Income Tax Cases

INCOME TAX
G.R. No. L-9996
October 15, 1957
EUFEMIA EVANGELISTA, MANUELA EVANGELISTA, and FRANCISCA EVANGELISTA, petitioners,

vs.
THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents.
Santiago F. Alidio and Angel S. Dakila, Jr., for petitioner.
Office of the Solicitor General Ambrosio Padilla, Assistant Solicitor General Esmeraldo Umali and Solicitor Felicisimo R.
Rosete for Respondents.
CONCEPCION, J.:
This is a petition filed by Eufemia Evangelista, Manuela Evangelista and Francisca Evangelista, for review of a decision
of the Court of Tax Appeals, the dispositive part of which reads:
FOR ALL THE FOREGOING, we hold that the petitioners are liable for the income tax, real estate dealer's tax
and the residence tax for the years 1945 to 1949, inclusive, in accordance with the respondent's assessment
for the same in the total amount of P6,878.34, which is hereby affirmed and the petition for review filed by
petitioner is hereby dismissed with costs against petitioners.
It appears from the stipulation submitted by the parties:
1. That the petitioners borrowed from their father the sum of P59,1400.00 which amount together with their
personal monies was used by them for the purpose of buying real properties,.
2. That on February 2, 1943, they bought from Mrs. Josefina Florentino a lot with an area of 3,713.40 sq. m.
including improvements thereon from the sum of P100,000.00; this property has an assessed value of
P57,517.00 as of 1948;
3. That on April 3, 1944 they purchased from Mrs. Josefa Oppus 21 parcels of land with an aggregate area of
3,718.40 sq. m. including improvements thereon for P130,000.00; this property has an assessed value of
P82,255.00 as of 1948;
4. That on April 28, 1944 they purchased from the Insular Investments Inc., a lot of 4,353 sq. m. including
improvements thereon for P108,825.00. This property has an assessed value of P4,983.00 as of 1948;
5. That on April 28, 1944 they bought form Mrs. Valentina Afable a lot of 8,371 sq. m. including improvements
thereon for P237,234.34. This property has an assessed value of P59,140.00 as of 1948;
6. That in a document dated August 16, 1945, they appointed their brother Simeon Evangelista to 'manage
their properties with full power to lease; to collect and receive rents; to issue receipts therefor; in default of
such payment, to bring suits against the defaulting tenants; to sign all letters, contracts, etc., for and in their
behalf, and to endorse and deposit all notes and checks for them;
7. That after having bought the above-mentioned real properties the petitioners had the same rented or leases
to various tenants;
8. That from the month of March, 1945 up to an including December, 1945, the total amount collected as rents
on their real properties was P9,599.00 while the expenses amounted to P3,650.00 thereby leaving them a net
rental income of P5,948.33;
9. That on 1946, they realized a gross rental income of in the sum of P24,786.30, out of which amount was
deducted in the sum of P16,288.27 for expenses thereby leaving them a net rental income of P7,498.13;
10. That in 1948, they realized a gross rental income of P17,453.00 out of the which amount was deducted the
sum of P4,837.65 as expenses, thereby leaving them a net rental income of P12,615.35.
It further appears that on September 24, 1954 respondent Collector of Internal Revenue demanded the payment of
income tax on corporations, real estate dealer's fixed tax and corporation residence tax for the years 1945-1949,
computed, according to assessment made by said officer, as follows:
INCOME TAXES
1945
14.84
1946
1,144.71
1947
10.34
1948
1,912.30
1949
1,575.90
Total including surcharge and

compromise
P6,157.09
REAL ESTATE DEALER'S FIXED TAX
1946
P37.50
1947
150.00
1948
150.00
1949
150.00
Total including penalty
P527.00
RESIDENCE TAXES OF CORPORATION
1945
P38.75
1946
38.75
1947
38.75
1948
38.75
1949
38.75
Total including surcharge
P193.75
TOTAL TAXES DUE
P6,878.34.
Said letter of demand and corresponding assessments were delivered to petitioners on December 3, 1954, whereupon
they instituted the present case in the Court of Tax Appeals, with a prayer that "the decision of the respondent
contained in his letter of demand dated September 24, 1954" be reversed, and that they be absolved from the
payment of the taxes in question, with costs against the respondent.
After appropriate proceedings, the Court of Tax Appeals the above-mentioned decision for the respondent, and a
petition for reconsideration and new trial having been subsequently denied, the case is now before Us for review at the
instance of the petitioners.
The issue in this case 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 section 24 and 84 of said Code, the pertinent parts of
which read:
SEC. 24. Rate of 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 (compaias colectivas), 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 participacion), associations or insurance companies, but does not
include duly registered general copartnerships. (compaias 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, properly, or industry
to a common fund, with the intention of dividing the profits among themselves.
Pursuant to the 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 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 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
transactions 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 the petitioners in February, 1943. In
other words, one cannot but perceive a character of habitually peculiar to business transactions engaged in
the purpose 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
Evangelista, 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 and 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 Evangelista 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 point.
Petitioners insist, however, that they are mere co-owners, not copartners, for, in consequence of the acts performed by
them, a legal entity, with a personality independent of that of its members, did not come into existence, and some of
the characteristics of partnerships are lacking in the case at bar. This pretense was correctly rejected by the Court of
Tax Appeals.
To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking, are distinct and
different from "partnerships". When our Internal Revenue Code includes "partnerships" among the entities subject to
the tax on "corporations", said Code must allude, therefore, to organizations which are not necessarily "partnerships",
in the technical sense of the term. Thus, for instance, section 24 of said Code exempts from the aforementioned tax
"duly registered general partnerships which constitute precisely one of the most typical forms of partnerships in this
jurisdiction. Likewise, as defined in section 84(b) of said 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. Again, pursuant to said section 84(b), the term
"corporation" includes, among other, joint accounts, (cuentas en participation)" and "associations," none of which has
a legal personality of its own, independent of that of its members. Accordingly, the lawmaker could not have regarded
that personality as a condition essential to the existence of the partnerships therein referred to. In fact, as above
stated, "duly registered general copartnerships" which are possessed of the aforementioned personality have
been expressly excluded by law (sections 24 and 84 [b] from the connotation of the term "corporation" It may not be
amiss to add that petitioners' allegation to the effect that their liability in connection with the leasing of the lots above
referred to, under the management of one person even if true, on which we express no opinion tends to increase
the similarity between the nature of their venture and that corporations, and is, therefore, an additional argument in
favor of the imposition of said tax on corporations.
Under the Internal Revenue Laws of the United States, "corporations" are taxed differently from "partnerships". By
specific provisions of said laws, such "corporations" include "associations, joint-stock companies and insurance
companies." However, the term "association" is not used in the aforementioned laws.
. . . in any narrow or technical sense. It includes any organization, created for the transaction of designed
affairs, or the attainment of some object, which like a corporation, continues notwithstanding that its members
or participants change, and the affairs of which, like corporate affairs, are conducted by a single individual, a
committee, a board, or some other group, acting in a representative capacity. It is immaterial whether such
organization is created by an agreement, a declaration of trust, a statute, or otherwise. It includes a voluntary
association, a joint-stock corporation or company, a 'business' trusts a 'Massachusetts' trust, a 'common law'
trust, and 'investment' trust (whether of the fixed or the management type), an interinsuarance exchange
operating through an attorney in fact, a partnership association, and any other type of organization (by
whatever name known) which is not, within the meaning of the Code, a trust or an estate, or a partnership. (7A
Mertens Law of Federal Income Taxation, p. 788; emphasis supplied.).
Similarly, the American Law.
. . . provides its own concept of a partnership, under the term 'partnership 'it includes not only a partnership as
known at common law but, as well, a syndicate, group, pool, joint venture or other unincorporated
organizations which carries on any business financial operation, or venture, and which is not, within the
meaning of the Code, a trust, estate, or a corporation. . . (7A Merten's Law of Federal Income taxation, p. 789;
emphasis supplied.)
The term 'partnership' includes a syndicate, group, pool, joint venture or other unincorporated organization,
through or by means of which any business, financial operation, or venture is carried on, . . .. ( 8 Merten's Law
of Federal Income Taxation, p. 562 Note 63; emphasis supplied.) .
For purposes of the tax on corporations, our National Internal Revenue Code, includes these partnerships with the
exception only of duly registered general copartnerships within the purview of the term "corporation." It is,
therefore, clear to our mind that petitioners herein constitute a partnership, insofar as said Code is concerned and are
subject to the income tax for corporations.
As regards the residence of tax for corporations, section 2 of Commonwealth Act No. 465 provides in part:
Entities liable to residence tax.-Every corporation, no matter how created or organized, whether domestic or
resident foreign, engaged in or doing business in the Philippines shall pay an annual residence tax of five
pesos and an annual additional tax which in no case, shall exceed one thousand pesos, in accordance with the
following schedule: . . .
The term 'corporation' as used in this Act includes joint-stock company, partnership, joint account (cuentas en
participacion), association or insurance company, no matter how created or organized. (emphasis supplied.)
Considering that the pertinent part of this provision is analogous to that of section 24 and 84 (b) of our National
Internal Revenue Code (commonwealth Act No. 466), and that the latter was approved on June 15, 1939, the day
immediately after the approval of said Commonwealth Act No. 465 (June 14, 1939), it is apparent that the terms
"corporation" and "partnership" are used in both statutes with substantially the same meaning. Consequently,
petitioners are subject, also, to the residence tax for corporations.
Lastly, the records show that petitioners have habitually engaged in leasing the properties above mentioned for a
period of over twelve years, and that the yearly gross rentals of said properties from June 1945 to 1948 ranged from
P9,599 to P17,453. Thus, they are subject to the tax provided in section 193 (q) of our National Internal Revenue Code,
for "real estate dealers," inasmuch as, pursuant to section 194 (s) thereof:
'Real estate dealer' includes any person engaged in the business of buying, selling, exchanging, leasing, or
renting property or his own account as principal and holding himself out as a full or part time dealer in real
estate or as an owner of rental property or properties rented or offered to rent for an aggregate amount of
three thousand pesos or more a year. . . (emphasis supplied.)
Wherefore, the appealed decision of the Court of Tax appeals is hereby affirmed with costs against the petitioners
herein. It is so ordered.
Bengzon, Paras, C.J., Padilla, Reyes, A., Reyes, J.B.L., Endencia and Felix, JJ., concur.
BAUTISTA ANGELO, J., concurring:

