977 Tax Code. The Court nullified the circular, ruling that the BIR did not simply interpret the law; rather it

P5.00/pack

P5.60/pack

P1.00/pack

P1.12/pack

This table reflects Section 145 of the Tax Code insofar as it mandates a 12% increase effective on 1 January 2000 based on the taxes indicated under paragraph C, sub-paragraph (1)-(4). However, Revenue Regulation No. 17-99 went further and added that "[T]he new specific tax rate for any existing brand of cigars, cigarettes packed by machine, distilled spirits, wines and fermented liquor shall not be lower than the excise tax that is actually being paid prior to January 1, 2000."13 Parenthetically, Section 145 states that during the transition period, i.e., within the next three (3) years from the effectivity of the Tax Code, the excise tax from any brand of cigarettes shall not be lower than the tax due from each brand on 1 October 1996. This qualification, however, is conspicuously absent as regards the 12% increase which is to be applied on cigars and cigarettes packed by machine, among others, effective on 1 January 2000. Clearly and unmistakably, Section 145 mandates a new rate of excise tax for cigarettes packed by machine due to the 12% increase effective on 1 January 2000 without regard to whether the revenue collection starting from this period may turn out to be lower than that collected prior to this date. By adding the qualification that the tax due after the 12% increase becomes effective shall not be lower than the tax actually paid prior to 1 January 2000, Revenue Regulation No. 17-99 effectively imposes a tax which is the higher amount between the ad valorem tax being paid at the end of the three (3)-year transition period and the specific tax under paragraph C, sub-paragraph (1)-(4), as increased by 12%a situation not supported by the plain wording of Section 145 of the Tax Code. This is not the first time that national revenue officials had ventured in the area of unauthorized administrative legislation. In Commissioner of Internal Revenue v. Reyes,14 respondent was not informed in writing of the law and the facts on which the assessment of estate taxes was made pursuant to Section 228 of the 1997 Tax Code, as amended by Republic Act (R.A.) No. 8424. She was merely notified of the findings by the Commissioner, who had simply relied upon the old provisions of the law and Revenue Regulation No. 12-85 which was based

legislated guidelines contrary to the statute passed by Congress. The Court held: It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the sense of more specific and less general interpretations of tax laws) which are issued from time to time by the Commissioner of Internal Revenue. It is widely accepted that the interpretation placed upon a statute by the executive officers, whose duty is to enforce it, is entitled to great respect by the courts. Nevertheless, such interpretation is not conclusive and will be ignored if judicially found to be erroneous. Thus, courts will not countenance administrative issuances that override, instead of remaining consistent and in harmony with, the law they seek to apply and implement.21 In Commissioner of Internal Revenue v. CA, et al.,22 the central issue was the validity of RMO 4-87 which had construed the amnesty coverage under E.O. No. 41 (1986) to include only assessments issued by the BIR after the promulgation of the executive order on 22 August 1986 and not assessments made to that date. Resolving the issue in the negative, the Court held:
x x x all such issuances must not override, but must remain consistent and in harmony with, the law they seek to apply and implement. Administrative rules and regulations are intended to carry out, neither to supplant nor to modify, the law.23 xxx If, as the Commissioner argues, Executive Order No. 41 had not been intended to include 1981-1985 tax liabilities already assessed (administratively) prior to 22 August 1986, the law could have simply so provided in its exclusionary clauses. It did not. The conclusion is unavoidable, and it is that the executive order has been designed to be in the nature of a general grant of tax amnesty subject only to the cases specifically excepted by it.24

low, medium or high, obviously remain the bases for the application of the increase in excise tax rates effective on 1 January 2000. The foregoing leads us to conclude that Revenue Regulation No. 17-99 is indeed indefensibly flawed. The Commissioner cannot seek refuge in his claim that the purpose behind the passage of the Tax Code is to generate additional revenues for the government. Revenue generation has undoubtedly been a major consideration in the passage of the Tax Code. However, as borne by the legislative record,25 the shift from the ad valorem system to the specific tax system is likewise meant to promote fair competition among the players in the industries concerned, to ensure an equitable distribution of the tax burden and to simplify tax administration by classifying cigarettes, among others, into high, medium and low-priced based on their net retail price and accordingly graduating tax rates. At any rate, this advertence to the legislative record is merely gratuitous because, as we have held, the meaning of the law is clear on its face and free from the ambiguities that the Commissioner imputes. We simply cannot disregard the letter of the law on the pretext of pursuing its spirit.26 Finally, the Commissioners contention that a tax refund partakes the nature of a tax exemption does not apply to the tax refund to which Fortune Tobacco is entitled. There is parity between tax refund and tax exemption only when the former is based either on a tax exemption statute or a tax refund statute. Obviously, that is not the situation here. Quite the contrary, Fortune Tobaccos claim for refund is premised on its erroneous payment of the tax, or better still the governments exaction in the absence of a law. Tax exemption is a result of legislative grace. And he who claims an exemption from the burden of taxation must justify his claim by showing that the legislature intended to exempt him by words too plain to be mistaken.27 The rule is that tax exemptions must be strictly construed such that the exemption will not be held to be conferred unless the terms under which it is granted clearly and distinctly show that such was the intention.28 A claim for tax refund may be based on statutes granting tax exemption or tax refund. In such case, the rule of strict interpretation against the taxpayer is applicable as the claim for refund partakes of the nature of an exemption, a legislative grace, which cannot be allowed unless granted in the most explicit and categorical language. The taxpayer must show that the legislature intended to exempt him from the tax by words too plain to be mistaken.29 Tax refunds (or tax credits), on the other hand, are not founded principally on legislative grace but on the legal principle which underlies all quasicontracts abhorring a persons unjust enrichment at the expense of another.30The dynamic of erroneous payment of tax fits to a tee the prototypic quasi-contract, solutio indebiti, which covers not only mistake in fact but also mistake in law.31 The Government is not exempt from the application of solutio indebiti.32 Indeed, the taxpayer expects fair dealing from the Government,

In the case at bar, the OSGs argument that by 1 January 2000, the excise tax on cigarettes should be the higher tax imposed under the specific tax system and the tax imposed under the ad valorem tax system plus the 12% increase imposed by paragraph 5, Section 145 of the Tax Code, is an unsuccessful attempt to justify what is clearly an impermissible incursion into the limits of administrative legislation. Such an interpretation is not supported by the clear language of the law and is obviously only meant to validate the OSGs thesis that Section 145 of the Tax Code is ambiguous and admits of several interpretations. The contention that the increase of 12% starting on 1 January 2000 does not apply to the brands of cigarettes listed under Annex "D" is likewise unmeritorious, absurd even. Paragraph 8, Section 145 of the Tax Code simply states that, "[T]he classification of each brand of cigarettes based on its average net retail price as of October 1, 1996, as set forth in Annex D, shall remain in force until revised by Congress." This declaration certainly does not lend itself to the interpretation given to it by the OSG. As plainly worded, the average net retail prices of the listed brands under Annex "D," which classify cigarettes according to their net retail price into

and the latter has the duty to refund without any unreasonable delay what it has erroneously collected.33 If the State expects its taxpayers to observe fairness and honesty in paying their taxes, it must hold itself against the same standard in refunding excess (or erroneous) payments of such taxes. It should not unjustly enrich itself at the expense of taxpayers. 34 And so, given its essence, a claim for tax refund necessitates only preponderance of evidence for its approbation like in any other ordinary civil case. Under the Tax Code itself, apparently in recognition of the pervasive quasicontract principle, a claim for tax refund may be based on the following: (a) erroneously or illegally assessed or collected internal revenue taxes; (b) penalties imposed without authority; and (c) any sum alleged to have been excessive or in any manner wrongfully collected.35 What is controlling in this case is the well-settled doctrine of strict interpretation in the imposition of taxes, not the similar doctrine as applied to tax exemptions. The rule in the interpretation of tax laws is that a statute will not be construed as imposing a tax unless it does so clearly, expressly, and unambiguously. A tax cannot be imposed without clear and express words for that purpose. Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication. In answering the question of who is subject to tax statutes, it is basic that in case of doubt, such statutes are to be construed most strongly against the government and in favor of the subjects or citizens because burdens are not to be imposed nor presumed to be imposed beyond what statutes expressly and clearly import.36 As burdens, taxes should not be unduly exacted nor assumed beyond the plain meaning of the tax laws.37 WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA G.R. SP No. 80675, dated 28 September 2004, and its Resolution, dated 1 March 2005, are AFFIRMED. No pronouncement as to costs. SO ORDERED. DANTE O. TINGA Associate Justice

G.R. No. 173594 vs.

February 6, 2008

SILKAIR (SINGAPORE) PTE, LTD., petitioner, COMMISSIONER OF INTERNAL REVENUE, respondent.

DECISION CARPIO MORALES, J.: Petitioner, Silkair (Singapore) Pte. Ltd. (Silkair), a corporation organized under the laws of Singapore which has a Philippine representative office, is an online international air carrier operating the Singapore-Cebu-DavaoSingapore, Singapore-Davao-Cebu-Singapore, and Singapore-CebuSingapore routes. On December 19, 2001, Silkair filed with the Bureau of Internal Revenue (BIR) a written application for the refund of P4,567,450.79 excise taxes it claimed to have paid on its purchases of jet fuel from Petron Corporation from January to June 2000.1 As the BIR had not yet acted on the application as of December 26, 2001, Silkair filed a Petition for Review2before the CTA following Commissioner of Internal Revenue v. Victorias Milling Co., Inc., et al.3 Opposing the petition, respondent Commissioner on Internal Revenue (CIR) alleged in his Answer that, among other things,
Petitioner failed to prove that the sale of the petroleum products was directly made from a domestic oil company to the international carrier. The excise tax on petroleum products is the direct liability of the manufacturer/producer, and when added to the cost of the goods sold to the buyer, it is no longer a tax but part of the price which the buyer has to pay to obtain the article.4 (Emphasis and underscoring supplied)

be filed by Petron Corporation as the taxpayer contemplated under the law. Petitioner cannot be considered as the taxpayer because it merely shouldered the burden of the excise tax and not the excise tax itself. Therefore, the right to claim for the refund of excise taxes paid on petroleum products lies with Petron Corporation who paid and remitted the excise tax to the BIR. Respondent, on the other hand, may only claim from Petron Corporation the reimbursement of the tax burden shifted to the former by the latter. The excise tax partaking the nature of an indirect tax, is clearly the liability of the manufacturer or seller who has the option whether or not to shift the burden of the tax to the purchaser. Where the burden of the tax is shifted to the [purchaser], the amount passed on to it is no longer a tax but becomes an added cost on the goods purchased which constitutes a part of the purchase price. The incidence of taxation or the person statutorily liable to pay the tax falls on Petron Corporation though the impact of taxation or the burden of taxation falls on another person, which in this case is petitioner Silkair.5 (Italics in the original; emphasis and underscoring supplied)

Silkair filed a Motion for Reconsideration6 during the pendency of which or on September 12, 2005 the Bengzon Law Firm entered its appearance as counsel,7 without Silkairs then-counsel of record (Jimenez Gonzales Liwanag Bello Valdez Caluya & Fernandez or "JGLaw") having withdrawn as such. By Resolution8 of September 22, 2005, the CTA Second Division denied Silkairs motion for reconsideration. A copy of the Resolution was furnished Silkairs counsel JGLaw which received it on October 3, 2005.9 On October 13, 2005, JGLaw, with the conformity of Silkair, filed its Notice of Withdrawal of Appearance. 10 On even date, Silkair, through the Bengzon Law Firm, filed a Manifestation/Motion11 stating:
Petitioner was formerly represented xxx by JIMENEZ GONZALES LIWANAG BELLO VALDEZ CALUYA & FERNANDEZ (JGLaw). 1. On 24 August 2005, petitioner served notice to JGLaw of its decision to cease all legal representation handled by the latter on behalf of the petitioner. Petitioner also requested JGLaw to make arrangements for the transfer of all files relating to its legal representation on behalf of petitioner to the undersigned counsel. xxx 2. The undersigned counsel was engaged to act as counsel for the petitioner in the above-entitled case; and thus, filed its entry of appearance on 12 September 2005. x x x 3. The undersigned counsel, through petitioner, has received information that the Honorable Court promulgated a Resolution on petitioners Motion for Reconsideration. To date, the undersigned counsel has yet to receive an official copy of the above-mentioned Resolution. In light of the foregoing, undersigned counsel hereby respectfully requests for an official copy of the Honorable Courts Resolution on petitioners Motion for Reconsideration x x x.12 (Underscoring supplied)

By Decision of May 27, 2005, the Second Division of the CTA denied Silkairs petition on the ground that as the excise tax was imposed on Petron Corporation as the manufacturer of petroleum products, any claim for refund should be filed by the latter; and where the burden of tax is shifted to the purchaser, the amount passed on to it is no longer a tax but becomes an added cost of the goods purchased. Thus the CTA discoursed:
The liability for excise tax on petroleum products that are being removed from its refinery is imposed on the manufacturer/producer (Section 130 of the NIRC of 1997). x x x xxxx While it is true that in the case of excise tax imposed on petroleum products, the seller thereof may shift the tax burden to the buyer, the latter is the proper party to claim for the refund in the case of exemption from excise tax. Since the excise tax was imposed upon Petron Corporation as the manufacturer of petroleum products, pursuant to Section 130(A)(2), and that the corresponding excise taxes were indeed, paid by it, . . . any claim for refund of the subject excise taxes should

On October 14, 2005, the Bengzon Law Firm received its requested copy of the September 22, 200513 CTA Second Division Resolution. Thirty-seven days later or on October 28, 2005, Silkair, through said counsel, filed a

Motion for Extension of Time to File Petition for Review14 before the CTA En Banc which gave it until November 14, 2005 to file a petition for review. On November 11, 2005, Silkair filed another Motion for Extension of Time.15 On even date, the Bengzon Law Firm informed the CTA of its withdrawal of appearance as counsel for Silkair with the information, that Silkair would continue to be represented by Atty. Teodoro A. Pastrana, who used to be with the firm but who had become a partner of the Pastrana and Fallar Law Offices.16 The CTA En Banc granted Silkairs second Motion for Extension of Time, giving Silkair until November 24, 2005 to file its petition for review. On November 17, 2005, Silkair filed its Petition for Review17 before the CTA En Banc. By Resolution of May 19,2006, the CTA En Banc dismissed18 Silkairs petition for review for having been filed out of time in this wise:
A petitioner is given a period of fifteen (15) days from notice of award, judgment, final order or resolution, or denial of motion for new trial or reconsideration to appeal to the proper forum, in this case, the CTA En Banc. This is clear from both Section 11 and Section 9 of Republic Act No. 9282 x x x. xxxx The petitioner, through its counsel of record Jimenez, Gonzalez, L[iwanag], Bello, Valdez, Caluya & Fernandez Law Offices, received the Resolution dated September 22, 2005 on October 3, 2005. At that time, the petitioner had two counsels of record, namely, Jimenez, Gonzales, L[iwanag], Bello, Valdez, Caluya & Fernandez Law Offices and The Bengzon Law Firm which filed its Entry of Appearance on September 12, 2005. However, as of said date, Atty. Mary Jane B. Austria-Delgado of Jimenez, Gonzales, L[iwanag], Bello, Valdez, Caluya & Fernandez Law Offices was still the counsel of record considering that the Notice of Withdrawal of Appearance signed by Atty. Mary Jane B. Austria-Delgado was filed only on October 13, 2005 or ten (10) days after receipt of the September 22, 2005 Resolution of the Courts Second Division. This notwithstanding, Section 2 of Rule 13 of the Rules of Court provides that if any party has appeared by counsel, service upon him shall be made upon his counsel or one of them, unless service upon the party himself is ordered by the Court. Where a party is represented by more than one counsel of record, "notice to any one of the several counsel on record is equivalent to notice to all the counsel (Damasco vs. Arrieta, et. al., 7 SCRA 224)." Considering that petitioner, through its counsel of record, had received the September 22, 2005 Resolution as early as October 3, 2005, it had only until October 18, 2005 within which to file its Petition for Review. Petitioner only managed to file the Petition for Review with the Court En Bancon November 17, 2005 or [after] thirty (30) days had lapsed from the final date of October 18, 2005 to appeal. The argument that it requested Motions for Extension of Time on October 28, 2005 or ten (10) days from the appeal period and the second Motion for Extension of Time to file its Petition for Review on November 11, 2005 and its allowance by the CTA En Banc notwithstanding, the questioned Decision is no longer appealable for failure to timely file the necessary Petition for Review.19 (Emphasis in the original)

