Evangelista vs.

Collector of Internal Revenue

Facts: Petitioners borrowed money from their father and purchased several lands. For several years, these lands were leased to tenants by the petitioners. In 1954, respondent Collector of Internal Revenue demanded from petitioners the payment of income tax on corporations, real estate dealer's fixed tax and corporation residence tax for the years 1945-1949. A letter of demand and corresponding assessments were delivered to petitioners. Petitioners claim that they should be absolved from paying said taxes since they are not a corporation. Issue: Whether petitioners are subject to the tax on corporations provided for in section 24 of Commonwealth Act. No. 466, otherwise known as the National Internal Revenue Code, as well as to the residence tax for corporations and the real estate dealers fixed tax. Held: Yes. Petitioners are subject to the income tax and residence tax for corporation. As defined in section 84 (b) of the Internal Revenue Code, "the term corporation includes partnerships, no matter how created or organized." This qualifying expression clearly indicates that a joint venture need not be undertaken in any of the standard forms, or in conformity with the usual requirements of the law on partnerships, in order that one could be deemed constituted for purposes of the tax on corporations. Partnership, as has been defined in the civil code refers to two or more persons who bind themselves to contribute money, properly, or industry to a common fund, with the intention of dividing the profits among themselves. Thus, petitioners, being engaged in the real estate transactions for monetary gain and dividing the same among themselves constitute a partnership so far as the Code is concerned and are subject to income tax for corporation. Since Sec 2 of the Code in defining corporations also includes joint-stock company, partnership, joint account, association or insurance company, no matter how created or organized, it follows that petitioners, regardless of how their partnership was created is also subject to the residence tax for corporations.

G.R. No. L-68118 October 29, 1985 JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P. OBILLOS, brothers and sisters, petitioners vs. COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.
AQUINO, J.: This case is about the income tax liability of four brothers and sisters who sold two parcels of land which they had acquired from their father. On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots with areas of 1,124 and 963 square meters located at Greenhills, San Juan, Rizal. The next day he transferred his rights to his four children, the petitioners, to enable them to build their residences. The company sold the two lots to petitioners for P178,708.12 on March 13 (Exh. A and B, p. 44, Rollo). Presumably, the Torrens titles issued to them would show that they were co-owners of the two lots. In 1974, or after having held the two lots for more than a year, the petitioners resold them to the Walled City Securities Corporation and Olga Cruz Canda for the total sum of P313,050 (Exh. C and D). They derived from the sale a total profit of P134,341.88 or P33,584 for each of them. They treated the profit as a capital gain and paid an income tax on one-half thereof or of P16,792. In April, 1980, or one day before the expiration of the five-year prescriptive period, the Commissioner of Internal Revenue required the four petitioners to pay corporate income tax on the total profit of P134,336 in addition to individual income tax on their shares thereof He assessed P37,018 as corporate income tax, P18,509 as 50% fraud surcharge and P15,547.56 as 42% accumulated interest, or a total of P71,074.56. Not only that. He considered the share of the profits of each petitioner in the sum of P33,584 as a " taxable in full (not a mere capital gain of which is taxable) and required them to pay deficiency income taxes aggregating P56,707.20 including the 50% fraud surcharge and the accumulated interest. Thus, the petitioners are being held liable for deficiency income taxes and penalties totalling P127,781.76 on their profit of P134,336, in addition to the tax on capital gains already paid by them. The Commissioner acted on the theory that the four petitioners had formed an unregistered partnership or joint venture within the meaning of sections 24(a) and 84(b) of the Tax Code (Collector of Internal Revenue vs. Batangas Trans. Co., 102 Phil. 822). The petitioners contested the assessments. Two Judges of the Tax Court sustained the same. Judge Roaquin dissented. Hence, the instant appeal. We hold that it is error to consider the petitioners as having formed a partnership under article 1767 of the Civil Code simply because they allegedly contributed P178,708.12 to buy the two lots, resold the same and divided the profit among themselves. To regard the petitioners as having formed a taxable unregistered partnership would result in oppressive taxation and confirm the dictum that the power to tax involves the power to destroy. That eventuality should be obviated. As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and simple. To consider them as partners would obliterate the distinction between a co-ownership and a partnership. The petitioners were not engaged in any joint venture by reason of that isolated transaction. Their original purpose was to divide the lots for residential purposes. If later on they found it not feasible to build their residences on the lots because of the high cost of construction, then they had no choice but to resell the same to dissolve the co-ownership. The division of the profit was merely incidental to the dissolution of the co-ownership which was in the nature of things a temporary state. It had to be terminated sooner or later. Castan Tobeas says: Como establecer el deslinde entre la comunidad ordinaria o copropiedad y la sociedad? El criterio diferencial-segun la doctrina mas generalizada-esta: por razon del origen, en que la sociedad presupone necesariamente la convencion, mentras que la comunidad puede existir y existe ordinariamente sin ela; y por razon del fin

objecto, en que el objeto de la sociedad es obtener lucro, mientras que el de la indivision es solo mantener en su integridad la cosa comun y favorecer su conservacion. Reflejo de este criterio es la sentencia de 15 de Octubre de 1940, en la que se dice que si en nuestro Derecho positive se ofrecen a veces dificultades al tratar de fijar la linea divisoria entre comunidad de bienes y contrato de sociedad, la moderna orientacion de la doctrina cientifica seala como nota fundamental de diferenciacion aparte del origen de fuente de que surgen, no siempre uniforme, la finalidad perseguida por los interesados: lucro comun partible en la sociedad, y mera conservacion y aprovechamiento en la comunidad. (Derecho Civil Espanol, Vol. 2, Part 1, 10 Ed., 1971, 328- 329). Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived". There must be an unmistakable intention to form a partnership or joint venture.* Such intent was present in Gatchalian vs. Collector of Internal Revenue, 67 Phil. 666, where 15 persons contributed small amounts to purchase a two-peso sweepstakes ticket with the agreement that they would divide the prize The ticket won the third prize of P50,000. The 15 persons were held liable for income tax as an unregistered partnership. The instant case is distinguishable from the cases where the parties engaged in joint ventures for profit. Thus, in Oa vs. ** This view is supported by the following rulings of respondent Commissioner: Co-owership distinguished from partnership.We find that the case at bar is fundamentally similar to the De Leon case. Thus, like the De Leon heirs, the Longa heirs inherited the 'hacienda' in question pro-indiviso from their deceased parents; they did not contribute or invest additional ' capital to increase or expand the inherited properties; they merely continued dedicating the property to the use to which it had been put by their forebears; they individually reported in their tax returns their corresponding shares in the income and expenses of the 'hacienda', and they continued for many years the status of coownership in order, as conceded by respondent, 'to preserve its (the 'hacienda') value and to continue the existing contractual relations with the Central Azucarera de Bais for milling purposes. Longa vs. Aranas, CTA Case No. 653, July 31, 1963). All co-ownerships are not deemed unregistered pratnership.Co-Ownership who own properties which produce income should not automatically be considered partners of an unregistered partnership, or a corporation, within the purview of the income tax law. To hold otherwise, would be to subject the income of all co-ownerships of inherited properties to the tax on corporations, inasmuch as if a property does not produce an income at all, it is not subject to any kind of income tax, whether the income tax on individuals or the income tax on corporation. (De Leon vs. CI R, CTA Case No. 738, September 11, 1961, cited in Araas, 1977 Tax Code Annotated, Vol. 1, 1979 Ed., pp. 77-78). Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where after an extrajudicial settlement the co-heirs used the inheritance or the incomes derived therefrom as a common fund to produce profits for themselves, it was held that they were taxable as an unregistered partnership. It is likewise different from Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198, where father and son purchased a lot and building, entrusted the administration of the building to an administrator and divided equally the net income, and from Evangelista vs. Collector of Internal Revenue, 102 Phil. 140, where the three Evangelista sisters bought four pieces of real property which they leased to various tenants and derived rentals therefrom. Clearly, the petitioners in these two cases had formed an unregistered partnership. In the instant case, what the Commissioner should have investigated was whether the father donated the two lots to the petitioners and whether he paid the donor's tax (See Art. 1448, Civil Code). We are not prejudging this matter. It might have already prescribed. WHEREFORE, the judgment of the Tax Court is reversed and set aside. The assessments are cancelled. No costs. SO ORDERED.

G.R. No. 78133 October 18, 1988 MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners, vs. THE COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.
De la Cuesta, De las Alas and Callanta Law Offices for petitioners. The Solicitor General for respondents GANCAYCO, J.: The distinction between co-ownership and an unregistered partnership or joint venture for income tax purposes is the issue in this petition. On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino, et al. and on May 28, 1966, they bought another three (3) parcels of land from Juan Roque. The first two parcels of land were sold by petitioners in 1968 toMarenir Development Corporation, while the three parcels of land were sold by petitioners to Erlinda Reyes and Maria Samson on March 19,1970. Petitioners realized a net profit in the sale made in 1968 in the amount of P165,224.70, while they realized a net profit of P60,000.00 in the sale made in 1970. The corresponding capital gains taxes were paid by petitioners in 1973 and 1974 by availing of the tax amnesties granted in the said years. However, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I. Plana, petitioners were assessed and required to pay a total amount of P107,101.70 as alleged deficiency corporate income taxes for the years 1968 and 1970. Petitioners protested the said assessment in a letter of June 26, 1979 asserting that they had availed of tax amnesties way back in 1974. In a reply of August 22, 1979, respondent Commissioner informed petitioners that in the years 1968 and 1970, petitioners as co-owners in the real estate transactions formed an unregistered partnership or joint venture taxable as a corporation under Section 20(b) and its income was subject to 1 the taxes prescribed under Section 24, both of the National Internal Revenue Code that the unregistered partnership was subject to corporate income tax as distinguished from profits derived from the partnership by them which is subject to individual income tax; and that the availment of tax amnesty under P.D. No. 23, as amended, by petitioners relieved petitioners of their individual income tax liabilities but did not relieve them from the tax liability of the unregistered partnership. Hence, the petitioners were required to pay the deficiency income tax assessed.

Petitioners filed a petition for review with the respondent Court of Tax Appeals docketed as CTA Case No. 3045. In due course, the respondent 2 court by a majority decision of March 30, 1987, affirmed the decision and action taken by respondent commissioner with costs against petitioners. 3 It ruled that on the basis of the principle enunciated in Evangelista an unregistered partnership was in fact formed by petitioners which like a corporation was subject to corporate income tax distinct from that imposed on the partners. In a separate dissenting opinion, Associate Judge Constante Roaquin stated that considering the circumstances of this case, although there might in fact be a co-ownership between the petitioners, there was no adequate basis for the conclusion that they thereby formed an unregistered partnership which made "hem liable for corporate income tax under the Tax Code. Hence, this petition wherein petitioners invoke as basis thereof the following alleged errors of the respondent court: A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF THE RESPONDENT COMMISSIONER, TO THE EFFECT THAT PETITIONERS FORMED AN UNREGISTERED PARTNERSHIP SUBJECT TO CORPORATE INCOME TAX, AND THAT THE BURDEN OF OFFERING EVIDENCE IN OPPOSITION THERETO RESTS UPON THE PETITIONERS. B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE TRANSACTIONS, THAT AN UNREGISTERED PARTNERSHIP EXISTED THUS IGNORING THE REQUIREMENTS LAID DOWN BY LAW THAT WOULD WARRANT THE PRESUMPTION/CONCLUSION THAT A PARTNERSHIP EXISTS. C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTA CASE AND THEREFORE SHOULD BE DECIDED ALONGSIDE THE EVANGELISTA CASE. D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE PETITIONERS FROM PAYMENT OF OTHER TAXES FOR THE PERIOD COVERED BY SUCH AMNESTY. (pp. 12-13, Rollo.) The petition is meritorious. 4 The basis of the subject decision of the respondent court is the ruling of this Court in Evangelista. In the said case, petitioners borrowed a sum of money from their father which together with their own personal funds they used in buying several real properties. They appointed their brother to manage their properties with full power to lease, collect, rent, issue receipts, etc. They had the real properties rented or leased to various tenants for several years and they gained net profits from the rental income. Thus, the Collector of Internal Revenue demanded the payment of income tax on a corporation, among others, from them. In resolving the issue, this Court held as follows: The issue in this case is whether petitioners are subject to the tax on corporations provided for in section 24 of Commonwealth Act No. 466, otherwise known as the National Internal Revenue Code, as well as to the residence tax for corporations and the real estate dealers' fixed tax. With respect to the tax on corporations, the issue hinges on the meaning of the terms corporation and partnership as used in sections 24 and 84 of said Code, the pertinent parts of which read: Sec. 24. Rate of the tax on corporations.There shall be levied, assessed, collected, and paid annually upon the total net income received in the preceding taxable year from all sources by every corporation organized in, or existing under the laws of the Philippines, no matter how created or organized but not including duly registered general co-partnerships (companies collectives), a tax upon such income equal to the sum of the following: ... Sec. 84(b). The term "corporation" includes partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participation), associations or insurance companies, but does not include duly registered general copartnerships (companies colectivas). Article 1767 of the Civil Code of the Philippines provides: By the contract of partnership two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves. Pursuant to this article, the essential elements of a partnership are two, namely: (a) an agreement to contribute money, property or industry to a common fund; and (b) intent to divide the profits among the contracting parties . The first element is undoubtedly present in the case at bar, for, admittedly, petitioners have agreed to, and did, contribute money and property to a common fund. Hence, the issue narrows down to their intent in acting as they did . Upon consideration of all the facts and circumstances surrounding the case, we are fully satisfied that their purpose was to engage in real estate transactions for monetary gain and then divide the same among themselves, because: 1. Said common fund was not something they found already in existence. It was not a property inherited by them pro indiviso. They created it purposely. What is more they jointly borrowed a substantial portion thereof in order to establish said common fund. 2. They invested the same, not merely in one transaction, but in a series of transactions. On February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944, they purchased 21 lots for P18,000.00. This was soon followed, on April 23, 1944, by the acquisition of another real estate for P108,825.00. Five (5) days later (April 28, 1944), they got a fourth lot for P237,234.14. The number of lots (24) acquired and transcations undertaken, as well as the brief interregnum between each, particularly the last three purchases, is strongly indicative of a pattern or common design that was not limited to the conservation and preservation of the aforementioned common fund or even of the property acquired by petitioners in February, 1943. In other words, one cannot but perceive a character of habituality peculiar to business transactions engaged in for purposes of gain. 3. The aforesaid lots were not devoted to residential purposes or to other personal uses, of petitioners herein. The properties were leased separately to several persons, who, from 1945 to 1948 inclusive, paid the total sum of P70,068.30 by way of rentals. Seemingly, the lots are still being so let, for petitioners do not even suggest that there has been any change in the utilization thereof. 4. Since August, 1945, the properties have been under the management of one person, namely, Simeon Evangelists, with full power to lease, to collect rents, to issue receipts, to bring suits, to sign letters and contracts, and to indorse and deposit notes and checks. Thus, the affairs relative to said properties have been handled as if the same belonged to a corporation or business enterprise operated for profit.

5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over fifteen (15) years, since the first property was acquired, and over twelve (12) years, since Simeon Evangelists became the manager. 6. Petitioners have not testified or introduced any evidence, either on their purpose in creating the set up already adverted to, or on the causes for its continued existence. They did not even try to offer an explanation therefor. Although, taken singly, they might not suffice to establish the intent necessary to constitute a partnership, the collective effect of these circumstances is such as to leave no room for doubt on the existence of said intent in petitioners herein. Only one or two of the aforementioned circumstances were present in the cases cited by petitioners herein, and, hence, those cases are not in 5 point. In the present case, there is no evidence that petitioners entered into an agreement to contribute money, property or industry to a common fund, and that they intended to divide the profits among themselves. Respondent commissioner and/ or his representative just assumed these conditions to be present on the basis of the fact that petitioners purchased certain parcels of land and became co-owners thereof. In Evangelists, there was a series of transactions where petitioners purchased twenty-four (24) lots showing that the purpose was not limited to the conservation or preservation of the common fund or even the properties acquired by them. The character of habituality peculiar to business transactions engaged in for the purpose of gain was present. In the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell the same nor make any improvements thereon. In 1966, they bought another three (3) parcels of land from one seller. It was only 1968 when they sold the two (2) parcels of land after which they did not make any additional or new purchase. The remaining three (3) parcels were sold by them in 1970. The transactions were isolated. The character of habituality peculiar to business transactions for the purpose of gain was not present. In Evangelista, the properties were leased out to tenants for several years. The business was under the management of one of the partners. Such condition existed for over fifteen (15) years. None of the circumstances are present in the case at bar. The co-ownership started only in 1965 and ended in 1970. Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista he said: I wish however to make the following observation Article 1769 of the new Civil Code lays down the rule for determining when a transaction should be deemed a partnership or a co-ownership. Said article paragraphs 2 and 3, provides; (2) Co-ownership or co-possession does not itself establish a partnership, whether such co-owners or co-possessors do or do not share any profits made by the use of the property; (3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived; From the above it appears that the fact that those who agree to form a co- ownership share or do not share any profits made by the use of the property held in common does not convert their venture into a partnership. Or the sharing of the gross returns does not of itself establish a partnership whether or not the persons sharing therein have a joint or common right or interest in the property. This only means that, aside from the circumstance of profit, the presence of other elements constituting partnership is necessary, such as the clear intent to form a partnership, the existence of a juridical personality different from that of the individual partners, and the freedom to transfer or assign any interest in the property by one with the consent of the others (Padilla, Civil Code of the Philippines Annotated, Vol. I, 1953 ed., pp. 635-636) It is evident that an isolated transaction whereby two or more persons contribute funds to buy certain real estate for profit in the absence of other circumstances showing a contrary intention cannot be considered a partnership. Persons who contribute property or funds for a common enterprise and agree to share the gross returns of that enterprise in proportion to their contribution, but who severally retain the title to their respective contribution, are not thereby rendered partners. They have no common stock or capital, and no community of interest as principal proprietors in the business itself which the proceeds derived. (Elements of the Law of Partnership by Flord D. Mechem 2nd Ed., section 83, p. 74.) A joint purchase of land, by two, does not constitute a co-partnership in respect thereto; nor does an agreement to share the profits and losses on the sale of land create a partnership; the parties are only tenants in common. (Clark vs. Sideway, 142 U.S. 682,12 Ct. 327, 35 L. Ed., 1157.) Where plaintiff, his brother, and another agreed to become owners of a single tract of realty, holding as tenants in common, and to divide the profits of disposing of it, the brother and the other not being entitled to share in plaintiffs commission, no partnership existed as between the three parties, whatever their relation may have been as to third parties. (Magee vs. Magee 123 N.E. 673, 233 Mass. 341.) In order to constitute a partnership inter sese there must be: (a) An intent to form the same; (b) generally participating in both profits and losses; (c) and such a community of interest, as far as third persons are concerned as enables each party to make contract, manage the business, and dispose of the whole property.-Municipal Paving Co. vs. Herring 150 P. 1067, 50 III 470.) The common ownership of property does not itself create a partnership between the owners, though they may use it for the purpose of making gains; and they may, without becoming partners, agree among themselves as to the management, and use 6 of such property and the application of the proceeds therefrom. (Spurlock vs. Wilson, 142 S.W. 363,160 No. App. 14.) The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have a joint or common right or interest in the property. There must be a clear intent to form a partnership, the existence of a juridical personality different from the individual partners, and the freedom of each party to transfer or assign the whole property. In the present case, there is clear evidence of co-ownership between the petitioners. There is no adequate basis to support the proposition that they thereby formed an unregistered partnership. The two isolated transactions whereby they purchased properties and sold the same a few years thereafter did not thereby make them partners. They shared in the gross profits as co- owners and paid their capital gains taxes on their net profits and availed of the tax amnesty thereby. Under the circumstances, they cannot be considered to have formed an unregistered partnership which is thereby liable for corporate income tax, as the respondent commissioner proposes. And even assuming for the sake of argument that such unregistered partnership appears to have been formed, since there is no such existing unregistered partnership with a distinct personality nor with assets that can be held liable for said deficiency corporate income tax, then

petitioners can be held individually liable as partners for this unpaid obligation of the partnership p. However, as petitioners have availed of the benefits of tax amnesty as individual taxpayers in these transactions, they are thereby relieved of any further tax liability arising therefrom. WHEREFROM, the petition is hereby GRANTED and the decision of the respondent Court of Tax Appeals of March 30, 1987 is hereby REVERSED and SET ASIDE and another decision is hereby rendered relieving petitioners of the corporate income tax liability in this case, without pronouncement as to costs. SO ORDERED. Cruz, Grio-Aquino and Medialdea, JJ., concur.