I agree with the opinion that petitioners have actually contributed money to a common fund with express purpose of
engaging in real estate business for profit. The series of transactions which they had undertaken attest to this. This
appears in the following portion of the decision:
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. On April 3, 1944, they purchase 21 lots for P18,000. This was soon followed on
April 23, 1944, by the acquisition of another real state for P108,825. Five (5) days later (April 28, 1944), they
got a fourth lot for P237,234.14. The number of lots (24) acquired and transactions 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 the petitioner in February, 1943, In other words, we cannot but perceive a
character of habitually peculiar to business transactions engaged in for purposes of gain.
I wish however to make 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 of itself establish a partnership, whether such co-owners or copossessors 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 partnership, whether or not the person 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 shared or do not share any profits
made by the use of 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
judicial 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
Floyd R. Mechem, 2n Ed., section 83, p. 74.)
A joint venture purchase of land, by two, does not constitute a copartnership in respect thereto; nor does not
agreement to share the profits and loses on the sale of land create a partnership; the parties are only tenants
in common. (Clark vs. Sideway, 142 U.S. 682, 12 S Ct. 327, 35 L. Ed., 1157.)
Where plaintiff, his brother, and another agreed to become owners of a single tract of reality, 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 plaintiff's commissions, no partnership existed as between the parties, whatever relation may have
been as to third parties. (Magee vs. Magee, 123 N. E. 6763, 233 Mass. 341.)
In order to constitute a partnership inter sese there must be: (a) An intent to form the same; (b) generally a
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 Ill. 470.)
The common ownership of property does not itself create a partnership between the owners, though they may
use it for purpose of making gains; and they may, without becoming partners, agree among themselves as to
the management and use of such property and the application of the proceeds therefrom. (Spurlock vs. Wilson,
142 S. W. 363, 160 No. App. 14.)
This is impliedly recognized in the following portion of the decision: "Although, taken singly, they might not suffice to
establish the intent necessary to constitute a partnership, the collective effect of these circumstances (referring to the
series of transactions) such as to leave no room for doubt on the existence of said intent in petitioners herein."
G.R. No. 112675 January 25, 1999

AFISCO INSURANCE CORPORATION; CCC INSURANCE CORPORATION; CHARTER INSURANCE CO., INC.;
CIBELES INSURANCE CORPORATION; COMMONWEALTH INSURANCE COMPANY; CONSOLIDATED INSURANCE
CO., INC.; DEVELOPMENT INSURANCE & SURETY CORPORATION DOMESTIC INSURANCE COMPANY OF THE
PHILIPPINE; EASTERN ASSURANCE COMPANY & SURETY CORP; EMPIRE INSURANCE COMPANY; EQUITABLE
INSURANCE CORPORATION; FEDERAL INSURANCE CORPORATION INC.; FGU INSURANCE CORPORATION;
FIDELITY & SURETY COMPANY OF THE PHILS., INC.; FILIPINO MERCHANTS' INSURANCE CO., INC.;
GOVERNMENT SERVICE INSURANCE SYSTEM; MALAYAN INSURANCE CO., INC.; MALAYAN ZURICH
INSURANCE CO.; INC.; MERCANTILE INSURANCE CO., INC.; METROPOLITAN INSURANCE COMPANY; METROTAISHO INSURANCE CORPORATION; NEW ZEALAND INSURANCE CO., LTD.; PAN-MALAYAN INSURANCE
CORPORATION; PARAMOUNT INSURANCE CORPORATION; PEOPLE'S TRANS-EAST ASIA INSURANCE
CORPORATION; PERLA COMPANIA DE SEGUROS, INC.; PHILIPPINE BRITISH ASSURANCE CO., INC.;
PHILIPPINE FIRST INSURANCE CO., INC.; PIONEER INSURANCE & SURETY CORP.; PIONEER
INTERCONTINENTAL INSURANCE CORPORATION; PROVIDENT INSURANCE COMPANY OF THE PHILIPPINES;
PYRAMID INSURANCE CO., INC.; RELIANCE SURETY & INSURANCE COMPANY; RIZAL SURETY & INSURANCE
COMPANY; SANPIRO INSURANCE CORPORATION; SEABOARD-EASTERN INSURANCE CO., INC.; SOLID
GUARANTY, INC.; SOUTH SEA SURETY & INSURANCE CO., INC.; STATE BONDING & INSURANCE CO., INC.;
SUMMA INSURANCE CORPORATION; TABACALERA INSURANCE CO., INC. all assessed as "POOL OF
MACHINERY INSURERS, petitioner,
vs.
COURT OF APPEALS, COURT OF TAX APPEALS and COMISSIONER OF INTERNAL REVENUE, respondent.
PANGANIBAN, J.:
Pursuant to "reinsurance treaties," a number of local insurance firms formed themselves into a "pool" in order to
facilitate the handling of business contracted with a nonresident foreign insurance company. May the "clearing house"
or "insurance pool" so formed be deemed a partnership or an association that is taxable as a corporation under the
National Internal Revenue Code (NIRC)? Should the pool's remittances to the member companies and to the said
foreign firm be taxable as dividends? Under the facts of this case, has the goverment's right to assess and collect said
tax prescribed?
The Case
These are the main questions raised in the Petition for Review on Certiorari before us, assailing the October 11, 1993
Decision 1 of the Court of Appeals 2 in CA-GR SP 25902, which dismissed petitioners' appeal of the October 19, 1992
Decision 3 of the Court of Tax Appeals 4 (CTA) which had previously sustained petitioners' liability for deficiency income
tax, interest and withholding tax. The Court of Appeals ruled:
WHEREFORE, the petition is DISMISSED, with costs against petitioner
The petition also challenges the November 15, 1993 Court of Appeals (CA) Resolution
denying reconsideration.
The Facts
The antecedent facts, 7 as found by the Court of Appeals, are as follows:
The petitioners are 41 non-life insurance corporations, organized and existing under the laws of the
Philippines. Upon issuance by them of Erection, Machinery Breakdown, Boiler Explosion and
Contractors' All Risk insurance policies, the petitioners on August 1, 1965 entered into a Quota Share
Reinsurance Treaty and a Surplus Reinsurance Treaty with the Munchener RuckversicherungsGesselschaft (hereafter called Munich), a non-resident foreign insurance corporation. The reinsurance
treaties required petitioners to form a [p]ool. Accordingly, a pool composed of the petitioners was
formed on the same day.
On April 14, 1976, the pool of machinery insurers submitted a financial statement and filed an
"Information Return of Organization Exempt from Income Tax" for the year ending in 1975, on the basis
of which it was assessed by the Commissioner of Internal Revenue deficiency corporate taxes in the
amount of P1,843,273.60, and withholding taxes in the amount of P1,768,799.39 and P89,438.68 on
dividends paid to Munich and to the petitioners, respectively. These assessments were protested by
the petitioners through its auditors Sycip, Gorres, Velayo and Co.
On January 27, 1986, the Commissioner of Internal Revenue denied the protest and ordered the
petitioners, assessed as "Pool of Machinery Insurers," to pay deficiency income tax, interest, and with
[h]olding tax, itemized as follows:
Net income per information return P3,737,370.00
===========
Income tax due thereon P1,298,080.00
Add: 14% Int. fr. 4/15/76
to 4/15/79 545,193.60
TOTAL AMOUNT DUE & P1,843,273.60

COLLECTIBLE
Dividend paid to Munich
Reinsurance Company P3,728,412.00
35% withholding tax at

source due thereon P1,304,944.20
Add: 25% surcharge 326,236.05
14% interest from
1/25/76 to 1/25/79 137,019.14
Compromise penalty-
non-filing of return 300.00

late payment 300.00
TOTAL AMOUNT DUE & P1,768,799.39

COLLECTIBLE ===========
Dividend paid to Pool Members P655,636.00
===========
10% withholding tax at
source due thereon P65,563.60
Add: 25% surcharge 16,390.90
14% interest from
1/25/76 to 1/25/79 6,884.18
Compromise penaltynon-filing of return 300.00
late payment 300.00
TOTAL AMOUNT DUE & P89,438.68