In a Separate Concurring Opinion,20 CTA Associate Justice Juanito C. Castaeda, Jr. posited that Silkair is not the proper party to claim the tax refund. Silkair filed a Motion for Reconsideration21 which the CTA En Banc denied.22 Hence, the present Petition for Review23 which raises the following issues: I. WHETHER OR NOT THE PETITION FOR REVIEW FILED WITH THE HONORABLE COURT OF TAX APPEALS EN BANC WAS TIMELY FILED. II. APPEAL BEING AN ESSENTIAL PART OF OUR JUDICIAL SYSTEM, WHETHER OR NOT PETITIONER SHOULD BE DEPRIVED OF ITS RIGHT TO APPEAL ON THE BASIS OF TECHNICALITY. III. ASSUMING THE HONORABLE SUPREME COURT WOULD HOLD THAT THE FILING OF THE PETITITON FOR REVIEW WITH THE HONORABLE COURT OF TAX APPEALS EN BANC WAS TIMELY, WHETHER OR NOT THE PETITIONER IS THE PROPER PARTY TO CLAIM FOR REFUND OR TAX CREDIT.24(Underscoring supplied)

Silkair posits that "the instant case does not involve a situation where the petitioner was represented by two (2) counsels on record, such that notice to the former counsel would be held binding on the petitioner, as in the case of Damasco v. Arrieta, etc., et al.25 x x x heavily relied upon by the respondent";26 and that "the case of Dolores De Mesa Abad v. Court of Appeals27 has more appropriate application to the present case."28 In Dolores De Mesa Abad, the trial court issued an order of November 19, 1974 granting the therein private respondents Motion for Annulment of documents and titles. The order was received by the therein petitioners counsel of record, Atty. Escolastico R. Viola, on November 22, 1974 prior to which or on July 17, 1974, Atty. Vicente Millora of the Millora, Tobias and Calimlim Law Office had filed an "Appearance and Manifestation." Atty. Millora received a copy of the trial courts order on December 9, 1974. On January 4, 1975, the therein petitioners, through Atty. Ernesto D. Tobias also of the Millora, Tobias and Calimlim Law Office, filed their Notice of Appeal and Cash Appeal Bond as well as a Motion for Extension of the period to file a Record on Appeal. They filed the Record on Appeal on January 24, 1975. The trial court dismissed the appeal for having been filed out of time, which was upheld by the Court of Appeals on the ground that the period within which to appeal should be counted from November 22, 1974, the date Atty. Viola received a copy of the November 19, 1974 order. The appellate court held that Atty. Viola was still the counsel of record, he not having yet withdrawn his appearance as counsel for the therein petitioners. On petition for certiorari,29 this Court held
x x x [R]espondent Court reckoned the period of appeal from the time petitioners original counsel, Atty. Escolastico R. Viola, received the Order granting the Motion for Annulment of documents and titles on November 22, 1974. But as petitioners stress, Atty. Vicente Millora of the Millora, Tobias and Calimlim Law Office had filed an "Appearance and Manifestation" on July 16, 1974. Where there may have been no specific withdrawal by Atty. Escolastico R. Viola, for which he should be admonished, by the appearance of a new counsel, it can be said that Atty. Viola had ceased as counsel for petitioners. In fact, Orders subsequent to the aforesaid date were already sent by the trial Court to the Millora, Tobias and Calimlim Law Office and not to Atty. Viola.

Under the circumstances, December 9, 1974 is the controlling date of receipt by petitioners counsel and from which the period of appeal from the Order of November 19, 1974 should be reckoned. That being the case, petitioners x x x appeal filed on January 4, 1975 was timely filed.30 (Underscoring supplied)

other duties or taxes imposed in the territories of the first Contracting Party , even when these supplies are to be used on the parts of the journey performed over the territory of the Contracting Party in which they are introduced into or taken on board. The materials referred to above may be required to be kept under customs supervision and control.

The facts of Dolores De Mesa Abad are not on all fours with those of the present case. In any event, more recent jurisprudence holds that in case of failure to comply with the procedure established by Section 26, Rule 13831 of the Rules of Court re the withdrawal of a lawyer as a counsel in a case, the attorney of record is regarded as the counsel who should be served with copies of the judgments, orders and pleadings. 32 Thus, where no notice of withdrawal or substitution of counsel has been shown, notice to counsel of record is, for all purposes, notice to the client. 33 The court cannot be expected to itself ascertain whether the counsel of record has been changed.34 In the case at bar, JGLaw filed its Notice of Withdrawal of Appearance on October 13, 200535 after the Bengzon Law Firm had entered its appearance. While Silkair claims it dismissed JGLaw as its counsel as early as August 24, 2005, the same was communicated to the CTA only on October 13, 2005.36 Thus, JGLaw was still Silkairs counsel of record as of October 3, 2005 when a copy of the September 22, 2005 resolution of the CTA Second Division was served on it. The service upon JGLaw on October 3, 2005 of the September 22, 2005 resolution of CTA Second Division was, therefore, for all legal intents and purposes, service to Silkair, and the CTA correctly reckoned the period of appeal from such date. TECHNICALITY ASIDE, on the merits, the petition just the same fails. Silkair bases its claim for refund or tax credit on Section 135 (b) of the NIRC of 1997 which reads
Sec. 135. Petroleum Products sold to International Carriers and Exempt Entities of Agencies. Petroleum products sold to the following are exempt from excise tax: xxxx (b) Exempt entities or agencies covered by tax treaties, conventions, and other international agreements for their use and consumption: Provided, however, That the country of said foreign international carrier or exempt entities or agencies exempts from similar taxes petroleum products sold to Philippine carriers, entities or agencies; x x x x x x x,

The proper party to question, or seek a refund of, an indirect tax is the statutory taxpayer, the person on whom the tax is imposed by law and who paid the same even if he shifts the burden thereof to another.37 Section 130 (A) (2) of the NIRC provides that "[u]nless otherwise specifically allowed, the return shall be filed and the excise tax paid by the manufacturer or producer before removal of domestic products from place of production." Thus, Petron Corporation, not Silkair, is the statutory taxpayer which is entitled to claim a refund based on Section 135 of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement between RP and Singapore. Even if Petron Corporation passed on to Silkair the burden of the tax, the additional amount billed to Silkair for jet fuel is not a tax but part of the price which Silkair had to pay as a purchaser.38 Silkair nevertheless argues that it is exempt from indirect taxes because the Air Transport Agreement between RP and Singapore grants exemption "from the same customs duties, inspection fees and other duties or taxes imposed in the territory of the first Contracting Party."39 It invokes Maceda v. Macaraig, Jr.40 which upheld the claim for tax credit or refund by the National Power Corporation (NPC) on the ground that the NPC is exempt even from the payment of indirect taxes. Silkairss argument does not persuade. In Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company,41 this Court clarified the ruling in Maceda v. Macaraig, Jr., viz:
It may be so that in Maceda vs. Macaraig, Jr., the Court held that an exemption from "all taxes" granted to the National Power Corporation (NPC) under its charter includes both direct and indirect taxes. But far from providing PLDT comfort, Maceda in fact supports the case of herein petitioner, the correct lesson ofMaceda being that an exemption from "all taxes" excludes indirect taxes, unless the exempting statute, like NPCs charter, is so couched as to include indirect tax from the exemption. Wrote the Court: x x x However, the amendment under Republic Act No. 6395 enumerated the details covered by the exemption. Subsequently, P.D. 380, made even more specific the details of the exemption of NPC to cover, among others, both direct and indirect taxes on all petroleum products used in its operation. Presidential Decree No. 938 [NPCs amended charter] amended the tax exemption by simplifying the same law in general terms. It succinctly exempts NPC from "all forms of taxes, duties[,] fees" The use of the phrase "all forms" of taxes demonstrates the intention of the law to give NPC all the tax exemptions it has been enjoying before xxxx

and Article 4(2) of the Air Transport Agreement between the Government of the Republic of the Philippines and the Government of the Republic of Singapore (Air Transport Agreement between RP and Singapore) which reads
Fuel, lubricants, spare parts, regular equipment and aircraft stores introduced into, or taken on board aircraft in the territory of one Contracting party by, or on behalf of, a designated airline of the other Contracting Party and intended solely for use in the operation of the agreed services shall, with the exception of charges corresponding to the service performed, be exempt from the same customs duties, inspection fees and

It is evident from the provisions of P.D. No. 938 that its purpose is to maintain the tax exemption of NPC from all forms of taxes including indirect taxes as provided under R.A. No. 6395 and P.D. 380 if it is to attain its goals. (Italics in the original; emphasis supplied)42

The exemption granted under Section 135 (b) of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement between RP and Singapore cannot, without a clear showing of legislative intent, be construed as including indirect taxes. Statutes granting tax exemptions must be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority, 43 and if an exemption is found to exist, it must not be enlarged by construction. 44 WHEREFORE, the petition is DENIED. Costs against petitioner. SO ORDERED. Quisumbing,Chairperson, Carpio, Tinga, Velasco, Jr., JJ., concur.

G.R. No. 158540

July 8, 2004

SOUTHERN CROSS CEMENT CORPORATION, petitioner,

vs.

and Holcim Ltd. of Switzerland (formerly Holderbank Financiere Glaris, Ltd., then Holderfin B.V.).8 On 22 May 2001, respondent Department of Trade and Industry ("DTI") accepted an application from Philcemcor, alleging that the importation of gray Portland cement9 in increased quantities has caused declines in domestic production, capacity utilization, market share, sales and employment; as well as caused depressed local prices. Accordingly, Philcemcor sought the imposition at first of provisional, then later, definitive safeguard measures on the import of cement pursuant to the SMA. Philcemcor filed the application in behalf of twelve (12) of its member-companies.10 After preliminary investigation, the Bureau of Import Services of the DTI, determined that critical circumstances existed justifying the imposition of provisional measures.11 On 7 November 2001, the DTI issued an Order,imposing a provisional measure equivalent to Twenty Pesos and Sixty Centavos (P20.60) per forty (40) kilogram bag on all importations of gray Portland cement for a period not exceeding two hundred (200) days from the date of issuance by the Bureau of Customs (BOC) of the implementing Customs Memorandum Order.12 The corresponding Customs Memorandum Order was issued on 10 December 2001, to take effect that same day and to remain in force for two hundred (200) days.13 In the meantime, the Tariff Commission, on 19 November 2001, received a request from the DTI for a formal investigation to determine whether or not to impose a definitive safeguard measure on imports of gray Portland cement, pursuant to Section 9 of the SMA and its Implementing Rules and Regulations. A notice of commencement of formal investigation was published in the newspapers on 21 November 2001. Individual notices were likewise sent to concerned parties, such as Philcemcor, various importers and exporters, the Embassies of Indonesia, Japan and Taiwan, contractors/builders associations, industry associations, cement workers' groups, consumer groups, non-government organizations and concerned government agencies.14 A preliminary conference was held on 27 November 2001, attended by several concerned parties, including Southern Cross.15 Subsequently, the Tariff Commission received several position papers both in support and against Philcemcor's application. 16The Tariff Commission also visited the corporate offices and manufacturing facilities of each of the applicant companies, as well as that of Southern Cross and two other cement importers.17 On 13 March 2002, the Tariff Commission issued its Formal Investigation Report ("Report"). Among the factors studied by the Tariff Commission in its Report were the market share of the domestic industry, 18 production and sales,19 capacity utilization,20 financial performance and profitability,21 and return on sales.22 The Tariff Commission arrived at the following conclusions:
1. The circumstances provided in Article XIX of GATT 1994 need not be demonstrated since the product under consideration (gray Portland cement) is not the subject of any Philippine obligation or tariff concession under the WTO Agreement. Nonetheless, such inquiry is governed by the

THE PHILIPPINE CEMENT MANUFACTURERS CORP., THE SECRETARY OF THE DEPARTMENT OF TRADE &
INDUSTRY, THE SECRETARY OF THE DEPARTMENT OF FINANCE, and THE COMMISSIONER OF THE BUREAU OF CUSTOMS, respondents. DECISION TINGA, J.: "Good fences make good neighbors," so observed Robert Frost, the archetype of traditional New England detachment. The Frost ethos has been heeded by nations adjusting to the effects of the liberalized global market.1 The Philippines, for one, enacted Republic Act (Rep. Act) No. 8751 (on the imposition of countervailing duties), Rep. Act No. 8752 (on the imposition of anti-dumping duties) and, finally, Rep. Act No. 8800, also known as the Safeguard Measures Act ("SMA") 2 soon after it joined the General Agreement on Tariff and Trade (GATT) and the World Trade Organization (WTO) Agreement.3 The SMA provides the structure and mechanics for the imposition of emergency measures, including tariffs, to protect domestic industries and producers from increased imports which inflict or could inflict serious injury on them.4 The wisdom of the policies behind the SMA, however, is not put into question by the petition at bar. The questions submitted to the Court relate to the means and the procedures ordained in the law to ensure that the determination of the imposition or non-imposition of a safeguard measure is proper. Antecedent Facts Petitioner Southern Cross Cement Corporation ("Southern Cross") is a domestic corporation engaged in the business of cement manufacturing, production, importation and exportation. Its principal stockholders are Taiheiyo Cement Corporation and Tokuyama Corporation, purportedly the largest cement manufacturers in Japan.5 Private respondent Philippine Cement Manufacturers Corporation6 ("Philcemcor") is an association of domestic cement manufacturers. It has eighteen (18) members,7 per Record. While Philcemcor heralds itself to be an association of domestic cement manufacturers, it appears that considerable equity holdings, if not controlling interests in at least twelve (12) of its member-corporations, were acquired by the three largest cement manufacturers in the world, namely Financiere Lafarge S.A. of France, Cemex S.A. de C.V. of Mexico,

national legislation (R.A. 8800) and the terms and conditions of the Agreement on Safeguards. 2. The collective output of the twelve (12) applicant companies constitutes a major proportion of the total domestic production of gray Portland cement and blended Portland cement. 3. Locally produced gray Portland cement and blended Portland cement (Pozzolan) are "like" to imported gray Portland cement. 4. Gray Portland cement is being imported into the Philippines in increased quantities, both in absolute terms and relative to domestic production, starting in 2000. The increase in volume of imports is recent, sudden, sharp and significant. 5. The industry has not suffered and is not suffering significant overall impairment in its condition, i.e., serious injury. 6. There is no threat of serious injury that is imminent from imports of gray Portland cement. 7. Causation has become moot and academic in view of the negative determination of the elements of serious injury and imminent threat of serious injury.23

the Secretary of Finance, a written instruction to the Commissioner of Customs, authorizing the return of the cash bond or the remainder thereof, as the case may be, previously collected as provisional general safeguard measure within ten (10) days from the date a final decision has been made; Provided, that the government shall not be liable for any interest on the amount to be returned. The Secretary shall not accept for consideration another petition from the same industry, with respect to the same imports of the product under consideration within one (1) year after the date of rendering such a decision."

The DTI hereby issues the following:

The application for safeguard measures against the importation of gray Portland cement filed by PHILCEMCOR (Case No. 02-2001) is hereby denied.27 (Emphasis in the original)

Accordingly, the Tariff Commission made the following recommendation, to wit:

The elements of serious injury and imminent threat of serious injury not having been established, it is hereby recommended that no definitive general safeguard measure be imposed on the importation of gray Portland cement.24

The DTI received the Report on 14 March 2002. After reviewing the report, then DTI Secretary Manuel Roxas II ("DTI Secretary") disagreed with the conclusion of the Tariff Commission that there was no serious injury to the local cement industry caused by the surge of imports. 25 In view of this disagreement, the DTI requested an opinion from the Department of Justice ("DOJ") on the DTI Secretary's scope of options in acting on the Commission's recommendations. Subsequently, then DOJ Secretary Hernando Perez rendered an opinion stating that Section 13 of the SMA precluded a review by the DTI Secretary of the Tariff Commission's negative finding, or finding that a definitive safeguard measure should not be imposed.26 On 5 April 2002, the DTI Secretary promulgated a Decision. After quoting the conclusions of the Tariff Commission, the DTI Secretary noted the DTI's disagreement with the conclusions. However, he also cited the DOJ Opinion advising the DTI that it was bound by the negative finding of the Tariff Commission. Thus, he ruled as follows:
The DTI has no alternative but to abide by the [Tariff] Commission's recommendations. IN VIEW OF THE FOREGOING, and in accordance with Section 13 of RA 8800 which states: "In the event of a negative final determination; or if the cash bond is in excess of the definitive safeguard duty assessed, the Secretary shall immediately issue, through

Philcemcor received a copy of the DTI Decision on 12 April 2002. Ten days later, it filed with the Court of Appeals a Petition for Certiorari, Prohibition and Mandamus28 seeking to set aside the DTI Decision, as well as the Tariff Commission's Report. Philcemcor likewise applied for a Temporary Restraining Order/Injunction to enjoin the DTI and the BOC from implementing the questioned Decision and Report. It prayed that the Court of Appeals direct the DTI Secretary to disregard the Report and to render judgment independently of the Report. Philcemcor argued that the DTI Secretary, vested as he is under the law with the power of review, is not bound to adopt the recommendations of the Tariff Commission; and, that the Report is void, as it is predicated on a flawed framework, inconsistent inferences and erroneous methodology.29 On 10 June 2002, Southern Cross filed its Comment.30 It argued that the Court of Appeals had no jurisdiction over Philcemcor's Petition, for it is on the Court of Tax Appeals ("CTA") that the SMA conferred jurisdiction to review rulings of the Secretary in connection with the imposition of a safeguard measure. It likewise argued that Philcemcor's resort to the special civil action of certiorari is improper, considering that what Philcemcor sought to rectify is an error of judgment and not an error of jurisdiction or grave abuse of discretion, and that a petition for review with the CTA was available as a plain, speedy and adequate remedy. Finally, Southern Cross echoed the DOJ Opinion that Section 13 of the SMA precludes a review by the DTI Secretary of a negative finding of the Tariff Commission. After conducting a hearing on 19 June 2002 on Philcemcor's application for preliminary injunction, the Court of Appeals' Twelfth Division31 granted the writ sought in its Resolution dated 21 June 2002.32 Seven days later, on 28 June 2002, the two-hundred (200)-day period for the imposition of the provisional measure expired. Despite the lapse of the period, the BOC continued to impose the provisional measure on all importations of Portland cement made by Southern Cross. The uninterrupted assessment of the tariff, according to Southern Cross, worked to its detriment to the point that the continued imposition would eventually lead to its closure.33