CIR V CA January 20, 1999

Facts: Sometime in the 1930s, Don Andres Soriano, a citizen and resident of the United States, formed the corporation A. Soriano Y Cia, predecessor of ANSCOR with a 1,000,000.00 capitalization divided into 10,000 common shares at a par value of P100/share. ANSCOR is wholly owned and controlled by the family of Don Andres, who are all non-resident aliens. In 1937, Don Andres subscribed to 4,963 shares of the 5,000 shares originally issued. On September 12, 1945, ANSCORs authorized capital stock was increased to P2,500,000.00 divided into 25,000 common shares wit h the same par value. Of the additional 15,000 shares, only 10,000 was issued which were all subscribed by Don Andres, after the other stockholders waived in favor of the former their pre-emptive rights to subscribe to the new issues. This increased his subscription to 14,963 common shares. A month later, Don Andres transferred 1,250 shares each to his two sons, Jose and Andres Jr., as their initial investments in ANSCOR. Both sons are foreigners. By 1947, ANSCOR declared stock dividends. Other stock dividend declarations were made between 1949 and December 20, 1963. On December 30, 1964 Don Andres died. As of that date, the records revealed that he has a total shareholdings of 185,154 shares. 50,495 of which are original issues and the balance of 134,659 shares as stock dividend declarations. Correspondingly, one-half of that shareholdings or 92,577 shares were transferred to his wife, Doa Carmen Soriano, as her conjugal share. The offer half formed part of his estate. A day after Don Andres died, ANSCOR increased its capital stock to P20M and in 1966 further increased it to P30M. In the same year (December 1966), stock dividends worth 46,290 and 46,287 shares were respectively received by the Don Andres estate and Doa Carmen from ANSCOR. Hence, increasing their accumulated shareholdings to 138,867 and 138,864 common shares each. On December 28, 1967, Doa Carmen requested a ruling from the United States Internal Revenue Service (IRS), inquiring if an exchange of common with preferred shares may be considered as a tax avoidance scheme. By January 2, 1968, ANSCOR reclassified its existing 300,000 common shares into 150,000 common and 150,000 preferred shares. In a letter-reply dated February 1968, the IRS opined that the exchange is only a recapitalization scheme and not tax avoidance. Consequently, on March 31, 1968 Doa Carmen exchanged her whole 138,864 common shares for 138,860 of the preferred shares. The estate of Don Andres in turn exchanged 11,140 of its common shares for the remaining 11,140 preferred shares. In 1973, after examining ANSCORs books of account and record Revenue examiners issued a report proposing that ANSCOR be assessed for deficiency withholding tax-at-source, for the year 1968 and the 2nd quarter of 1969 based on the transaction of exchange and redemption of stocks. BIR made the corresponding assessments. ANSCORs subsequent protest on the assessments was denied in 1983 by petitioner. ANSCOR filed a petition for review with the CTA, the Tax Court reversed petitioners ruling. CA affirmed the ruling of the CTA. Hence this position. Issue: Whether or not a person assessed for deficiency withholding tax under Sec. 53 and 54 of the Tax Code is being held liable in its capacity as a withholding agent. Held: An income taxpayer covers all persons who derive taxable income. ANSCOR was assessed by petitioner for deficiency withholding tax, as such, it is being held liable in its capacity as a withholding agent and not in its personality as taxpayer. A withholding agent, A. Soriano Corp. in this case, cannot be deemed a taxpayer for it to avail of a tax amnesty under a Presi dential decree that condones the collection of all internal revenue taxes including the increments or penalties on account of non-payment as well as all civil, criminal, or administrative liabilities arising from or incident to voluntary disclosures under the NIRC of previously untaxed income and/or wealth realized here or abroad by any taxpayer, natural or juridical. The Court explains: The withholding agent is not a taxpayer, he is a mere tax collector. Under the withholding s ystem, however, the agent-payer becomes a payee by fiction of law. His liability is direct and independent from the taxpayer, because the income tax is still imposed and due from the latter. The agent is not liable for the tax as no wealth flowed into him, he earned no income.

Tan v Del Rosario, Jr.

Facts: This is a consolidated case involving the constitutionality of RA 7496 or the Simplified Net Income Taxation (SNIT) scheme. st Petitioners claim to be taxpayers adversely affected by the continued implementation of the SNIT. In the 1 case, they contend that the House Bill which eventually became RA 7496 is a misnomer or deficient because it was named as Simplified Net Income Taxation Scheme for the SelfEmployed and Professionals Engaged in the Practice of their Profession while the actual title contains the said words with the additional phrase, Amending Section 21 and 29 of the National Internal Revenue Code.

In the 2 case, they argue that respondents have exceeded their rule-making authority in applying SNIT to general professional partnerships by issuing Revenue Regulation 2-93 to carry out the RA. Issue: Whether or not general professional partnerships may be taxed under SNIT Held: No. A general professional partnership is not itself an income taxpayer. Income tax is imposed not on the partnership (which is tax exempt), but on the partners themselves in their individual capacity computed on their distributive shares of partnership profits. There is no distinction in income tax liability between a person who practices his profession alone and one who does it through partnership with others in the exercise of a common profession. In the case, SNIT is not envisioned by the Congress to cover corporations or partnerships which are independently subject to the payment of income tax. *** Notes: *2 KINDS OF PARTNERSHIPS UNDER TAX CODE 1. Taxable Partnerships no matter how it was created or organized, they are subject to income tax by law. 2. Exempt Partnerships the partners, not the partnership (although obligated to file an income tax return for administration and data) are liable for income tax in their individual capacity.

nd

CIR vs. Isabela Cultural Corporation

Facts: Isabela Cultural Corporation (ICC), a domestic corporation received an assessment notice for deficiency income tax and expanded withholding tax from BIR. It arose from the disallowance of ICCs claimed expense for professional and security services paid by ICC; as well as the alleged understatement of interest income on the three promissory notes due from Realty Investment Inc. The deficiency expanded withholding tax was allegedly due to the failure of ICC to withhold 1% e-withholding tax on its claimed deduction for security services. ICC sought a reconsideration of the assessments. Having received a final notice of assessment, it brought the case to CTA, which held that it is unappealable, since the final notice is not a decision. CTAs ruling was reversed by CA, which was sustained by SC, and case was remanded to CTA. CTA rendered a decision in favor of ICC. It ruled that the deductions for professional and security services were properly claimed, it said that even if services were rendered in 1984 or 1985, the amount is not yet determined at that time. Hence it is a proper deduction in 1986. It likewise found that it is the BIR which overstate the interest income, when it applied compounding absent any stipulation. Petitioner appealed to CA, which affirmed CTA, hence the petition. Issue: Whether or not the expenses for professional and security services are deductible. Held: No. One of the requisites for the deductibility of ordinary and necessary expenses is that it must have been paid or incurred during the taxable year. This requisite is dependent on the method of accounting of the taxpayer. In the case at bar, ICC is using the accrual method of accounting. Hence, under this method, an expense is recognized when it is incurred. Under a Revenue Audit Memorandum, when the method of accounting is accrual, expenses not being claimed as deductions by a taxpayer in the current year when they are incurred cannot be claimed in the succeeding year. The accrual of income and expense is permitted when the all-events test has been met. This test requires: 1) fixing of a right to income or liability to pay; and 2) the availability of the reasonable accurate determination of such income or liability. The test does not demand that the amount of income or liability be known absolutely, only that a taxpayer has at its disposal the information necessary to compute the amount with reasonable accuracy. From the nature of the claimed deductions and the span of time during which the firm was retained, ICC can be expected to have reasonably known the retainer fees charged by the firm. They cannot give as an excuse the delayed billing, since it could have inquired into the amount of their obligation and reasonably determine the amount.

G.R. No. 118794 May 8, 1996 PHILIPPINE REFINING COMPANY (now known as "UNILEVER PHILIPPINES [PRC], INC."), petitioner, vs. COURT OF APPEALS, COURT OF TAX APPEALS, and THE COMMISSIONER OF INTERNAL REVENUE, respondents.
REGALADO, J.:p This is an appeal by certiorari from the decision of respondent Court of Appeals affirming the decision of the Court of Tax Appeals which disallowed petitioner's claim for deduction as bad debts of several accounts in the total sum of P395,324.27, and imposing a 25% surcharge and 20% annual delinquency interest on the alleged deficiency income tax liability of petitioner.
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Petitioner Philippine Refining Company (PRC) was assessed by respondent Commissioner of Internal Revenue (Commissioner) to pay a deficiency tax for the year 1985 in the amount of P1,892,584.00, computed as follows: Deficiency Income Tax Net Income per investigation P197,502,568.00 Add: Disallowances Bad Debts P 713,070.93 Interest Expense P 2,666,545.49 P3,379,616.00 Net Taxable Income 200,882,184.00 Tax Due Thereon 70,298,764.00 Less: Tax Paid 69,115,899.00 Deficiency Income Tax 1,182,865.00 Add: 20% Interest (60% max.) 709,719.00 Total Amount Due and Collectible P1,892,584.00
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The assessment was timely protested by petitioner on April 26, 1989, on the ground that it was based on the erroneous disallowances of "bad debts" and "interest expense" although the same are both allowable and legal deductions. Respondent Commissioner, however, issued a warrant of garnishment against the deposits of petitioner at a branch of City Trust Bank, in Makati, Metro Manila, which action the latter considered as a denial of its protest. Petitioner accordingly filed a petition for review with the Court of Tax Appeals (CTA) on the same assignment of error, that is, that the "bad debts" 3 and "interest expense" are legal and allowable deductions. In its decision of February 3, 1993 in C.T.A. Case No. 4408, the CTA modified the findings of the Commissioner by reducing the deficiency income tax assessment to P237,381.26, with surcharge and interest incident to delinquency. In said decision, the Tax Court reversed and set aside the Commissioner's disallowance of the interest expense of P2,666,545.19 but maintained the disallowance of the supposed bad debts of thirteen (13) debtors in the total sum of P395,324.27. Petitioner then elevated the case to respondent Court of Appeals which, as earlier stated, denied due course to the petition for review and 4 dismissed the same on August 24, 1994 in CA-G.R. SP No. 31190, on the following ratiocination: We agree with respondent Court of Tax Appeals: Out of the sixteen (16) accounts alleged as bad debts, We find that only three (3) accounts have met the requirements of the worthlessness of the accounts, hence were properly written off as: bad debts, namely: 1. Petronila Catap P 29,098.30 (Pet Mini Grocery) 2. Esther Guinto 254,375.54 (Esther Sari-sari Store) 3. Manuel Orea 34,272.82 (Elman Gen. Mdsg.) TOTAL P 317,746.66 xxx xxx xxx With regard to the other accounts, namely: 1. Remoblas Store P 11,961.00

2. Tomas Store 16,842.79 3. AFPCES 13,833.62 4. CM Variety Store 10,895.82 5. U' Ren Mart Enterprise 10,487.08 6. Aboitiz Shipping Corp. 89,483.40 7. J. Ruiz Trucking 69,640.34 8. Renato Alejandro 13,550.00 9. Craig, Mostyn Pty. Ltd. 23,738.00 10. C. Itoh 19,272.22 11. Crocklaan B.V. 77,690.00 12. Enriched Food Corp. 24,158.00 13. Lucito Sta. Maria 13,772.00 TOTAL P 395,324.27 We find that said accounts have not satisfied the requirements of the "worthlessness of a debt". Mere testimony of the Financial Accountant of the Petitioner explaining the worthlessness of said debts is seen by this Court as nothing more than a self-serving exercise which lacks probative value. There was no iota of documentary evidence (e.g., collection letters sent, report from investigating fieldmen, letter of referral to their legal department, police report/affidavit that the owners were bankrupt due to fire that engulfed their stores or that the owner has been murdered. etc.), to give support to the testimony of an employee of the Petitioner. Mere allegations cannot prove the worthlessness of such debts in 1985. Hence, the claim for 5 deduction of these thirteen (13) debts should be rejected. 1. This pronouncement of respondent Court of Appeals relied on the ruling of this Court in Collector vs. Goodrich International Rubber Co., which established the rule in determining the "worthlessness of a debt." In said case, we held that for debts to be considered as "worthless," and thereby qualify as "bad debts" making them deductible, the taxpayer should show that (1) there is a valid and subsisting debt. (2) the debt must be actually ascertained to be worthless and uncollectible during the taxable year; (3) the debt must be charged off during the taxable year; and (4) the debt must arise from the business or trade of the taxpayer. Additionally, before a debt can be considered worthless, the taxpayer must also show that it is indeed uncollectible even in the future. Furthermore, there are steps outlined to be undertaken by the taxpayer to prove that he exerted diligent efforts to collect the debts, viz.: (1) sending of statement of accounts; (2) sending of collection letters; (3) giving the account to a lawyer for collection; and (4) filing a collection case in court. On the foregoing considerations, respondent Court of Appeals held that petitioner did not satisfy the requirements of "worthlessness of a debt" as to the thirteen (13) accounts disallowed as deductions. It appears that the only evidentiary support given by PRC for its aforesaid claimed deductions was the explanation or justification posited by its financial adviser or accountant, Guia D. Masagana. Her allegations were not supported by any documentary evidence, hence both the Court of Appeals and the CTA ruled that said contentions per se cannot prove that the debts were indeed uncollectible and can be considered as bad debts as to make them deductible. That both lower courts are correct is shown by petitioner's own submission and the discussion thereof which we have taken time and patience to cull from the antecedent proceedings in this case, albeit bordering on factual settings. The accounts of Remoblas Store in the amount of P11,961.00 and CM Variety Store in the amount of P10,895.82 are uncollectible, according to petitioner, since the stores were burned in November, 1984 and in early 1985, respectively, and there are no assets belonging to the debtors that 7 can be garnished by PRC. However, PRC failed to show any documentary evidence for said allegations. Not a single document was offered to show that the stores were burned, even just a police report or an affidavit attesting to such loss by fire. In fact, petitioner did not send even a single demand letter to the owners of said stores. The account of Tomas Store in the amount of P16,842.79 is uncollectible, claims petitioner PRC, since the owner thereof was murdered and left no visible assets which could satisfy the debt. Withal, just like the accounts of the two other stores just mentioned, petitioner again failed to present proof of the efforts exerted to collect the debt, other than the aforestated asseverations of its financial adviser. The accounts of Aboitiz Shipping Corporation and J. Ruiz Trucking in the amounts of P89,483.40 and P69,640.34, respectively, both of which allegedly arose from the hijacking of their cargo and for which they were given 30% rebates by PRC, are claimed to be uncollectible. Again, petitioner failed to present an iota of proof, not even a copy of the supposed policy regulation of PRC that it gives rebates to clients in case of loss arising from fortuitous events or force majeure, which rebates it now passes off as uncollectible debts. As to the account of P13,550.00 representing the balance collectible from Renato Alejandro, a former employee who failed to pay the judgment against him, it is petitioner's theory that the same can no longer be collected since his whereabouts are unknown and he has no known property
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which can be garnished or levied upon. Once again, petitioner failed to prove the existence of the said case against that debtor or to submit any documentation to show that Alejandro was indeed bound to pay any judgment obligation. The amount of P13,772.00 corresponding to the debt of Lucito Sta. Maria is allegedly due to the loss of his stocks through robbery and the account is uncollectible due to his insolvency. Petitioner likewise failed to submit documentary evidence, not even the written reports of the alleged investigation conducted by its agents as testified to by its aforenamed financial adviser. Regarding the accounts of C. Itoh in the amount of P19,272.22, Crocklaan B.V. in the sum of P77,690.00, and Craig, Mostyn Pty. Ltd. with a balance of P23,738.00, petitioner contends that these debtors being foreign corporations, it can sue them only in their country of incorporation; and since this will entail expenses more than the amounts of the debts to be collected, petitioner did not file any collection suit but opted to write them off as bad debts. Petitioner was unable to show proof of its efforts to collect the debts, even by a single demand letter therefor. While it is not required to file suit, it is at least expected by the law to produce reasonable proof that the debts are uncollectible although diligent efforts were exerted to collect the same. The account of Enriched Food Corporation in the amount of P24,158.00 remains unpaid, although petitioner claims that it sent several letters. This is not sufficient to sustain its position. even if true, but even smacks of insouciance on its part. On top of that, it was unable to show a single copy of the alleged demand letters sent to the said corporation or any of its corporate officers. With regard to the account of AFPCES for unpaid supplies in the amount of P13,833.62, petitioner asserts that since the debtor is an agency of the government, PRC did not file a collection suit therefor. Yet, the mere fact that AFPCES is a government agency does not preclude PRC from filing suit since said agency, while discharging proprietary functions, does not enjoy immunity from suit. Such pretension of petitioner cannot pass judicial muster. No explanation is offered by petitioner as to why the unpaid account of U' Ren Mart Enterprise in the amount of P10,487.08 was written off as a bad debt. However, the decision of the CTA includes this debtor in its findings on the lack of documentary evidence to justify the deductions claimed, since the worthlessness of the debts involved are sought to be established by the mere self-serving testimony of its financial consultant. The contentions of PRC that nobody is in a better position to determine when an obligation becomes a bad debt than the creditor itself, and that its judgment should not be substituted by that of respondent court as it is PRC which has the facilities in ascertaining the collectibility or uncollectibility of these debts, are presumptuous and uncalled for. The Court of Tax Appeals is a highly specialized body specifically created for the purpose of reviewing tax cases. Through its expertise, it is undeniably competent to determine the 8 issue of whether or not the debt is deductible through the evidence presented before it. Because of this recognized expertise, the findings of the CTA will not ordinarily be reviewed absent a showing of gross error or abuse on its part. The findings of fact of the CTA are binding on this Court and in the absence of strong reasons for this Court to delve into facts, only questions of law 10 are open for determination. Were it not, therefore, due to the desire of this Court to satisfy petitioner's calls for clarification and to use this case as a vehicle for exemplification, this appeal could very well have been summarily dismissed. The Court vehemently rejects the absurd thesis of petitioner that despite the supervening delay in the tax payment, nothing is lost on the part of the Government because in the event that these debts are collected, the same will be returned as taxes to it in the year of the recovery. This is an irresponsible statement which deliberately ignores the fact that while the Government may eventually recover revenues under that hypothesis, the delay caused by the non-payment of taxes under such a contingency will obviously have a disastrous effect on the revenue collections necessary for governmental operations during the period concerned. 2. We need not tarry at length on the second issue raised by petitioner. It argues that the imposition of the 25% surcharge and the 20% delinquency interest due to delay in its payment of the tax assessed is improper and unwarranted, considering that the assessment of the Commissioner was modified by the CTA and the decision of said court has not yet become final and executory. Regarding the 25% surcharge penalty, Section 248 of the Tax Code provides: Sec. 248. Civil Penalties. (a) There shall be imposed, in addition to the tax required to be paid, a penalty equivalent to twenty-five percent (25%) of the amount due, in the following cases: xxx xxx xxx (3) Failure to pay the tax within the time prescribed for its payment. With respect to the penalty of 20% interest, the relevant provision is found in Section 249 of the same Code, as follows:
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Sec. 249. Interest. (a) In general. There shall be assessed and collected on any unpaid amount of tax, interest at the rate of twenty percent (20%) per annum, or such higher rate as may be prescribed by regulations, from the date prescribed for payment until the amount is fully paid. xxx xxx xxx (c) Delinquency interest. In case of failure pay: (1) The amount of the tax due on any return required to be filed, or (2) The amount of the tax due for which no return is required, or (3) A deficiency tax, or any surcharge or interest thereon, on the due date appearing in the notice and demand of the Commissioner, there shall be assessed and collected, on the unpaid amount, interest at the rate prescribed in paragraph (a) hereof until the amount is fully paid, which interest shall form part of the tax. (emphasis supplied) xxx xxx xxx As correctly pointed out by the Solicitor General, the deficiency tax assessment in this case, which was the subject of the demand letter of respondent Commissioner dated April 11,1989, should have been paid within thirty (30) days from receipt thereof. By reason of petitioner's default thereon, the delinquency penalties of 25% surcharge and interest of 20% accrued from April 11, 1989. The fact that petitioner appealed the assessment to the CTA and that the same was modified does not relieve petitioner of the penalties incident to delinquency. The reduced amount of P237,381.25 is but a part of the original assessment of P1,892,584.00. Our attention has also been called to two of our previous rulings and these we set out here for the benefit of petitioner and whosoever may be minded to take the same stance it has adopted in this case. Tax laws imposing penalties for delinquencies, so we have long held, are intended to hasten tax payments by punishing evasions or neglect of duty in respect thereof. If penalties could be condoned for flimsy reasons, the law imposing penalties for delinquencies would be rendered nugatory, and the maintenance of the Government and its multifarious activities will be 11 adversely affected. We have likewise explained that it is mandatory to collect penalty and interest at the stated rate in case of delinquency. The intention of the law is to discourage delay in the payment of taxes due the Government and, in this sense, the penalty and interest are not penal but compensatory for 12 the concomitant use of the funds by the taxpayer beyond the date when he is supposed to have paid them to the Government. Unquestionably, petitioner chose to turn a deaf ear to these injunctions. ACCORDINGLY, the petition at bar is DENIED and the judgment of respondent Court of Appeals is hereby AFFIRMED, with treble costs against petitioner.SO ORDERED