COLLECTIBLE ===========
The CA ruled in the main that the pool of machinery insurers was a partnership taxable as a corporation, and that the
latter's collection of premiums on behalf of its members, the ceding companies, was taxable income. It added that
prescription did not bar the Bureau of Internal Revenue (BIR) from collecting the taxes due, because "the taxpayer
cannot be located at the address given in the information return filed." Hence, this Petition for Review before us. 9
The Issues
Before this Court, petitioners raise the following issues:
1. Whether or not the Clearing House, acting as a mere agent and performing strictly administrative
functions, and which did not insure or assume any risk in its own name, was a partnership or
association subject to tax as a corporation;
2. Whether or not the remittances to petitioners and MUNICHRE of their respective shares of
reinsurance premiums, pertaining to their individual and separate contracts of reinsurance, were
"dividends" subject to tax; and
3. Whether or not the respondent Commissioner's right to assess the Clearing House had already
prescribed. 10
The Court's Ruling

The petition is devoid of merit. We sustain the ruling of the Court of Appeals that the pool is taxable as a corporation,
and that the government's right to assess and collect the taxes had not prescribed.
First Issue:
Pool Taxable as a Corporation
Petitioners contend that the Court of Appeals erred in finding that the pool of clearing house was an informal
partnership, which was taxable as a corporation under the NIRC. They point out that the reinsurance policies were
written by them "individually and separately," and that their liability was limited to the extent of their allocated share
in the original risk thus reinsured. 11 Hence, the pool did not act or earn income as a reinsurer. 12 Its role was limited to
its principal function of "allocating and distributing the risk(s) arising from the original insurance among the signatories
to the treaty or the members of the pool based on their ability to absorb the risk(s) ceded[;] as well as the
performance of incidental functions, such as records, maintenance, collection and custody of funds, etc." 13
Petitioners belie the existence of a partnership in this case, because (1) they, the reinsurers, did not share the same
risk or solidary liability, 14 (2) there was no common fund; 15 (3) the executive board of the pool did not exercise control
and management of its funds, unlike the board of directors of a corporation; 16 and (4) the pool or clearing house "was
not and could not possibly have engaged in the business of reinsurance from which it could have derived income for
itself." 17
The Court is not persuaded. The opinion or ruling of the Commission of Internal Revenue, the agency tasked with the
enforcement of tax law, is accorded much weight and even finality, when there is no showing. that it is patently wrong,
18
particularly in this case where the findings and conclusions of the internal revenue commissioner were subsequently
affirmed by the CTA, a specialized body created for the exclusive purpose of reviewing tax cases, and the Court of
Appeals. 19 Indeed,
[I]t has been the long standing policy and practice of this Court to respect the conclusions of quasijudicial agencies, such as the Court of Tax Appeals which, by the nature of its functions, is dedicated
exclusively to the study and consideration of tax problems and has necessarily developed an expertise
on the subject, unless there has been an abuse or improvident exercise of its authority. 20
This Court rules that the Court of Appeals, in affirming the CTA which had previously sustained the internal revenue
commissioner, committed no reversible error. Section 24 of the NIRC, as worded in the year ending 1975, provides:
Sec. 24. Rate of tax on corporations. (a) Tax on domestic corporations. A tax is hereby imposed
upon the taxable net income received during each taxable year from all sources by every corporation
organized in, or existing under the laws of the Philippines, no matter how created or organized, but not
including duly registered general co-partnership (compaias colectivas), general professional
partnerships, private educational institutions, and building and loan associations . . . .
Ineludibly, the Philippine legislature included in the concept of corporations those entities that resembled them such as
unregistered partnerships and associations. Parenthetically, the NIRC's inclusion of such entities in the tax on
corporations was made even clearer by the tax Reform Act of 1997, 21 which amended the Tax Code. Pertinent
provisions of the new law read as follows:
Sec. 27. Rates of Income Tax on Domestic Corporations.
(A) In General. Except as otherwise provided in this Code, an income tax of thirty-five percent (35%)
is hereby imposed upon the taxable income derived during each taxable year from all sources within
and without the Philippines by every corporation, as defined in Section 22 (B) of this Code, and taxable
under this Title as a corporation . . . .
Sec. 22. Definition. When used in this Title:
xxx xxx xxx

(B) The term "corporation" shall include partnerships, no matter how created or organized, joint-stock
companies, joint accounts (cuentas en participacion), associations, or insurance companies, but does
not include general professional partnerships [or] a joint venture or consortium formed for the purpose
of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating or consortium agreement under a service contract without the
Government. "General professional partnerships" are partnerships formed by persons for the sole
purpose of exercising their common profession, no part of the income of which is derived from
engaging in any trade or business.
xxx xxx xxx
Thus, the Court in Evangelista v. Collector of Internal Revenue 22 held that Section 24 covered these unregistered
partnerships and even associations or joint accounts, which had no legal personalities apart from their individual
members. 23 The Court of Appeals astutely applied Evangelista. 24
. . . Accordingly, a pool of individual real property owners dealing in real estate business was
considered a corporation for purposes of the tax in sec. 24 of the Tax Code in Evangelista v. Collector
of Internal Revenue, supra. The Supreme Court said:
The term "partnership" includes a syndicate, group, pool, joint venture or other
unincorporated organization, through or by means of which any business, financial
operation, or venture is carried on. *** (8 Merten's Law of Federal Income Taxation, p.
562 Note 63)
Art. 1767 of the Civil Code recognizes the creation of a contract of partnership when "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." 25 Its requisites are: "(1) mutual contribution to a common stock, and (2) a joint interest in the
profits." 26 In other words, a partnership is formed when persons contract "to devote to a common purpose either
money, property, or labor with the intention of dividing the profits between
themselves." 27 Meanwhile, an association implies associates who enter into a "joint enterprise . . . for the transaction
of business." 28
In the case before us, the ceding companies entered into a Pool Agreement 29 or an association 30 that would handle all
the insurance businesses covered under their quota-share reinsurance treaty 31 and surplus reinsurance treaty 32 with
Munich. The following unmistakably indicates a partnership or an association covered by Section 24 of the NIRC:
(1) The pool has a common fund, consisting of money and other valuables that are deposited in the name and credit of
the pool. 33 This common fund pays for the administration and operation expenses of the pool. 24
(2) The pool functions through an executive board, which resembles the board of directors of a corporation, composed
of one representative for each of the ceding companies. 35
(3) True, the pool itself is not a reinsurer and does not issue any insurance policy; however, its work is indispensable,
beneficial and economically useful to the business of the ceding companies and Munich, because without it they would
not have received their premiums. The ceding companies share "in the business ceded to the pool" and in the
"expenses" according to a "Rules of Distribution" annexed to the Pool Agreement. 36 Profit motive or business is,
therefore, the primordial reason for the pool's formation. As aptly found by the CTA:
. . . The fact that the pool does not retain any profit or income does not obliterate an antecedent fact,
that of the pool being used in the transaction of business for profit. It is apparent, and petitioners
admit, that their association or coaction was indispensable [to] the transaction of the business, . . . If
together they have conducted business, profit must have been the object as, indeed, profit was
earned. Though the profit was apportioned among the members, this is only a matter of consequence,
as it implies that profit actually resulted. 37
The petitioners' reliance on Pascuals v. Commissioner 38 is misplaced, because the facts obtaining therein are not on all
fours with the present case. In Pascual, there was no unregistered partnership, but merely a co-ownership which took
up only two isolated transactions. 39 The Court of Appeals did not err in applying Evangelista, which involved a
partnership that engaged in a series of transactions spanning more than ten years, as in the case before us.
Second Issue:
Pool's Remittances are Taxable
Petitioners further contend that the remittances of the pool to the ceding companies and Munich are not dividends
subject to tax. They insist that such remittances contravene Sections 24 (b) (I) and 263 of the 1977 NIRC and "would
be tantamount to an illegal double taxation as it would result in taxing the same taxpayer" 40 Moreover, petitioners
argue that since Munich was not a signatory to the Pool Agreement, the remittances it received from the pool cannot
be deemed dividends. 41 They add that even if such remittances were treated as dividends, they would have been
exempt under the previously mentioned sections of the 1977 NIRC, 42 as well as Article 7 of paragraph 1 43 and Article
5 of paragraph 5 44 of the RP-West German Tax Treaty. 45
Petitioners are clutching at straws. Double taxation means taxing the same property twice when it should be taxed
only once. That is, ". . . taxing the same person twice by the same jurisdiction for the same thing" 46 In the instant
case, the pool is a taxable entity distinct from the individual corporate entities of the ceding companies. The tax on its
income is obviously different from the tax on the dividends received by the said companies. Clearly, there is no double
taxation here.
The tax exemptions claimed by petitioners cannot be granted, since their entitlement thereto remains unproven and
unsubstantiated. It is axiomatic in the law of taxation that taxes are the lifeblood of the nation. Hence, "exemptions
therefrom are highly disfavored in law and he who claims tax exemption must be able to justify his claim or right." 47
Petitioners have failed to discharge this burden of proof. The sections of the 1977 NIRC which they cite are
inapplicable, because these were not yet in effect when the income was earned and when the subject information
return for the year ending 1975 was filed.
Referring, to the 1975 version of the counterpart sections of the NIRC, the Court still cannot justify the exemptions
claimed. Section 255 provides that no tax shall ". . . be paid upon reinsurance by any company that has already paid
the tax . . ." This cannot be applied to the present case because, as previously discussed, the pool is a taxable entity
distinct from the ceding companies; therefore, the latter cannot individually claim the income tax paid by the former
as their own.
On the other hand, Section 24 (b) (1) 48 pertains to tax on foreign corporations; hence, it cannot be claimed by the
ceding companies which are domestic corporations. Nor can Munich, a foreign corporation, be granted exemption
based solely on this provision of the Tax Code, because the same subsection specifically taxes dividends, the type of
remittances forwarded to it by the pool. Although not a signatory to the Pool Agreement, Munich is patently an
associate of the ceding companies in the entity formed, pursuant to their reinsurance treaties which required the
creation of said pool.
Under its pool arrangement with the ceding companies; Munich shared in their income and loss. This is manifest from a
reading of Article 3 49 and 10 50 of the Quota-Share Reinsurance treaty and Articles 3 51 and 10 52 of the Surplus
Reinsurance Treaty. The foregoing interpretation of Section 24 (b) (1) is in line with the doctrine that a tax exemption
must be construed strictissimi juris, and the statutory exemption claimed must be expressed in a language too plain to
be mistaken. 53
Finally the petitioners' claim that Munich is tax-exempt based on the RP- West German Tax Treaty is likewise
unpersuasive, because the internal revenue commissioner assessed the pool for corporate taxes on the basis of the
information return it had submitted for the year ending 1975, a taxable year when said treaty was not yet in effect. 54
Although petitioners omitted in their pleadings the date of effectivity of the treaty, the Court takes judicial notice that
it took effect only later, on December 14, 1984. 55
Third Issue:
Prescription
Petitioners also argue that the government's right to assess and collect the subject tax had prescribed. They claim that
the subject information return was filed by the pool on April 14, 1976. On the basis of this return, the BIR telephoned
petitioners on November 11, 1981, to give them notice of its letter of assessment dated March 27, 1981. Thus, the
petitioners contend that the five-year statute of limitations then provided in the NIRC had already lapsed, and that the
internal revenue commissioner was already barred by prescription from making an assessment. 56
We cannot sustain the petitioners. The CA and the CTA categorically found that the prescriptive period was tolled
under then Section 333 of the NIRC, 57 because "the taxpayer cannot be located at the address given in the
information return filed and for which reason there was delay in sending the assessment." 58 Indeed, whether the
government's right to collect and assess the tax has prescribed involves facts which have been ruled upon by the
lower courts. It is axiomatic that in the absence of a clear showing of palpable error or grave abuse of discretion, as in
this case, this Court must not overturn the factual findings of the CA and the CTA.
Furthermore, petitioners admitted in their Motion for Reconsideration before the Court of Appeals that the pool
changed its address, for they stated that the pool's information return filed in 1980 indicated therein its "present
address." The Court finds that this falls short of the requirement of Section 333 of the NIRC for the suspension of the
prescriptive period. The law clearly states that the said period will be suspended only "if the taxpayer informs the
Commissioner of Internal Revenue of any change in the address."
WHEREFORE, the petition is DENIED. The Resolution of the Court of Appeals dated October 11, 1993 and November 15,
1993 are hereby AFFIRMED. Cost against petitioners.1wphi1.nt
SO ORDERED.
G.R. No. 48231
June 30, 1947
WISE & CO., INC., ET AL., plaintiffs-appellants,