Southern Cross timely filed a Motion for Reconsideration of the Resolution on 9 September 2002. Alleging that Philcemcor was not entitled to provisional relief, Southern Cross likewise sought a clarificatory order as to whether the grant of the writ of preliminary injunction could extend the earlier imposition of the provisional measure beyond the two hundred (200)-day limit imposed by law. The appeals' court failed to take immediate action on Southern Cross's motion despite the four (4) motions for early resolution the latter filed between September of 2002 and February of 2003. After six (6) months, on 19 February 2003, the Court of Appeals directed Philcemcor to comment on Southern Cross's Motion for Reconsideration.34 After Philcemcor filed its Opposition35 on 13 March 2003, Southern Cross filed another set of four (4) motions for early resolution. Despite the efforts of Southern Cross, the Court of Appeals failed to directly resolve the Motion for Reconsideration. Instead, on 5 June 2003, it rendered a Decision,36 granting in part Philcemcor's petition. The appellate court ruled that it had jurisdiction over the petition for certiorari since it alleged grave abuse of discretion. It refused to annul the findings of the Tariff Commission, citing the rule that factual findings of administrative agencies are binding upon the courts and its corollary, that courts should not interfere in matters addressed to the sound discretion and coming under the special technical knowledge and training of such agencies.37 Nevertheless, it held that the DTI Secretary is not bound by the factual findings of the Tariff Commission since such findings are merely recommendatory and they fall within the ambit of the Secretary's discretionary review. It determined that the legislative intent is to grant the DTI Secretary the power to make a final decision on the Tariff Commission's recommendation.38 The dispositive portion of the Decision reads:
WHEREFORE, based on the foregoing premises, petitioner's prayer to set aside the findings of the Tariff Commission in its assailed Report dated March 13, 2002 is DENIED. On the other hand, the assailed April 5, 2002 Decision of the Secretary of the Department of Trade and Industry is hereby SET ASIDE. Consequently, the case is REMANDED to the public respondent Secretary of Department of Trade and Industry for a final decision in accordance with RA 8800 and its Implementing Rules and Regulations. SO ORDERED.39

that in light of the appellate court's Decision there was no longer any legal impediment to his deciding Philcemcor's application for definitive safeguard measures.41 He made a determination that, contrary to the findings of the Tariff Commission, the local cement industry had suffered serious injury as a result of the import surges.42 Accordingly, he imposed a definitive safeguard measure on the importation of gray Portland cement, in the form of a definitive safeguard duty in the amount of P20.60/40 kg. bag for three years on imported gray Portland Cement.43 On 7 July 2003, Southern Cross filed with the Court a "Very Urgent Application for a Temporary Restraining Order and/or A Writ of Preliminary Injunction" ("TRO Application"), seeking to enjoin the DTI Secretary from enforcing hisDecision of 25 June 2003 in view of the pending petition before this Court. Philcemcor filed an opposition, claiming, among others, that it is not this Court but the CTA that has jurisdiction over the application under the law. On 1 August 2003, Southern Cross filed with the CTA a Petition for Review, assailing the DTI Secretary's 25 June 2003 Decision which imposed the definite safeguard measure. Prescinding from this action, Philcemcor filed with this Court a Manifestation and Motion to Dismiss in regard to Southern Cross's petition, alleging that it deliberately and willfully resorted to forumshopping. It points out that Southern Cross's TRO Application seeks to enjoin the DTI Secretary's second decision, while its Petition before the CTA prays for the annulment of the same decision.44 Reiterating its Comment on Southern Cross's Petition for Review, Philcemcor also argues that the CTA, being a special court of limited jurisdiction, could only review the ruling of the DTI Secretary when a safeguard measure is imposed, and that the factual findings of the Tariff Commission are not binding on the DTI Secretary. 45 After giving due course to Southern Cross's Petition, the Court called the case for oral argument on 18 February 2004. 46 At the oral argument, attended by the counsel for Philcemcor and Southern Cross and the Office of the Solicitor General, the Court simplified the issues in this wise: (i) whether the Decision of the DTI Secretary is appealable to the CTA or the Court of Appeals; (ii) assuming that the Court of Appeals has jurisdiction, whether itsDecision is in accordance with law; and, (iii) whether a Temporary Restraining Order is warranted.47 During the oral arguments, counsel for Southern Cross manifested that due to the imposition of the general safeguard measures, Southern Cross was forced to cease operations in the Philippines in November of 2003.48 Propriety of the Temporary Restraining Order Before the merits of the Petition, a brief comment on Southern Cross's application for provisional relief. It sought to enjoin the DTI Secretary from enforcing the definitive safeguard measure he imposed in his 25 June 2003Decision. The Court did not grant the provisional relief for it would be tantamount to enjoining the collection of taxes, a peremptory judicial act which is traditionally frowned upon, 49 unless there is a clear statutory basis for it.50 In that regard, Section 218 of the Tax Reform Act of 1997 prohibits

On 23 June 2003, Southern Cross filed the present petition, assailing the appellate court's Decision for departing from the accepted and usual course of judicial proceedings, and not deciding the substantial questions in accordance with law and jurisprudence. The petition argues in the main that the Court of Appeals has no jurisdiction over Philcemcor's petition, the proper remedy being a petition for review with the CTA conformably with the SMA, and; that the factual findings of the Tariff Commission on the existence or non-existence conditions warranting the imposition of general safeguard measures are binding upon the DTI Secretary. The timely filing of Southern Cross's petition before this Court necessarily prevented the Court of AppealsDecision from becoming final.40 Yet on 25 June 2003, the DTI Secretary issued a new Decision, ruling this time that

any court from granting an injunction to restrain the collection of any national internal revenue tax, fee or charge imposed by the internal revenue code.51A similar philosophy is expressed by Section 29 of the SMA, which states that the filing of a petition for review before the CTA does not stop, suspend, or otherwise toll the imposition or collection of the appropriate tariff duties or the adoption of other appropriate safeguard measures.52 This evinces a clear legislative intent that the imposition of safeguard measures, despite the availability of judicial review, should not be enjoined notwithstanding any timely appeal of the imposition. The Forum-Shopping Issue In the same breath, we are not convinced that the allegation of forumshopping has been duly proven, or that sanction should befall upon Southern Cross and its counsel. The standard by Section 5, Rule 7 of the 1997 Rules of Civil Procedure in order that sanction may be had is that "the acts of the party or his counsel clearly constitute willful and deliberate forum shopping."53 The standard implies a malicious intent to subvert procedural rules, and such state of mind is not evident in this case. The Jurisdictional Issue On to the merits of the present petition. In its assailed Decision, the Court of Appeals, after asserting only in brief that it had jurisdiction over Philcemcor'sPetition, discussed the issue of whether or not the DTI Secretary is bound to adopt the negative recommendation of the Tariff Commission on the application for safeguard measure. The Court of Appeals maintained that it had jurisdiction over the petition, as it alleged grave abuse of discretion on the part of the DTI Secretary, thus:
A perusal of the instant petition reveals allegations of grave abuse of discretion on the part of the DTI Secretary in rendering the assailed April 5, 2002 Decision wherein it was ruled that he had no alternative but to abide by the findings of the Commission on the matter of safeguard measures for the local cement industry. Abuse of discretion is admittedly within the ambit of certiorari. Grave abuse of discretion implies such capricious and whimsical exercise of judgment as is equivalent to lack of jurisdiction. It is alleged that, in the assailed Decision, the DTI Secretary gravely abused his discretion in wantonly evading to discharge his duty to render an independent determination or decision in imposing a definitive safeguard measure.54

imposition of a safeguard measure may file with the CTA, a petition for review of such ruling within thirty (30) days from receipt thereof. Provided, however, that the filing of such petition for review shall not in any way stop, suspend or otherwise toll the imposition or collection of the appropriate tariff duties or the adoption of other appropriate safeguard measures, as the case may be. The petition for review shall comply with the same requirements and shall follow the same rules of procedure and shall be subject to the same disposition as in appeals in connection with adverse rulings on tax matters to the Court of Appeals.57 (Emphasis supplied)

It is not difficult to divine why the legislature singled out the CTA as the court with jurisdiction to review the ruling of the DTI Secretary in connection with the imposition of a safeguard measure. The Court has long recognized the legislative determination to vest sole and exclusive jurisdiction on matters involving internal revenue and customs duties to such a specialized court.58 By the very nature of its function, the CTA is dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the subject.59 At the same time, since the CTA is a court of limited jurisdiction, its jurisdiction to take cognizance of a case should be clearly conferred and should not be deemed to exist on mere implication. 60 Concededly, Rep. Act No. 1125, the statute creating the CTA, does not extend to it the power to review decisions of the DTI Secretary in connection with the imposition of safeguard measures.61 Of course, at that time which was before the advent of trade liberalization the notion of safeguard measures or safety nets was not yet in vogue. Undeniably, however, the SMA expanded the jurisdiction of the CTA by including review of the rulings of the DTI Secretary in connection with the imposition of safeguard measures. However, Philcemcor and the public respondents agree that the CTA has appellate jurisdiction over a decision of the DTI Secretary imposing a safeguard measure, but not when his ruling is not to impose such measure. In a related development, Rep. Act No. 9282, enacted on 30 March 2004, expressly vests unto the CTA jurisdiction over "[d]ecisions of the Secretary of Trade and Industry, in case of nonagricultural product, commodity or article xxx involving xxx safeguard measures under Republic Act No. 8800, where either party may appeal the decision to impose or not to impose said duties."62 Had Rep. Act No. 9282 already been in force at the beginning of the incidents subject of this case, there would have been no need to make any deeper inquiry as to the extent of the CTA's jurisdiction. But as Rep. Act No. 9282 cannot be applied retroactively to the present case, the question of whether such jurisdiction extends to a decision not to impose a safeguard measure will have to be settled principally on the basis of the SMA. Under Section 29 of the SMA, there are three requisites to enable the CTA to acquire jurisdiction over the petition for review contemplated therein: (i) there must be a ruling by the DTI Secretary; (ii) the petition must be filed by an interested party adversely affected by the ruling; and (iii) such ruling must be in connection with the imposition of a safeguard measure. The

We do not doubt that the Court of Appeals' certiorari powers extend to correcting grave abuse of discretion on the part of an officer exercising judicial or quasi-judicial functions.55 However, the special civil action of certiorari is available only when there is no plain, speedy and adequate remedy in the ordinary course of law.56 Southern Cross relies on this limitation, stressing that Section 29 of the SMA is a plain, speedy and adequate remedy in the ordinary course of law which Philcemcor did not avail of. The Section reads:
Section 29. Judicial Review. Any interested party who is adversely affected by the ruling of the Secretary in connection with the

first two requisites are clearly present. The third requisite deserves closer scrutiny. Contrary to the stance of the public respondents and Philcemcor, in this case where the DTI Secretary decides not to impose a safeguard measure, it is the CTA which has jurisdiction to review his decision. The reasons are as follows: First. Split jurisdiction is abhorred. Essentially, respondents' position is that judicial review of the DTI Secretary's ruling is exercised by two different courts, depending on whether or not it imposes a safeguard measure, and in either case the court exercising jurisdiction does so to the exclusion of the other. Thus, if the DTI decision involves the imposition of a safeguard measure it is the CTA which has appellate jurisdiction; otherwise, it is the Court of Appeals. Such setup is as novel and unusual as it is cumbersome and unwise. Essentially, respondents advocate that Section 29 of the SMA has established split appellate jurisdiction over rulings of the DTI Secretary on the imposition of safeguard measure. This interpretation cannot be favored, as the Court has consistently refused to sanction split jurisdiction. 63 The power of the DTI Secretary to adopt or withhold a safeguard measure emanates from the same statutory source, and it boggles the mind why the appeal modality would be such that one appellate court is qualified if what is to be reviewed is a positive determination, and it is not if what is appealed is a negative determination. In deciding whether or not to impose a safeguard measure, provisional or general, the DTI Secretary would be evaluating only one body of facts and applying them to one set of laws. The reviewing tribunal will be called upon to examine the same facts and the same laws, whether or not the determination is positive or negative. In short, if we were to rule for respondents we would be confirming the exercise by two judicial bodies of jurisdiction over basically the same subject matterprecisely the split-jurisdiction situation which is anathema to the orderly administration of justice. 64 The Court cannot accept that such was the legislative motive especially considering that the law expressly confers on the CTA, the tribunal with the specialized competence over tax and tariff matters, the role of judicial review without mention of any other court that may exercise corollary or ancillary jurisdiction in relation to the SMA. The provision refers to the Court of Appeals but only in regard to procedural rules and dispositions of appeals from the CTA to the Court of Appeals.65 The principle enunciated in Tejada v. Homestead Property Corporation66 is applicable to the case at bar:
The Court agrees with the observation of the [that] when an administrative agency or body is conferred quasi-judicial functions, all controversies relating to the subject matter pertaining to its specialization are deemed to be included within the jurisdiction of said administrative agency or body. Split jurisdiction is not favored.67

Second. The interpretation of the provisions of the SMA favors vesting untrammeled appellate jurisdiction on the CTA. A plain reading of Section 29 of the SMA reveals that Congress did not expressly bar the CTA from reviewing a negative determination by the DTI Secretary nor conferred on the Court of Appeals such review authority. Respondents note, on the other hand, that neither did the law expressly grant to the CTA the power to review a negative determination. However, under the clear text of the law, the CTA is vested with jurisdiction to review the ruling of the DTI Secretary "in connection with the imposition of a safeguard measure." Had the law been couched instead to incorporate the phrase "the ruling imposing a safeguard measure," then respondent's claim would have indisputable merit. Undoubtedly, the phrase "in connection with" not only qualifies but clarifies the succeeding phrase "imposition of a safeguard measure." As expounded later, the phrase also encompasses the opposite or converse ruling which is the non-imposition of a safeguard measure. In the American case of Shaw v. Delta Air Lines, Inc.,68 the United States Supreme Court, in interpreting a key provision of the Employee Retirement Security Act of 1974, construed the phrase "relates to" in its normal sense which is the same as "if it has connection with or reference to."69 There is no serious dispute that the phrase "in connection with" is synonymous to "relates to" or "reference to," and that all three phrases are broadly expansive. This is affirmed not just by jurisprudential fiat, but also the acquired connotative meaning of "in connection with" in common parlance. Consequently, with the use of the phrase "in connection with," Section 29 allows the CTA to review not only the ruling imposing a safeguard measure, but all other rulings related or have reference to the application for such measure. Now, let us determine the maximum scope and reach of the phrase "in connection with" as used in Section 29 of the SMA. A literalist reading or linguistic survey may not satisfy. Even the US Supreme Court in New York State Blue Cross Plans v. Travelers Ins.70 conceded that the phrases "relate to" or "in connection with" may be extended to the farthest stretch of indeterminacy for, universally, relations or connections are infinite and stop nowhere.71Thus, in the case the US High Court, examining the same phrase of the same provision of law involved in Shaw, resorted to looking at the statute and its objectives as the alternative to an "uncritical literalism."72 A similar inquiry into the other provisions of the SMA is in order to determine the scope of review accorded therein to the CTA.73 The authority to decide on the safeguard measure is vested in the DTI Secretary in the case of non-agricultural products, and in the Secretary of the Department of Agriculture in the case of agricultural products. 74 Section 29 is likewise explicit that only the rulings of the DTI Secretary or the Agriculture Secretary may be reviewed by the CTA.75 Thus, the acts of other bodies that were granted some powers by the SMA, such as the Tariff Commission, are not subject to direct review by the CTA. Under the SMA, the Department Secretary concerned is authorized to decide on several matters. Within thirty (30) days from receipt of a petition