G.R. No. 159991 November 16, 2006 CARMELINO F. PANSACOLA, Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION QUISUMBING, J.: 1 For review on certiorari is the Decision dated June 5, 2003 of the Court of Appeals in CA-G.R. S.P. No. 60475. The appellate court denied petitioners availment of the increased amounts of personal and additional exemptions under Republic Act No. 8424, the Nation al Internal Revenue 2 3 Code of 1997 (NIRC), which took effect on January 1, 1998. Also assailed is the appellate courts Resolution dated September 11, 2003, denying the motion for reconsideration. The facts are undisputed. On April 13, 1998, petitioner Carmelino F. Pansacola filed his income tax return for the taxable year 1997 that reflected an overpayment of P5,950. 4 In it he claimed the increased amounts of personal and additional exemptions under Section 35 of the NIRC, although his certificate of income tax 5 withheld on compensation indicated the lesser allowed amounts on these exemptions. He claimed a refund of P5,950 with the Bureau of Internal Revenue, which was denied. Later, the Court of Tax Appeals also denied his claim because according to the tax court, "it would be absurd for the 6 law to allow the deduction from a taxpayers gross income earned on a certain year of exemptions availing on a different taxable year" Petitioner 7 sought reconsideration, but the same was denied. 8 On appeal, the Court of Appeals denied his petition for lack of merit. The appellate court ruled that Umali v. Estanislao, relied upon by petitioner, was inapplicable to his case. It further ruled that the NIRC took effect on January 1, 1998, thus the increased exemptions were effective only to cover taxable year 1998 and cannot be applied retroactively.

Petitioner, before us, raises a single issue: *W+hether or not the increased personal and additional exemptions under *the NIRC+ can be availed of by the *p+etitioner for purposes of 9 computing his income tax liability for the taxable year 1997 and thus be entitled to the refund. Simply stated, the issue is: Could the exemptions under Section 35 of the NIRC, which took effect on January 1, 1998, be availed of for the taxable year 1997? 10 Petitioner argues that the personal and additional exemptions are of a fixed character based on Section 35 (A) and (B) of the NIRC and as ruled by this Court in Umali, these personal and additional exemptions are fixed amounts to which an individual taxpayer is entitled. He contends that unlike other allowable deductions, the availability of these exemptions does not depend on the taxpayers prof ession, trade or business for a particular taxable period. Relying again in Umali, petitioner alleges that the Court of Appeals erred in ruling that the increased exemptions were meant to be applied beginning taxable year 1998 and were to be reflected in the taxpayers returns to be filed on or before April 15, 1999. Petitioner reasons that such ruling would postpone the availability of the increased exemptions and literally defer the effectivity of the NIRC to January 1, 1999. Petitioner insists that the increased exemptions were already available on April 15, 1998, the deadline for filing income tax returns for taxable year 1997, because the NIRC was already effective. Respondent, through the Office of the Solicitor General, counters that the increased exemptions were not yet available for taxable year 1997 because all provisions of the NIRC took effect on January 1, 1998 only; that the fixed character of personal and additional exemptions does not 11 necessarily mean that these were not time bound; and petitioners proposition was contrary to Section 35 (C) of the NIRC. It further stated that petitioners exemptions were determined as of December 31, 1997 and the effectivity of the NIRC during the period of January 1 to April 15, 1998 did not affect his tax liabilities within the taxable year 1997; and the inclusive period from January 1 to April 15, 1998, the filing dates and deadline for administrative purposes, was outside of the taxable year 1997. Respondent also maintains that Umali is not applicable to this case. Prefatorily, personal and additional exemptions under Section 35 of the NIRC are fixed amounts to which certain individual taxpayers (citizens, 12 resident aliens) are entitled. Personal exemptions are the theoretical personal, living and family expenses of an individual allowed to be deducted from the gross or net income of an individual taxpayer. These are arbitrary amounts which have been calculated by our lawmakers to be roughly 13 equivalent to the minimum of subsistence, taking into account the personal status and additional qualified dependents of the taxpayer. They are fixed amounts in the sense that the amounts have been predetermined by our lawmakers as provided under Section 35 (A) and (B). Unless and until our lawmakers make new adjustments on these personal exemptions, the amounts allowed to be deducted by a taxpayer are fixed as predetermined by Congress. 14 15 A careful scrutiny of the provisions of the NIRC specifically shows that Section 79 (D) provides that the personal and additional exemptions shall be determined in accordance with the main provisions in Title II of the NIRC. Its main provisions pertain to Section 35 (A) and (B) which state, SEC. 35. Allowance of Personal Exemption for Individual Taxpayer. 16 (A) In General.-For purposes of determining the tax provided in Section 24(A) of this Title, there shall be allowed a basic personal exemption as follows: xxxx For each married individual P32,000 xxxx (B) Additional Exemption for Dependents.There shall be allowed an additional exemption of Eight thousand pesos (P8,000) for each dependent not exceeding four (4). (Emphasis ours.) Section 35 (A) and (B) allow the basic personal and additional exemptions as deductions from gross or net income, as the case maybe, to arrive at the correct taxable income of certain individual taxpayers. Section 24 (A) (1) (a) imposed income tax on a resident c itizens taxable income derived for each taxable year. It provides as follows: SEC. 24. Income Tax Rates. (A) Rates of Income Tax on Individual Citizen (1) An income tax is hereby imposed: 17 18 19 (a) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C), and (D) of this Section, derived for each taxable year from all sources within and without the Philippines by every individual citizen of the Philippines residing therein; (Emphasis ours.) Section 31 defines "taxable income" as the pertinent items of gross income specified in the NIRC, less the deductions and/or personal and 20 additional exemptions, if any, authorized for such types of income by the NIRC or other special laws. As defined in Section 22 (P), "taxable year" 21 means the calendar year, upon the basis of which the net income is computed under Title II of the NIRC. Section 43 also supports the rule that the 22 taxable income of an individual shall be computed on the basis of the calendar year. In addition, Section 45 provides that the deductions provided for under Title II of the NIRC shall be taken for the taxable year in which they are "paid or accrued" or "paid or incurred." 23 Moreover, Section 79 (H) requires the employer to determine, on or before the end of the calendar year but prior to the payment of the compensation for the last payroll period, the tax due from each employees taxable compensation income for the entire taxable year in accordan ce with Section 24 (A). This is for the purpose of either withholding from the employees December salary, or refunding to him n ot later than January 25 of the succeeding year, the difference between the tax due and the tax withheld. Therefore, as provided in Section 24 (A) (1) (a) in relation to Sections 31 and 22 (P) and Sections 43, 45 and 79 (H) of the NIRC, the income subject to income tax is the taxpayers income as derived and computed during the calendar year, his taxable year. Clearly from the abovequoted provisions, what the law should consider for the purpose of determining the tax due from an individual taxpayer is his status and qualified dependents at the close of the taxable year and not at the time the return is filed and the tax due thereon is paid. Now comes Section 35 (C) of the NIRC which provides, Sec. 35. Allowance of Personal Exemption for Individual Taxpayer. xxxx (C) Change of Status. If the taxpayer marries or should have additional dependent(s) as defined above during the taxable year, the taxpayer may claim the corresponding additional exemption, as the case may be, in full for such year. If the taxpayer dies during the taxable year, his estate may still claim the personal and additional exemptions for himself and his dependent(s) as if he died at the close of such year.

If the spouse or any of the dependents dies or if any of such dependents marries, becomes twenty-one (21) years old or becomes gainfully employed during the taxable year, the taxpayer may still claim the same exemptions as if the spouse or any of the dependents died, or as if such dependents married, became twenty-one (21) years old or became gainfully employed at the close of such year. Emphasis must be made that Section 35 (C) of the NIRC allows a taxpayer to still claim the corresponding full amount of exemption for a taxable year, e.g. if he marries; have additional dependents; he, his spouse, or any of his dependents die; and if any of his dependents marry, turn 21 years old; or become gainfully employed. It is as if the changes in his or his dependents status took place at the close of the ta xable year. Consequently, his correct taxable income and his corresponding allowable deductions e.g. personal and additional deductions, if any, had already been determined as of the end of the calendar year. In the case of petitioner, the availability of the aforementioned deductions if he is thus entitled, would be reflected on his tax return filed on or 24 before the 15th day of April 1999 as mandated by Section 51 (C) (1). Since the NIRC took effect on January 1, 1998, the increased amounts of personal and additional exemptions under Section 35, can only be allowed as deductions from the individual taxpayers gross o r net income, as the case maybe, for the taxable year 1998 to be filed in 1999. The NIRC made no reference that the personal and additional exemptions shall apply on income earned before January 1, 1998. Thus, petitioners reliance in Umali is misplaced. 25 In Umali, we noted that despite being given authority by Section 29 (1) (4) of the National Internal Revenue Code of 1977 to adjust these exemptions, no adjustments were made to cover 1989. Note that Rep. Act No. 7167 is entitled "An Act Adjusting the Basic Personal and Additional Exemptions Allowable to Individuals for Income Tax Purposes to the Poverty Threshold Level, Amending for the Purpose Section 29, Paragraph (L), Items (1) and (2) (A), of the National Internal Revenue Code, As Amended, and For Other Purposes." Thus, we said in Umali, that the adjustment provided by Rep. Act No. 7167 effective 1992, should consider the poverty threshold level in 1991, the time it was enacted. And we observed therein that since the exemptions would especially benefit lower and middle-income taxpayers, the exemption should be made to cover the past year 1991. To such an extent, Rep. Act No. 7167 was a social legislation intended to remedy the non-adjustment in 1989. And as cited in Umali, this legislative intent is also clear in the records of the House of Representatives Journal. This is not so in the case at bar. There is nothing in the NIRC that expresses any such intent. The policy declarations in its enactment do not indicate it was a social legislation that adjusted personal and additional exemptions according to the poverty threshold level nor is there any indication that its application should retroact. At the time petitioner filed his 1997 return and paid the tax due thereon in April 1998, the increased amounts of personal and additional exemptions in Section 35 were not yet available. It has not yet accrued as of December 31, 1997, the last day of his taxable year. Petitioners taxable income covers his income for the calendar year 1997. The law canno t be given retroactive effect. It is established that tax 26 laws are prospective in application, unless it is expressly provided to apply retroactively. In the NIRC, we note, there is no specific mention that the increased amounts of personal and additional exemptions under Section 35 shall be given retroactive effect. Conformably too, personal and additional exemptions are considered as deductions from gross income. Deductions for income tax purposes partake of the nature of tax 27 28 29 exemptions, hence strictly construed against the taxpayer and cannot be allowed unless granted in the most explicit and categorical language 30 31 too plain to be mistaken. They cannot be extended by mere implication or inference. And, where a provision of law speaks categorically, the need for interpretation is obviated, no plausible pretense being entertained to justify non-compliance. All that has to be done is to apply it in every 32 case that falls within its terms. Accordingly, the Court of Appeals and the Court of Tax Appeals were correct in denying petitioners claim for refund. 1wphi1 WHEREFORE, the petition is DENIED for lack of merit. The Decision dated June 5, 2003 and the Resolution dated September 11, 2003 of the Court of Appeals in CA-G.R. S.P. No. 60475 are hereby AFFIRMED. SO ORDERED.

G.R. Nos. L-9738 and L-9771 May 31, 1957 BLAS GUTIERREZ, and MARIA MORALES, petitioners, vs. HONORABLE COURT OF TAX APPEALS, and THE COLLECTOR OF INTERNAL REVENUE, respondents. COLLECTOR OF INTERNAL REVENUE, petitioner, vs. BLAS GUTIERREZ, MARIA MORALES, and COURT OF TAX APPEALS, respondents.
Rafael Morales for petitioners. Assistant Solicitor General Ramon L. Avancea and Solicitor Jose P. Alejandro for respondents. FELIX, J.: Maria Morales was the registered owner of an agricultural land designated as Lot No. 724-C of the cadastral survey of Mabalacat, Pampanga. The Republic of the Philippines, at the request of the U.S. Government and pursuant to the terms of the Military Bases Agreement of March 14, 1947, instituted condemnation proceedings in the Court of the First Instance of Pampanga, docketed, as Civil Case No. 148, for the purpose of expropriating the lands owned by Maria Morales and others needed for the expansion of the Clark Field Air Base, which project is necessary for the mutual protection and defense of the Philippines and the United States. Blas Gutierrez was also made a party defendant in said Civil Case No. 148 for being the husband of the landowner Maria Morales. At the commencement of the action, the Republic of the Philippines, therein plaintiff deposited with the Clerk of the Court of First Instance of Pampanga the sum of P156,960, which was provisionally fixed as the value of the lands sought to be expropriated, in order that it could take immediate possession of the same. On January 27, 1949, upon order of the Court, the sum of P34,580 (PNB Check 721520-Exh. R) was paid by the Provincial treasurer of Pampanga to Maria Morales out of the original deposit of P156,960 made by therein plaintiff. After due hearing, the Court of First Instance of Pampanga rendered decision dated November 29, 1949, wherein it fixed as just compensation P2,500 per hectare for some of the lots and P3,000 per hectare for the others, which values were based on the reports of the Commission on Appraisal whose members were chosen by both parties and by the Court, which took into consideration the different conditions affecting, the value of the condemned properties in making their findings. In virtue of said decision, defendant Maria Morales was to receive the amount of P94,305.75 as compensation for Lot No. 724-C which was one of the expropriated lands. But the Court disapproved defendants' claims for consequential damages considering them amply compensated by the