vs.
BIBIANO L. MEER, Collector of Internal Revenue, defendant-appellee.
Ross, Selph, Carrascoso and Janda for appellants.
Office of the Solicitor General for appellee.
HILADO, J.:
This is an appeal by Wise & Co., Inc. and its co-plaintiff from the judgment of the Court of First Instance of Manila in
civil case No. 56200 of said court, absolving the defendant Collector of Internal Revenue from the complaint without
costs. The complaint was for recovery of certain amounts therein specified, which had been paid by said plaintiffs
under written protest to said defendant, who had previously assessed said amounts against the respective plaintiffs by
way of deficiency income taxes for the year 1937, as detailed under paragraph 6 of defendant's special defense
(Record of Appeal, pp. 7-10). Appellants made eight assignments of error, to wit:
The trial court erred in finding:
I. That the Manila Wine Merchants, Ltd., a Hongkong corporation, was in liquidation beginning June 1, 1937,
and that all dividends declared and paid thereafter were distributions of all its assets in complete liquidation.
II. That all distributions made by the Hongkong corporation after June 1, 1937, were subject to both normal tax
and surtax.
III. That income received by one corporation from another was taxable under the Income Tax Law, and that
Wise & Co., Inc., was taxable on the distribution of its share of the same net profits on which the Hongkong
Company had already paid Philippine tax, despite the clear provisions of section 10 of the Income Tax Law then
in effect.
IV. That the non-resident individual stockholder appellants were subject to both normal and additional tax on
the distributions received despite the clear provisions of section 5 (b) of the Income Tax Law then in effect.
V. That section 25 (a) of the Income Tax Law makes distributions in liquidation of a foreign corporation,
dissolution proceedings of which were conducted in a foreign country, taxable income to a non-resident
individual stockholder.
VI. That section 199 of the Income Tax regulations, providing that in a distribution by a corporation in complete
liquidation of its assets the gain realized by a stockholder, whether individual or corporate, is taxable as a
dividend, is ineffective.
VII. That the deficiency assessment was properly collected.
VIII. That the refunds claimed by plaintiffs were not in order, and in rendering judgment absolving the Collector
of Internal Revenue from making such refunds.
The facts have been stipulated in writing, as quoted verbatim in the decision of the trial court thus:
I
That the allegations of paragraphs I and II of the complaint are true and correct.
II
That during the year 1937, plaintiffs, except Mr. E.M.G. Strickland (who, as husband of the plaintiff Mrs. E.M.G.
Strickland, is only a nominal party herein), were stockholders of Manila Wine Merchants, Ltd., a foreign
corporation duly authorized to do business in the Philippines.
III
That on May 27, 1937, the Board of Directors of Manila Wine Merchants, Ltd., (hereinafter referred to as the
Hongkong Company), recommended to the stockholders of the company that they adopt the resolutions
necessary to enable the company to sell its business and assets to Manila Wine Merchants, Inc., a Philippine
corporation formed on May 27, 1937, (hereinafter referred to as the Manila Company), for the sum of P400,000
Philippine currency; that this sale was duly authorized by the stockholders of the Hongkong Company at a
meeting held on July 22, 1937; that the contract of sale between the two companies was executed on the
same date, a copy of the contract being attached hereto as Schedule "A"; and that the final resolutions
completing the said sale and transferring the business and assets of the Hongkong Company to the Manila
Company were adopted on August 3, 1937, on which date the Manila Company were adopted on August 3,
1937, on which date the Manila Company paid the Hongkong company the P400,000 purchase price.
IV
That pursuant to a resolution by its Board of Directors purporting to declare a dividend, the Hongkong
Company made a distribution from its earnings for the year 1937 to its stockholders, plaintiffs receiving the
following:
Declared and paid

June 8, 1937
Wise & Co., Inc.
P7,677.8
2
Mr. J.F. MacGregor
2,554.86
Mr. N.C. MacGregor
2,369.48
Mr. C.J. Lafrentz
529.51
Mrs. E.M.G. Strickland
2,369.48
Mrs. M.J.G. Mullins
2,369.48
P17,870.
63
That the Hongkong Company has paid Philippine income tax on the entire earnings from which the said
distributions were paid.
V
That after deducting the said dividend of June 8, 1937, the surplus of the Hongkong Company resulting from
the active conduct of its business was P74,182.12. That as a result of the sale of its business and assets to the
Manila Company, the surplus of the Hongkong Company was increased to a total of P270,116.59.
That pursuant to resolutions of its Board of Directors, and of its shareholders, purporting to declare dividends,
copies of which are attached hereto as Schedules "B" and "B-1", the Hongkong Company distributed this
surplus to its stockholders, plaintiffs receiving the following sums on the following dates:
Declared
July 22, 1937
Paid
August 4,
1937
Wise & Co., Inc.
Declared
July 22, 1937
Paid
October 28,
1937
P113,851.85
P 2,198.24
Mr. J.F. MacGregor
37,885.20
731.48
Mr. N.C. MacGregor
35,137.03
678.42
7,851.86
151.61
35,137.03
678.42
Mr. C.J. Lafrentz
Mrs. E.M.G. Strickland
Mrs. M.J.G. Mullins
35,137.03
678.42
P265,000.00
P 5,116.59
That Philippine income tax had been paid by the Hongkong Company on the said surplus from which the said
distributions were made.
VI
That on August 19, 1937, at a special general meeting of the shareholders of the Hongkong Company, the
stockholders by proper resolution directed that the company be voluntarily liquidated and its capital
distributed among the stockholders; that the stockholders at such meeting appointed a liquidator duly paid off
the remaining debts of the Hongkong Company and distributed its capital among the stockholders including
plaintiffs; that the liquidator duly filed his accounting on January 12, 1938, and in accordance with the
provisions of Hongkong Law, the Hongkong Company was duly dissolved at the expiration of three moths from
that date.
VII
That plaintiffs duly filed Philippine income tax returns. That defendant subsequently made the following
deficiency assessments against plaintiffs:
WISE & COMPANY, INC.
Net income as per return
P87,649.67
Add: Deductions disallowed Loss on shares

of
pstock in the Manila Wine Merchants,
Ltd.
presulting from the liquidation of said
firm
Income not declared:

Return of capital
Share of surplus
Total liquidating dividends received

Less value of shares as per books
Profits realized on shares of stock in the

Manila Wine Merchants Ltd. resulting
from the liquidation of the said firm
Accrued income tax as per return
44,515.00
P51,185.00
123,727.88
P174,912.88
95,700.00
P79,212.88
5,258.98
Total
P216,636.53
Deduct accrued income tax
12,262.45
Net income as per investigation
204,374.08
6 per cent Normal tax
12,262.45
Less amount already paid
6,307.92
Balance still due and collectible
7,003.47
J. F. MACGREGOR
P47,479.44
Deduct: Ordinary dividends
Net income as per investigation subject to

normal tax:
Return of capital
Share of surplus
Less cost of shares
6,307.92
P17,032,25
41,171.52
P58,203.77
17,032.25
Profit realized on shares of stock

in the Manila Wine Merchants., Ltd.
Resulting from the liquidation of said
firm
Normal tax at 3 per cent
Additional tax due
P41,171.52
1,235.15
549.59
Total normal and additional taxes
1,784.74
Less: Amount already paid
549.59
1,235.15
N. C. MACGREGOR
P44,177.06
5,992.11

normal tax:
Return of capital
Share of surplus
P15,796.75
38,184.95
Total liquidating dividends received.

Less cost of shares
P53,981.70
15,796.75
Profit realized on shares of stock in the

Manila Wine Merchants, Ltd. Resulting
P38,184.95
1,145.55
Additional tax due
483.54
1,629.09
483.55
1,145.54
C. J. LAFRENTZ
P9,778.18
1,245.20

normal tax:
Return of capital
Share of surplus
P3,530.00
8,532.98

Less cost of shares
P12,062.98
3,530.00

P8,532.98
3 per cent normal tax due and collectible
255.99
MRS. E. M. G. STRICKLAND
P44,057.06
5,872.11

normal tax:
Return of capital
Share of surplus
P15,796.75
38,184.95

Less cost of shares
P53,981.70
15,796.75

P38,184.95
1,145.55
Additional tax due
481.14
1,626.69
1,145.54
MRS. M. J. G. MULLINS
Net income per return
P44,057.06
5,872.11