seeking the imposition of a safeguard measure, or from the date he made motu proprio initiation, the Secretary shall make a preliminary determination on whether the increased imports of the product under consideration substantially cause or threaten to cause serious injury to the domestic industry.76Such ruling is crucial since only upon the Secretary's positive preliminary determination that a threat to the domestic industry exists shall the matter be referred to the Tariff Commission for formal investigation, this time, to determine whether the general safeguard measure should be imposed or not.77 Pursuant to a positive preliminary determination, the Secretary may also decide that the imposition of a provisional safeguard measure would be warranted under Section 8 of the SMA.78 The Secretary is also authorized to decide, after receipt of the report of the Tariff Commission, whether or not to impose the general safeguard measure, and if in the affirmative, what general safeguard measures should be applied.79 Even after the general safeguard measure is imposed, the Secretary is empowered to extend the safeguard measure,80 or terminate, reduce or modify his previous rulings on the general safeguard measure.81 With the explicit grant of certain powers involving safeguard measures by the SMA on the DTI Secretary, it follows that he is empowered to rule on several issues. These are the issues which arise in connection with, or in relation to, the imposition of a safeguard measure. They may arise at different stages the preliminary investigation stage, the post-formal investigation stage, or the post-safeguard measure stage yet all these issues do become ripe for resolution because an initiatory action has been taken seeking the imposition of a safeguard measure. It is the initiatory action for the imposition of a safeguard measure that sets the wheels in motion, allowing the Secretary to make successive rulings, beginning with the preliminary determination. Clearly, therefore, the scope and reach of the phrase "in connection with," as intended by Congress, pertain to all rulings of the DTI Secretary or Agriculture Secretary which arise from the time an application or motu proprioinitiation for the imposition of a safeguard measure is taken. Indeed, the incidents which require resolution come to the fore only because there is an initial application or action seeking the imposition of a safeguard measure. From the legislative standpoint, it was a matter of sense and practicality to lump up the questions related to the initiatory application or action for safeguard measure and to assign only one court and; that is the CTA to initially review all the rulings related to such initiatory application or action. Both directions Congress put in place by employing the phrase "in connection with" in the law. Given the relative expanse of decisions subject to judicial review by the CTA under Section 29, we do not doubt that a negative ruling refusing to impose a safeguard measure falls within the scope of its jurisdiction. On a literal level, such negative ruling is "a ruling of the Secretary in connection with the imposition of a safeguard measure," as it is one of the possible outcomes that may result from the initial application or action for a safeguard measure. On a more critical level, the rulings of the DTI Secretary in connection with a safeguard measure, however diverse the

outcome may be, arise from the same grant of jurisdiction on the DTI Secretary by the SMA.82 The refusal by the DTI Secretary to grant a safeguard measure involves the same grant of authority, the same statutory prescriptions, and the same degree of discretion as the imposition by the DTI Secretary of a safeguard measure. The position of the respondents is one of "uncritical literalism"83 incongruent with the animus of the law. Moreover, a fundamentalist approach to Section 29 is not warranted, considering the absurdity of the consequences. Third. Interpretatio Talis In Ambiguis Semper Fienda Est, Ut Evitur Inconveniens Et Absurdum.84 Even assuming arguendo that Section 29 has not expressly granted the CTA jurisdiction to review a negative ruling of the DTI Secretary, the Court is precluded from favoring an interpretation that would cause inconvenience and absurdity.85 Adopting the respondents' position favoring the CTA's minimal jurisdiction would unnecessarily lead to illogical and onerous results. Indeed, it is illiberal to assume that Congress had intended to provide appellate relief to rulings imposing a safeguard measure but not to those declining to impose the measure. Respondents might argue that the right to relief from a negative ruling is not lost since the applicant could, as Philcemcor did, question such ruling through a special civil action for certiorari under Rule 65 of the 1997 Rules of Civil Procedure, in lieu of an appeal to the CTA. Yet these two reliefs are of differing natures and gravamen. While an appeal may be predicated on errors of fact or errors of law, a special civil action for certiorari is grounded on grave abuse of discretion or lack of or excess of jurisdiction on the part of the decider. For a special civil action for certiorari to succeed, it is not enough that the questioned act of the respondent is wrong. As the Court clarified in Sempio v. Court of Appeals:
A tribunal, board or officer acts without jurisdiction if it/he does not have the legal power to determine the case. There is excess of jurisdiction where, being clothed with the power to determine the case, the tribunal, board or officer oversteps its/his authority as determined by law. And there is grave abuse of discretion where the tribunal, board or officer acts in a capricious, whimsical, arbitrary or despotic manner in the exercise of his judgment as to be said to be equivalent to lack of jurisdiction. Certiorari is often resorted to in order to correct errors of jurisdiction. Where the error is one of law or of fact, which is a mistake of judgment, appeal is the remedy.86

It is very conceivable that the DTI Secretary, after deliberate thought and careful evaluation of the evidence, may either make a negative preliminary determination as he is so empowered under Section 7 of the SMA, or refuse to adopt the definitive safeguard measure under Section 13 of the same law. Adopting the respondents' theory, this negative ruling is susceptible to reversal only through a special civil action for certiorari, thus depriving the affected party the chance to elevate the ruling on appeal on the rudimentary grounds of errors in fact or in law. Instead, and despite whatever indications that the DTI Secretary acted with measure and within

the bounds of his jurisdiction are, the aggrieved party will be forced to resort to a gymnastic exercise, contorting the straight and narrow in an effort to discombobulate the courts into believing that what was within was actually beyond and what was studied and deliberate actually whimsical and capricious. What then would be the remedy of the party aggrieved by a negative ruling that simply erred in interpreting the facts or the law? It certainly cannot be the special civil action for certiorari, for as the Court held in Silverio v. Court of Appeals: "Certiorari is a remedy narrow in its scope and inflexible in its character. It is not a general utility tool in the legal workshop."87 Fortunately, this theoretical quandary need not come to pass. Section 29 of the SMA is worded in such a way that it places under the CTA's judicial review all rulings of the DTI Secretary, which are connected with the imposition of a safeguard measure. This is sound and proper in light of the specialized jurisdiction of the CTA over tax matters. In the same way that a question of whether to tax or not to tax is properly a tax matter, so is the question of whether to impose or not to impose a definitive safeguard measure. On another note, the second paragraph of Section 29 similarly reveals the legislative intent that rulings of the DTI Secretary over safeguard measures should first be reviewed by the CTA and not the Court of Appeals. It reads:
The petition for review shall comply with the same requirements and shall follow the same rules of procedure and shall be subject to the same disposition as in appeals in connection with adverse rulings on tax matters to the Court of Appeals.

Undoubtedly, Section 13 prescribes certain limitations and restrictions before general safeguard measures may be imposed. However, the most fundamental restriction on the DTI Secretary's power in that respect is contained in Section 5 of the SMAthat there should first be a positive final determination of the Tariff Commissionwhich the Court of Appeals curiously all but ignored. Section 5 reads:
Sec. 5. Conditions for the Application of General Safeguard Measures. The Secretary shall apply a general safeguard measure upon a positive final determination of the [Tariff] Commission that a product is being imported into the country in increased quantities, whether absolute or relative to the domestic production, as to be a substantial cause of serious injury or threat thereof to the domestic industry; however, in the case of non-agricultural products, the Secretary shall first establish that the application of such safeguard measures will be in the public interest. (emphasis supplied)

The plain meaning of Section 5 shows that it is the Tariff Commission that has the power to make a "positive final determination." This power lodged in the Tariff Commission, must be distinguished from the power to impose the general safeguard measure which is properly vested on the DTI Secretary.88 All in all, there are two condition precedents that must be satisfied before the DTI Secretary may impose a general safeguard measure on grey Portland cement. First, there must be a positive final determination by the Tariff Commission that a product is being imported into the country in increased quantities (whether absolute or relative to domestic production), as to be a substantial cause of serious injury or threat to the domestic industry. Second, in the case of non-agricultural products the Secretary must establish that the application of such safeguard measures is in the public interest.89 As Southern Cross argues, Section 5 is quite clear-cut, and it is impossible to finagle a different conclusion even through overarching methods of statutory construction. There is no safer nor better settled canon of interpretation that when language is clear and unambiguous it must be held to mean what it plainly expresses: 90 In the quotable words of an illustrious member of this Court, thus:
[I]f a statute is clear, plain and free from ambiguity, it must be given its literal meaning and applied without attempted interpretation. The verba legis or plain meaning rule rests on the valid presumption that the words employed by the legislature in a statute correctly express its intent or will and preclude the court from construing it differently. The legislature is presumed to know the meaning of the words, to have used words advisedly, and to have expressed its intent by the use of such words as are found in the statute.91

This is the only passage in the SMA in which the Court of Appeals is mentioned. The express wish of Congress is that the petition conform to the requirements and procedure under Rule 43 of the Rules of Civil Procedure. Since Congress mandated that the form and procedure adopted be analogous to a review of a CTA ruling by the Court of Appeals, the legislative contemplation could not have been that the appeal be directly taken to the Court of Appeals. Issue of Binding Effect of Tariff Commission's Factual Determination on DTI Secretary. The next issue for resolution is whether the factual determination made by the Tariff Commission under the SMA is binding on the DTI Secretary. Otherwise stated, the question is whether the DTI Secretary may impose general safeguard measures in the absence of a positive final determination by the Tariff Commission. The Court of Appeals relied upon Section 13 of the SMA in ruling that the findings of the Tariff Commission do not necessarily constitute a final decision. Section 13 details the procedure for the adoption of a safeguard measure, as well as the steps to be taken in case there is a negative final determination. The implication of the Court of Appeals' holding is that the DTI Secretary may adopt a definitive safeguard measure, notwithstanding a negative determination made by the Tariff Commission.

Moreover, Rule 5 of the Implementing Rules and Regulations of the SMA,92 which interprets Section 5 of the law, likewise requires a positive final determination on the part of the Tariff Commission before the application of the general safeguard measure. The SMA establishes a distinct allocation of functions between the Tariff Commission and the DTI Secretary. The plain meaning of Section 5 shows

that it is the Tariff Commission that has the power to make a "positive final determination." This power, which belongs to the Tariff Commission, must be distinguished from the power to impose general safeguard measure properly vested on the DTI Secretary. The distinction is vital, as a "positive final determination" clearly antecedes, as a condition precedent, the imposition of a general safeguard measure. At the same time, a positive final determination does not necessarily result in the imposition of a general safeguard measure. Under Section 5, notwithstanding the positive final determination of the Tariff Commission, the DTI Secretary is tasked to decide whether or not that the application of the safeguard measures is in the public interest. It is also clear from Section 5 of the SMA that the positive final determination to be undertaken by the Tariff Commission does not entail a mere gathering of statistical data. In order to arrive at such determination, it has to establish causal linkages from the statistics that it compiles and evaluates: after finding there is an importation in increased quantities of the product in question, that such importation is a substantial cause of serious threat or injury to the domestic industry. The Court of Appeals relies heavily on the legislative record of a congressional debate during deliberations on the SMA to assert a purported legislative intent that the findings of the Tariff Commission do not bind the DTI Secretary.93 Yet as explained earlier, the plain meaning of Section 5 emphasizes that only if the Tariff Commission renders a positive determination could the DTI Secretary impose a safeguard measure. Resort to the congressional records to ascertain legislative intent is not warranted if a statute is clear, plain and free from ambiguity. The legislature is presumed to know the meaning of the words, to have used words advisedly, and to have expressed its intent by the use of such words as are found in the statute.94 Indeed, the legislative record, if at all to be availed of, should be approached with extreme caution, as legislative debates and proceedings are powerless to vary the terms of the statute when the meaning is clear.95 Our holding in Civil Liberties Union v. Executive Secretary96 on the resort to deliberations of the constitutional convention to interpret the Constitution is likewise appropriate in ascertaining statutory intent:
While it is permissible in this jurisdiction to consult the debates and proceedings of the constitutional convention in order to arrive at the reason and purpose of the resulting Constitution, resort thereto may be had only when other guides fail as said proceedings are powerless to vary the terms of the Constitution when the meaning is clear. Debates in the constitutional convention "are of value as showing the views of the individual members, and as indicating the reasons for their votes, but they give us no light as to the views of the large majority who did not talk xxx. We think it safer to construe the constitution from what appears upon its face."97

authoritative congressional record. Hence, resort to legislative deliberations is allowable when the statute is crafted in such a manner as to leave room for doubt on the real intent of the legislature. Section 5 plainly evinces legislative intent to restrict the DTI Secretary's power to impose a general safeguard measure by preconditioning such imposition on a positive determination by the Tariff Commission. Such legislative intent should be given full force and effect, as the executive power to impose definitive safeguard measures is but a delegated powerthe power of taxation, by nature and by command of the fundamental law, being a preserve of the legislature.98 Section 28(2), Article VI of the 1987 Constitution confirms the delegation of legislative power, yet ensures that the prerogative of Congress to impose limitations and restrictions on the executive exercise of this power:
The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the Government.99

The safeguard measures which the DTI Secretary may impose under the SMA may take the following variations, to wit: (a) an increase in, or imposition of any duty on the imported product; (b) a decrease in or the imposition of a tariff-rate quota on the product; (c) a modification or imposition of any quantitative restriction on the importation of the product into the Philippines; (d) one or more appropriate adjustment measures, including the provision of trade adjustment assistance; and (e) any combination of the above-described actions. Except for the provision of trade adjustment assistance, the measures enumerated by the SMA are essentially imposts, which precisely are the subject of delegation under Section 28(2), Article VI of the 1987 Constitution.100 This delegation of the taxation power by the legislative to the executive is authorized by the Constitution itself.101At the same time, the Constitution also grants the delegating authority (Congress) the right to impose restrictions and limitations on the taxation power delegated to the President.102 The restrictions and limitations imposed by Congress take on the mantle of a constitutional command, which the executive branch is obliged to observe. The SMA empowered the DTI Secretary, as alter ego of the President,103 to impose definitive general safeguard measures, which basically are tariff imposts of the type spoken of in the Constitution. However, the law did not grant him full, uninhibited discretion to impose such measures. The DTI Secretary authority is derived from the SMA; it does not flow from any inherent executive power. Thus, the limitations imposed by Section 5 are absolute, warranted as they are by a constitutional fiat.104 Philcemcor cites our 1912 ruling in Lamb v. Phipps105 to assert that the DTI Secretary, having the final decision on the safeguard measure, has the power to evaluate the findings of the Tariff Commission and make an independent judgment thereon. Given the constitutional and statutory limitations governing the present case, the citation is

Moreover, it is easy to selectively cite passages, sometimes out of their proper context, in order to assert a misleading interpretation. The effect can be dangerous. Minority or solitary views, anecdotal ruminations, or even the occasional crude witticisms, may improperly acquire the mantle of legislative intent by the sole virtue of their publication in the

misplaced. Lamb pertained to the discretion of the Insular Auditor of the Philippine Islands, whom, as the Court recognized, "[t]he statutes of the United States require[d] xxx to exercise his judgment upon the legality xxx [of] provisions of law and resolutions of Congress providing for the payment of money, the means of procuring testimony upon which he may act."106 Thus in Lamb, while the Court recognized the wide latitude of discretion that may have been vested on the Insular Auditor, it also recognized that such latitude flowed from, and is consequently limited by, statutory grant. However, in this case, the provision of the Constitution in point expressly recognizes the authority of Congress to prescribe limitations in the case of tariffs, export/import quotas and other such safeguard measures. Thus, the broad discretion granted to the Insular Auditor of the Philippine Islands cannot be analogous to the discretion of the DTI Secretary which is circumscribed by Section 5 of the SMA. For that matter, Cario v. Commissioner on Human Rights,107 likewise cited by Philcemcor, is also inapplicable owing to the different statutory regimes prevailing over that case and the present petition. In Cario, the Court ruled that the constitutional power of the Commission on Human Rights (CHR) to investigate human rights' violations did not extend to adjudicating claims on the merits.108 Philcemcor claims that the functions of the Tariff Commission being "only investigatory," it could neither decide nor adjudicate.109 The applicable law governing the issue in Cario is Section 18, Article XIII of the Constitution, which delineates the powers and functions of the CHR. The provision does not vest on the CHR the power to adjudicate cases, but only to investigate all forms of human rights violations.110 Yet, without modifying the thorough disquisition of the Court in Cario on the general limitations on the investigatory power, the precedent is inapplicable because of the difference in the involved statutory frameworks. The Constitution does not repose binding effect on the results of the CHR's investigation.111 On the other hand, through Section 5 of the SMA and under the authority of Section 28(2), Article VI of the Constitution, Congress did intend to bind the DTI Secretary to the determination made by the Tariff Commission.112 It is of no consequence that such determination results from the exercise of investigatory powers by the Tariff Commission since Congress is well within its constitutional mandate to limit the authority of the DTI Secretary to impose safeguard measures in the manner that it sees fit. The Court of Appeals and Philcemcor also rely on Section 13 of the SMA and Rule 13 of the SMA's Implementing Rules in support of the view that the DTI Secretary may decide independently of the determination made by the Tariff Commission. Admittedly, there are certain infelicities in the language of Section 13 and Rule 13. But reliance should not be placed on the textual imprecisions. Rather, Section 13 and Rule 13 must be viewed in light of the fundamental prescription imposed by Section 5. 113 Section 13 of the SMA lays down the procedure to be followed after the Tariff Commission renders its report. The provision reads in full:

SEC. 13. Adoption of Definitive Measures. Upon its positive determination, the Commission shall recommend to the Secretary an appropriate definitive measure, in the form of: (a) An increase in, or imposition of, any duty on the imported product; (b) A decrease in or the imposition of a tariff-rate quota (MAV) on the product; (c) A modification or imposition of any quantitative restriction on the importation of the product into the Philippines; (d) One or more appropriate adjustment measures, including the provision of trade adjustment assistance; (e) Any combination of actions described in subparagraphs (a) to (d). The Commission may also recommend other actions, including the initiation of international negotiations to address the underlying cause of the increase of imports of the product, to alleviate the injury or threat thereof to the domestic industry, and to facilitate positive adjustment to import competition. The general safeguard measure shall be limited to the extent of redressing or preventing the injury and to facilitate adjustment by the domestic industry from the adverse effects directly attributed to the increased imports: Provided, however, That when quantitative import restrictions are used, such measures shall not reduce the quantity of imports below the average imports for the three (3) preceding representative years, unless clear justification is given that a different level is necessary to prevent or remedy a serious injury. A general safeguard measure shall not be applied to a product originating from a developing country if its share of total imports of the product is less than three percent (3%): Provided, however, That developing countries with less than three percent (3%) share collectively account for not more than nine percent (9%) of the total imports. The decision imposing a general safeguard measure, the duration of which is more than one (1) year, shall be reviewed at regular intervals for purposes of liberalizing or reducing its intensity. The industry benefiting from the application of a general safeguard measure shall be required to show positive adjustment within the allowable period. A general safeguard measure shall be terminated where the benefiting industry fails to show any improvement, as may be determined by the Secretary. The Secretary shall issue a written instruction to the heads of the concerned government agencies to implement the appropriate general safeguard measure as determined by the Secretary within fifteen (15) days from receipt of the report. In the event of a negative final determination, or if the cash bond is in excess of the definitive safeguard duty assessed, the Secretary shall immediately issue, through the Secretary of Finance, a written instruction to the Commissioner of Customs, authorizing the return of the cash bond or the remainder thereof, as the case may be, previously collected as provisional general safeguard measure within ten (10) days from the date a final decision has been made: Provided, That the government shall not be liable for any interest on the amount to be returned. The Secretary shall not accept for consideration another petition from the same industry, with

respect to the same imports of the product under consideration within one (1) year after the date of rendering such a decision. When the definitive safeguard measure is in the form of a tariff increase, such increase shall not be subject or limited to the maximum levels of tariff as set forth in Section 401(a) of the Tariff and Customs Code of the Philippines.

impose the appropriate tariff measures. That is why the SMA empowers the DTI Secretary to adopt safeguard measures other than those recommended by the Tariff Commission. Unlike the recommendations of the Tariff Commission, its determination has a different effect on the DTI Secretary. Only on the basis of a positive final determination made by the Tariff Commission under Section 5 can the DTI Secretary impose a general safeguard measure. Clearly, then the DTI Secretary is bound by the determinationmade by the Tariff Commission. Some confusion may arise because the sixth paragraph of Section 13124 uses the variant word "determined" in a different context, as it contemplates "the appropriate general safeguard measure as determined by the Secretary within fifteen (15) days from receipt of the report." Quite plainly, the word "determined" in this context pertains to the DTI Secretary's power of choice of the appropriate safeguard measure, as opposed to the Tariff Commission's power to determine the existence of conditions necessary for the imposition of any safeguard measure. In relation to Section 5, such choice also relates to the mandate of the DTI Secretary to establish that the application of safeguard measures is in the public interest, also within the fifteen (15) day period. Nothing in Section 13 contradicts the instruction in Section 5 that the DTI Secretary is allowed to impose the general safeguard measures only if there is a positive determination made by the Tariff Commission. Unfortunately, Rule 13.2 of the Implementing Rules of the SMA is captioned "Final Determination by the Secretary." The assailed Decision and Philcemcor latch on this phraseology to imply that the factual determination rendered by the Tariff Commission under Section 5 may be amended or reversed by the DTI Secretary. Of course, implementing rules should conform, not clash, with the law that they seek to implement, for a regulation which operates to create a rule out of harmony with the statute is a nullity.125 Yet imperfect draftsmanship aside, nothing in Rule 13.2 implies that the DTI Secretary can set aside the determination made by the Tariff Commission under the aegis of Section 5. This can be seen by examining the specific provisions of Rule 13.2, thus:
RULE 13.2. Final Determination by the Secretary RULE 13.2.a. Within fifteen (15) calendar days from receipt of the Report of the Commission, the Secretary shall make a decision, taking into consideration the measures recommended by the Commission. RULE 13.2.b. If the determination is affirmative, the Secretary shall issue, within two (2) calendar days after making his decision, a written instruction to the heads of the concerned government agencies to immediately implement the appropriate general safeguard measure as determined by him. Provided, however, that in the case of non-agricultural products, the Secretary shall first establish that the imposition of the safeguard measure will be in the public interest. RULE 13.2.c. Within two (2) calendar days after making his decision, the Secretary shall also order its publication in two (2)

To better comprehend Section 13, note must be taken of the distinction between the investigatory and recommendatory functions of the Tariff Commission under the SMA. The word "determination," as used in the SMA, pertains to the factual findings on whether there are increased imports into the country of the product under consideration, and on whether such increased imports are a substantial cause of serious injury or threaten to substantially cause serious injury to the domestic industry.114The SMA explicitly authorizes the DTI Secretary to make a preliminary determination, 115 and the Tariff Commission to make the final determination.116 The distinction is fundamental, as these functions are not interchangeable. The Tariff Commission makes its determination only after a formal investigation process, with such investigation initiated only if there is a positive preliminary determination by the DTI Secretary under Section 7 of the SMA.117 On the other hand, the DTI Secretary may impose definitive safeguard measure only if there is a positive final determination made by the Tariff Commission.118 In contrast, a "recommendation" is a suggested remedial measure submitted by the Tariff Commission under Section 13 after making a positive final determination in accordance with Section 5. The Tariff Commission is not empowered to make a recommendation absent a positive final determination on its part.119 Under Section 13, the Tariff Commission is required to recommend to the [DTI] Secretary an "appropriate definitive measure."120 The Tariff Commission "may also recommend other actions, including the initiation of international negotiations to address the underlying cause of the increase of imports of the products, to alleviate the injury or threat thereof to the domestic industry and to facilitate positive adjustment to import competition."121 The recommendations of the Tariff Commission, as rendered under Section 13, are not obligatory on the DTI Secretary. Nothing in the SMA mandates the DTI Secretary to adopt the recommendations made by the Tariff Commission. In fact, the SMA requires that the DTI Secretary establish that the application of such safeguard measures is in the public interest, notwithstanding the Tariff Commission's recommendation on the appropriate safeguard measure based on its positive final determination.122 The non-binding force of the Tariff Commission's recommendations is congruent with the command of Section 28(2), Article VI of the 1987 Constitution that only the President may be empowered by the Congress to impose appropriate tariff rates, import/export quotas and other similar measures.123 It is the DTI Secretary, as alter ego of the President, who under the SMA may impose such safeguard measures subject to the limitations imposed therein. A contrary conclusion would in essence unduly arrogate to the Tariff Commission the executive power to

newspapers of general circulation. He shall also furnish a copy of his Order to the petitioner and other interested parties, whether affirmative or negative. (Emphasis supplied.)

Moreover, the DTI Secretary does not have the power to review the findings of the Tariff Commission for it is not subordinate to the Department of Trade and Industry ("DTI"). It falls under the supervision, not of the DTI nor of the Department of Finance (as mistakenly asserted by Southern Cross),126 but of the National Economic Development Authority, an independent planning agency of the government of co-equal rank as the DTI.127 As the supervision and control of a Department Secretary is limited to the bureaus, offices, and agencies under him,128 the DTI Secretary generally cannot exercise review authority over actions of the Tariff Commission. Neither does the SMA specifically authorize the DTI Secretary to alter, amend or modify in any way the determination made by the Tariff Commission. The most that the DTI Secretary could do to express displeasure over the Tariff Commission's actions is to ignore its recommendation, but not its determination. The word "determination" as used in Rule 13.2 of the Implementing Rules is dissonant with the same word as employed in the SMA, which in the latter case is undeviatingly in reference to the determination made by the Tariff Commission. Beyond the resulting confusion, however, the divergent use in Rule 13.2 is explicable as the Rule textually pertains to the power of the DTI Secretary to review the recommendations of the Tariff Commission, not the latter's determination. Indeed, an examination of the specific provisions show that there is no real conflict to reconcile. Rule 13.2 respects the logical order imposed by the SMA. The Rule does not remove the essential requirement under Section 5 that a positive final determination be made by the Tariff Commission before a definitive safeguard measure may be imposed by the DTI Secretary. The assailed Decision characterizes the findings of the Tariff Commission as merely recommendatory and points to the DTI Secretary as the authority who renders the final decision.129 At the same time, Philcemcor asserts that the Tariff Commission's functions are merely investigatory, and as such do not include the power to decide or adjudicate. These contentions, viewed in the context of the fundamental requisite set forth by Section 5, are untenable. They run counter to the statutory prescription that a positive final determination made by the Tariff Commission should first be obtained before the definitive safeguard measures may be laid down. Was it anomalous for Congress to have provided for a system whereby the Tariff Commission may preclude the DTI, an office of higher rank, from imposing a safeguard measure? Of course, this Court does not inquire into the wisdom of the legislature but only charts the boundaries of powers and functions set in its enactments. But then, it is not difficult to see the internal logic of this statutory framework. For one, as earlier stated, the DTI cannot exercise review powers over the Tariff Commission which is not its subordinate office.

Moreover, the mechanism established by Congress establishes a measure of check and balance involving two different governmental agencies with disparate specializations. The matter of safeguard measures is of such national importance that a decision either to impose or not to impose then could have ruinous effects on companies doing business in the Philippines. Thus, it is ideal to put in place a system which affords all due deliberation and calls to fore various governmental agencies exercising their particular specializations. Finally, if this arrangement drawn up by Congress makes it difficult to obtain a general safeguard measure, it is because such safeguard measure is the exception, rather than the rule. The Philippines is obliged to observe its obligations under the GATT, under whose framework trade liberalization, not protectionism, is laid down. Verily, the GATT actually prescribes conditions before a member-country may impose a safeguard measure. The pertinent portion of the GATT Agreement on Safeguards reads:
2. A Member may only apply a safeguard measure to a product only if that member has determined, pursuant to the provisions set out below, that such product is being imported into its territory in such increased quantities, absolute or relative to domestic production, and under such conditions as to cause or threaten to cause serious injury to the domestic industry that produces like or directly competitive products.130 3. (a) A Member may apply a safeguard measure only following an investigation by the competent authorities of that Member pursuant to procedures previously established and made public in consonance with Article X of the GATT 1994. This investigation shall include reasonable public notice to all interested parties and public hearings or other appropriate means in which importers, exporters and other interested parties could present evidence and their views, including the opportunity to respond to the presentations of other parties and to submit their views, inter alia, as to whether or not the application of a safeguard measure would be in the public interest. The competent authorities shall publish a report setting forth their findings and reasoned conclusions reached on all pertinent issues of fact and law.131

The SMA was designed not to contradict the GATT, but to complement it. The two requisites laid down in Section 5 for a positive final determination are the same conditions provided under the GATT Agreement on Safeguards for the application of safeguard measures by a member country. Moreover, the investigatory procedure laid down by the SMA conforms to the procedure required by the GATT Agreement on Safeguards. Congress has chosen the Tariff Commission as the competent authority to conduct such investigation. Southern Cross stresses that applying the provision of the GATT Agreement on Safeguards, the Tariff Commission is clearly empowered to arrive at binding conclusions. 132 We agree: binding on the DTI Secretary is the Tariff Commission's determinations on whether a product is imported in increased quantities, absolute or relative to domestic production and whether any such increase is a substantial cause of serious injury or threat thereof to the domestic industry.133

Satisfied as we are with the proper statutory paradigm within which the SMA should be analyzed, the flaws in the reasoning of the Court of Appeals and in the arguments of the respondents become apparent. To better understand the dynamics of the procedure set up by the law leading to the imposition of definitive safeguard measures, a brief step-by-step recount thereof is in order. 1. After the initiation of an action involving a general safeguard measure,134 the DTI Secretary makes a preliminary determination whether the increased imports of the product under consideration substantially cause or threaten to substantially cause serious injury to the domestic industry,135 and whether the imposition of a provisional measure is warranted under Section 8 of the SMA.136 If the preliminary determination is negative, it is implied that no further action will be taken on the application. 2. When his preliminary determination is positive, the Secretary immediately transmits the records covering the application to the Tariff Commission for immediate formal investigation.137 3. The Tariff Commission conducts its formal investigation, keyed towards making a final determination. In the process, it holds public hearings, providing interested parties the opportunity to present evidence or otherwise be heard.138 To repeat, Section 5 enumerates what the Tariff Commission is tasked to determine: (a) whether a product is being imported into the country in increased quantities, irrespective of whether the product is absolute or relative to the domestic production; and (b) whether the importation in increased quantities is such that it causes serious injury or threat to the domestic industry. 139 The findings of the Tariff Commission as to these matters constitute the final determination, which may be either positive or negative. 4. Under Section 13 of the SMA, if the Tariff Commission makes a positive determination, the Tariff Commission "recommends to the [DTI] Secretary an appropriate definitive measure." The Tariff Commission "may also recommend other actions, including the initiation of international negotiations to address the underlying cause of the increase of imports of the products, to alleviate the injury or threat thereof to the domestic industry, and to facilitate positive adjustment to import competition."140 5. If the Tariff Commission makes a positive final determination, the DTI Secretary is then to decide, within fifteen (15) days from receipt of the report, as to what appropriate safeguard measures should he impose. 6. However, if the Tariff Commission makes a negative final determination, the DTI Secretary cannot impose any definitive safeguard measure. Under Section 13, he is instructed instead to return whatever cash bond was paid by the applicant upon the initiation of the action for safeguard measure. The Effect of the Court's Decision The Court of Appeals erred in remanding the case back to the DTI Secretary, with the instruction that the DTI Secretary may impose a general safeguard measure even if there is no positive final determination

from the Tariff Commission. More crucially, the Court of Appeals could not have acquired jurisdiction over Philcemcor's petition for certiorari in the first place, as Section 29 of the SMA properly vests jurisdiction on the CTA. Consequently, the assailed Decision is an absolute nullity, and we declare it as such. What is the effect of the nullity of the assailed Decision on the 5 June 2003 Decision of the DTI Secretary imposing the general safeguard measure? We have recognized that any initial judicial review of a DTI ruling in connection with the imposition of a safeguard measure belongs to the CTA. At the same time, the Court also recognizes the fundamental principle that a null and void judgment cannot produce any legal effect. There is sufficient cause to establish that the 5 June 2003 Decision of the DTI Secretary resulted from the assailed Court of Appeals Decision, even if the latter had not yet become final. Conversely, it can be concluded that it was because of the putative imprimatur of the Court of Appeals' Decision that the DTI Secretary issued his ruling imposing the safeguard measure. Since the 5 June 2003 Decision derives its legal effect from the void Decision of the Court of Appeals, this ruling of the DTI Secretary is consequently void. The spring cannot rise higher than the source. The DTI Secretary himself acknowledged that he drew stimulating force from the appellate court's Decision for in his own 5 June 2003 Decision, he declared: From the aforementioned ruling, the CA has remanded the case to the DTI Secretary for a final decision. Thus, there is no legal impediment for the Secretary to decide on the application.141 The inescapable conclusion is that the DTI Secretary needed the assailed Decision of the Court of Appeals to justify his rendering a second Decision. He explicitly invoked the Court of Appeals' Decision as basis for rendering his 5 June 2003 ruling, and implicitly recognized that without such Decision he would not have the authority to revoke his previous ruling and render a new, obverse ruling. It is clear then that the 25 June 2003 Decision of the DTI Secretary is a product of the void Decision, it being an attempt to carry out such null judgment. There is therefore no choice but to declare it void as well, lest we sanction the perverse existence of a fruit from a non-existent tree. It does not even matter what the disposition of the 25 June 2003 Decision was, its nullity would be warranted even if the DTI Secretary chose to uphold his earlier ruling denying the application for safeguard measures. It is also an unfortunate spectacle to behold the DTI Secretary, seeking to enforce a judicial decision which is not yet final and actually pending review on appeal. Had it been a judge who attempted to enforce a decision that is not yet final and executory, he or she would have readily been subjected to sanction by this Court. The DTI Secretary may be beyond the ambit of administrative review by this Court, but we are capacitated to allocate the boundaries set by the law of the land and to exact fealty to the legal order, especially from the instrumentalities and officials of government.

WHEREFORE, the petition is GRANTED. The assailed Decision of the Court of Appeals is DECLARED NULL AND VOID and SET ASIDE. The Decision of the DTI Secretary dated 25 June 2003 is also DECLARED NULL AND VOID and SET ASIDE. No Costs. SO ORDERED. Puno, (Chairman), Quisumbing, Austria-Martinez, and Callejo, Sr., JJ., concur.