price awarded to their said properties. In order to avoid further litigation expenses and delay inherent to an appeal, the parties entered into a compromise agreement on January 7, 1950, modifying in part the decision rendered by the Court in the sense of fixing the compensation for all the lands, without distinction, at P2,500 per hectare, which compromise agreement was approved by the Court on January 9, 1950. This reduction of the price to P2,500 per hectare did not affect Lot No. 724-C of defendant Maria Morales. Sometime in 1950, the spouses Blas Gutierrez and Maria Morales received the sum of P59.785.75 presenting the balance remaining in their favor after deducting the amount of P34,580 already withdrawn from the compensation to them. In a notice of assessment dated January 28, 1953, the Collector of Internal Revenue demanded of the petitioners the payment of P8,481 as alleged deficiency income tax for the year 1950, inclusive of surcharges and penalties. On March 5, 1953, counsel for petitioner sent a letter to the Collector of Internal Revenue requesting the letter to withdraw and reconsider said assessment, contending among others, that the compensation paid to the spouses by the Government for their property was not "income derived from sale, dealing or disposition of property" referred to by section 29 of the Tax Code and therefore not taxable; that even granting that condemnation of private properties is embraced within the meaning of the word "sale" or "dealing", the compensation received by the taxpayers must be considered as income for 1948 and not for 1950 since the amount deposited and paid in 1948 represented more than 25 per cent of the total compensation awarded by the court; that the assessment was made after the lapse of the 3-year prescriptive period provided for in section 51-(d) of the Tax Code; that the compensation in question should be exempted from taxation by reason of the provision of section 29 ( b)-6 of the Tax Code; that the spouses Blas Gutierrez and Maria Morales did not realize any profit in said transaction as there were improvements on the land already made and that the purchasing value of the peso at the time of the expropriation proceeding had depreciated if compared to the value of the pre-war peso; and that penalties should not be imposed on said spouses because granting the assessment was correct, the emission of the compensation awarded therein was due to an honest mistake. This request was denied by the Collector of Internal Revenue, in a letter dated April 26, 1954, refuting point by point the arguments advanced by the taxpayers. The record further shows that a warrant of distraint and levy was issued by the Collector of Internal Revenue on the properties of Mr. & Mrs. Blas Gutierrez found in Mabalacat, Pampanga, and a notice of tax lien was duly registered with the Register of Deeds of San Fernando, Pampanga, on the same date Counsel for the spouses then requested that the matter be referred to the Conference Staff of the Bureau of Internal Revenue for proper hearing to which the Collector answered in a letter dated December 24, 1954, stating that the request would be granted upon compliance by the taxpayers with the requirements of Department of Finance order No. 213, i.e., the filing of a verified petition to that effect and that one half of the total assessment should be guaranteed by a bond, provided that the taxpayers would agree in writing to the suspension of the running of the period of prescription. The taxpayers then served notice that the case would be brought on appeal to the Court of Tax Appeals, which they did by filing a petition with said Court to review the assessment made by the Collector, of Internal Revenue, docketed as C.T.A. Case No. 65. In that instance, it was prayed that the Court render judgment declaring that the taking of petitioners' land by the Government was not a sale or dealing in property; that the amount paid to, petitioners as just compensation for their property should not be dismissed by, way of taxation; that said compensation was by law exempt from taxation and that the period to collect the income taxes by summary methods had prescribed; that respondent Collector of Internal Revenue be enjoined from carrying out further steps to collect from petitioners methods the said taxes which they alleged to be erroneously assessed and for remedies which would serve the ends of law and justice. The Solicitor General, in representation of the respondent Collector of Internal Revenue, filed an answer on February 11, 1955, admitting some of the allegations of petitioners and denying some of them, and as special defenses, he advanced the contention that Court had no jurisdiction to entertain the petition; profit realized by petitioners from the sale of the land in question was subject to income tax, that the full compensation received by petitioners should be included in the income received in 1950, same having been paid in 1950 by the Government; that under the Bases Agreement only residents of the United states are exempt from the payment of income tax in the Philippines in respects to profits derived under a contract with the U.S. Government in connection with the construction, maintenance and operation of the bases; that in the determination of the gain or loss from the sale of property acquired on or after March 1, 1913, the cost of acquisition and the selling price shall be taken into account without qualification as to the purchasing power of the currency; that the imposition of the 50 per cent surcharge was in accordance with the Tax Code, that the Collector of Internal Revenue was empowered to collect petitioners' deficiency income tax; and prayed that the petition for review be dismissed; petitioners be ordered to pay the amount of P8,481 plus the delinquency penalty of 5 per cent for late payment and monthly interest at the rate of 1 per cent from April 1, 1953, up to the date of actual payment and for such other relief that may be deemed just and equitable in the premises. After due hearing and after the parties filed their respective memoranda, the Court of Tax Appeals rendered decision on August 31, 1955, holding that it had jurisdiction to hear and determine the case; that the gain derived by the petitioners from the expropriation of their property constituted taxable income and as such was capital gain; and that said gain was taxable in 1950 when it realized. It was also found by said Court that the evidence did not warrant the imposition of the 50 per cent surcharge because the petitioners acted in good faith and without intent to defraud the Government when they failed to include in their gross income the proceeds they received from the expropriated property, and, therefore, modified the assessment made by respondent, requiring petitioners to pay only the sum of P5,654. From this decision, both parties appealed to this Court and in this instance, petitioners Blas Gutierrez and Maria Morales, as appellants in G.R. No. L-9738, made the following assessments of error: 1. That the Court of Tax Appeals erred in holding that, for income tax purposes, income from expropriation should be deemed as income from sale, any profit derived therefrom is subject to income tax as capital gain pursuant to the provisions of Section 37-(a)-(5) in relation to Section 29-(a) of the Tax Code; 2. That the Court of Tax Appeals erred in not holding that, under the particular circumstances in which the property of the appellants was taken by the Philippine Government, the amount paid to them as just compensation is exempt from income tax pursuant to Section 29(b)-(6) of the Tax Code; 3. That the Court of Tax Appeals erred in not holding that the respondent Collector is definitely barred by the Statute of Limitations from collecting the deficiency income tax in question, whether administratively thru summary methods, or judicially thru the ordinary court procedures; 4. That the Court of Tax Appeals erred in not holding that the capital gain found by the respondent Collector as have been derived by the petitioners-appellants from the expropriation of their property is merely nominal not subject to income tax, and in not holding that the pronouncement of the court in the expropriation case in this respect is binding upon the respondent Collector of Internal Revenue; and

5. That the Court of Tax Appeals erred in not pronouncing upon the pleadings of the parties that the petitioners-appellants did not derive any capital gain from the expropriation of their property. The appeal of the respondent Collector of the Internal Revenue was docketed in this Court as G.R. No. L-9771, and in this case the Solicitor General ascribed to the lower court the commission of the following error: That the Court of Tax Appeals erred in holding that respondents are not subject to the payment of the 50 per cent surcharge in spite of the fact that the latter's income tax return for the year 1950 is false and/or fraudulent. The facts just narrated are not disputed and the controversy only arose from the assertion by the Collector of Internal Revenue that petitionersappellants failed to include from their gross income, in filing their income tax return for 1950, the amount of P94,305.75 which they had received as compensation for their land taken by the Government by expropriation proceedings. It is the contention of respondent Collector of Internal Revenue that such transfer of property, for taxation purposes, is "sale" and that the income derived therefrom is taxable. The pertinent provisions of the National Internal Revenue Code applicable to the instant cases are the following: SEC. 29. GROSS INCOME. (a) General definition. "Gross income" includes gains, profits, and income derived from salaries, wages, or compensation for personal service of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, sales or dealings in property, whether real or personal, growing out of ownership or use of or interest in such property; also from interests, rents, dividends, securities, or the transactions of any business carried on for gain or profit, or gains, profits, and income derived from any source whatsoever. SEC. 37. INCOME FROM SOURCES WITHIN THE PHILIPPINES. (a) Gross income from sources within the Philippines. The following items of gross income shall be treated as gross income from sources within the Philippines: xxx xxx xxx (5) SALE OF REAL PROPERTY. Gains, profits, and income from the sale of real property located in the Philippines; xxx xxx xxx There is no question that the property expropriated being located in the Philippines, compensation or income derived therefrom ordinarily has to be considered as income from sources within the Philippines and subject to the taxing jurisdiction of the Philippines. However, it is to be remembered that said property was acquired by the Government through condemnation proceedings and appellants' stand is, therefore, that same cannot be considered as sale as said acquisition was by force, there being practically no meeting of the minds between the parties. Consequently, the taxpayers contend, this kind of transfer of ownership must perforce be distinguished from sale, for the purpose of Section 29-(a) of the Tax Code. But the authorities in the United States on the matter sustain the view expressed by the Collector of Internal Revenue, for it is held that: The transfer of property through condemnation proceedings is a sale or exchange within the meaning of section 117 (a) of the 1936 Revenue Act and profit from the transaction constitutes capital gain" (1942. Com. Int. Revenue vs. Kieselbach (CCA 3) 127 F. (24) 359). "The taking of property by condemnation and the, payment of just compensation therefore is a "sale" or "exchange" within the meaning of section 117 (a) of the Revenue Act of 1936, and profits from that transaction is capital gain (David S. Brown vs. Comm., 1942, 42 BTA 139). The proposition that income from expropriation proceedings is income from sales or exchange and therefore taxable has been likewise upheld in the case of Lapham vs. U.S. (1949, 40 AFTR 1370) and in Kneipp vs. U.S. (1949, 85 F Suppl. 902). It appears then that the acquisition by the Government of private properties through the exercise of the power of eminent domain, said properties being JUSTLY compensated, is embraced within the meaning of the term "sale" "disposition of property", and the proceeds from said transaction clearly fall within the definition of gross income laid down by Section 29 of the Tax Code of the Philippines. Petitioners-appellants also averred that granting that the compensation thus received is "income", same is exempted under Section 29-(b)-6 of the Tax Code, which reads as follows: SEC. 29. GROSS INCOME. xxx xxx xxx (b) EXCLUSIONS FROM GROSS INCOME. The following items shall not be included in gross income and shall exempt from taxation under this Title; xxx xxx xxx (6) Income exempt under treaty. Income of any kind, to the extent required by any treaty obligation binding upon government of the Philippines. The taxpayers maintain that since, at the of the U.S. Government, the proceeding to expropriate the land in question necessary for the expansion of the Clark Field Air Base was instituted by the Philippine Government as part of its obligation under the Military Bases Agreement, the compensation accruing therefrom must necessarily fall under the exemption provided for by Section 29-(b)-6 of the Tax Code. We find this stand untenable, for the same Military Bases Agreement cited by appellants contains the following: ARTICLE XXII CONDEMNATION OR EXPROPRIATION 1. Whenever it is necessary to acquire by condemnation or expropriation proceedings real property belonging to private persons, association, or corporations located in bases named in Annex "A" and Annex "B" in order to carry out the purposes of this agreement, the Philippines, will institute and prosecute such condemnation proceeding in accordance with the laws of the Philippines. The United States agrees to reimburse the Philippines for all the reasonable expenses, damages, and costs thereby incurred, including title value of the property as determined by the Court. In addition, subject to mutual agreements of the two governments, the United States shall reimburse the Philippines for the reasonable costs of transportation and removal of any occupants displaced or ejected by reason of the condemnation or expropriation. ARTICLE XII INTERNAL REVENUE EXEMPTION

(1) No member of the United States Armed Forces except Filipino citizens, serving in the Philippines in connection with the bases and residing in the Philippines by reason only of such service, or his dependents, shall be liable to pay income tax in the Philippines except in respect of income derived from Philippine sources. (2) No National of the United States serving in the Philippines in connection with the construction, maintenance, operation or defense of the bases and residing in the Philippines by reason only of such employment, or his spouse and minor children and dependent parents of either spouse, shall be liable to pay income tax in the Philippines except in respect of income derived from Philippine sources or sources other than the United States. (3) No person referred to in paragraphs 1 and 2 of this said Article shall be liable to pay the government or local authorities of the Philippines any poll or residence tax, or any imports or exports duties, or any other tax on personal property imported for his own use provided, that private owned vehicles shall be subject to payment of the following only: when certified as being used for military purposes by appropriate United States Authorities, the normal license plate fee; otherwise, the normal license and registration fees. (4) No national of the United States, or corporation organized under the laws of the United States, shall be liable to pay income tax in the Philippines in respect of any profits derived under a contract made in the United States with the government of the United States in connection with the construction, maintenance, operation and defense of the bases, or any tax in the nature of a license in respect of any service of work for the United, States in connection with the construction, maintenance, operation and defense of the bases. xxx xxx xxx The facts brought about by the aforementioned terms of the said treaty need no further elucidation. It is unmistakable that although the condemnation or expropriation of properties was provided for, the exemption from tax of the compensation to be paid for the expropriation of privately owned lands located in the Philippines was not given any attention, and the internal revenue exemptions specifically taken care of by said Agreement applies only to members of the U.S. Armed Forces serving in the Philippines and U.S. nationals working in these Islands in connection with the construction, maintenance, operation and defense of said bases. Anent appellant taxpayers' allegation that the respondent Collector of Internal Revenue was barred from collecting the deficiency income tax assessment, it having been made beyond the 3-year period prescribed by section 51-(d) of the Tax Code, We have this much to say. Although it is true that by order of the Court of First Instance of Pampanga, the amount of P34,580 out of the original deposit made by the Government was withdrawn in favor of appellants on January 27, 1949, the same cannot be considered as income for 1950 when the balance of P59,785.75 was actually received. Before that date (1950), appellant taxpayers were still the owners of their whole property that was subject of condemnation proceedings and said amount of P34,580 was not paid to, but merely deposited in court and withdrawn by them. Therefore, the payment of the value of Maria Morales' Lot 724-C was actually made by the Republic of the Philippines in 1950 and it has to be credited as income for 1950 for it was then when title over said property passed to the Republic of the Philippines. Appellant taxpayers cannot say that the title over the property expropriated already passed to the Government when the latter was placed in possession thereof, for in condemnation proceedings, title to the land does not pass to the plaintiff until the indemnity is paid (Calvo vs. Zandueta, 49 Phil. 605), and notwithstanding possession acquired by the expropriator, title does not actually pass to him until payment of the amount adjudged by the Court and the registration of the judgment with the Register of Deeds (See Visayan Refining Company vs. Camus et al., 40 Phil. 550; Metropolitan Water District vs. De los Angeles, 55 Phil. 783). Now, if said amount should have been reported as income for 1950 in the return that must have been filed on or before March 1, 1951, the assessment made by the Collector on January 28, 1953, is still within the 3-year prescriptive period provided for by Section 51-d and could, therefore, be collected either by the administrative methods of distraint and levy or by judicial action (See Collector of Internal Revenue vs. A P. Reyes et al., 100 Phil., 872; Collector of Internal Revenue vs. Zulueta et al., 100 Phil., 872; and Sambrano vs. Court of Tax Appeals et al., supra, p. 1). As to appellant taxpayers' proposition that the profit, derived by them from the expropriation of their property is merely nominal and not subject to income tax, We find Section 35 of the Tax Code illuminating. Said section reads as follows: SEC. 35. DETERMINATION OF GAIN OR LOSS FROM THE SALE OR OTHER DISPOSITION OF PROPERTY. The gain derived or loss sustained from the sale or other disposition of property, real or personal, or mixed, shall be determined in accordance with the following schedule: (a) xxx xxx xxx (b) In the case of property acquired on or after March first, nineteen hundred and thirteen, the cost thereof if such property was acquired by purchase or the fair market price or value as of the date of the acquisition if the same was acquired by gratuitous title. xxx xxx xxx The records show that the property in question was adjudicated to Maria Morales by order of the Court of First Instance of Pampanga on March 23, 1929, and in accordance with the aforequoted section of the National Internal Revenue Code, only the fair market price or value of the property as of the date of the acquisition thereof should be considered in determining the gain or loss sustained by the property owner when the property was disposed, without taking into account the purchasing power of the currency used in the transaction. The records placed the value of the said property at the time of its acquisition by appellant Maria Morales P28,291.73 and it is a fact that same was compensated with P94,305.75 when it was expropriated. The resulting difference is surely a capital gain and should be correspondingly taxed. As to the only question raised by appellant Collector of Internal Revenue in case L-9771, assailing the lower Court's order exonerating petitioners from the 50 per cent surcharge imposed on the latter, on the ground that the taxpayers' income tax return for 1950 is false and/or fraudulent, it should be noted that the Court of Tax Appeals found that the evidence did not warrant the imposition of said surcharge because the petitioners therein acted in good faith and without intent to defraud the Government. The question of fraud is a question of fact which frequently requires a nicely balanced judgement to answer. All the facts and circumstances surrounding the conduct of the tax payer's business and all the facts incident to the preparation of the alleged fraudulent return should be considered. (Mertens, Federal Income Taxation, Chapter 55). The question of fraud being a question of fact and the lower court having made the finding that "the evidence of this case does not warrant the imposition of the 50 per cent surcharge", We are constrained to refrain from giving any consideration to the question raised by the Solicitor General, for it is already settled in this jurisdiction that in passing upon petitions to review decisions of the Court of Tax Appeals, We have to confine ourselves to questions of law. WHEREFORE, the decision appealed from by both parties is hereby affirmed, without pronouncement as to costs. It is so ordered.
11

SEC. 35. Allowance of Personal Exemption for Individual Taxpayer.-

xxxx (C) Change of Status. If the taxpayer marries or should have additional dependent(s) as defined above during the taxable year, the taxpayer may claim the corresponding additional exemption, as the case may be, in full for such year. If the taxpayer dies during the taxable year, his estate may still claim the personal and additional exemptions for himself and his dependent(s) as if he died at the close of such year. If the spouse or any of the dependents dies or if any of such dependents marries, becomes twenty-one (21) years old or becomes gainfully employed during the taxable year, the taxpayer may still claim the same exemptions as if the spouse or any of the dependents died, or as if such dependents married, became twenty-one (21) years old or became gainfully employed at the close of such year. xxxx 12 NIRC, Sections 3 SEC. 79. Income Tax Collected at Source. xxxx (H) Year-end Adjustment. On or before the end of the calendar year but prior to the payment of compensation for the last payroll period, the employer shall determine the tax due from each employee on taxable compensation income for the entire taxable year in accordance with Section 24(A). The difference between the tax due from the employee for the entire year and the sum of taxes from January to November shall either be withheld from his salary in December of the current calendar year or refunded to the employee not later than January 25 of the succeeding year. 24 SEC. 51. Individual Return.xxxx (C) When to File (1) The return of any individualshall be filed on or before the fifteenth (15th) day of April of each year covering income for the preceding taxable year. 25 SEC. 29. Deductions from gross income.- xxxx (l) Personal exemptions allowable to individuals.- xxxx (4) Allowances for adjustment.-Upon the recommendation of the Secretary of Finance, the President shall automatically adjust not more often than once every three years, the personal and additional exemptions taking into account, among others, the movement in consumer price indices, levels of minimum wages, and bare subsistence levels.