normal tax:
Return of capital
Share of surplus
P15,796.75
38,184.95

Less cost of shares
P53,981.70
15,796.75

Additional tax due
P38,184.95
1,145.55
481.14
1,626.69
481.15
P1,145.54
VIII
That said plaintiffs duly paid the said amounts demanded by defendant under written protest, which was
overruled in due course; that the plaintiffs have since July 1, 1939 requested from defendant a refund of the
said amounts which defendant has refused and still refuses to refund.
IX
That this stipulation is equally the work of both parties and shall be fairly interpreted to give effect to their
intention that this case shall be decided solely upon points of law.
X
The parties incorporate the Corporation Law and Companies Act of Hongkong and the applicable decisions
made thereunder, into this stipulation by reference, and either party may at any stage in the proceedings in
this case cite applicable sections of the law and the authorities decided thereunder as though the same had
been duly proved in evidence.
XI
That the parties hereto reserve the right to submit other and further evidence at the trial of this case. (Record
on Appeal, pp. 19-26.)
1. The first assignment of error. Appellants maintain that the amounts received by them and on which the taxes in
question were assessed and collected were ordinary dividends; while upon the other hand, appellee contends that they
were liquidating dividends. If the first proposition is correct, this assignment would be well-taken, otherwise, the
decision of the court upon the point must be upheld.
It appears that on May 27, 1937, the Board of Directors of the Manila Wine Merchants, Ltd. (hereafter called the
Hongkong Co.), recommended to the stockholders of said company "that the Company should be wound up voluntarily
by the members and the business sold as a going concern to a new company incorporated under the laws of the
Philippine Islands under the style of "The Manila Wine Merchants, Inc." (Annex A defendant's answer, Record on
Appeal, p. 12), and that they adopt the resolutions necessary to enable the company to sell its business and assets to
said new company (hereafter called the Manila Company), organized on that same date, for the price of P400,000,
Philippine currency; that the sale was duly authorized by the stockholders of the Hongkong Co. at a meeting held on
July 22, 1937; and that the contract of sale between the two companies was executed on the same day, as appears
from the copy of the contract, Schedule A of the Stipulation of Facts (par. III, Stipulation of Facts, Record on Appeal, pp.
19-20). It will be noted that the Board of Directors of the Hongkong Co., in recommending the sale, specifically
mentioned "a new Company incorporated under the laws of the Philippine Islands under the style of "The Manila Wine
Merchants, Inc." as the purchaser, which fact shows that at the time of the recommendation the Manila Company had
already been formed, although on the very same day; and this and the further fact that it was really the latter
corporation that became the purchaser should clearly point to the conclusion that the Manila Company was organized
for the express purpose of succeeding the Hongkong Co. The stipulated facts would admit of no saner interpretation.
While it is true that the contract of sale was signed on July 22, 1937, it contains in its paragraph 4 of the express
provision that the transfer "will take effect as on and from the first day of June, One thousand nine hundred and thirtyseven, and until completion thereof, the Company shall stand possessed of the property hereby agreed to be
transferred and shall carry on its business in trust for the Corporation" (Schedule A of Stipulation of Facts, Record on
Appeal, p. 15). "The Company" was the Hongkong Company and "the Corporation" was the Manila Company. For "the
Company" to carry on business in trust for the "Corporation," it was necessary for the latter to be the owner of the
business. It is plain that the parties considered the sale as made as on and from June 1, 1937 for the purposes of
said sale and transfer, both parties agreed that the deed of July 22, 1937, was to retroact to the first day of the
preceding month.
The cited provision could not have served any other purpose than to consider the sale as made as of June 1, 1937. If it
had not been for this purpose, if the intention had been that the sale was to be effective upon the date of the written
contract or subsequently, said provision would certainly never have been written, for how could the transfer or sale
take effect as of June 1, 1937, if it were to be considered as made at a later date?
The first distribution made after June 1, 1937, of what plaintiffs call ordinary dividends but what defendant
denominates liquidating dividends was declared and paid on June 8, 1937 (Stipulation, Paragraph IV, Record on Appeal,
p. 20). It will be recalled that the recommendation of the Board of Directors of the Hongkong Company, at their
meeting on May 27, 1937, was first of all "that the company should be wound up voluntarily by the members"(Record
on Appeal, p.12), and in pursuance of that purpose, it was further recommended that the Company's business be sold
as a going concern to the Manila Company (ibid). Complying with the Companies Ordinance 1932 for companies
registered in Hongkong for the voluntary winding up by members, a Declaration of Solvency was drawn up duly signed
before the British Consul-General in Manila by the same directors, and said declaration was returned to Hongkong for
filing with the Registrar of Companies (ibid.) Both recommendations were in due course approved and ratified. The
later execution of the formal deed of sale and the successive distributions of the amounts in question among the
stockholders of the Hongkong Company were obviously other steps in its complete liquidation. And they leave no room
for doubt in the mind of the court that said distributions were not in the ordinary course of business and with intent to
maintain the corporation as a going concern in which case they would have been distributions of ordinary dividends
but after the liquidation of the business had been decided upon, which makes them payments for the surrender and
relinquishment of the stockholders' interest in the corporation, or so-called liquidating dividends.
More than with the distribution of June 8, 1937, is this true with those declared on July 22, 1937, and paid on August 4
and October 28, 1937, respectively (Stipulation of Facts, par. 5, Record on Appeal, p. 21). The distributions thus
declared on July 22, 1937, and paid on August 4 and October 28, 1937, were from the surplus of the Hongkong
Company resulting from the active conduct of its business and amounting to P74,182.12, which surplus was
augmented to a total of P270,116.59 as a result of the sale of its business and assets to the Manila Company (ibid.). In
both Schedules B and B-1 of the Stipulation of Facts (Record on appeal, pp. 16-18), being minutes of directors'
meetings of the Hongkong Co., where authorization and instruction were given to declare and pay in the form of
"dividends" to the shareholders the amounts in question, it was specifically provided that the surplus to be so
distributed be that resulting after providing for return of capital and necessary or various expenses, as shown in the
balance sheet prepared as of June 1, 1937, and in the reconstructed balance sheet of the same date presented by the
company's auditors, it having been resolved in Schedule B-1 that "any balance remaining to be distributed when final
liquidator's account has been rendered and paid" (Record on Appeal, p. 18; emphasis supplied). It thus becomes more
evident that those distributions were to be made in the course or as a result of the Hongkong Company's liquidation
and that said liquidation was to be complete and final. And although the various resolutions above-mentioned speak of
distributions of dividends when referring to those already alluded to, "a distribution does not necessarily become a
dividend by reason of the fact that it is called a dividend by the distributing corporation." (Holmes Federal Taxes, 6th
edition, 774.)
The ordinary connotation of liquidating dividend involves the distribution of assets by a corporation to its
stockholders upon dissolution. (Klein, Federal Income Taxation, 253-254.)
But it is contended by plaintiffs that as of August 4, 1937, the Hongkong Company "had taken no steps toward
dissolution or liquidation and still retained on hand liquid assets in excess of its capitalization." They also assert that it
was only on August 19, 1937, that said company took the first corporate steps toward liquidation (Appellant's Brief, pp.
9-10). The fact, however, is that since July 22, 1937, when the formal deed of sale of all the properties, assets, and
business of the Hongkong Company to the Manila Company was made, it was expressly stipulated that the sale or
transfer shall take effect as of June 1, 1937. As already indicated, the transfer of what was sold, like the sale itself, was,
by the mutual agreement of the parties, considered as made on and from that date, and that, if thereafter and until
final completion of the transfer, the Hongkong Company continued to run the business, it did so in trust for the new
owner, the Manila Company. In the case of Canal-Commercial T. & S. Bk. vs. Comm'r (63 Fed. [2d], 619, 620) it was
held that:
. . . The determining element therefore is whether the distribution was in the ordinary course of business and
with intent to maintain the corporation as a going concern, or after deciding to quit with intent to liquidate the
business. Proceedings actually begun to dissolve the corporation or formal action taken to liquidate it are but
evidentiary and not indispensable. Tootle vs. Commissioner (C.C.A. 58 F. [2d, 576.) The fact that the
distribution is wholly from surplus and not from capital, and therefore lawful as a dividend is only evidence. In
Hellmich vs. Hellman, and Tootle vs. Commissioner, supra, the distribution was wholly from profits yet held to
be one in liquidation . . . (Emphasis Supplied.)
In the case at bar, when in the deed of July 22, 1937, by authority of its stockholders, the Hongkong Company thru its
authorized representative declared and agreed that the aforesaid sale and transfer shall take effect as of June 1, 1937,
and distribution from its assets to those same stockholders made after June 1, 1937, altho before July 22, 1937, must
have been considered by them as liquidating dividends; for how could they consistently deem all the business and
assets of the corporation sold as of June 1, 1937, and still say that said corporation, as a going concern, distributed
ordinary dividends to them thereafter?
In Holmby Corporation vs. Comm'r (83 Fed. [2d], 548-550), the court said:
. . . the fact that the distributions were called "dividends" and were made, in part, from earnings and profits,
and that some of them were made before liquidation or dissolution proceedings were commenced, is not
controlling. . . . The determining element is whether the distributions were in the ordinary course of business
and with intent to maintain the corporation as a going concern, or after deciding to quit and with intent to
liquidate the business . . .. (Emphasis supplied.)
The directors or representatives of the Hongkong Company or the Manila Company, or both, could of course not
convert into ordinary dividends what in law and in reality were not such. As aptly stated by Chief Justice Shaw in
Comm. vs. Hunt (38 Am. Dec., 354-355),
The law is not to be hoodwinked by colorable pretenses. It looks at truth and reality through whatever disguise
they may assume.
The amounts thus distributed among the plaintiffs were not in the nature of a recurring return on stock in fact, they
surrendered and relinquished their stock in return for said distributions, thus ceasing to be stockholders of the
Hongkong Company, which in turn ceased to exist in its own right as a going concern during its more or less brief
administration of the business as trustee for the Manila Company, and finally disappeared even as such trustee.
The distinction between a distribution in liquidation and an ordinary dividend is factual; the result in each case
depending on the particular circumstances of the case and the intent of the parties. If the distribution is in the
nature of a recurring return on stock it is an ordinary dividend. However, if the corporation is really winding up
its business or recapitalizing and narrowing its activities, the distribution may properly be treated as in
complete or partial liquidation and as payment by the corporation to the stockholder for his stock. The
corporation is, in the latter instances, wiping out all parts of the stockholders' interest in the company . . ..
(Montgomery, Federal Income Tax Handbook [1938-1939], 258; emphasis supplied.)
It is our considered opinion that we are not dealing here with "the legal right of a taxpayer to decrease the amount of
what otherwise will be his taxes, or altogether avoid them, by means which the law permits" (St. Louis Union Co. vs.
U.S., 82 Fed. [2d], 61), but with a situation where we have to apply in favor of the government the principle that the
"liability for taxes cannot be evaded by a transaction constituting a colorable subterfuge" (61 C.J., 173), it being clear
that the distributions under consideration were not ordinary dividends and were taxable in the manner, form and
amounts decreed by the court below.
2. The second assignment of error. In disposing of the first assignment of error, we held that the distributions in the
instant case were not ordinary dividends but payments for surrendered or relinquished stock in a corporation in
complete liquidation, sometimes called liquidating dividends. The question is whether such amounts were taxable
income. The Income Tax Law, Act No. 2833 section 25 (a), as amended by section 4 of Act. No. 3761, inter alia
stipulated:
Where a corporation, partnership, association, joint-account, or insurance company distributes all of its assets
in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder, whether individual
or corporation, is a taxable income or a deductible loss as the case may be. (Emphasis supplied.)
Partial source of the foregoing provision was section 201 (c) of the U.S. Revenue Act of 1918, approved February 24,
1919, providing:
Amounts distributed in the liquidation of a corporation shall be treated as payments in exchange for the stock
or share, and any gain or profit realized thereby shall be taxed to the distributee as other gains or profits.
It is a familiar rule of statutory construction that the judicial construction attached to the sources of statutes adopted
in a jurisdiction are of authoritative value in the interpretation of such local laws. The Supreme Court of the United