MARSHALL, C.J., Opinion of the Court SUPREME COURT OF THE UNITED STATES 17 U.S. 316

MCCULLOCH V. MARYLAND
ERROR TO THE COURT OF APPEALS OF THE STATE OF MARYLAND Argued: --- Decided: MARSHALL, Chief Justice, delivered the opinion of the Court. In the case now to be determined, the defendant, a sovereign State, denies the obligation of a law enacted by the legislature of the Union, and the plaintiff, on his part, contests the validity of an act which has been passed by the legislature of that State. The Constitution of our country, in its most interesting and vital parts, is to be considered, the conflicting powers of the Government of the Union and of its members, as marked in that Constitution, are to be discussed, and an opinion given which may essentially influence the great operations of the Government. No tribunal can approach such a question without a deep sense of its importance, and of the awful responsibility involved in its decision. But it must be decided peacefully, or remain a source of [p401]hostile legislation, perhaps, of hostility of a still more serious nature; and if it is to be so decided, by this tribunal alone can the decision be made. On the Supreme Court of the United States has the Constitution of our country devolved this important duty. The first question made in the cause is -- has Congress power to incorporate a bank? It has been truly said that this can scarcely be considered as an open question entirely unprejudiced by the former proceedings of the Nation respecting it. The principle now contested was introduced at a very early period of our history, has been recognised by many successive legislatures, and has been acted upon by the Judicial Department, in cases of peculiar delicacy, as a law of undoubted obligation. It will not be denied that a bold and daring usurpation might be resisted after an acquiescence still longer and more complete than this. But it is conceived that a doubtful question, one on which human reason may pause and the human judgment be suspended, in the decision of which the great principles of liberty are not concerned, but the respective powers of those who are equally the representatives of the people, are to be adjusted, if not put at rest by the practice of the Government, ought to receive a considerable impression from that practice. An exposition of the Constitution, deliberately established by legislative acts, on the faith of which an immense property has been advanced, ought not to be lightly disregarded.

The power now contested was exercised by the first Congress elected under the present Constitution. [p402] The bill for incorporating the Bank of the United States did not steal upon an unsuspecting legislature and pass unobserved. Its principle was completely understood, and was opposed with equal zeal and ability. After being resisted first in the fair and open field of debate, and afterwards in the executive cabinet, with as much persevering talent as any measure has ever experienced, and being supported by arguments which convinced minds as pure and as intelligent as this country can boast, it became a law. The original act was permitted to expire, but a short experience of the embarrassments to which the refusal to revive it exposed the Government convinced those who were most prejudiced against the measure of its necessity, and induced the passage of the present law. It would require no ordinary share of intrepidity to assert that a measure adopted under these circumstances was a bold and plain usurpation to which the Constitution gave no countenance. These observations belong to the cause; but they are not made under the impression that, were the question entirely new, the law would be found irreconcilable with the Constitution. In discussing this question, the counsel for the State of Maryland have deemed it of some importance, in the construction of the Constitution, to consider that instrument not as emanating from the people, but as the act of sovereign and independent States. The powers of the General Government, it has been said, are delegated by the States, who alone are truly sovereign, and must be exercised in subordination to the States, who alone possess supreme dominion.[p403] It would be difficult to sustain this proposition. The convention which framed the Constitution was indeed elected by the State legislatures. But the instrument, when it came from their hands, was a mere proposal, without obligation or pretensions to it. It was reported to the then existing Congress of the United States with a request that it might be submitted to a convention of delegates, chosen in each State by the people thereof, under the recommendation of its legislature, for their assent and ratification. This mode of proceeding was adopted, and by the convention, by Congress, and by the State legislatures, the instrument was submitted to the people. They acted upon it in the only manner in which they can act safely, effectively and wisely, on such a subject -- by assembling in convention. It is true, they assembled in their several States -- and where else should they have assembled? No political dreamer was ever wild enough to think of breaking down the lines which separate the States, and of compounding the American people into one common mass. Of consequence, when they act, they act in their States. But the measures they adopt do not, on that account, cease to be the measures of the people themselves, or become the measures of the State governments. From these conventions the Constitution derives its whole authority. The government proceeds directly from the people; is "ordained and established" in the name of the people, and is declared to be ordained, in order to form a more perfect union, establish justice, insure domestic

tranquillity, and secure [p404] the blessings of liberty to themselves and to their posterity. The assent of the States in their sovereign capacity is implied in calling a convention, and thus submitting that instrument to the people. But the people were at perfect liberty to accept or reject it, and their act was final. It required not the affirmance, and could not be negatived, by the State Governments. The Constitution, when thus adopted, was of complete obligation, and bound the State sovereignties. It has been said that the people had already surrendered all their powers to the State sovereignties, and had nothing more to give. But surely the question whether they may resume and modify the powers granted to Government does not remain to be settled in this country. Much more might the legitimacy of the General Government be doubted had it been created by the States. The powers delegated to the State sovereignties were to be exercised by themselves, not by a distinct and independent sovereignty created by themselves. To the formation of a league such as was the Confederation, the State sovereignties were certainly competent. But when, "in order to form a more perfect union," it was deemed necessary to change this alliance into an effective Government, possessing great and sovereign powers and acting directly on the people, the necessity of referring it to the people, and of deriving its powers directly from them, was felt and acknowledged by all. The Government of the Union then (whatever may be the influence of this fact on the case) is, [p405] emphatically and truly, a Government of the people. In form and in substance, it emanates from them. Its powers are granted by them, and are to be exercised directly on them, and for their benefit. This Government is acknowledged by all to be one of enumerated powers. The principle that it can exercise only the powers granted to it would seem too apparent to have required to be enforced by all those arguments which its enlightened friends, while it was depending before the people, found it necessary to urge; that principle is now universally admitted. But the question respecting the extent of the powers actually granted is perpetually arising, and will probably continue to arise so long as our system shall exist. In discussing these questions, the conflicting powers of the General and State Governments must be brought into view, and the supremacy of their respective laws, when they are in opposition, must be settled. If any one proposition could command the universal assent of mankind, we might expect it would be this -- that the Government of the Union, though limited in its powers, is supreme within its sphere of action. This would seem to result necessarily from its nature. It is the Government of all; its powers are delegated by all; it represents all, and acts for all. Though any one State may be willing to control its operations, no State is willing to allow others to control them. The nation, on those subjects on which it can act, must necessarily bind its component parts. But this question is not left to mere reason; the people have, in express terms, decided it by saying, [p406] "this Constitution, and the laws of the United States, which shall be made in pursuance thereof," "shall be the supreme law of the land," and by requiring that the members of the State legislatures and the

officers of the executive and judicial departments of the States shall take the oath of fidelity to it. The Government of the United States, then, though limited in its powers, is supreme, and its laws, when made in pursuance of the Constitution, form the supreme law of the land, "anything in the Constitution or laws of any State to the contrary notwithstanding." Among the enumerated powers, we do not find that of establishing a bank or creating a corporation. But there is no phrase in the instrument which, like the Articles of Confederation, excludes incidental or implied powers and which requires that everything granted shall be expressly and minutely described. Even the 10th Amendment, which was framed for the purpose of quieting the excessive jealousies which had been excited, omits the word "expressly," and declares only that the powers "not delegated to the United States, nor prohibited to the States, are reserved to the States or to the people," thus leaving the question whether the particular power which may become the subject of contest has been delegated to the one Government, or prohibited to the other, to depend on a fair construction of the whole instrument. The men who drew and adopted this amendment had experienced the embarrassments resulting from the insertion of this word in the Articles [p407] of Confederation, and probably omitted it to avoid those embarrassments. A Constitution, to contain an accurate detail of all the subdivisions of which its great powers will admit, and of all the means by which they may be carried into execution, would partake of the prolixity of a legal code, and could scarcely be embraced by the human mind. It would probably never be understood by the public. Its nature, therefore, requires that only its great outlines should be marked, its important objects designated, and the minor ingredients which compose those objects be deduced from the nature of the objects themselves. That this idea was entertained by the framers of the American Constitution is not only to be inferred from the nature of the instrument, but from the language. Why else were some of the limitations found in the 9th section of the 1st article introduced? It is also in some degree warranted by their having omitted to use any restrictive term which might prevent its receiving a fair and just interpretation. In considering this question, then, we must never forget that it is a Constitution we are expounding. Although, among the enumerated powers of Government, we do not find the word "bank" or "incorporation," we find the great powers, to lay and collect taxes; to borrow money; to regulate commerce; to declare and conduct a war; and to raise and support armies and navies. The sword and the purse, all the external relations, and no inconsiderable portion of the industry of the nation are intrusted to its Government. It can never be pretended [p408] that these vast powers draw after them others of inferior importance merely because they are inferior. Such an idea can never be advanced. But it may with great reason be contended that a Government intrusted with such ample powers, on the due execution of which the happiness and prosperity of the Nation so vitally depends, must also be intrusted with ample means for their execution. The power being given, it is the interest of the Nation to facilitate its execution. It can never be their interest, and cannot be presumed to have been their intention, to clog and embarrass its execution by withholding the most appropriate means. Throughout this vast republic, from the St. Croix to the Gulf of

Mexico, from the Atlantic to the Pacific, revenue is to be collected and expended, armies are to be marched and supported. The exigencies of the Nation may require that the treasure raised in the north should be transported to the south that raised in the east, conveyed to the west, or that this order should be reversed. Is that construction of the Constitution to be preferred which would render these operations difficult, hazardous and expensive? Can we adopt that construction (unless the words imperiously require it) which would impute to the framers of that instrument, when granting these powers for the public good, the intention of impeding their exercise, by withholding a choice of means? If, indeed, such be the mandate of the Constitution, we have only to obey; but that instrument does not profess to enumerate the means by which the powers it confers may be executed; nor does it prohibit the creation of a corporation, [p409] if the existence of such a being be essential, to the beneficial exercise of those powers. It is, then, the subject of fair inquiry how far such means may be employed. It is not denied that the powers given to the Government imply the ordinary means of execution. That, for example, of raising revenue and applying it to national purposes is admitted to imply the power of conveying money from place to place as the exigencies of the Nation may require, and of employing the usual means of conveyance. But it is denied that the Government has its choice of means, or that it may employ the most convenient means if, to employ them, it be necessary to erect a corporation. On what foundation does this argument rest? O n this alone: the power of creating a corporation is one appertaining to sovereignty, and is not expressly conferred on Congress. This is true. But all legislative powers appertain to sovereignty. The original power of giving the law on any subject whatever is a sovereign power, and if the Government of the Union is restrained from creating a corporation as a means for performing its functions, on the single reason that the creation of a corporation is an act of sovereignty, if the sufficiency of this reason be acknowledged, there would be some difficulty in sustaining the authority of Congress to pass other laws for the accomplishment of the same objects. The Government which has a right to do an act and has imposed on it the duty of performing that act must, according to the dictates of reason, be allowed [p410]to select the means, and those who contend that it may not select any appropriate means that one particular mode of effecting the object is excepted take upon themselves the burden of establishing that exception. The creation of a corporation, it is said, appertains to sovereignty. This is admitted. But to what portion of sovereignty does it appertain? Does it belong to one more than to another? In America, the powers of sovereignty are divided between the Government of the Union and those of the States. They are each sovereign with respect to the objects committed to it, and neither sovereign with respect to the objects committed to the other. We cannot comprehend that train of reasoning, which would maintain that the extent of power granted by the people is to be ascertained not by the nature and terms of the grant, but by its date. Some State Constitutions were formed before, some since, that of the United States. We cannot believe that their relation to each other is in any degree dependent upon

this circumstance. Their respective powers must, we think, be precisely the same as if they had been formed at the same time. Had they been formed at the same time, and had the people conferred on the General Government the power contained in the Constitution, and on the States the whole residuum of power, would it have been asserted that the Government of the Union was not sovereign, with respect to those objects which were intrusted to it, in relation to which its laws were declared to be supreme? If this could not have been asserted, we cannot well comprehend the process of reasoning [p411] which maintains that a power appertaining to sovereignty cannot be connected with that vast portion of it which is granted to the General Government, so far as it is calculated to subserve the legitimate objects of that Government. The power of creating a corporation, though appertaining to sovereignty, is not, like the power of making war or levying taxes or of regulating commerce, a great substantive and independent power which cannot be implied as incidental to other powers or used as a means of executing them. It is never the end for which other powers are exercised, but a means by which other objects are accomplished. No contributions are made to charity for the sake of an incorporation, but a corporation is created to administer the charity; no seminary of learning is instituted in order to be incorporated, but the corporate character is conferred to subserve the purposes of education. No city was ever built with the sole object of being incorporated, but is incorporated as affording the best means of being well governed. The power of creating a corporation is never used for its own sake, but for the purpose of effecting something else. No sufficient reason is therefore perceived why it may not pass as incidental to those powers which are expressly given if it be a direct mode of executing them. But the Constitution of the United States has not left the right of Congress to employ the necessary means for the execution of the powers conferred on the Government to general reasoning. To its enumeration of powers is added that of making all [p412] laws which shall be necessary and proper for carrying into execution the foregoing powers, and all other powers vested by this Constitution in the Government of the United States or in any department thereof. The counsel for the State of Maryland have urged various arguments to prove that this clause, though in terms a grant of power, is not so in effect, but is really restrictive of the general right which might otherwise be implied of selecting means for executing the enumerated powers. In support of this proposition, they have found it necessary to contend that this clause was inserted for the purpose of conferring on Congress the power of making laws. That, without it, doubts might be entertained whether Congress could exercise its powers in the form of legislation. But could this be the object for which it was inserted? A Government is created by the people having legislative, executive and judicial powers. Its legislative powers are vested in a Congress, which is to consist of a senate and house of representatives. Each house may determine the rule of its proceedings, and it is declared that every bill which shall have passed both houses shall, before it becomes a law, be presented to the President of the

United States. The 7th section describes the course of proceedings by which a bill shall become a law, and then the 8th section enumerates the powers of Congress. Could it be necessary to say that a legislature should exercise legislative powers, in the shape of legislation? After allowing each house to prescribe [p413] its own course of proceeding, after describing the manner in which a bill should become a law, would it have entered into the mind of a single member of the convention that an express power to make laws was necessary to enable the legislature to make them? That a legislature, endowed with legislative powers, can legislate is a proposition too self-evident to have been questioned. But the argument on which most reliance is placed is drawn from that peculiar language of this clause. Congress is not empowered by it to make all laws which may have relation to the powers conferred on the Government, but such only as may be "necessary and proper" for carrying them into execution. The word "necessary" is considered as controlling the whole sentence, and as limiting the right to pass laws for the execution of the granted powers to such as are indispensable, and without which the power would be nugatory. That it excludes the choice of means, and leaves to Congress in each case that only which is most direct and simple. Is it true that this is the sense in which the word "necessary" is always used? Does it always import an absolute physical necessity so strong that one thing to which another may be termed necessary cannot exist without that other? We think it does not. If reference be had to its use in the common affairs of the world or in approved authors, we find that it frequently imports no more than that one thing is convenient, or useful, or essential to another. To employ the means necessary to an end is generally understood as employing any means calculated to [p414] produce the end, and not as being confined to those single means without which the end would be entirely unattainable. Such is the character of human language that no word conveys to the mind in all situations one single definite idea, and nothing is more common than to use words in a figurative sense. Almost all compositions contain words which, taken in a their rigorous sense, would convey a meaning different from that which is obviously intended. It is essential to just construction that many words which import something excessive should be understood in a more mitigated sense -- in that sense which common usage justifies. The word "necessary" is of this description. It has not a fixed character peculiar to itself. It admits of all degrees of comparison, and is often connected with other words which increase or diminish the impression the mind receives of the urgency it imports. A thing may be necessary, very necessary, absolutely or indispensably necessary. To no mind would the same idea be conveyed by these several phrases. The comment on the word is well illustrated by the passage cited at the bar from the 10th section of the 1st article of the Constitution. It is, we think, impossible to compare the sentence which prohibits a State from laying "imposts, or duties on imports or exports, except what may be absolutely necessary for executing its inspection laws," with that which authorizes Congress "to make all laws which shall be necessary and proper for carrying into execution" the powers of the General Government without feeling a conviction that the convention understood itself to change

materially [p415] the meaning of the word "necessary," by prefixing the word "absolutely." This word, then, like others, is used in various senses, and, in its construction, the subject, the context, the intention of the person using them are all to be taken into view. Let this be done in the case under consideration. The subject is the execution of those great powers on which the welfare of a Nation essentially depends. It must have been the intention of those who gave these powers to insure, so far as human prudence could insure, their beneficial execution. This could not be done by confiding the choice of means to such narrow limits as not to leave it in the power of Congress to adopt any which might be appropriate, and which were conducive to the end. This provision is made in a Constitution intended to endure for ages to come, and consequently to be adapted to the various crises of human affairs. To have prescribed the means by which Government should, in all future time, execute its powers would have been to change entirely the character of the instrument and give it the properties of a legal code. It would have been an unwise attempt to provide by immutable rules for exigencies which, if foreseen at all, must have been seen dimly, and which can be best provided for as they occur. To have declared that the best means shall not be used, but those alone without which the power given would be nugatory, would have been to deprive the legislature of the capacity to avail itself of experience, to exercise its reason, and to accommodate its legislation to circumstances. [p416] If we apply this principle of construction to any of the powers of the Government, we shall find it so pernicious in its operation that we shall be compelled to discard it. The powers vested in Congress may certainly be carried into execution, without prescribing an oath of office. The power to exact this security for the faithful performance of duty is not given, nor is it indispensably necessary. The different departments may be established; taxes may be imposed and collected; armies and navies may be raised and maintained; and money may be borrowed, without requiring an oath of office. It might be argued with as much plausibility as other incidental powers have been assailed that the convention was not unmindful of this subject. The oath which might be exacted -- that of fidelity to the Constitution -- is prescribed, and no other can be required. Yet he would be charged with insanity who should contend that the legislature might not superadd to the oath directed by the Constitution such other oath of office as its wisdom might suggest. So, with respect to the whole penal code of the United States, whence arises the power to punish in cases not prescribed by the Constitution? All admit that the Government may legitimately punish any violation of its laws, and yet this is not among the enumerated powers of Congress. The right to enforce the observance of law by punishing its infraction might be denied with the more plausibility because it is expressly given in some cases. Congress is empowered "to provide for the punishment [p417] of counterfeiting the securities and current coin of the United States," and "to define and punish piracies and felonies committed on the high seas, and offences against the law of nations." The several powers of Congress may