Roxas et al vs CTA GR L 25043 April 26, 1968

Facts: The Roxas brothers owned agricultural lands with a total area of 19,000 hectares. At the end of the second world war, the tenant express their desire to purchase from the brothers the parcels where they actually occupy. For its part, the government, in consonance wit h the constitutional mandate to acquire big landed estate and apportion them among landless tenants, persuaded the brothers to part with their landholdings. However, the government did not have the funds to cover the purchase price, so Roxas allowed the farmers to buy the land for the same price but by instalment. Subsequently, the CIR demanded that the brothers to pay real estate dealers tax for the sale of the said land. Issue: Are petitioners liable? Ruling: No. the contention of the CIR Roxas y Cia should be considered a real estate dealer because it engaged in the selling of real estate as without merit. The sale of the farm was not only in consonance with but in obedience to the request and pursuant to the policy of the government to allocate lands to the landless. It is the duty of the government to pay the agreed compensation after it persuaded Roxas y Cia to sell the hacienda, and to subsequently subdivide them among the farmers at very reasonable terms and prices.

G.R. No. L-24248 July 31, 1974 ANTONIO TUASON, JR., petitioner, vs. JOSE B. LINGAD, as Commissioner of Internal Revenue, respondent.
Araneta, Mendoza & Papa for petitioner. Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R. Rosete and Special Attorney Antonio H. Garces for respondent. CASTRO, J.:p In this petition for review of the decision of the Court of Tax Appeals in CTA Case 1398, the petitioner Antonio Tuason, Jr. (hereinafter referred to as the petitioner) assails the Tax Court's conclusion that the gains he realized from the sale of residential lots (inherited from his mother) were ordinary gains and not gains from the sale of capital assets under section 34(1) of the National Internal Revenue Code. The essential facts are not in dispute. In 1948 the petitioner inherited from his mother several tracts of land, among which were two contiguous parcels situated on Pureza and Sta. Mesa streets in Manila, with an area of 318 and 67,684 square meters, respectively. When the petitioner's mother was yet alive she had these two parcels subdivided into twenty-nine lots. Twenty-eight were allocated to their then occupants who had lease contracts with the petitioner's predecessor at various times from 1900 to 1903, which contracts expired on December 31, 1953. The 29th lot (hereinafter referred to as Lot 29), with an area of 48,000 square meters, more or less, was not leased to any person. It needed filling because of its very low elevation, and was planted to kangkong and other crops.

After the petitioner took possession of the mentioned parcels in 1950, he instructed his attorney-in-fact, J. Antonio Araneta, to sell them. There was no difficulty encountered in selling the 28 small lots as their respective occupants bought them on a 10-year installment basis. Lot 29 could not however be sold immediately due to its low elevation. Sometime in 1952 the petitioner's attorney-in-fact had Lot 29 filled, then subdivided into small lots and paved with macadam roads. The small lots were then sold over the years on a uniform 10-year annual amortization basis. J. Antonio Araneta, the petitioner's attorney-in-fact, did not employ any broker nor did he put up advertisements in the matter of the sale thereof. In 1953 and 1954 the petitioner reported his income from the sale of the small lots (P102,050.79 and P103,468.56, respectively) as long-term capital gains. On May 17, 1957 the Collector of Internal Revenue upheld the petitioner's treatment of his gains from the said sale of small lots, against a contrary ruling of a revenue examiner. In his 1957 tax return the petitioner as before treated his income from the sale of the small lots (P119,072.18) as capital gains and included only thereof as taxable income. In this return, the petitioner deducted the real estate dealer's tax he paid for 1957. It was explained, however, that the payment of the dealer's tax was on account of rentals received from the mentioned 28 lots and other properties of the petitioner. On the basis of the 1957 opinion of the Collector of Internal Revenue, the revenue examiner approved the petitioner's treatment of his income from the sale of the lots in question. In a memorandum dated July 16, 1962 to the Commissioner of Internal Revenue, the chief of the BIR Assessment Department advanced the same opinion, which was concurred in by the Commissioner of Internal Revenue. On January 9, 1963, however, the Commissioner reversed himself and considered the petitioner's profits from the sales of the mentioned lots as ordinary gains. On January 28, 1963 the petitioner received a letter from the Bureau of Internal Revenue advising him to pay deficiency income tax for 1957, as follows: Net income per orig. investigation ............... P211,095.36 Add: 56% of realized profit on sale of lots which was deducted in the income tax return and allowed in the original report of examination ................. 59,539.09 Net income per final investigation ................. P270,824.70 Less: Personal exemption ..................................... 1,800.00 Amount subject to tax ................................. P269,024.70 Tax due thereon .......................................... P98,551.00 Less: Amount already assessed .................... 72,199.00 Balance ......... P26,352.00 Add: % monthly interest from 6-20-59 to 6-29-62 .................................... 4,742.36 TOTAL AMOUNT DUE AND COLLECTIBLE ......................................... P31,095.36 The petitioner's motion for reconsideration of the foregoing deficiency assessment was denied, and so he went up to the Court of Tax Appeals, which however rejected his posture in a decision dated January 16, 1965, and ordered him, in addition, to pay a 5% Surcharge and 1% monthly interest "pursuant to Sec. 51(e) of the Revenue Code." Hence, the present petition. The petitioner assails the correctness of the opinion below that as he was engaged in the business of leasing the lots he inherited from his mother as well other real properties, his subsequent sales of the mentioned lots cannot be recognized as sales of capital assets but of "real property used in trade or business of the taxpayer." The petitioner argues that (1) he is not the one who leased the lots in question; (2) the lots were residential, not commercial lots; and (3) the leases on the 28 small lots were to last until 1953, before which date he was powerless to eject the lessees therefrom. The basic issue thus raised is whether the properties in question which the petitioner had inherited and subsequently sold in small lots to other persons should be regarded as capital assets. 1. The National Internal Revenue Code (C.A. 466, as amended) defines the term "capital assets" as follows: (1) Capital assets. The term "capital assets" means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property, used in the trade or business, of a character which is subject to the allowance for depreciation provided in subsection (f) of section thirty; or real property used in the trade or business of the taxpayer. As thus defined by law, the term "capital assets" includes all the properties of a taxpayer whether or not connected with his trade or business, except: (1) stock in trade or other property included in the taxpayer's inventory; (2) property primarily for sale to customers in the ordinary course of his trade or business; (3) property used in the trade or business of the taxpayer and subject to depreciation allowance; and (4) real property used 1 in trade or business. If the taxpayer sells or exchanges any of the properties above-enumerated, any gain or loss relative thereto is an ordinary 2 gain or an ordinary loss; the gain or loss from the sale or exchange of all other properties of the taxpayer is a capital gain or a capital loss. Under section 34(b) (2) of the Tax Code, if a gain is realized by a taxpayer (other than a corporation) from the sale or exchange of capital assets held for more than twelve months, only 50% of the net capital gain shall be taken into account in computing the net income. The Tax Code's provision on so-called long-term capital gains constitutes a statute of partial exemption. In view of the familiar and settled rule that 3 tax exemptions are construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority, the field of application of the 4 term it "capital assets" is necessarily narrow, while its exclusions must be interpreted broadly. Consequently, it is the taxpayer's burden to bring 5 himself clearly and squarely within the terms of a tax-exempting statutory provision, otherwise, all fair doubts will be resolved against him. It bears emphasis nonetheless that in the determination of whether a piece of property is a capital asset or an ordinary asset, a careful examination 6 and weighing of all circumstances revealed in each case must be made. In the case at bar, after a thoroughgoing study of all the circumstances relevant to the resolution of the issue raised, this Court is of the view, and so holds, that the petitioner's thesis is bereft of merit.

When the petitioner obtained by inheritance the parcels in question, transferred to him was not merely the duty to respect the terms of any contract thereon, but as well the correlative right to receive and enjoy the fruits of the business and property which the decedent had established 7 and maintained. Moreover, the record discloses that the petitioner owned other real properties which he was putting out for rent, from which he periodically derived a substantial income, and for which he had to pay the real estate dealer's tax (which he used to deduct from his gross income). 8 In fact, as far back as 1957 the petitioner was receiving rental payments from the mentioned 28 small lots, even if the leases executed by his deceased mother thereon expired in 1953. Under the circumstances, the petitioner's sales of the several lots forming part of his rental business cannot be characterized as other than sales of non-capital assets. The sales concluded on installment basis of the subdivided lots comprising Lot 29 do not deserve a different characterization for tax purposes. The following circumstances in combination show unequivocally that the petitioner was, at the time material to this case, engaged in the real estate business: (1) the parcels of land involved have in totality a substantially large area, nearly seven (7) hectares, big enough to be transformed into a subdivision, and in the case at bar, the said properties are located in the heart of Metropolitan Manila; (2) they were subdivided into small lots and then sold on installment basis (this manner of selling residential lots is one of the basic earmarks of a real estate business); (3) comparatively valuable improvements were introduced in the subdivided lots for the unmistakable purpose of not simply liquidating the estate but of making the lots more saleable to the general public; (4) the employment of J. Antonio Araneta, the petitioner's attorney-in-fact, for the purpose of developing, managing, administering and selling the lots in question indicates the existence of owner-realty broker relationship; (5) the sales were made with frequency and continuity, and from these the petitioner consequently received substantial income periodically; (6) the annual sales volume of the petitioner from the said lots was considerable, e.g., P102,050.79 in 1953; P103,468.56 in 1954; and P119,072.18 in 1957; and (7) the petitioner, by his own tax returns, was not a person who can be indubitably adjudged as a stranger to the real estate business. Under the circumstances, this Court finds no error in the holding below that the income of the petitioner from the sales of the lots in question should be considered as ordinary income. 2. This Court notes, however, that in ordering the petitioner to pay the deficiency income tax, the Tax Court also required him to pay a 5% surcharge plus 1% monthly interest. In our opinion this additional requirement should be eliminated because the petitioner relied in good faith upon opinions rendered by no less than the highest officials of the Bureau of Internal Revenue, including the Commissioner himself. The following 9 ruling in Connell Bros. Co. (Phil.) vs. Collector of Internal Revenue applies with reason to the case at bar: We do not think Section 183(a) of the National Internal Revenue Code is applicable. The same imposes the penalty of 25% when the percentage tax is not paid on time, and contemplates a case where the liability for the tax is undisputed or indisputable. In the present case the taxes were paid, the delay being with reference to the deficiency, owing to a controversy as to the proper interpretation if Circulars Nos. 431 and 440 of the office of respondent-appellee. The controversy was generated in good faith, since that office itself appears to have formerly taken the view that the inclusion of the words "tax included" on invoices issued 10 by the taxpayer was sufficient compliance with the requirements of said circulars. ACCORDINGLY, the judgment of the Court of Tax Appeals is affirmed, except the portion thereof that imposes 5% surcharge and 1% monthly interest, which is hereby set aside. No costs. Makalintal, C.J., Makasiar, Esguerra and Muoz Palma, JJ., concur. Teehankee, J., took no part. Footnotes 1 Jose P. Alejandro, Law on Taxation. (2nd edition), p. 228. 2 Ibid. 3 Esso Standard Eastern, Inc. vs. Acting Commissioner of Customs, 18 SCRA 488; Philippine Acetylene Co., Inc. vs. Commissioner of Internal Revenue, 20 SCRA 1056; Philippine Guaranty Co., Inc. vs. Commissioner of Internal Revenue, 15 SCRA 1 citing La Carlota Sugar Central vs. Jimenez, L-12436, May 31, 1961. See also Cooley on Taxation, 4th edition, Vol. 2, pp. 1403-1404. 4 See Corn Products Refining Co. vs. Commissioner, 350 U.S. 46, 100 L. Ed. 29, 76 S. Ct. 20. 5 See Sloane vs. Commissioner; 188 F (2d) 254 (CA-6, 1951). 6 See Klarkowski, TCM 1965-328. Aff'd 385 F (2d) 398 (CA-7, 1967) which held that in determining the correct boundary between these two types of assets the following must be considered: "(1) the purpose for which the property was initially acquired; (2) the purpose for which the property was subsequently held; (3) the extent to which improvements, if any, were made to the property by the taxpayer; (4) the frequency, number, and continuity of sales; (5) the extent and nature of the transactions involved; (6) the ordinary business of the taxpayer; (7) the extent of advertising, promotion, or other activities used in soliciting buyers for the sale of the property; (8) the listing of property with brokers; and (9) the purpose for which the property was held at the time of sale." 7 See Article 781, New Civil Code. "The inheritance of a person includes not only the property and the transmissible rights and obligations existing at the time of his death, but also those which have accrued thereto since the opening of the succession." 8 Section 182(3) (aa) of the National Internal Revenue Code prescribes an annual fixed tax on real estate dealers. Section 194(s) defines a "real estate dealer" as including "any person engaged in the business of buying, selling, exchanging, leasing, or renting property as principal and holding himself out as a full or part-time dealer in real estate or as an owner of rental property or properties rented or offered to rent for an aggregate amount of four thousand pesos or more a year. Any person shall be considered as engaged in business as real estate dealer by the mere fact that he is the owner or sublessor of property rented or offered to rent for an aggregate amount of four thousand pesos or more a year. ..." 9 10 SCRA 470; see also Republic vs. Heras, 32 SCRA 507. 10 R.A. 6110 (approved on August 9, 1969) which substantially amended the National Internal Revenue Code seems to support the principle of good faith. Sec. 338-A thus provides: "Non-retroactivity of rulings.-Any revocation, modification, or reversal of any of the rules and regulations promulgated in accordance with the preceding section or any of the rulings or circulars promulgated by the Commissioner of Internal Revenue shall not be given retroactive application if the revocation, modification, or reversal will be prejudicial to the taxpayers, except in the following cases; (a) where the taxpayer deliberately mis-states or omits material facts from his return or any document required of him by the Bureau of Internal Revenue; (b) where the facts

subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or (c) where
the taxpayer acted in bad faith."

G.R. No. L-14532 May 26, 1965 JOSE LEON GONZALES, petitioner-appellant, vs. THE HON. COURT OF TAX APPEALS and THE COLLECTOR OF INTERNAL REVENUE, respondents-appellees. ----------------------------G.R. No. L-14533 May 26, 1965 JUANA G. GONZALES and FORTUNATO DE LEON, petitioners-appellants, vs. THE HON. COURT OF TAX APPEALS and THE COLLECTOR OF INTERAL REVENUE, respondents-appellees.
Guillermo B. Ilagan and Delfin J. Hilario for petitioners-appellants. Office of the Solicitor General for respondents-appellees. BENGZON, C.J.: Statement. This is an appeal from the decision of the Court of Tax Appeals denying the refund of income taxes imposed on, and paid by, Jose Leon Gonzales and Juana F. Gonzales. 1 The Facts. Jose Leon Gonzales and Juana F. Gonzales are brother and sister [the latter being married to Atty. Fortunato de Leon ]. Both petitioners are co-heirs and co-owners, (one-sixth each) of a tract of land of 871, [982.] square meters which they, along with four other co-heirs, inherited from their mother. This realty, located at Caloocan, Rizal, was the object of expropriation proceedings, which this Court finally decided in May 1954, in G.R. No.L-4918. Therein, we fixed the just compensation for the property at P1.50 per square meter. We also ordered the payment of interest at the legal rate of 6% from January 25, 1947 (when the Government took possession of the property) to the date of payment, which payment was actually made on October 31, 1954. Excluded from the payment of interest was the sum of P28,850.00, the amount deposited by the Government upon taking possession of the estate. The total compensation paid the six heirs for the expropriated property amounted to P1,307,973.00. Subtracting therefrom the amount of P28,850.00 just mentioned, there remained a difference of P1,279,123.00, the interest on which, at the legal rate of 6% per annum, totalled P535,587.70. Divided among the six heirs, this total gave a share of P89,305.61 as interest to each of them.1wph1.t Upon the amounts received from the Government, Jose Leon Gonzales and Juana F. Gonzales, were each ascertained to have made a capital gain of 2 P213,328.82 [P1,279,973.00 divided by 6 heirs], and each of them to have received the amount of P89,309.61 as share in the interests of P535,857.70 (this, sum is divided by 6). A tentative return for 1954 was thus prepared and filed for each of the two petitioners describing the amounts of P213,328.82 as capital gain, and in addition, the amount of P89,309.61 as ordinary income. On the basis of such income, each of the petitioners was assessed P86,166.00. The Government paid to petitioners the proceeds of the expropriation award and interest through the People's Homesite and Housing Corporation sometime in October 1954 the last check having been delivered on November 4, 1954. However, the sum of P532,234.70 was retained by the Housing Corporation; and on November 18, 1954, at the request of respondent Collector, it turned over to the Bureau of Internal Revenue the amount of P516,007.00 representing income taxes reportedly due and owing from the six co-heirs of the estate. Therefore, petitioners Jose Leon Gonzales and his sister Juana F. Gonzales were each credited the amount of P86,166.00 as payment of their income tax. (Official Receipts Nos. 520491 and 520496 dated November 19, 1954) On February 29, 1956, petitioner Juana F. Gonzales wrote the respondent Collector a letter, seeking the refund of P24,426.00 allegedly representing excess payment of income taxes for 1954. The letter pertinently stated: We respectively contend that the assessment was erroneous in that the amount of P89,309.61 representing interest, was considered as ordinary income and not merely capital gain. If the interest was computed as capital gain, there shall be due and owing from your office the amount of P24,426.00 assuming for argument's sake that your assessment was correct. (Exhs. H & 2, also par. 22, "Stifacts") On November 5, 1956, petitioner Jose Leon Gonzales also wrote a letter to said respondent requesting refund of a similar amount of P24,426.00 for the same reasons as his co-petitioner. No action appears to have been taken on this refund claim. On November 12, 1956, respondent Collector denied the request of Juana F. Gonzales for refund of P24,426.00. The Suits. So on November 15, 1956, Jose Leon Gonzales and Juana F. Gonzales submitted to the Court of Tax Appeals a joint petition seeking a refund, this time of the amount of P86,166.00 for each of the two petitioners; but the next day, both petitioners amended their petition by filing separate petitions which were docketed separately as CTA Case No. 328 and CTA Case No. 329. It appears that on November 24, 1956, Atty. Fortunato de Leon wrote the respondent Collector the following letter: Sir: This is to acknowledge receipt today of your letter of November 12, 1956, denying the claim of Mrs. Juana F. Gonzales de Leon for refund, to which we take exception. We are not only claiming the refund of P24,426.00 but the entire amount of P86,166.00 for various reasons more specifically contained in our petition before the Court of Tax Appeals on November 16, 1956, Case No. 328. We had to file the petition because we believe our claim is meritorious and that the prescriptive period may run out. For all legal purposes we shall consider your letter herein referred to as a denial of the claim for refund of the total amount of P86,166.00. And the difference in amount may be considered for all purposes as variance only. Respondent Collector, however, disclaims receipt of this second written claim for refund. On December 5, 1956, respondent Collector contested the amended petitions. Trial ensued, and in the course thereof the parties signed a "Partial Stipulation of Facts." Decision. On July 16, 1958, a decision was rendered by the Court of Tax Appeals denying petitioners' claim for refund, with costs against them. Their motion for reconsideration and new trial having been denied, petitioners perfected this appeal and now pray for reversal.