States has had occasion to construe certain pertinent parts of the Federal Revenue Act above-mentioned on February
20, 1928, when it decided the case of Hellmich vs. Hellman (276 U.S., 233; 72 Law. ed., 544). The case involved the
recovery of additional income taxes assessed against the plaintiffs under protest. And its determination hinged around
the construction of parts of said act after which those of our own law now under discussion were patterned. Justice
Sanford said:
The question here is whether the gains realized by stockholders from the amounts distributed in the liquidation
of the assets of a dissolved corporation, out of its earnings or profits accumulated since February 28, 1913,
were taxable to them as other "gains or profits", or whether the amounts so distributed were "dividends"
exempt from the normal tax.
Section 201 (a) of the act defined the term "dividend" as "any distribution made by a corporation . . . to its
shareholders . . . whether in cash or in other property .. out of its earnings or profits accumulated since
February 28, 1913 . . .." Section 201 (c) provided that "amounts distributed in the liquidation of a corporation
shall be treated as payments in exchange for stock or shares, and any gain or profit realized thereby shall be
taxed to the distributee as other gains or profits."
Our law at the time of the transactions in question, in providing that where a corporation, etc. distributes all its assets
in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder is a taxable income or a
deductible loss as the case may be, in effect treated such distributions as payments in exchange for the stock or
share. Thus, in making the deficiency assessments under consideration, the Collector, among other items, made
proper deduction of the "value of shares" or "cost of shares" in the case of each individual plaintiff, assessing the tax
only on the resulting "profit realized" (Stipulation, par. VII, Record on Appeal, pp. 22-25); and of course in case the
value or cost of the shares should exceed the distribution received by the stockholder, the resulting difference will be
treated as a "deductible loss."
In the same case the Supreme Court of the United States made the following quotation, which is here relevant, from
Treasury Regulations 45, article 1548:
. . . So-called liquidation or dissolution dividends are not dividends within the meaning of the statute, and
amounts so distributed, whether or not including any surplus earned since February 28, 1913, are to be
regarded as payments for the stock of the dissolved corporation. Any excess so received over the cost of his
stock to the stockholder, or over its fair market value as of March 1, 1913, if acquired prior thereto, is a taxable
profit. A distribution in liquidation of the assets and business of a corporation, which is a return to the
stockholders of the value of his stock upon a surrender of his interest in the corporation, is distinguishable
from a dividend paid by a going corporation out of current earnings or accumulated surplus when declared by
the directors in their discretion, which is in the nature of a recurrent return upon the stock. (72 Law. ed., 546.)
The Income Tax Law of the Philippines in force at the time defined the term "dividend" in section 25 (a), as amended,
as "any distribution made by a corporation . . . out of its earnings or profits accumulated since March 1, 1913, and
payable to its shareholders whether in cash or other property." This definition is substantially the same as that given to
the same term by the U.S. Revenue Act of 1918 quoted by Justice Sanford in the passage above inserted.
Plaintiffs contend that defendant's position would result in double taxation. A similar contention has been adversely
disposed of against the taxpayer in the Hellmich case in these words:
The gains realized by the stockholders from the distribution of the assets in liquidation were subject to the
normal tax in like manner as if they had sold their stock to third persons. The objection that this results in
double taxation of the accumulated earnings and profits is no more available in the one case than it would
have been in the other. See Merchants' Loan & T. Co. vs. Smietanki, 255 U.S., 509; 65 Law. ed., 751; 15 A.L.R.,
1305; 41 Sup. Ct. Rep., 386; Goodrich vs. Edwards, 255 U.S. 527; 65 Law. ed., 758; 41 Sup. Ct. Rep., 390.
When, as here, Congress clearly expressed its intention, the statute must be sustained even though double
taxation results. See Patton vs. Brady , 184 U.S., 608; 46 Law ed., 713; 22 Sup. Ct. Rep., 493; Cream of Wheat
Co. vs. Grand Forks County, 253 U.S., 325, 330; 64 Law. ed., 931, 934; 40 Sup. Ct. Rep., 558. (Hellmich vs.
Hellman, supra; 72 Law. ed., 547.)
It should be borne in mind that plaintiffs received the distributions in question in exchange for the surrender and
relinquishment by them of their stock in the Hongkong Company which was dissolved and in process of complete
liquidation. That money in the hands of the corporation formed a part of its income and was properly taxable to it
under the then existing Income Tax Law. When the corporation was dissolved and in process of complete liquidation
and its shareholders surrendered their stock to it and it paid the sums in question to them in exchange, a transaction
took place, which was no different in its essence from a sale of the same stock to a third party who paid therefor. In
either case the shareholder who received the consideration for the stock earned that much money as income of his
own, which again was properly taxable to him under the same Income Tax Law. In the case of the sale to a third
person, it is not perceived how the objection of double taxation could have been successfully raised. Neither can we
conceive how it could be available where, as in this case, the stock was transferred back to the dissolved corporation.
3. The third assignment of error. In view of what has been said in our consideration of the second assignment of
error, the third can be briefly disposed of. Having held that the distributions involved herein were not ordinary
dividends but payments for stock surrendered and relinquished by the shareholders to the dissolved corporation, or socalled liquidating dividends, we have the road clear to declaring that under section 25 (a) of the former Income Tax
Law, as amended, said distributions were taxable alike to Wise and Co., Inc. and to the other plaintiffs. We hold that
both the proviso of section 10 (a) of said Income Tax Law and section 198 of Regulations No. 81 refer to ordinary
dividends, not to distributions made in complete liquidation or dissolution of a corporation which result in the
realization of a gain as specifically contemplated in section 25 (a) of the same law, as amended, which as aforesaid
expressly provides for the taxability of such gain as income, whether the stockholder happens to be an individual or a
corporation. By analogy, we can cite the following additional passages from the Hellmich case:
The controlling question is whether the amounts distributed to the stockholders out of the earnings and profits
accumulated by the corporation since February 28, 1913, were to be treated under section 201 (a) as
"dividends," which were exempt from the normal tax; or under section 201 (c) as payments made by the
corporation in exchange for its stock, which were taxable "as other gains or profits.
It is true that if section 201 (a) stood alone its broad definition of the term "dividend" would apparently include
distributions made to stockholders in the liquidation of a corporation although this term, as generally understood
and used, refers to the recurrent return upon stock paid to stockholders by a going corporation in the ordinary course
of business, which does not reduce their stockholdings and leaves them in a position to enjoy future returns upon the
same stock. (See Lynch vs. Hornby, 247 U.S., 339, 344-346; and Langstaff vs. Lucas [D. C.], 9 Fed. [2d], 691, 694.)
However, when section 201 (a) and section 201 (c) are read together, under the long-established rule that the
intention of the lawmakers is to be deduced from a view of every material part of the statute (Kohlsaat vs.
Murphy, 96 U.S., 153, 159; 24 Law. ed., 846), we think it clear that the general definition of a dividend in
section 201 (a) was not intended to apply to distributions made to stockholders in the liquidation of a
corporation, but that it was intended that such distributions should be governed by section 201 (c), which,
dealing specifically with such liquidation, provided that the amounts distributed should "be treated as
payments in exchange for stock," and that any gain realized thereby should be taxed to the stockholders "as
other gains or profits." This brings the two sections into entire harmony and gives to each its natural meaning
and due effect. . . . (Hellmich vs. Hellman, supra; emphasis supplied.)
4. The fourth assignment of error. Under this assignment it is contended by the non-resident individual stockholder
appellants that they were not subject to the normal tax as regards the distributions received by them and involved in
the instant case. They "reported these distributions as dividends from profits on which Philippine income tax had been
paid . . .." (Appellants' brief, p. 21.) They assert that the distributions were subject only to the additional tax; whereas
the Collector contends that they were subject to both the normal and the additional tax. After what has been said
above, it hardly needs stating that the manner and form of reporting these distributions employed by said appellants
could not, under the Law, change their real nature as payments for surrendered stock, or so-called liquidating
dividends, provided for in section 25 (a) of the then Income Tax Law. Such distributions under the law were subject to
both the normal and the additional tax provided for.
. . . Loosely speaking, the distribution to the stockholders of a corporation's assets, upon liquidation, might be
termed a dividend; but this is not what is generally meant and understood by that word. As generally
understood and used, a dividend is a return upon the stock of its stockholders, paid to them by a going
corporation without reducing their stockholdings, leaving them in a position to enjoy future returns upon the
same stock . . .. In other words, it is earnings paid to him by the corporation upon his invested capital therein,
without wiping out his capital. On the other hand, when a solvent corporation dissolves and liquidates, it
distributes to its stockholders not only any earnings it may have on hand, but it also pays to them their
invested capital, namely, the amount which they had paid in for their stocks, thus wiping out their interest in
the company . . .. (Langstaff vs. Lucas, 9 Fed. [2d], 691, 694.)
5. The fifth assignment of error. This assignment is made in behalf of those appellants who were non-resident alien
individuals, and for them it is in effect said that if the distributions received by them were to be considered as a sale of
their stock to the Hongkong Company, the profit realized by them does not constitute income from Philippine sources
and is not subject to Philippine taxes, "since all steps in the carrying out of this so-called sale took place outside the
Philippines." (Appellants' brief, p. 26.) We do not think this contention is tenable under the facts and circumstances of
record. The Hongkong Company was at the time of the sale of its business in the Philippines, and the Manila Company
was a domestic corporation domiciled and doing business also in the Philippines. Schedule A of the Stipulation of Facts
(Record on Appeal, p. 13) declares, among other things, that the Hongkong Company was incorporated for the purpose
of carrying on in the Philippine Islands the business of wine, beer, and spirit merchants and the other objects set out in
its memorandum of association. Hence, its earnings, profits, and assets, including those from whose proceeds the
distributions in question were made, the major part of which consisted in the purchase price of the business, had been
earned and acquired in the Philippines. From aught that appears in the record it is clear that said distributions were
income "from Philippine sources."
6. The sixth assignment of error. Section 199 of Regulations No. 81, deleting immaterial parts, reads:
SEC. 199. Distributions in liquidation. In all cases where a corporation . . . distributes all of its property or
assets in complete liquidation or dissolution, the gain realized from the transaction by the stockholder . . . is
taxable as a dividend to the extent that it is paid out of earnings or profits of the corporation . . .. If the amount
received by the stockholder in liquidation is less than the cost or other basis of the stock, a deductible loss is
sustained.
This regulation would seem to support the contention that the distributions in question, at least those proceeding from
sources other than the earnings or profits of the dissolved corporation, were not taxable. Placing the above-quoted
section of Regulations No. 81 side by side with section 25 (a) of the amended Income Tax Law then in force, we notice
that while the regulation limits the taxability of the gain realized by the stockholder "to the extent that it is paid out of
earnings or profits of the corporation, "section 25 (a) of the law, far from so limiting its taxability, provides that the
gain thus realized, is a "taxable income" under the law so long as a gain is realized, it will be taxable income
whether the distribution comes from the earnings or profits of the corporation or from the sale of all of its assets in
general, so long as the distribution is made "in complete liquidation or dissolution". The regulation makes the gain
taxable as a dividend, while the law makes it a taxable income. An inevitable conflict between the two provisions
seems to exist, and in such a case, of course, the law prevails.
Treasury Department cannot impose or exempt from income taxes, and regulations purporting to exempt from
taxation income specifically taxes would be void.
xxx
xxx
xxx
Any erroneous interpretation of revenue act by regulation of Treasury Department would not estop government
from asserting tax on income, though taxpayer had been misled by such interpretation, and by it induced to
expose property to taxation. (Langstaff vs. Lucas, 9 Fed. [2d], 691.)
7 and 8. The seventh and eight assignments of error. In view of what has been said above, these two assignments
need no separate treatment.
For the foregoing consideration, the judgment appealed from will be affirmed with the costs of both instances against
the appellants. So ordered.
Moran, C.J., Paras, Feria, Pablo, Perfecto, Bengzon, Briones, Hontiveros, Padilla, and Tuason, JJ., concur.
RESOLUTION ON MOTION FOR RECONSIDERATION