exist in a very imperfect State, to be sure, but they may exist and be carried into execution, although no punishment should be inflicted, in cases where the right to punish is not expressly given. Take, for example, the power "to establish post-offices and post-roads." This power is executed by the single act of making the establishment. But from this has been inferred the power and duty of carrying the mail along the post road from one post office to another. And from this implied power has again been inferred the right to punish those who steal letters from the post office, or rob the mail. It may be said with some plausibility that the right to carry the mail, and to punish those who rob it, is not indispensably necessary to the establishment of a post office and post road. This right is indeed essential to the beneficial exercise of the power, but not indispensably necessary to its existence. So, of the punishment of the crimes of stealing or falsifying a record or process of a Court of the United States, or of perjury in such Court. To punish these offences is certainly conducive to the due administration of justice. But Courts may exist, and may decide the causes brought before them, though such crimes escape punishment. The baneful influence of this narrow construction on all the operations of the Government, and the absolute [p418] impracticability of maintaining it without rendering the Government incompetent to its great objects, might be illustrated by numerous examples drawn from the Constitution and from our laws. The good sense of the public has pronounced without hesitation that the power of punishment appertains to sovereignty, and may be exercised, whenever the sovereign has a right to act, as incidental to his Constitutional powers. It is a means for carrying into execution all sovereign powers, and may be used although not indispensably necessary. It is a right incidental to the power, and conducive to its beneficial exercise. If this limited construction of the word "necessary" must be abandoned in order to punish, whence is derived the rule which would reinstate it when the Government would carry its powers into execution by means not vindictive in their nature? If the word "necessary" means "needful," "requisite," "essential," "conducive to," in order to let in the power of punishment for the infraction of law, why is it not equally comprehensive when required to authorize the use of means which facilitate the execution of the powers of Government, without the infliction of punishment? In ascertaining the sense in which the word "necessary" is used in this clause of the Constitution, we may derive some aid from that with which it it is associated. Congress shall have power "to make all laws which shall be necessary and proper to carry into execution" the powers of the Government. If the word "necessary" was used in that strict and rigorous sense for which the counsel for the State of [p419] Maryland contend, it would be an extraordinary departure from the usual course of the human mind, as exhibited in composition, to add a word the only possible effect of which is to qualify that strict and rigorous meaning, to present to the mind the idea of some choice of means of legislation not strained and compressed within the narrow limits for which gentlemen contend.

But the argument which most conclusively demonstrates the error of the construction contended for by the counsel for the State of Maryland is founded on the intention of the convention as manifested in the whole clause. To waste time and argument in proving that, without it, Congress might carry its powers into execution would be not much less idle than to hold a lighted taper to the sun. As little can it be required to prove that, in the absence of this clause, Congress would have some choice of means. That it might employ those which, in its judgment, would most advantageously effect the object to be accomplished. That any means adapted to the end, any means which tended directly to the execution of the Constitutional powers of the Government, were in themselves Constitutional. This clause, as construed by the State of Maryland, would abridge, and almost annihilate, this useful and necessary right of the legislature to select its means. That this could not be intended is, we should think, had it not been already controverted, too apparent for controversy. We think so for the following reasons: 1st. The clause is placed among the powers of Congress, not among the limitations on those powers. [p420] 2d. Its terms purport to enlarge, not to diminish, the powers vested in the Government. It purports to be an additional power, not a restriction on those already granted. No reason has been or can be assigned for thus concealing an intention to narrow the discretion of the National Legislature under words which purport to enlarge it. The framers of the Constitution wished its adoption, and well knew that it would be endangered by its strength, not by its weakness. Had they been capable of using language which would convey to the eye one idea and, after deep reflection, impress on the mind another, they would rather have disguised the grant of power than its limitation. If, then, their intention had been, by this clause, to restrain the free use of means which might otherwise have been implied, that intention would have been inserted in another place, and would have been expressed in terms resembling these. "In carrying into execution the foregoing powers, and all others," &c., "no laws shall be passed but such as are necessary and proper." Had the intention been to make this clause restrictive, it would unquestionably have been so in form, as well as in effect. The result of the most careful and attentive consideration bestowed upon this clause is that, if it does not enlarge, it cannot be construed to restrain, the powers of Congress, or to impair the right of the legislature to exercise its best judgment in the selection of measures to carry into execution the Constitutional powers of the Government. If no other motive for its insertion can be suggested, a sufficient one is found in the desire to remove all doubts respecting [p421] the right to legislate on that vast mass of incidental powers which must be involved in the Constitution if that instrument be not a splendid bauble. We admit, as all must admit, that the powers of the Government are limited, and that its limits are not to be transcended. But we think the sound construction of the Constitution must allow to the national

legislature that discretion with respect to the means by which the powers it confers are to be carried into execution which will enable that body to perform the high duties assigned to it in the manner most beneficial to the people. Let the end be legitimate, let it be within the scope of the Constitution, and all means which are appropriate, which are plainly adapted to that end, which are not prohibited, but consist with the letter and spirit of the Constitution, are Constitutional. [*] That a corporation must be considered as a means not less usual, not of higher dignity, not more requiring a particular specification than other means has been sufficiently proved. If we look to the origin of corporations, to the manner in which they have been framed in that Government from which we have derived most of our legal principles and ideas, or to the uses to which they have been applied, we find no reason to suppose that a Constitution, omitting, and wisely omitting, to enumerate all the means for carrying into execution the great powers vested in Government, ought to have specified this. Had it been intended to grant this power as one which should be distinct and independent, to be exercised in any case whatever, it [p422] would have found a place among the enumerated powers of the Government. But being considered merely as a means, to be employed only for the purpose of carrying into execution the given powers, there could be no motive for particularly mentioning it. The propriety of this remark would seem to be generally acknowledged by the universal acquiescence in the construction which has been uniformly put on the 3d section of the 4th article of the Constitution. The power to "make all needful rules and regulations respecting the territory or other property belonging to the United States" is not more comprehensive than the power "to make all laws which shall be necessary and proper for carrying into execution" the powers of the Government. Yet all admit the constitutionality of a Territorial Government, which is a corporate body. If a corporation may be employed, indiscriminately with other means, to carry into execution the powers of the Government, no particular reason can be assigned for excluding the use of a bank, if required for its fiscal operations. To use one must be within the discretion of Congress if it be an appropriate mode of executing the powers of Government. That it is a convenient, a useful, and essential instrument in the prosecution of its fiscal operations is not now a subject of controversy. All those who have been concerned in the administration of our finances have concurred in representing its importance and necessity, and so strongly have they been felt that Statesmen of the first class, whose previous opinions [p423] against it had been confirmed by every circumstance which can fix the human judgment, have yielded those opinions to the exigencies of the nation. Under the Confederation, Congress, justifying the measure by its necessity, transcended, perhaps, its powers to obtain the advantage of a bank; and our own legislation attests the universal conviction of the utility of this measure. The time has passed away when it can be necessary to enter into any discussion in order to prove the importance of this instrument as a means to effect the legitimate objects of the Government.

But were its necessity less apparent, none can deny its being an appropriate measure; and if it is, the decree of its necessity, as has been very justly observed, is to be discussed in another place. Should Congress, in the execution of its powers, adopt measures which are prohibited by the Constitution, or should Congress, under the pretext of executing its powers, pass laws for the accomplishment of objects not intrusted to the Government, it would become the painful duty of this tribunal, should a case requiring such a decision come before it, to say that such an act was not the law of the land. But where the law is not prohibited, and is really calculated to effect any of the objects intrusted to the Government, to undertake here to inquire into the decree of its necessity would be to pass the line which circumscribes the judicial department and to tread on legislative ground. This Court disclaims all pretensions to such a power. [p424] After this declaration, it can scarcely be necessary to say that the existence of State banks can have no possible influence on the question. No trace is to be found in the Constitution of an intention to create a dependence of the Government of the Union on those of the States, for the execution of the great powers assigned to it. Its means are adequate to its ends, and on those means alone was it expected to rely for the accomplishment of its ends. To impose on it the necessity of resorting to means which it cannot control, which another Government may furnish or withhold, would render its course precarious, the result of its measures uncertain, and create a dependence on other Governments which might disappoint its most important designs, and is incompatible with the language of the Constitution. But were it otherwise, the choice of means implies a right to choose a national bank in preference to State banks, and Congress alone can make the election. After the most deliberate consideration, it is the unanimous and decided opinion of this Court that the act to incorporate the Bank of the United States is a law made in pursuance of the Constitution, and is a part of the supreme law of the land. The branches, proceeding from the same stock and being conducive to the complete accomplishment of the object, are equally constitutional. It would have been unwise to locate them in the charter, and it would be unnecessarily inconvenient to employ the legislative power in making those subordinate arrangements. The great duties of the bank are prescribed; those duties require branches; and the bank itself [p425] may, we think, be safely trusted with the selection of places where those branches shall be fixed, reserving always to the Government the right to require that a branch shall be located where it may be deemed necessary. It being the opinion of the Court that the act incorporating the bank is constitutional, and that the power of establishing a branch in the State of Maryland might be properly exercised by the bank itself, we proceed to inquire: 2. Whether the State of Maryland may, without violating the Constitution, tax that branch?

That the power of taxation is one of vital importance; that it is retained by the States; that it is not abridged by the grant of a similar power to the Government of the Union; that it is to be concurrently exercised by the two Governments -- are truths which have never been denied. But such is the paramount character of the Constitution that its capacity to withdraw any subject from the action of even this power is admitted. The States are expressly forbidden to lay any duties on imports or exports except what may be absolutely necessary for executing their inspection laws. If the obligation of this prohibition must be conceded -- if it may restrain a State from the exercise of its taxing power on imports and exports -- the same paramount character would seem to restrain, as it certainly may restrain, a State from such other exercise of this power as is in its nature incompatible with, and repugnant to, the constitutional laws of the Union. A law absolutely repugnant to another as entirely [p426] repeals that other as if express terms of repeal were used. On this ground, the counsel for the bank place its claim to be exempted from the power of a State to tax its operations. There is no express provision for the case, but the claim has been sustained on a principle which so entirely pervades the Constitution, is so intermixed with the materials which compose it, so interwoven with its web, so blended with its texture, as to be incapable of being separated from it without rending it into shreds. This great principle is that the Constitution and the laws made in pursuance thereof are supreme; that they control the Constitution and laws of the respective States, and cannot be controlled by them. From this, which may be almost termed an axiom, other propositions are deduced as corollaries, on the truth or error of which, and on their application to this case, the cause has been supposed to depend. These are, 1st. That a power to create implies a power to preserve; 2d. That a power to destroy, if wielded by a different hand, is hostile to, and incompatible with these powers to create and to preserve; 3d. That, where this repugnancy exists, that authority which is supreme must control, not yield to that over which it is supreme. These propositions, as abstract truths, would perhaps never be controverted. Their application to this case, however, has been denied, and both in maintaining the affirmative and the negative, a splendor of eloquence, and strength of argument seldom if ever surpassed have been displayed. [p427] The power of Congress to create and, of course, to continue the bank was the subject of the preceding part of this opinion, and is no longer to be considered as questionable. That the power of taxing it by the States may be exercised so as to destroy it is too obvious to be denied. But taxation is said to be an absolute power which acknowledges no other limits than those expressly prescribed in the Constitution, and, like sovereign power of every other description, is intrusted to the discretion of those who use it. But the very terms of this argument admit that the sovereignty of the State, in the article of taxation itself, is subordinate to, and may be controlled by, the Constitution of the

United States. How far it has been controlled by that instrument must be a question of construction. In making this construction, no principle, not declared, can be admissible which would defeat the legitimate operations of a supreme Government. It is of the very essence of supremacy to remove all obstacles to its action within its own sphere, and so to modify every power vested in subordinate governments as to exempt its own operations from their own influence. This effect need not be stated in terms. It is so involved in the declaration of supremacy, so necessarily implied in it, that the expression of it could not make it more certain. We must, therefore, keep it in view while construing the Constitution. The argument on the part of the State of Maryland is not that the States may directly resist a law of Congress, but that they may exercise their [p428]acknowledged powers upon it, and that the Constitution leaves them this right, in the confidence that they will not abuse it. Before we proceed to examine this argument and to subject it to test of the Constitution, we must be permitted to bestow a few considerations on the nature and extent of this original right of taxation, which is acknowledged to remain with the States. It is admitted that the power of taxing the people and their property is essential to the very existence of Government, and may be legitimately exercised on the objects to which it is applicable, to the utmost extent to which the Government may choose to carry it. The only security against the abuse of this power is found in the structure of the Government itself. In imposing a tax, the legislature acts upon its constituents. This is, in general, a sufficient security against erroneous and oppressive taxation. The people of a State, therefore, give to their Government a right of taxing themselves and their property, and as the exigencies of Government cannot be limited, they prescribe no limits to the exercise of this right, resting confidently on the interest of the legislator and on the influence of the constituent over their representative to guard them against its abuse. But the means employed by the Government of the Union have no such security, nor is the right of a State to tax them sustained by the same theory. Those means are not given by the people of a particular State, not given by the constituents of the legislature which claim the right to tax them, but by the people of all the States They are given by all, [p429] for the benefit of all -- and, upon theory, should be subjected to that Government only which belongs to all. It may be objected to this definition that the power of taxation is not confined to the people and property of a State. It may be exercised upon every object brought within its jurisdiction. This is true. But to what source do we trace this right? It is obvious that it is an incident of sovereignty, and is coextensive with that to which it is an incident. All subjects over which the sovereign power of a State extends are objects of taxation, but those over which it does not extend are, upon the soundest principles, exempt from taxation. This proposition may almost be pronounced self-evident. The sovereignty of a State extends to everything which exists by its own authority or is introduced by its permission, but does it extend to those

means which are employed by Congress to carry into execution powers conferred on that body by the people of the United States? We think it demonstrable that it does not. Those powers are not given by the people of a single State. They are given by the people of the United States, to a Government whose laws, made in pursuance of the Constitution, are declared to be supreme. Consequently, the people of a single State cannot confer a sovereignty which will extend over them. If we measure the power of taxation residing in a State by the extent of sovereignty which the people of a single State possess and can confer on its Government, we have an intelligible standard, applicable [p430] to every case to which the power may be applied. We have a principle which leaves the power of taxing the people and property of a State unimpaired; which leaves to a State the command of all its resources, and which places beyond its reach all those powers which are conferred by the people of the United States on the Government of the Union, and all those means which are given for the purpose of carrying those powers into execution. We have a principle which is safe for the States and safe for the Union. We are relieved, as we ought to be, from clashing sovereignty; from interfering powers; from a repugnancy between a right in one Government to pull down what there is an acknowledged right in another to build up; from the incompatibility of a right in one Government to destroy what there is a right in another to preserve. We are not driven to the perplexing inquiry, so unfit for the judicial department, what degree of taxation is the legitimate use and what degree may amount to the abuse of the power. The attempt to use it on the means employed by the Government of the Union, in pursuance of the Constitution, is itself an abuse because it is the usurpation of a power which the people of a single State cannot give. We find, then, on just theory, a total failure of this original right to tax the means employed by the Government of the Union, for the execution of its powers. The right never existed, and the question whether it has been surrendered cannot arise. But, waiving this theory for the present, let us resume the inquiry, whether this power can be exercised [p431] by the respective States, consistently with a fair construction of the Constitution? That the power to tax involves the power to destroy; that the power to destroy may defeat and render useless the power to create; that there is a plain repugnance in conferring on one Government a power to control the constitutional measures of another, which other, with respect to those very measures, is declared to be supreme over that which exerts the control, are propositions not to be denied. But all inconsistencies are to be reconciled by the magic of the word CONFIDENCE. Taxation, it is said, does not necessarily and unavoidably destroy. To carry it to the excess of destruction would be an abuse, to presume which would banish that confidence which is essential to all Government. But is this a case of confidence? Would the people of any one State trust those of another with a power to control the most insignificant operations of their State Government? We know they would not. Why, then, should we suppose that the people of any one State should be willing to trust those of