Issue. A careful perusal of the debated issues will show that the resolution of this appeal hinges decisively on two propositions: (1) Whether or not petitioners' claim for refund of the total of P86,166.00 may be properly entertained; and (2) Whether or not the sum of P89,309.61 which each of the petitioners received as interest on the value of the land expropriated is taxable as ordinary income, and not as capital gain. Discussion. The record shows that on November 18, 1954, at the request of respondent Collector, the People's Homesite and Housing Corporation turned over to the Bureau of Internal Revenue the sum of P516,007.00 representing income taxes due from the six co-owners of the expropriated property. Of this amount, the two appellants Gonzales were each credited with the amount of P86,166.00 as income taxes for 1954. (The receipts evidencing such payments are O.R. No. 520491, dated November 19, 1954 for P86,166.00 for Jose Leon Gonzales and O.R. No. 520496 dated November 19, 1954 for Juana F. Gonzales.) It likewise appears that appellant Juana F. Gonzales in her letter of February 29, 1956, requested for the refund of P24,426.00 (only), citing as sole ground therefor that the amount of P89,309.61 which was her share in the interests paid on the expropriated property was taxed by respondent Collector as ordinary income. She contended that it should have been taxed as capital gain. Appellant Jose Leon Gonzales on his part, in his letter of November 5, 1958, requested the refund of a similar amount of P24,426.00 only. Then a joint petition was filed by both parties before the Court of Tax Appeals first on November 15, 1956, but the next day, November 16, 1956, they filed separate petitions containing similar allegations. It would appear, therefore, that from November 19, 1954, when the payments for income taxes were received from the appellants to February 29, 1956, when appellant Juana Gonzales filed her claim for refund and to November 5, 1956, and appellant Jose Leon Gonzales filed his own refund claim, less than two years had elapsed. But, since their respective claims for refund were restricted to the amount of P24,426.00 only, it should be clear that any demand for the return of an amount in excess thereof (P86,166.00) is not included. Remarkedly, the so-called claim for refund of the amount of P86,166.00 was made only on November 24, 1956, (after the complaints had been filed) without giving the Collector "an opportunity to consider his mistake, if mistake has been committed." (Kiener Co. vs. David, 92 Phil. 945) And it refers specifically and exclusively to appellant Juana F. Gonzales' claim (Exh. "J"). Appellant Jose Leon Gonzales seems not to have filed any refund claim for a similar amount. Be that as it may, this later claim for refund for P86,166.00 made on November 24, 1956, by appellant Juana F. Gonzales has been definitely filed beyond the statutory period of two year, from the date of payment, which was November 19, 1954. A stringent requirement of the Tax Code is that before a suit or proceeding for the refund of any internal revenue tax can be maintained in any court, a written claim for its refund shall be filed with the Collector of Internal Revenue before filing the action in court and before the expiration of 3 two years from the date of payment of the taxes to be refunded. This requirement is mandatory and failure to comply therewith is fatal to the 4 action. What is more, the claim for refund should set forth in detail the facts and the grounds upon which it is based, so as to apprise the Collector 5 accordingly. Appellants maintain that it was not they who had paid the tax of P86,166.00 imposed upon each of them, but that it was respondent Collector himself who paid those taxes and issued receipts therefor without their knowledge and consent. And that even if the receipts of payment were in fact sent by the respondent Collector to the People's Homesite and Housing Corporation and were received by the latter on November 23, 1953, said receipts could not have been received by appellants earlier than November 28, 1954, considering that the Rules of Court treats a service as complete only upon the expiration of five days from mailing. We find no merit in these contentions. To begin with, there is no proof positive on record that appellant Juana F. Gonzales' so-called refund claim for the amount of P86,166.00 had been sent to, let alone received by, respondent Neither have they protested against this payment by the Collector to the Collector. In the second place, the refund letter of November 24, 1956, assuming that it was duly filed, referred to Juana F. Gonzales' claim alone, and made no mention of Jose Leon Gonzales'. ln the third place, the aforesaid refund claim does not set forth in detail the facts and grounds upon which it was based and failed to apprise the respondent of her grounds for raising her claim from P24,426.00 to P86,166.00 (see letter). Lastly, appellant Juana F. Gonzales' eleventh-hour modification upping her refund claim from P24,426.00 to P86,166.00 was made on November 24, 1956 or eight days after the filing of her amended petition before the respondent court on November 16, 1956, and a few days after the two-year period. Obviously then, the requirement of prior timely claim for refund of the sum of P86,166.00 had not been met in this case. The demand for refund 6 must precede the suit, and this requirement is mandatory; so much so that non-compliance therewith bars the action. Appellants insist that payment of the tax was not made by them but by the respondent Collector himself, and that, therefore, the prescriptive period should begin not from the date of such payment but from the date appellants learned of such payment. This contention offers no help to appellants' cause. Assuming that appellants indeed learned of their payments only on November 24, 1953, they should have claimed the refund of P86,166.00 from said date and before they filled their petitions with the respondent Court on November 15 or 16, 1956. Neither could they blame the respondent Collector for failing to act on their refund claims sooner for it was incumbent upon appellants to urge him to act expeditiously on their claims, knowing as they did that the time for bringing an action for a refund of income tax, fixed by statute, is not extended by the delay of the Collector of Internal Revenue in giving notice of the rejection of their claim. Moreover, the provisions of section 306 of the Tax Code are mandatory and not subject to any qualification and, hence, they apply regardless of 8 the conditions under which the payment has been made. With respect, therefore, to the issue of whether or not appellants' claim for refund of P86,166.00 (each) could now be entertained, we believe that the same has been barred by prescription. Anyway, it is mainly based on the proposition that our ruling in Gutierrez vs. Court of Tax Appeals, L-9738 and L-9771, May 31, 1957, should be abandoned, a proposition we are not disposed to encourage. Thus, our decision will, therefore, address itself only to appellants' earlier claim for refund in the sum of P24,426.00. Which brings us to the question of whether or not the sum of P89,309.61 which each of the appellants had received as share in the interest on the proceeds of the expropriation should be taxed as capital gain or as ordinary income. Appellants argue that the accessory follows the principal, that the amount paid in expropriation proceedings (the principal, i.e., the profit thereon is admittedly capital gain, not ordinary income, and that, therefore, the interest paid thereon (the accessory) is capital gain, not ordinary income.

This contention may not be sustained. In a previous case, we held that "the acquisition by the Government of private properties through the exercise of the power of eminent domain, said properties being justly compensated, is embraced within the meaning of the term 'sale' or 'disposition of property'" and the definition of gross income laid down by Section 29 of the Tax Code of the Philippines. We also adhered to the view that the transfer of property through condemnation proceedings is a sale or exchange and that profit from the transaction constitutes capital gain. But to say that the proceeds of expropriation which is the return of capital and, therefore, a capital gain, partakes of the same nature as interests paid thereon is far from correct; because interest is compensation for the delay in the return of such capital. In fact, the authorities support the conclusion that for income tax purposes, interest does not form part of the price paid by the Government in condemnation proceedings; and may not be treated as part of the capital gain. It was so held by the United States Supreme Court in Kieselback v. Commissioner of Internal Revenue, 317 U.S. 399. Borrowing the words and phrases of said Court, we could say now: The sum paid these taxpayers above the award of P1,307,973.00 was paid because of the failure to put the award in the taxpayer's hands on the day, January 25, 1947, when the property was taken. This additional payment was necessary to give the owners the full equivalent of the value of the property at the time it was taken. Whether one calls it interest on the value or payments to meet the constitutional requirement of just compensation is immaterial. It is income paid to the taxpayers in lieu of what they might have earned on the sum found to be the value of the property on the day the property was taken. It is not a capital gain upon an asset sold. The sale price was the 10 P1,307,973.00. The property was turned over in January, 1947. This was the sale. Title then passed. The subsequent earnings of the property went to the Government. The transaction was as though a purchase money lien at legal interest was retained upon the property. Such interest when paid would, of course, be ordinary income. Incidentally, the above Supreme Court's decision disapproved the Seaside Improvement case on which petitioners rely. We see, therefore, no reason to impute error to the opinion of the Collector of Internal Revenue and the Court of Tax Appeals that interest paid was ordinary income, bearing in mind that the Tax Code provides: SEC. 29. Gross Income. General Definition. "Gross income" includes gains, profits, and income derived from ... interests, rents, dividends, securities, or the transactions of any business carried on for gain or profit, or gains, profits and income derived from any 11 source whatever. Having arrived at these conclusions, we deem it unnecessary to discuss the other points extensively argued in the appellants' brief. Judgment Consequently, finding no error in the appealed decision, we hereby affirm it, with costs. So ordered. Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Parades, Dizon, Regala, Makalintal, Bengzon, J.P., and Zaldivar, JJ., concur. Footnotes 1 For convenience, he will not be referred to as petitioner, being practically a nominal party. 2 Acquisition cost of the land.................................... P28,000.00; Payment by Government....................................... 1,307,973.00; Therefore, capital gain........................................... 1,279,973.00. Sec. 306, National Internal Revenue Code. Giving him copy of the complaint is not enough. See Aranas, Annotations (1963) Vol. III, p. 206. 4 Wee Poco & Co. v. Posadas, 64 Phil. 640; Bermejo v. Coll. of Internal Revenue, 47 Off. Gaz. Suppl. 12, p. 292; Keiner Ltd. v. Saturnino David, L-5163, April 22, 1953; Johnston Lumber Co., Inc. v. Court of Tax Appeals & Coll. of Internal Revenue, 52 Off. Gaz. 5226. 5 Asiatic Petroleum Co. v. Posadas, 52 Phil. 728; Wee Poco v. Posadas, supra. 6 Johnston Lumber Co., Inc. v. Court of Tax Appeals & Coll. of Internal Revenue, supra. 7 U.S. v. Michael, 282 U.S. 656 and cited in Koppel (Phil), Inc. v. Coll. of Internal Revenue, L-10550, Sept. 19, 1961. See also: Keiner Co., Ltd. v. S. David, supra. 8 Guagua Electric Light Plant Co. v. Coll. of Internal Revenue & the Court of Tax Appeals, 59 Off. Gaz. Suppl. 27, p. 4207. 9 Gutierrez vs. CTA Coll. of Internal Revenue, & Coll. of Internal Revenue vs. Gutierrez, et al., G.R. Nos. L-9718, L-9771, May 31, 1957. 10 The involuntary character of the transaction is not significant. Helvering vs. Hammel, 331 U.S. 504, 510, 85 L. Ed. 303, 306, 61 S. Ct. 368, 131 ALR 1481. 11 Sec. 29(b) (4) does not apply, and is not invoked by petitioners.
3

G.R. No. 139786 September 27, 2006 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. CITYTRUST INVESTMENT PHILS., INC., respondent. x---------------------------------------------x G.R. No. 140857 September 27, 2006 ASIANBANK CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION SANDOVAL-GUTIERREZ, J.: 1 Does the twenty percent (20%) final withholding tax (FWT) on a bank's passive income form part of the taxable gross receipts for the purpose of computing the five percent (5%) gross receipts tax (GRT)? This is the central issue in the present two (2) consolidated petitions for review.

In G.R. No. 139786, petitioner Commissioner of Internal Revenue (Commissioner) assails the Court of Appeals Decision dated August 17, 1999 in 2 3 CA-G.R. SP No. 52707 affirming the Court of Tax Appeals (CTA) Decision ordering the refund or issuance of tax credit certificate in favor of respondent Citytrust Investment Philippines., Inc. (Citytrust). In G.R. No. 140857, petitioner Asianbank Corporation (Asianbank) challenges the 4 5 Court of Appeals Decision dated November 22, 1999 in CA-G.R. SP No. 51248 reversing the CTA Decision ordering a tax refund in its (Asianbank's) favor. A brief review of the taxation laws provides an adequate backdrop for our subsequent narration of facts. Under Section 27(D), formerly Section 24(e)(1) of the National Internal Revenue Code of 1997 (Tax Code), the earnings of banks from passive 6 income are subject to a 20% FWT, thus: (D) Rates of Tax on Certain Passive Incomes (1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from Trust Funds and Similar Arrangements, and Royalties. A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest on currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements received by domestic corporation and royalties, derived from sources within the Philippines: x x x Apart from the 20% FWT, banks are also subject to the 5% GRT on their gross receipts, which includes their passive income. Section 121 (formerly Section 119) of the Tax Code reads: SEC. 121. Tax on banks and Non-bank financial intermediaries. There shall be collected a tax on gross receipts derived from sources within the Philippines by all banks and non-bank financial intermediaries in accordance with the following schedule: (a) On interest, commissions and discounts from lending activities as well as income from financial leasing, on the basis of remaining maturities of instruments from which such receipts are derived: Short-term maturity (not in excess of two [2] years) Medium-term maturity (over two [2] years but not exceeding four [4] years) Long-term maturity (1) Over four (4) years but not exceeding seven (7) years (2) Over seven (7) years (b) On dividends 1% 0% 0% 5% 3%

(c) On royalties, rentals of property, real or personal, profits from exchange and all other items treated as gross income under Section 32 of this Code 5% Provided, however, That in case the maturity period referred to in paragraph (a) is shortened thru pretermination, then the maturity period shall be reckoned to end as of the date of pretermination for purposes of classifying the transaction as short, medium or longterm and the correct rate of tax shall be applied accordingly. Nothing in this Code shall preclude the Commissioner from imposing the same tax herein provided on persons performing similar banking activities. I - G.R. No. 139786 Citytrust, respondent, is a domestic corporation engaged in quasi-banking activities. In 1994, Citytrust reported the amount of P110,788,542.30 as its total gross receipts and paid the amount of P5,539,427.11 corresponding to its 5% GRT. 7 Meanwhile, on January 30, 1996, the CTA, in Asian Bank Corporation v. Commissioner of Internal Revenue (ASIAN BANK case), ruled that the basis in computing the 5% GRT is the gross receipts minus the 20% FWT. In other words, the 20% FWT on a bank's passive income does not form part of the taxable gross receipts. On July 19, 1996, Citytrust, inspired by the above-mentioned CTA ruling, filed with the Commissioner a written claim for the tax refund or credit in the amount of P326,007.01. It alleged that its reported total gross receipts included the 20% FWT on its passive income amounting to P32,600,701.25. Thus, it sought to be reimbursed of the 5% GRT it paid on the portion of 20% FWT or the amount of P326,007.01. 8 On the same date, Citytrust filed a petition for review with the CTA, which eventually granted its claim. On appeal by the Commissioner, the Court of Appeals affirmed the CTA Decision, citing as main bases Commissioner of Internal Revenue v. Tours 9 10 Specialist Inc. and Commissioner of Internal Revenue v. Manila Jockey Club, holding that monies or receipts that do not redound to the benefit of the taxpayer are not part of its gross receipts, thus: Patently, as expostulated by our Supreme Court, monies or receipts that do not redound to the benefit of the taxpayer are not part of its gross receipts for the purpose of computing its taxable gross receipts. In Manila Jockey Club, a portion of the wager fund and the tenpeso contribution, although actually received by the Club, was not considered as part of its gross receipts for the purpose of imposing the amusement tax. Similarly, in Tours Specialists, the room or hotel charges actually received by them from the foreign travel agency was, likewise, not included in its gross receipts for the imposition of the 3% contractor's tax. In both cases, the fees, bets or hotel charges, as the case may be, were actually received and held in trust by the taxpayers. On the other hand, the 20% final tax on the Respondent's passive income was already deducted and withheld by various withholding agents. Hence, the actual or the exact amount received by the Respondent, as its passive income in the year 1994, was less the 20% final tax already withheld by various withholding agents. The various withholding agents at source were required under section 50 (a), of the National Internal Revenue Code of 1986, to withhold the 20% final tax on certain passive income x x x. Moreover, under Section 51 (g) of the said Code, all taxes withheld pursuant to the provisions of this Code and its implementing regulations are considered trust funds and shall be maintained in a separate account and not commingled with any other funds of the withholding agent. Accordingly, the 20% final tax withheld against the Respondent's passive income was already remitted to the Bureau of Internal Revenue, for the corresponding year that the same was actually withheld and considered final withholding taxes under Section 50 of the same Code. Indubitably, to include the same to the Respondent's gross receipts for the year 1994 would be to tax twice the passive income derived by Respondent for the said year, which would constitute double taxation anathema to our taxation laws. II - G.R. No. 140857