another with a power to control the operations of a Government to which they have confided their most important and most valuable interests? In the Legislature of the Union alone are all represented. The Legislature of the Union alone, therefore, can be trusted by the people with the power of controlling measures which concern all, in the confidence that it will not be abused. This, then, is not a case of confidence, and we must consider it is as it really is. [p432] If we apply the principle for which the State of Maryland contends, to the Constitution generally, we shall find it capable of changing totally the character of that instrument. We shall find it capable of arresting all the measures of the Government, and of prostrating it at the foot of the States. The American people have declared their Constitution and the laws made in pursuance thereof to be supreme, but this principle would transfer the supremacy, in fact, to the States. If the States may tax one instrument, employed by the Government in the execution of its powers, they may tax any and every other instrument. They may tax the mail; they may tax the mint; they may tax patent rights; they may tax the papers of the custom house; they may tax judicial process; they may tax all the means employed by the Government to an excess which would defeat all the ends of Government. This was not intended by the American people. They did not design to make their Government dependent on the States. Gentlemen say they do not claim the right to extend State taxation to these objects. They limit their pretensions to property. But on what principle is this distinction made? Those who make it have furnished no reason for it, and the principle for which they contend denies it. They contend that the power of taxation has no other limit than is found in the 10th section of the 1st article of the Constitution; that, with respect to everything else, the power of the States is supreme, and admits of no control. If this be true, the distinction between property and [p433] other subjects to which the power of taxation is applicable is merely arbitrary, and can never be sustained. This is not all. If the controlling power of the States be established, if their supremacy as to taxation be acknowledged, what is to restrain their exercising control in any shape they may please to give it? Their sovereignty is not confined to taxation; that is not the only mode in which it might be displayed. The question is, in truth, a question of supremacy, and if the right of the States to tax the means employed by the General Government be conceded, the declaration that the Constitution and the laws made in pursuance thereof shall be the supreme law of the land is empty and unmeaning declamation. In the course of the argument, the Federalist has been quoted, and the opinions expressed by the authors of that work have been justly supposed to be entitled to great respect in expounding the Constitution. No tribute can be paid to them which exceeds their merit; but in applying their opinions to the cases which may arise in the progress of our Government, a right to judge of their correctness must be retained; and to understand the argument, we must examine the proposition it maintains and the objections against which it is directed. The subject of those numbers from which passages have been cited is the unlimited power of taxation which is

vested in the General Government. The objection to this unlimited power, which the argument seeks to remove, is stated with fulness and clearness. It is that an indefinite power of taxation in the latter (the Government[p434] of the Union) might, and probably would, in time, deprive the former (the Government of the States) of the means of providing for their own necessities, and would subject them entirely to the mercy of the National Legislature. As the laws of the Union are to become the supreme law of the land; as it is to have power to pass all laws that may be necessary for carrying into execution the authorities with which it is proposed to vest it; the National Government might, at any time, abolish the taxes imposed for State objects upon the pretence of an interference with its own. It might allege a necessity for doing this, in order to give efficacy to the national revenues; and thus, all the resources of taxation might, by degrees, become the subjects of federal monopoly, to the entire exclusion and destruction of the State Governments. The objections to the Constitution which are noticed in these numbers were to the undefined power of the Government to tax, not to the incidental privilege of exempting its own measures from State taxation. The consequences apprehended from this undefined power were that it would absorb all the objects of taxation, "to the exclusion and destruction of the State Governments." The arguments of the Federalist are intended to prove the fallacy of these apprehensions, not to prove that the Government was incapable of executing any of its powers without exposing the means it employed to the embarrassments of State taxation. Arguments urged against these objections and these apprehensions are to be understood as relating to the points they[p435] mean to prove. Had the authors of those excellent essays been asked whether they contended for that construction of the Constitution which would place within the reach of the States those measures which the Government might adopt for the execution of its powers, no man who has read their instructive pages will hesitate to admit that their answer must have been in the negative. It has also been insisted that, as the power of taxation in the General and State Governments is acknowledged to be concurrent, every argument which would sustain the right of the General Government to tax banks chartered by the States, will equally sustain the right of the States to tax banks chartered by the General Government. But the two cases are not on the same reason. The people of all the States have created the General Government, and have conferred upon it the general power of taxation. The people of all the States, and the States themselves, are represented in Congress, and, by their representatives, exercise this power. When they tax the chartered institutions of the States, they tax their constituents, and these taxes must be uniform. But when a State taxes the operations of the Government of the United States, it acts upon institutions created not by their own constituents, but by people over whom they claim no control. It acts upon the measures of a Government created by others as well as themselves, for the benefit of others in common with themselves. The difference is that which always exists, and always must exist, between the action of the whole on a [p436] part, and

the action of a part on the whole -- between the laws of a Government declared to be supreme, and those of a Government which, when in opposition to those laws, is not supreme. But if the full application of this argument could be admitted, it might bring into question the right of Congress to tax the State banks, and could not prove the rights of the States to tax the Bank of the United States. The Court has bestowed on this subject its most deliberate consideration. The result is a conviction that the States have no power, by taxation or otherwise, to retard, impede, burden, or in any manner control the operations of the constitutional laws enacted by Congress to carry into execution the powers vested in the General Government. This is, we think, the unavoidable consequence of that supremacy which the Constitution has declared. We are unanimously of opinion that the law passed by the Legislature of Maryland, imposing a tax on the Bank of the United States is unconstitutional and void. This opinion does not deprive the States of any resources which they originally possessed. It does not extend to a tax paid by the real property of the bank, in common with the other real property within the State, nor to a tax imposed on the interest which the citizens of Maryland may hold in this institution, in common with other property of the same description throughout the State. But this is a tax on the operations of the bank, and is, consequently, a tax on the operation of an instrument employed by the Government [p437] of the Union to carry its powers into execution. Such a tax must be unconstitutional. JUDGMENT. This cause came on to be heard, on the transcript of the record of the Court of Appeals of the State of Maryland, and was argued by counsel; on consideration whereof, it is the opinion of this Court that the act of the Legislature of Maryland is contrary to the Constitution of the United States, and void, and therefore that the said Court of Appeals of the State of Maryland erred, in affirming the judgment of the Baltimore County Court, in which judgment was rendered against James W. McCulloch; but that the said Court of Appeals of Maryland ought to have reversed the said judgment of the said Baltimore County Court, and ought to have given judgment for the said appellant, McCulloch. It is, therefore, adjudged and ordered that the said judgment of the said Court of Appeals of the State of Maryland in this case be, and the same hereby is, reversed and annulled. And this Court, proceeding to render such judgment as the said Court of Appeals should have rendered, it is further adjudged and ordered that the judgment of the said Baltimore County Court be reversed and annulled, and that judgment be entered in the said Baltimore County Court for the said James W. McCulloch. * See Montague v. Richardson, 24 Conn. 348.

U.S. Supreme Court

PANHANDLE OIL CO. v. STATE OF MISSISSIPPI EX REL. KNOX, 277 U.S. 218
(1928)
277 U.S. 218 PANHANDLE OIL CO. v. STATE OF MISSISSIPPI ex rel. KNOX, Atty. Gen. No. 288. Argued March 5, 1928. Decided May 14, 1928.

Mr. George Butler, of Jackson, Miss., for plaintiff in error. [277 U.S. 218, 219] Mr. J. L. Byrd, of Jackson, Miss., for defendant in error. [277 U.S. 218, 220] Mr. Justice BUTLER delivered the opinion of the Court. Chapter 116 of the Laws of Mississippi of 1922 provided that 'any person engaged in the business of distributor of gasoline, or retail dealer in gasoline, shall pay for the privilege of engaging in such business, an excise tax of 1? (one cent) per gallon upon the sale of gasoline, ...' except that sold in interstate commerce or purchased outside the state and brought in by the consumer for his own use. Chapter 115, Laws of 1924, increased the tax to three cents, and chapter 119, Laws of 1926, made it four cents per gallon. Since some time in 1925 petitioner has been engaged in that business. The State sued to recover taxes claimed on account of sales made by petitioner to the United States for the use of its Coast Guard fleet in service in the Gulf of Mexico and its Veterans' Hospital at Gulfport. Some of the sales were made while the act of 1924 was in force and some after the rate had been increased by the act of 1926. Accordingly the demand was for three cents a gallon on some and four cents on the rest. Petitioner defended on the ground that these statutes, if construed to impose taxes on such sales, are[277 U.S. 218, 221] repugnant to the federal Constitution. The court of first instance sustained that contention and the State appealed. The Supreme Court held the exaction a valid privilege tax measured by the number of gallons sold; that it was not a tax upon instrumentalities of the federal government, and that the United States was not entitled to buy such gasoline without payment of the taxes charged dealers. 147 Miss. 663, 112 So. 584. The United States is empowered by the Constitution to maintain and operate the fleet and hospital. Article 1, 8. That authorization and laws enacted pursuant thereto are supreme (article 6); and, in case of conflict, they control state enactments. The states may not burden or interfere with the exertion of national power or make it a source of revenue or take the

funds raised or tax the means used for the performance of federal functions. McCulloch v. Maryland, 4 Wheat. 316, 425, et seq.; Dobbins v. Commissioners of Erie County, 16 Pet. 435, 448; Ohio v. Thomas, 173 U.S. 276 , 19 S. Ct. 453; Choctaw, O. & G. R. R. v. Harrison, 235 U.S. 292 , 35 S. Ct. 27; Indian Oil Co. v. Oklahoma, 240 U.S. 522 , 36 S. Ct. 453; Johnson v. Maryland, 254 U.S. 51 , 41 S. Ct. 16; Clallam County v. United States, 263 U.S. 341, 344, 44 S. Ct. 121; Northwestern Mutual Life Ins. Co. v. Wisconsin, 275 U.S. 136 , 48 S. Ct. 55; New Brunswick v. United States, 276 U.S. 547 , 48 S. Ct. 371. The strictness of that rule was emphasized in Gillespie v. Oklahoma, 257 U.S. 501, 505 , 42 S. Ct. 171. The right of the United States to make such purchases is derived from the Constitution. The petitioner's right to make sales to the United States was not given by the State and does not depend on state laws; it results from the authority of the national government under the Constitution to choose its own means and sources of supply. While Mississippi may impose charges upon petitioner for the privilege of carrying on trade that is subject to the power of the State, it may not lay any tax upon transactions by which the United States secures the things desired for its governmental purposes. [277 U.S. 218, 222] The validity of the taxes claimed is to be determined by the practical effect of enforcement in respect of sales to the government. Wagner v. City of Covington, 251 U.S. 95, 102 , 40 S. Ct. 93. A charge at the prescribed rate is made on account of every gallon acquired by the United States. It is immaterial that the seller and not the purchaser is required to report and make payment to the State. Sale and purchase constitute a transaction by which the tax is measured and on which the burden rests. The amount of money claimed by the State rises and falls precisely as does the quantity of gasoline so secured by the government. It depends immediately upon the number of gallons. The necessary operation of these enactments when so construed is directly to retard, impede, and burden the exertion by the United States of its constitutional powers to operate the fleet and hospital. McCulloch v. Maryland, supra, 436; Gillespie v. Oklahoma, supra, 505 (42 S. Ct. 171); Jaybird Mining Co. v. Weir, 271 U.S. 609, 613 , 46 S. Ct. 592. To use the number of gallons sold the United States as a measure of the privilege tax is in substance and legal effect to tax the sale. Telegraph Co. v. Texas, 105 U.S. 460 ; Frick v. Pennsylvania, 268 U.S. 473, 494 , 45 S. Ct. 603, 42 A. L. R. 316. And that is to tax the United States-to exact tribute on its transactions and apply the same to the support of the State. The exactions demanded from petitioner infringe its right to have the constitutional independence of the United States in respect of such purchases remain untrammeled. Osborn v. United States Bank, 9 Wheat. 738, 867; Telegraph Co. v. Texas, supra. Cf. Terrace v. Thompson, 263 U.S. 197, 216 , 44 S. Ct. 15. Petitioner is not liable for the taxes claimed. Judgment reversed. Mr. Justice HOLMES (dissenting). The State of Mississippi in 1924 and 1926 imposed upon distributors and retail dealers of gasoline, for the [277 U.S. 218, 223] privilege of engaging in the business, an excise tax of three cents and four cents respectively per gallon sold in the State. The Supreme Court of the State

declares it to be a privilege tax but points out that whether this tax is on the privilege or on the property it is imposed before the gasoline has left the dealer's hands. The plaintiff in error, a dealer, was sued by the State for certain sums that were due under the statutes. It pleaded that the sales in respect of which the tax was demanded were sales to the United States for the use of its Coast Guard and Veterans' Hospital, that these being instrumentalities of the government it did not include the amount of the tax in the price charged, and that the statute did not and could not tax the dealer for them consistently with the Constitution of the United States. The Supreme Court of the State upheld the tax and pointed out the extreme consequences to which a different decision might lead. It seems to me that the State Court was right. I should say plainly right, but for the effect of certain dicta of Chief Justice Marshall which culminated in or rather were founded upon his often quoted proposition that the power to tax is the power to destroy. In those days it was not recognized as it is today that most of the distinctions of the law are distinctions of degree. If the States had any power it was assumed that they had all power, and that the necessary alternative was to deny it altogether. But this Court which so often has defeated the attempt to tax in certain ways can defeat an attempt to discriminate or otherwise go too far without wholly abolishing the power to tax. The power to tax is not the power to destroy while this Court sits. The power to fix rates is the power to destroy if unlimited, but this Court while it endeavors to prevent confiscation does not prevent the fixing of rates. A tax is not an unconstitutional regulation in every case where an absolute prohibition of sales would be one. Hatch v. Reardon, 204 U.S. 152, 162 , 27 S. Ct. 188. [277 U.S. 218, 224] To come down more closely to the question before us, when the Government comes into a State to purchase I do not perceive why it should be entitled to stand differently from any other purchaser. It avails itself of the machinery furnished by the State and I do not see why it should not contribute in the same proportion that every other purchaser contributes for the privileges that it uses. It has no better or other right to use them than anyone else. The cost of maintaining the State that makes the business possible is just as necessary an element in the cost of production as labor or coal. If the plaintiff in error had paid the tax and had added it to the price the Government would have had nothing to say. It could take the gasoline or leave it but it could not require the seller to abate his charge even if it had been arbitrarily increased in the hope of getting more from the Government than could be got from the public at large. But in fact the Government has not attempted to say anything in this case, which is simply that of dealer trying to cut down a legitimate tax on his business because certain purchasers proposed to use the goods in a certain way, although so far as the sale was concerned they were free to turn the gasoline into the ocean, use if for private purposes or sell it again. It does not appear that the Government would have refused to pay a price that included the tax if demanded, but if the Government has refused it would not have exonerated the seller. Pierce Oil Corporation v. Hopkins, 264 U.S. 137, 139 , 44 S. Ct. 251. An imperfect analogy with taxation that affects interstate commerce is relied upon. Even the law on that subject has been liberalized since the

decision of most of the cases cited. Sonneborn Brothers v. Cureton, 262 U.S. 506 , 43 S. Ct. 643. But obviously it does not follow from the invalidity of a tax directly burdening interstate commerce that a tax upon a domestic seller is bad because he may be able to shift the burden to a purchaser, even [277 U.S. 218, 225] though an agency of the Government, who is willing to pay the price with the tax and who has no rational ground for demanding favor. I am not aware that the President, the Members of Congress, the Judiciary or, to come nearer to the case in hand, the Coast Guard or the officials of the Veterans' Hospital, because they are instrumentalities of government and cannot function naked and unfed, hitherto having been held entitled to have their bills for food and clothing cut down so far as their butchers and tailors have been taxed on their sales; and I had not supposed that the butchers and tailors could omit from their tax returns all receipts from the large class of customers to which I have referred. The question of interference with Government, I repeat, is one of reasonableness and degree and it seems to me that the interference in this case is too remote. Metcalf v. Mitchell, 269 U.S. 514 , 46 S. Ct. 172. Mr. Justice BRANDEIS and Mr. Justice STONE agree with this opinion. Mr. Justice McREYNOLDS (dissenting). I am unable to think that every man who sells a gallon of gasoline to be used by the United States thereby becomes a federal instrumentality, with the privilege of claiming freedom from taxation by the state. sells a gallon of gasoline to be used by the but it ought not to be extended beyond the reasons which underlie it. Its limitations were well pointed out fifty years ago in Union Pac. Railroad Co. v. Peniston, 18 Wall. 5, 30, 31 (21 L. Ed. 787): 'It cannot be that a state tax which remotely affects the efficient exercise of a federal power is for that reason alone inhibited by the Constitution. To hold that would be to deny to the States all power to tax persons or property. Every tax levied by a State withdraws from the reach of federal taxation a portion of the property [277 U.S. 218, 226] from which it is taken, and to that extent diminishes the subject upon which federal taxes may be laid. The States are, and they must ever be, coexistent with the national government. Neither may destroy the other. Hence the federal Constitution must receive a practical construction. Its limitations and its implied prohibitions must not be extended so far as to destroy the necessary powers of the States, or prevent their efficient exercise.' Mr. Justice STONE concurs in these views.