Asianbank, petitioner, is a domestic corporation also engaged in banking business. For the taxable quarters ending June 30, 1994 to June 30, 1996, Asianbank filed and remitted to the Bureau of Internal Revenue (BIR) the 5% GRT on its total gross receipts. On the strength of the January 30, 1996 CTA Decision in the ASIAN BANK case, Asianbank filed with the Commissioner a claim for refund of the overpaid GRT amounting to P2,022,485.78. To toll the running of the two-year prescriptive period for filing of claims, Asianbank also filed a petition for review with the CTA. 11 On February 3, 1999, the CTA allowed refund in the reduced amount of P1,345,743.01, the amount proven by Asianbank. Unsatisfied, the Commissioner filed with the Court of Appeals a petition for review. On November 22, 1999, the Court of Appeals reversed the CTA Decision and ruled in favor of the Commissioner, thus: It is true that Revenue Regulation No. 12-80 provides that the gross receipts tax on banks and other financial institutions should be based on all items of income actually received. Actual receipt here is used in opposition to mere accrual. Accrued income refers to income already earned but not yet received. (Rep. v. Lim Tian Teng Sons & Co., 16 SCRA 584). But receipt may be actual or constructive. Article 531 of the Civil Code provides that possession is acquired by the material occupation of a thing or the exercise of a right, or by the fact that it is subject to the action of one will, or by the proper acts and legal formalities established for acquiring such right. Moreover, taxation income may be received by the taxpayer himself or by someone authorized to receive it for him (Art. 532, Civil Code). The 20% final tax withheld from interest income of banks and other similar institutions is not income that they have not received; it is simply withheld from them and paid to the government, for their benefit. Thus, the 20% income tax withheld from the interest income is, in fact, money of the taxpayer bank but paid by the payor to the government in satisfaction of the bank's obligation to pay the tax on interest earned. It is the bank's obligation to pay the tax. Hence, the withholding of the said tax and its payment to the government is for its benefit. xxx The case of Collector of Internal Revenue vs. Manila Jockey Club is inapplicable. In that case, a percentage of the gross receipts to be collected by the Manila Jockey Club was earmarked by law to be turned over to the Board on Races and distributed as prizes among owners of winning horses and authorized bonus for jockeys. The Manila Jockey Club itself derives no benefit at all from earmarked percentage. That is why it cannot be considered as part of its gross receipts. WHEREFORE, the C.T.A's judgment herein appealed from is hereby REVERSED, and judgment is hereby rendered DISMISSING the respondent's Petition for Review in C.T.A Case No. 5412. SO ORDERED. Hence, the present consolidated petitions. The Commissioner's arguments in the two (2) petitions may be synthesized as follows: first, there is no law which excludes the 20% FWT from the taxable gross receipts for the purpose of computing the 5% GRT; second, the imposition of the 20% FWT on the bank's passive income and the 5% GRT on its taxable gross receipts, which include the bank's passive income, does not constitute double taxation; 12 third, the ruling by this Court in Manila Jockey Club, cited in the ASIAN BANK case, is not applicable; and fourth, in the computation of the 5% GRT, the passive income need not be actually received in order to form part of the taxable gross receipts. 13 In its Resolution dated January 17, 2000, this Court adopted as Citytrust's Comment on the instant petition for review its Memorandum submitted to the CTA and its Comment submitted to the Court of Appeals. Citytrust contends therein that: first, Section 4(e) of Revenue Regulations No. 12-80 dated November 7, 1980 provides that the rates of taxes on the gross receipts of financial institutions shall be based only on 14 all items of income actually received; and, second, this Court's ruling in Manila Jockey Club is applicable. Asianbank echoes similar arguments. We rule in favor of the Commissioner. The issue of whether the 20% FWT on a bank's interest income forms part of the taxable gross receipts for the purpose of computing the 5% GRT is 15 no longer novel. This has been previously resolved by this Court in a catena of cases, such as China Banking Corporation v. Court of Appeals, 16 17 Commissioner of Internal Revenue v. Solidbank Corporation, Commissioner of Internal Revenue v. Bank of Commerce, and the latest, 18 Commissioner of Internal Revenue v. Bank of the Philippine Islands. The above cases are unanimous in defining "gross receipts" as "the entire receipts without any deduction." We quote the Court's enlightening 19 ratiocination in Bank of the Philippines Islands, thus: The Tax Code does not provide a definition of the term "gross receipts". Accordingly, the term is properly understood in its plain and ordinary meaning and must be taken to comprise of the entire receipts without any deduction. We, thus, made the following disquisition in Bank of Commerce: The word "gross" must be used in its plain and ordinary meaning. It is defined as "whole, entire, total, without deduction." A common definition is "without deduction." "Gross" is also defined as "taking in the whole; having no deduction or abatement; whole, total as opposed to a sum consisting of separate or specified parts." Gross is the antithesis of net. Indeed, in China Banking Corporation v. Court of Appeals, the Court defined the term in this wise: As commonly understood, the term "gross receipts" means the entire receipts without any deduction. Deducting any amount from the gross receipts changes the result, and the meaning, to net receipts. Any deduction from gross receipts is inconsistent with a law that mandates a tax on gross receipts, unless the law itself makes an exception. As explained by the Supreme Court of Pennsylvania in Commonwealth of Pennsylvania v. Koppers Company, Inc . Highly refined and technical tax concepts have been developed by the accountant and legal technician primarily because of the impact of federal income tax legislation. However, this is no way should affect or control the normal usage of words in the construction of our statutes; and we see nothing that would require us not to include the proceeds here in question in the gross receipts allocation unless statutorily such inclusion is prohibited. Under the ordinary basic methods of handling accounts, the term gross receipts, in the absence of any statutory definition of the term, must be taken to include the whole total gross receipts without any deductions, x x x. [Citations omitted] (Emphasis supplied)" Likewise, in Laclede Gas Co. v. City of St. Louis, the Supreme Court of Missouri held:

The word "gross" appearing in the term "gross receipts," as used in the ordinance, must have been and was there used as the direct antithesis of the word "net." In its usual and ordinary meaning, "gross receipts" of a business is the whole and entire amount of the receipts without deduction, x x x. On the ordinary, "net receipts" usually are the receipts which remain after deductions are made from the gross amount thereof of the expenses and cost of doing business, including fixed charges and depreciation. Gross receipts become net receipts after certain proper deductions are made from the gross. And in the use of the words "gross receipts," the instant ordinance, or course, precluded plaintiff from first deducting its costs and expenses of doing business, etc., in arriving at the higher base figure upon which it must pay the 5% tax under this ordinance. (Emphasis supplied) xxxxxx Additionally, we held in Solidbank, to wit: [W]e note that US cases have persuasive effect in our jurisdiction because Philippine income tax law is patterned after its US counterpart. [G]ross receipts with respect to any period means the sum of: (a) The total amount received or accrued during such period from the sale, exchange, or other disposition of x x x other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of its trade or business, and (b) The gross income, attributable to a trade or business, regularly carried on by the taxpayer, received or accrued during such period x x x. x x x [B]y gross earnings from operations x x x was intended all operations x x x including incidental, subordinate, and subsidiary operations, as well as principal operations. When we speak of the "gross earnings" of a person or corporation, we mean the entire earnings or receipts of such person or corporation from the business or operation to which we refer. From these cases, "gross receipts" refer to the total, as opposed to the net income. These are therefore the total receipts before any deduction for the expenses of management. Webster's New International Dictionary, in fact, defines gross as "whole or entire." 20 In China Banking Corporation, this Court further explained that the legislative intent to apply the term in its plain and ordinary meaning may be surmised from a historical perspective of the levy on gross receipts. From the time the GRT on banks was first imposed in 1946 under Republic Act 21 22 No. 39 and throughout its successive re-enactments, the legislature has not established a definition of the term "gross receipts." Under Revenue Regulations No. 12-80 and No. 17-84, as well as several numbered rulings, the BIR has consistently ruled that the term "gross receipts" does not admit of any deduction. This interpretation has remained unchanged throughout the various re-enactments of the present Section 121 of the Tax Code. On the presumption that the legislature is familiar with the contemporaneous interpretation of a statute given by the administrative agency tasked to enforce the statute, the reasonable conclusion is that the legislature has adopted the BIR's interpretation. In other words, the subsequent re-enactments of the present Section 121, without changes in the term interpreted by the BIR, confirm that its interpretation carries out the legislative purpose. Now, bereft of any laudable statutory basis, Citytrust and Asianbank simply anchor their argument on Section 4(e) of Revenue Regulations No. 1280 stating that "the rates of taxes to be imposed on the gross receipts of such financial institutions shall be based on all items of income actually received." They contend that since the 20% FWT is withheld at source and is paid directly to the government by the entities from which the banks derived the income, the same cannot be considered actually received, hence, must be excluded from the taxable gross receipts. The argument is bereft of merit. First, Section 4(e) merely recognizes that income may be taxable either at the time of its actual receipt or its accrual, depending on the accounting method of the taxpayer. It does not really exclude accrued interest income from the taxable gross receipts but merely postpones its inclusion until actual payment of the interest to the lending bank. Thus, while it is true that Section 4(e) states that "the rates of taxes to be imposed on the gross receipts of such financial institutions shall be based on all items of income actually received," it goes on to distinguish actual receipt from accrual, i.e., that "mere accrual shall not be considered, but once payment is received in such accrual or in case of prepayment, then the amount actually received shall be included in the tax base of such financial institutions." And second, Revenue Regulations No. 12-80, issued on November 7, 1980, had been superseded by Revenue Regulations No. 17-84 issued on October 12, 1984. Section 4(e) of Revenue Regulations No. 12-80 provides that only items of income actually received shall be included in the tax base for computing the GRT. On the other hand, Section 7(c) of Revenue Regulations No. 17-84 includes all interest income in computing the GRT, thus: SECTION 7. Nature and Treatment of Interest on Deposits and Yield on Deposit Substitutes. (a) The interest earned on Philippine Currency bank deposits and yield from deposit substitutes subjected to the withholding taxes in accordance with these regulations need not be included in the gross income in computing the depositor's/investor's income tax liability in accordance with the provision of Section 29 (b), (c) and (d) of the National Internal Revenue Code, as amended. (b) Only interest paid or accrued on bank deposits, or yield from deposit substitutes declared for purposes of imposing the withholding taxes in accordance with these regulations shall be allowed as interest expense deductible for purposes of computing taxable net income of the payor. (c) If the recipient of the above-mentioned items of income are financial institutions, the same shall be included as part of the tax base upon which the gross receipt tax is imposed. Revenue Regulations No. 17-84 categorically states that if the recipient of the above-mentioned items of income are financial institutions, the same shall be included as part of the tax base upon which the gross receipt tax is imposed. There is, therefore, an implied repeal of Section 4(e). There exists a disparity between Section 4(e) which imposes the GRT only on all items of income actually received (as opposed to their mere accrual) and Section 7(c) which includes all interest income (whether actual or accrued) in computing the GRT. As held by this Court in 23 Commissioner of Internal Revenue v. Solidbank Corporation, "the exception having been eliminated, the clear intent is that the later R.R. No. 17-

84 includes the exception within the scope of the general rule." Clearly, then, the current Revenue Regulations require interest income, whether 2 actually received or merely accrued, to form part of the bank's taxable gross receipts. 25 Moreover, this Court, in Bank of Commerce, settled the matter by holding that "actual receipt may either be physical receipt or constructive receipt," thus: Actual receipt of interest income is not limited to physical receipt. Actual receipt may either be physical receipt or constructive receipt. When the depositary bank withholds the final tax to pay the tax liability of the lending bank, there is prior to the withholding a constructive receipt by the lending bank of the amount withheld. From the amount constructively received by the lending bank, the depositary bank deducts the final withholding tax and remits it to the government for the account of the lending bank. Thus, the interest income actually received by the lending bank, both physically and constructively, is the net interest plus the amount withheld as final tax. The concept of a withholding tax on income obviously and necessarily implies that the amount of the tax withheld comes from the income earned by the taxpayer. Since the amount of the tax withheld constitute income earned by the taxpayer, then that amount manifestly forms part of the taxpayer's gross receipts. Because the amount withheld belongs to the taxpayer, he can transfer its ownership to the government in payment of his tax liability. The amount withheld indubitably comes from the income of the taxpayer, and thus forms part of his gross receipts. Corollarily, the Commissioner contends that the imposition of the 20% FWT and 5% GRT does not constitute double taxation. We agree. Double taxation means taxing for the same tax period the same thing or activity twice, when it should be taxed but once, for the same purpose and 26 with the same kind of character of tax. This is not the situation in the case at bar. The GRT is a percentage tax under Title V of the Tax Code ([Section 121], Other Percentage Taxes), while the FWT is an income tax under Title II of the Code (Tax on Income). The two concepts are different 27 from each other. In Solidbank Corporation, this Court defined that a percentage tax is a national tax measured by a certain percentage of the gross selling price or gross value in money of goods sold, bartered or imported; or of the gross receipts or earnings derived by any person engaged in the sale of services. It is not subject to withholding. An income tax, on the other hand, is a national tax imposed on the net or the gross income realized in a taxable year. It is subject to withholding. Thus, there can be no double taxation here as the Tax Code imposes two different kinds of taxes. 28 Now, both Asianbank and Citytrust rely on Manila Jockey Club in support of their positions. We are not convinced. In said case, Manila Jockey Club paid amusement tax on its commission in the total amount of bets called wager funds from the period November 1946 to October 1950. But such payment did not include the 5 % of the funds which went to the Board on Races and to the owners of horses and jockeys. We ruled that the gross receipts of the Manila Jockey Club should not include the 5 % because although delivered to the Club, such money has been especially earmarked by law or regulation for other persons. 29 The Manila Jockey Club does not apply to the cases at bar because what happened there is earmarking and not withholding. Earmarking is not the same as withholding. Amounts earmarked do not form part of gross receipts because these are by law or regulation reserved for some person other than the taxpayer, although delivered or received. On the contrary, amounts withheld form part of gross receipts because these are in 30 constructive possession and not subject to any reservation, the withholding agent being merely a conduit in the collection process. The distinction was explained in Solidbank, thus: "The Manila Jockey Club had to deliver to the Board on Races, horse owners and jockeys amounts that never became the property of the race track (Manila Jockey Club merely held that these amounts were held in trust and did not form part of gross receipts). Unlike these amounts, the interest income that had been withheld for the government became property of the financial institutions upon constructive possession thereof. Possession was indeed acquired, since it was ratified by the financial institutions in whose name the act of possession had been executed. The money indeed belonged to the taxpayers; merely holding it in trust was not enough (A trustee does not own money received in trust.) It is a basic concept in taxation that such money does not constitute taxable income to the trustee [China Banking Corp. v. Court of Appeals, supra, p. 27]). The government subsequently becomes the owner of the money when the financial institutions pay the FWT to extinguish their obligation to the government. As this Court has held before, this is the consideration for the transfer of ownership of the FWT from these institutions to the government (Ibid., p. 26). It is ownership that determines whether interest income forms part of taxable gross receipts (Ibid., p. 27). Being originally owned by these financial institutions as part of their interest income, the FWT should form part of their taxable gross receipts. In fine, let it be stressed that tax exemptions are highly disfavored. It is a governing principle in taxation that tax exemptions are to be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority and should be granted only by clear and unmistakable terms. WHEREFORE, in G.R. No. 139786, we GRANT the petition of the Commissioner of Internal Revenue and REVERSE the Decision of the Court of Appeals dated August 17, 1999 in CA-G.R. SP No. 52707. In G.R. No. 140857, we DENY the petition of Asianbank Corporation and AFFIRM in toto the Decision of the Court of Appeals in CA-G.R. SP No. 51248. Costs against petitioner. SO ORDERED.

G.R. No. 168118 August 28, 2006 THE MANILA BANKING CORPORATION, Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION SANDOVAL-GUTIERREZ, J.: 1 2 Before us is a Petition for Review on Certiorari assailing the Decision of the Court of Appeals dated May 11, 2005 in CA-G.R. SP No. 77177, entitled "The Manila Banking Corporation, petitioner, versus Commissioner of Internal Revenue, respondent." The Manila Banking Corporation, petitioner, was incorporated in 1961 and since then had engaged in the commercial banking industry until 1987. On May 22, 1987, the Monetary Board of the Bangko Sentral ng Pilipinas (BSP) issued Resolution No. 505, pursuant to Section 29 of Republic Act

(R.A.) No. 265 (the Central Bank Act), prohibiting petitioner from engaging in business by reason of insolvency. Thus, petitioner ceased operations that year and its assets and liabilities were placed under the charge of a government-appointed receiver. 4 Meanwhile, R.A. No. 8424, otherwise known as the Comprehensive Tax Reform Act of 1997, became effective on January 1, 1998. One of the changes introduced by this law is the imposition of the minimum corporate income tax on domestic and resident foreign corporations. Implementing this law is Revenue Regulations No. 9-98 stating that the law allows a four (4) year period from the time the corporations were registered with the Bureau of Internal Revenue (BIR) during which the minimum corporate income tax should not be imposed. On June 23, 1999, after 12 years since petitioner stopped its business operations, the BSP authorized it to operate as a thrift bank. The following year, specifically on April 7, 2000, it filed with the BIR its annual corporate income tax return and paid P33,816,164.00 for taxable year 1999. Prior to the filing of its income tax return, or on December 28, 1999, petitioner sent a letter to the BIR requesting a ruling on whether it is entitled to the four (4)-year grace period reckoned from 1999. In other words, petitioners position is that since it resumed operations in 1999, it w ill pay its minimum corporate income tax only after four (4) years thereafter. 5 On February 22, 2001, the BIR issued BIR Ruling No. 007-2001 stating that petitioner is entitled to the four (4)-year grace period. Since it reopened in 1999, the minimum corporate income tax may be imposed "not earlier than 2002, i.e. the fourth taxable year beginning 1999." The relevant portions of the BIR Ruling state: In reply, we hereby confirm that the law and regulations allow new corporations as well as existing corporations a leeway or adjustment period of four years counted from the year of commencement of business operations (reckoned at the time of registration by the corporation with the BIR) during which the MCIT (minimum corporate income tax) does not apply. If new corporations, as well as existing corporations such as those registered with the BIR in 1994 or earlier, are granted a 4-year grace period, we see no reason why TMBC, a corporation that has ceased business activities due to involuntary closure for more than a decade and is now only starting again to place its business back in order, may not be given the same opportunity. It should be stressed that although TMBC had been registered with the BIR before 1994, yet it did not have any business from 1987 to June 1999 due to its involuntary closure. This Office is therefore of an opinion, that for purposes of justice, equity and consistent with the intent of the law, TMBC's reopening last July 1999 is akin to the commencement of business operations of a new corporation, in consideration of which the law allows a 4-year period during which MCIT is not to be applied. Hence, MCIT may be imposed upon TMBC not earlier than 2002, i.e., the fourth taxable year beginning 1999 which is the year when TMBC reopened. Likewise, we find merit in your position that for having just come out of receivership proceedings, which not only resulted in substantial losses but actually brought about a complete cessation of all businesses, TMBC may be qualified to ask for suspension of the MCIT. The law provides that the Secretary of Finance, upon the recommendation of the Commissioner, may suspend the imposition of the MCIT on any corporation which suffers losses on account of prolonged labor dispute, or because of force majeure, or because of legitimate business reverses. [NIRC, Sec. 27(E)(3)] Revenue Regulations 9-98 defines the term "legitimate business reverses" to include substantial losses sustained due to fire, robbery, theft or embezzlement, or for other economic reasons as determined by the Secretary of Finance. Cessation of business activities as a result of being placed under involuntary receivership may be one such economic reason. But to be a basis for the recognition of the suspension of MCIT, such a situation should be properly defined and included in the regulations, which this Office intends to do. Pending such inclusion, the same cannot yet be invoked. Nevertheless, it is the position of this Office that the counting of the fourth taxable year, insofar as TMBC is concerned, begins in the year 1999 when TMBC reopened such that it will be only subject to MCIT beginning the year 2002. Pursuant to the above Ruling, petitioner filed with the BIR a claim for refund of the sum of P33,816,164.00 erroneously paid as minimum corporate income tax for taxable year 1999. Due to the inaction of the BIR on its claim, petitioner filed with the Court of Tax Appeals (CTA) a petition for review. On April 21, 2003, the CTA denied the petition, finding that petitioners payment of the amount of P33,816,164.00 corresponding to its minimum corporate income tax for taxable year 1999 is in order. The CTA held that petitioner is not entitled to the four (4)-year grace period because it is not a new corporation. It has continued to be the same corporation, registered with the Securities and Exchange Commission (SEC) and the BIR, despite being placed under receivership, thus: Moreover, it must be emphasized that when herein petitioner was placed under receivership, there was merely an interruption of its business operations. However, its corporate existence was never affected. The general rule is that the appointment of the receiver does not terminate the charter or work a dissolution of the corporation, even though the receivership is a permanent one. In other words, the corporation continues to exist as a legal entity, clothed with its franchises (65 Am. Jur. 2d, pp. 973-974). Petitioner, for all intents and purposes, remained to be the same corporation, registered with the SEC and with the BIR. While it may continue to perform its corporate functions, all its properties and assets were under the control and custody of a receiver, and its dealings with the public is somehow limited, if not momentarily suspended. x x x On June 11, 2003, petitioner filed with the Court of Appeals a petition for review. On May 11, 2005, the appellate court rendered a Decision affirming the assailed judgment of the CTA. Thus, this petition for review on certiorari. The main issue for our resolution is whether petitioner is entitled to a refund of its minimum corporate income tax paid to the BIR for taxable year 1999. Petitioner contends that the Court of Tax Appeals erred in holding that it is not entitled to the four (4)-year grace period provided by law suspending the payment of its minimum corporate income tax since it is not a newly created corporation, having been registered as early as 1961. For his part, the Commissioner of Internal Revenue (CIR), respondent, maintains that pursuant to R.A. No. 8424, petitioner should pay its minimum corporate income tax beginning January 1, 1998 as it did not close its business operations in 1987 but merely suspended the same. Even if placed under receivership, its corporate existence was never affected. Thus, it falls under the category of an existing corporation recommencing its banking business operations. Section 27(E) of the Tax Code provides: Sec. 27. Rates of Income Tax on Domestic Corporations. x x x (E) Minimum Corporate Income Tax on Domestic Corporations. (1) Imposition of Tax. - A minimum corporate income tax of two percent (2%) of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum corporate income tax is greater than the tax computed under Subsection (A) of this Section for the taxable year.

(2) Carry Forward of Excess Minimum Tax. - Any excess of the minimum corporate income tax over the normal income tax as computed under Subsection (A) of this Section shall be carried forward and credited against the normal income tax for the three (3) immediately succeeding taxable years. xxx Upon the other hand, Revenue Regulation No. 9-98 specifies the period when a corporation becomes subject to the minimum corporate income tax, thus: (5) Specific Rules for Determining the Period When a Corporation Becomes Subject to the MCIT (minimum corporate income tax) For purposes of the MCIT, the taxable year in which business operations commenced shall be the year in which the domestic corporation registered with the Bureau of Internal Revenue (BIR). Firms which were registered with BIR in 1994 and earlier years shall be covered by the MCIT beginning January 1, 1998. xxx The intent of Congress relative to the minimum corporate income tax is to grant a four (4)-year suspension of tax payment to newly formed corporations. Corporations still starting their business operations have to stabilize their venture in order to obtain a stronghold in the industry. It does not come as a surprise then when many companies reported losses in their initial years of operations. The following are excerpts from the Senate deliberations: Senator Romulo: x x x Let me go now to the minimum corporate income tax, which is on page 45 of the Journal, which is to minimize tax evasion on those corporations which have been declaring losses year in and year out. Here, the tax rate is three-fourths, three quarter of a percent or .75% applied to corporations that do not report any taxable income on the fourth year of their business operation. Therefore, those that do not report income on the first, second and third year are not included here. Senator Enrile: We assume that this is the period of stabilization of new company that is starting in business. Senator Romulo: That is right. Thus, in order to allow new corporations to grow and develop at the initial stages of their operations, the lawmaking body saw the need to provide a grace period of four years from their registration before they pay their minimum corporate income tax. Significantly, on February 23, 1995, Congress enacted R.A. No. 7906, otherwise known as the "Thrift Banks Act of 1995." It took effect on March 18, 1995. This law provides for the regulation of the organization and operations of thrift banks. Under Section 3, thrift banks include savings and mortgage banks, private development banks, and stock savings and loans associations organized under existing laws. On June 15, 1999, the BIR issued Revenue Regulation No. 4-95 implementing certain provisions of the said R.A. No. 7906. Section 6 provides: Sec. 6. Period of exemption. All thrift banks created and organized under the provisions of the Act shall be exempt from the payment of all taxes, fees, and charges of whatever nature and description, except the corporate income tax imposed under Title II of the NIRC and as specified in Section 2(A) of these regulations, for a period of five (5) years from the date of commencement of operations; while for thrift banks which are already existing and operating as of the date of effectivity of the Act (March 18, 1995), the tax exemption shall be for a period of five (5) years reckoned from the date of such effectivity. For purposes of these regulations, "date of commencement of operations" shall be understood to mean the date when the thrift bank was registered with the Securities and Exchange Commission or the date when the Certificate of Authority to Operate was issued by the Monetary Board of the Bangko Sentral ng Pilipinas, whichever comes later. xxx As mentioned earlier, petitioner bank was registered with the BIR in 1961. However, in 1987, it was found insolvent by the Monetary Board of the BSP and was placed under receivership. After twelve (12) years, or on June 23, 1999, the BSP issued to it a Certificate of Authority to Operate as a thrift bank. Earlier, or on January 21, 1999, it registered with the BIR. Then it filed with the SEC its Articles of Incorporation which was approved on June 22, 1999. It is clear from the above-quoted provision of Revenue Regulations No. 4-95 that the date of commencement of operations of a thrift bank is the date it was registered with the SEC or the date when the Certificate of Authority to Operate was issued to it by the Monetary Board of the BSP, whichever comes later. Let it be stressed that Revenue Regulations No. 9-98, implementing R.A. No. 8424 imposing the minimum corporate income tax on corporations, provides that for purposes of this tax, the date when business operations commence is the year in which the domestic corporation registered with the BIR. However, under Revenue Regulations No. 4-95, the date of commencement of operations of thrift banks, such as herein petitioner, is the date the particular thrift bank was registered with the SEC or the date when the Certificate of Authority to Operate was issued to it by the Monetary Board of the BSP, whichever comes later. Clearly then, Revenue Regulations No. 4-95, not Revenue Regulations No. 9-98, applies to petitioner, being a thrift bank. It is, therefore, entitled to a grace period of four (4) years counted from June 23, 1999 when it was authorized by the BSP to operate as a thrift bank. Consequently, it should only pay its minimum corporate income tax after four (4) years from 1999. WHEREFORE, we GRANT the petition. The assailed Decision of the Court of Appeals in CA-G.R. SP No. 77177 is hereby REVERSED. Respondent Commissioner of Internal Revenue is directed to refund to petitioner bank the sum of P33,816,164.00 prematurely paid as minimum corporate income tax. SO ORDERED. Footnotes
1 2

Under Rule 45 of the 1997 Revised Rules of Civil Procedure, as amended. Penned by Associate Justice Eugenio S. Labitoria (retired) and concurred in by Associate Justice Eliezer R. de los Santos and Associate Justice Arturo D. Brion (now Secretary of Labor). 3 Sec. 29. Proceedings upon insolvency. - Whenever, upon examination by the head of the appropriate supervising or examining department or his examiners or agents into the condition of any bank or non-bank financial intermediary performing quasi-banking functions, it shall be disclosed that the condition of the same is one of insolvency, or that its continuance in business would involve probable loss to its depositors or creditors, it shall be the duty of the department head concerned forthwith, in writing, to inform the Monetary Board of the facts, and the Board may, upon finding the statements of the department head to be true, forbid the institution to

do business in the Philippines and shall designate an official of the Central Bank or a person of recognized competence in banking or finance, as receiver to immediately take charge of its assets and liabilities, as expeditiously as possible collect and gather all the assets and administer the same for the benefit of its creditors, exercising all the powers necessary for these purposes including, but not limited to, bringing suits and foreclosing mortgages in the name of the bank or non-bank financial intermediary performing quasi-banking functions. xxx 4 An Act Amending the National Internal Revenue Code, as amended.

MARCOS II vs. CA

273 SCRA 47, GR No. 120880, June 5, 1997

"The approval of the court sitting in probate is not a mandatory requirement in the collection of estate taxes." "In case of failure to file a return, the tax may be assessed at anytime within 10 years after the omission." FACTS: Bongbong Marcos sought for the reversal of the ruling of the Court of Appeals to grant CIR's petition to levy the properties of the late Pres. Marcos to cover the payment of his tax delinquencies during the period of his exile in the US. The Marcos family was assessed by the BIR after it failed to file estate tax returns. However the assessment were not protested administratively by Mrs. Marcos and the heirs of the late president so that they became final and unappealable after the period for filing of opposition has prescribed. Marcos contends that the properties could not be levied to cover the tax dues because they are still pending probate with the court, and settlement of tax deficiencies could not be had, unless there is an order by the probate court or until the probate proceedings are terminated. Petitioner also pointed out that applying Memorandum Circular No. 38-68, the BIR's Notices of Levy on the Marcos properties were issued beyond the allowed period, and are therefore null and void. ISSUE: Are the contentions of Bongbong Marcos correct? HELD: No. The deficiency income tax assessments and estate tax assessment are already final and unappealable -and-the subsequent levy of real properties is a tax remedy resorted to by the government, sanctioned by Section 213 and 218 of the National Internal Revenue Code. This summary tax remedy is distinct and separate from the other tax remedies (such as Judicial Civil actions and Criminal actions), and is not affected or precluded by the pendency of any other tax remedies instituted by the government. The approval of the court, sitting in probate, or as a settlement tribunal over the deceased's estate is not a mandatory requirement in the collection of estate taxes. On the contrary, under Section 87 of the NIRC, it is the probate or settlement court which is bidden not to authorize the executor or judicial administrator of the decedent's estate to deliver any distributive share to any party interested in the estate, unless it is shown a Certification by the Commissioner of Internal Revenue that the estate taxes have been paid. This provision disproves the petitioner's contention that it is the probate court which approves the assessment and collection of the estate tax. On the issue of prescription, the omission to file an estate tax return, and the subsequent failure to contest or appeal the assessment made by the BIR is fatal to the petitioner's cause, as under Sec.223 of the NIRC, in case of failure to file a return, the tax may be assessed at anytime within 10 years after the omission, and any tax so assessed may be collected by levy upon real property within 3 years (now 5 years) following the assessment of the tax. Since the estate tax assessment had become final and unappealable by the petitioner's default as regards protesting the validity of the said assessment, there is no reason why the BIR cannot continue with the collection of the said tax.

CIR vs SC Johnson 309 scra 87

Facts: Respondent is a domestic corporation organized and operating under the Philippine Laws, entered into a licensed agreement with the SC Johnson and Son, USA, a non-resident foreign corporation based in the USA pursuant to which the respondent was granted the right to use the trademark, patents and technology owned by the later including the right to manufacture, package and distribute the products covered by the Agreement and secure assistance in management, marketing and production from SC Johnson and Son USA. For the use of trademark or technology, respondent was obliged to pay SC Johnson and Son, USA royalties based on a percentage of net sales and subjected the same to 25% withholding tax on royalty payments which respondent paid for the period covering July 1992 to May 1993 in the total amount of P1,603,443.00. On October 29, 1993, respondent filed with the International Tax Affairs Division (ITAD) of the BIR a claim for refund of overpaid withholding tax on royalties arguing that, the antecedent facts attending respondents case fall squarely within the same circumstances under which said MacGeorge and Gillette rulings were issued. Since the agreement was approved by the Technology Transfer Board, the preferential tax rate of 10% should apply to the respondent. So, royalties paid by the respondent to SC Johnson and Son, USA is only subject to 10% withholding tax. The Commissioner did not act on said claim for refund. Private respondent SC Johnson & Son, Inc. then filed a petition for review before the CTA, to claim a refund of the overpaid withholding tax on royalty payments from July 1992 to May 1993. On May 7, 1996, the CTA rendered its decision in favor of SC Johnson and ordered the CIR to issue a tax credit certificate in the amount of P163,266.00 representing overpaid withholding tax on royalty payments beginning July 1992 to May 1993. The CIR thus filed a petition for review with the CA which rendered the decision subject of this appeal on November 7, 1996 finding no merit in the

petition and affirming in toto the CTA ruling. Issue: Whether or not tax refunds are considered as tax exemptions. Held: It bears stress that tax refunds are in the nature of tax exemptions. As such they are registered as in derogation of sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemption. The burden of proof is upon him who claims the exemption in his favor and he must be able to justify his claim by the clearest grant of organic or statute law. Private respondent is claiming for a refund of the alleged overpayment of tax on royalties; however there is nothing on record to support a claim that the tax on royalties under the RP-US Treaty is paid under similar circumstances as the tax on royalties under the RP-West Germany Tax Treaty.

COMMISSIONER OF INTERNAL REVENUE VS. COURT OF APPEALS

GR NO. 108576, JANUARY 20, 1999
FACTS: Don Andres Soriano, a citizen and resident of the United States, formed the corporation "A. Soriano Y Cia", predecessor of ANSCOR. ANSCOR is wholly owned and controlled by the family of Don Andres, who are all non-resident aliens. Don Andres died, but his estate continued to receive stock dividends as well as his wife Doa Carmen Soriano. Pursuant to a board resolution, ANSCOR redeemed a considerable number of common shares from Don Andres estate. As stated in the Board Resolutions, ANSCOR's business purpose for both redemptions of stocks is to partially retire said stocks as treasury shares in order to reduce the company's foreign exchange remittances in case cash dividends are declared. ANSCOR also reclassified some of Doa Carmens common shares to preferred shares. After examining ANSCOR's books of account and records, Revenue examiners issued a report proposing that ANSCOR be assessed for deficiency withholding tax-at-source based on the transactions of exchange and redemption of stocks. ANSCOR filed a petition for review with the CTA assailing the tax assessments on the redemptions and exchange of stocks. The CTA ruled that ANSCORs redemption and exchange of the stocks of its foreign stockholders cannot be considered as "essentially equivalent to a distribution of taxable dividends" under Section 83(b) of the then 1939 Internal Revenue Act. ANSCOR avers that it has no duty to withhold any tax either from the Don Andres estate or from Doa Carmen based on the two transactions, because the same were done for legitimate business purposes which are (a) to reduce its foreign exchange remittances in the event the company would declare cash dividends, and to (b) subsequently "filipinized" ownership of ANSCOR, as allegedly, envisioned by Don Andres. It likewise invoked the amnesty provisions of P.D. 67. ISSUES: (1) May the withholding agent, in such capacity, be deemed a taxpayer for it to avail of the amnesty? (2) Whether ANSCOR's redemption of stocks from its stockholder and the exchange of stocks can be considered as "essentially equivalent to the distribution of taxable dividend" making the proceeds thereof taxable under the provisions of the above-quoted law? HELD: (1) NO. PD 67 condones the taxpayer. An income taxpayer covers all persons who derive taxable income. ANSCOR was assessed by petitioner for deficiency withholding tax/. As such, it is being held liable in its capacity as a withholding agent and not its personality as a taxpayer. In the operation of the withholding tax system, the withholding agent is the payor, a separate entity acting no more than an agent of the government for the collection of the tax in order to ensure its payments; the payer is the taxpayer he is the person subject to tax impose by law; and the payee is the taxing authority. In other words, the withholding agent is merely a tax collector, not a taxpayer. Under the withholding system, however, the agent-payor becomes a payee by fiction of law. His (agent) liability is direct and independent from the taxpayer, because the income tax is still impose on and due from the latter. The agent is not liable for the tax as no wealth flowed into him he earned no income. The Tax Code only makes the agent personally liable for the tax arising from the breach of its legal duty to withhold as distinguish from its duty to pay tax. (2) The three elements in the imposition of income tax are: (1) there must be gain or and profit, (2) that the gain or profit is realized or received, actually or constructively, and (3) it is not exempted by law or treaty from income tax. The existence of legitimate business purposes in support of the redemption of stock dividends is immaterial in income taxation. The test of taxability under the exempting clause of Section 83(b) is whether income was realized through the redemption of stock dividends. The redemption converts into money the stock dividends which become a realized profit or gain and consequently, the stockholder's separate property. Profits derived from the capital invested cannot escape income tax. As realized income, the proceeds of the redeemed stock dividends can be reached by income taxation regardless of the existence of any business purpose for the redemption. Hence, the proceeds are essentially considered equivalent to a distribution of taxable dividends. As "taxable dividend" under Section 83(b), it is part of the "entire income" subject to tax under Section 22 ( tax on non-resident alien individual) in relation to Section 21 (rates of tax on citizens or residents) of the then 1939 Code. As income, it is subject to income tax which is required to be withheld at source. CIR V TOKYO SHIPPING CO., LTD. May 26, 1995 Facts: Private respondent is a foreign corporation represented in the Philippines by Soriamont Steamship Agencies, Inc. It owns and operates tramper vessel M/V Gardenia. In December 1980, NASUTRA chartered M/V Gardenia to load 16,500 metric tons of raw sugar in the Philippines. On December 23, 1980 Mr. Edilberto Lising, the operations supervisor of Soriamont Agency, paid the required income and common carriers taxes in the sum total of P107,142.75 based on the expected gross receipts of the vessel. Upon arriving, however, at Guimaras Port of Iloilo, the vessel found no sugar for loading. On January 10, 1981, NASUTRA and private respondents agent mutually agreed to have the vessel sail for Japan without any cargo.

Claiming the pre-payment of income and common carriers taxes as erroneous since no receipt was realized from the charter agreement private respondent instituted a claim for tax credit or refund of the sum of P107,142,75 before petitioner commissioner of Internal Revenue on March 23, 1981. Petitioner failed to act promptly on the claim, hence, on May 14, 1981, private respondent filed a petition for review before public respondent CTA. Petitioner contested the petition. As special and affirmative defenses, it alleged the following: that taxes are presumed to have been collected in accordance with law; that in an action for refund, the burden of proof is upon the taxpayer to show that taxes are erroneously or illegally collected and the taxpayers failure to sustain said burden is fatal to the action for refund; and that claims for refund are construed strictly against tax claimants. After trial, respondent tax court decided in favor of the private respondent. Issue: Whether or not tax claimants has the burden of proof to support its claim of refund. Held: A claim for refund is in the nature of a claim for exemption and should be construed in strictissimi juris against the taxpayer. Likewise, there can be no disagreement with petitioners stance that private respondent has the burden of proof to establish the factual basi s of its claim for tax refund. Xxxxxxx Pursuant to section 24 (b) (2) of the National Internal Revenue Code, a resident foreign corporation engaged in the transport of cargo is liable for taxes depending on the amount of income it derives from sources within the Philippines. Thus, before such a tax liability can be enforced the taxpayer must be shown to have earned income sourced from the Philippines. The respondent court held that sufficient evidence has been adduced by the private respondent proving that it derived no receipt from its charter agreement with NASUTRA. Fair deal is expected by our taxpayers from the BIR and the duty demands that BIR should refund without any unreasonable delay what it has erroneously collected. The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the hen that lays the golden egg." And, in order to maintain the general publics trust and confidence in the Government this power must be used justly and not treacherously.