July 28,
1947
HILADO, J.:
Plaintiffs and appellants have filed a motion for reconsideration dated July 10, 1947. After carefully considering said
motion, which makes particular reference to appellants' fifth assignment of error, the Court does not consider the
arguments therein adduced tenable. Stripped to their bare essentials, the movants' contentions are summarized in the
following propositions found on pages 3-4 of their motto, to wit:
Since appellants J.F. MacGregor, N.C. MacGregor, C.J. Lafrentz, E.M.G. Strickland, and Mrs. M.J.G. Mullins were
all non-resident aliens and since the court has held that the transaction in this case amounted to a sale or
exchange of their shares in a foreign corporation, which sale or exchange took place entirely outside of the
Philippine Islands, it follows that they have not derived income from the Philippine sources and are not subject
to the taxes which have been collected from them by defendant.
xxx
xxx
xxx
. . . On the other hand if the income results from the sale or exchange of the shares in question then the nonresident alien stockholders who converted their shares abroad have received no income from Philippine
sources and are not subject to any tax whatsoever on their profits from the transaction.
Leaving aside the other portions of the above-quoted propositions as sufficiently covered in the court's decision, let us
direct attention to those parts thereof wherein it is pretended that the transaction took place "entirely outside the
Philippine Islands" or "abroad."
In the minutes, Schedule B of the stipulation of facts (Rec. on Appeal, pp. 16-17), it appears that on July 22, 1937, an
extraordinary meeting of shareholders of the Manila Wine Merchants, Ltd. was held and in said meeting, among other
things, it was resolved that the Directors of said company "be authorized and instructed to declare and pay in the form
of dividend to the shareholders the amount of any surplus existing after the above-referred to sale has been
consummated. This surplus, after providing for return of capital and necessary expense, as shown in the Balance Sheet
prepared as of June 1, 1937, after giving effect to the sale transaction above-referred to, amounts to approximately
P270,000." While Schedule B does not state the place where the meeting was held, Schedule B-1 of the same
stipulation of facts (Record on Appeal, pp. 17-18) furnishes us the information that it was held in Manila. Schedule B-1
in this connection says:
Sale of Company: In accordance with resolution passed at an Extraordinary Meeting of Shareholders held in
Manila (underscoring supplied) on July 22, 1937, at 3 o'clock, the Directors of the Manila Wine Merchants Ltd.,
were authorized to sell the Company as a going concern in accordance with sale agreement presented at the
Meeting.
Later in the same Schedule B-1 we find that the declaration of dividends authorized in the previous meeting, as stated
in the minutes Schedule B, was made by the Board of Directors of the same Manila Wine Merchants, Ltd., of whose
meeting on that same date, July 22, 1937, Schedule B-1 constitutes the minutes. The pertinent parts to the minutes of
said meeting read as follows:
Dividend: The second matter before the Meeting was the question of declaring a dividend to enable a
distribution in cash to be made, the dividend to be the entire amount standing at surplus after providing for
return of capital and various expenses in accordance with reconstructed balance sheet as at June 1, 1937
presented by our auditors.
xxx
xxx
xxx
Resolved that as after the Manila Wine Merchants Ltd. has been sold for the stipulated sum of P400,000 and
money received, there will be after providing for return of capital, payment of income tax and other charges, a
sum of approximately P270,000 standing at surplus account, a dividend is now hereby declared in amount
covering the entire balance remaining at surplus account after the concern has been wound up, and we hereby
authorize the distribution of P265,000 as and when funds are available, any balance remaining to be
distributed when final Liquidator's account has been rendered and paid."
Again, while the minutes Schedule B-1 do not reveal the place where that board meeting was held, the fact stated
therein that it was held on July 22,1937, the self-same date of the extraordinary meeting of shareholders referred to in
the minutes Schedule B, at 3 o'clock (presumably p.m.), as recorded in Schedule B-1, clearly shows that the said board
meeting was held also in Manila, and not in Hongkong or elsewhere abroad, for J.F. Macgregor and E. Heybrook, both of
whom appear in both Schedules B and B-1 to have participated in both meetings, could not, so far as the record
discloses, very well be in Manila and Hongkong or elsewhere abroad on that same date. There is no showing, nor is it
even pretended that these two gentlemen after the meeting held in Manila on July 22, 1937, at 3 o'clock, took an
airplane or other mode of conveyance, as fast or faster, and hurried to Hongkong or elsewhere abroad and attended
the other meeting that very same day. Indeed, that both meetings must have been held in Manila would seem to be
the only natural and logical supposition from the fact that the Manila Wine Merchants, Ltd., was admittedly conducting
its business in said city and the Philippines in general (Schedule A, Rec. on Appeal, p. 13). It seems clear, therefore,
that the dividends in question were declared in the Philippine Islands.
What was the legal effect of that declaration? Paragraph V of the stipulation of facts (Rec. on Appeal, pp. 20-21) states
that, pursuant to these resolutions, "the Hongkong Company (the same Manila Wine Merchants, Ltd.) distributed this
surplus to its stockholders, plaintiffs receiving (underscoring supplied) the following sums on the following dates" (then
follow plaintiffs' names with the respective amounts in Philippine pesos received by them on the dates stated). It is not
stated that they received their dividends in Hongkong or other foreign money. And in their own brief (p. 25) they say
that the payments or distributions thus received by them, as a result of the liquidation and sale of said company,
"were included as gross income in their Philippine income tax returns". This fact further tends to show that those
payments or distributions were received in the Philippine Islands, either by plaintiffs personally or through their proxies
or agents. Besides, in paragraph V of the stipulation of facts (Rec. on Appeal, p. 21) it appears that the dividends or
distributions pertaining to these individual plaintiffs as well as that pertaining to their co-plaintiff Wise and Co., Inc.,
were paid on the same dates, namely, August 24, 1937, and October 28, 1937; and it being undisputed that Wise and
Co., Inc. was domiciled and had its principal office in Manila (complaint, par. I, Rec. on Appeal, p.2), in which city it was
presumably paid, it would seem obvious that the concomitant payments thus made to the other plaintiffs were likewise
effected in the same place, whether the individual plaintiffs acted personally or through proxies or agents. It should
also be remembered that while the "registered office" of the Manila Wine Merchants, Ltd. was situated in the colony of
Hongkong (Schedule A, Rec. on Appeal, p. 13), the fact is that the only business for which it was incorporated was the
wine, beer, and spirit business, which had been and was being conducted exclusively within the Philippine Islands, and
from the record we deduce that it had also office in Manila where, so far as the record discloses, the payments were
made. Finally, the fact that payment was made in Philippine pesos would strongly corroborate the conclusion that it
was made in this country if it had been made in Hongkong or elsewhere abroad, the reasonable assumption is that it
would have been made in Hongkong dollars or in the currency of such other place abroad.
. . . However, where a corporation has not only declared a dividend but has specifically appropriated and set
apart from its other assets a fund out of which the dividend is to be paid, such action constitutes the assets to
set apart a trust fund in the hands of the corporation for the payment of the stockholders to the exclusion of
other creditors. . . . (18 C.J.S., p. 1115; emphasis supplied.)
As between successive owners of shares of stock in a corporation, the general rule is that dividends belong to
the persons who are the owners of the stock at the time they are declared, without regard to the time during
which the dividends were earned, and this is true although the dividends are made payable at a future date.
(18 C.J.S., 119, sec. 470 [a]; emphasis supplied.)
There is no controversy about the legal proposition that dividends declared belong to the owner of the stock at
the time the dividend is declared. (Livingstone County Bank vs. First State Bank, 136 Ky., 546, 554, cited in
footnote 36, p. 818, 14 C.J.; emphasis supplied.)
The moment the dividend is declared, it becomes then separate and distinct from the stock and the dividend
falls to him who is proprietor of the stock of which it was theretofore incident.
The doctrine is that a dividend is considered parcel of the mass of corporate property until declared and
therefore incident to and parcel of the stock up to the time it is declared; and before its declaration, will pass
with the sale or devise of the stock. Whosoever owns the stock prior to the declaration of a dividend, owns the
dividend also. (McLaren vs. Crescent Planning Mill Co., 117 Mo. A., 40, 47, cited in note 36, p. 818, 14 C.J.;
emphasis supplied.)
In De Koven vs. Alsop (205 Ill., 309; 63 L.R.A., 587), the court said:
A dividend is defined as "a corporate profit set aside, declared, and ordered by the directors to be paid to the
stockholders on demand or at a fixed time. Until the dividend is declared, these corporate profits belong to the
corporation, not to the stockholders, and are liable for corporate indebtedness." (Emphasis supplied.)
We are fully satisfied from the facts and data furnished here by the parties themselves that the dividends in question
were paid to plaintiffs, personally or thru their proxies or agents, in the Philippines. But aside from this, from the
moment they were declared and a definite fund specified for their payment (all surplus remaining "after providing for
return of capital and various expenses") and all of this was done in the Philippines to all legal intents and
purposes they earned those dividends in this country. From the record we deduce that the funds and assets of the
Manila Wine Merchants, Ltd., from which those dividends proceeded, were in the Philippines where its business was
located. So far as the record discloses, its liquidation was effected in terms of Philippine pesos, indicating that it was
made here. And this in turn would lead to the deduction that the funds and assets liquidated were here.
Motion denied. So ordered.
G.R. No. 153793 August 29, 2006

COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
JULIANE BAIER-NICKEL, as represented by Marina Q. Guzman (Attorney-in-fact) Respondent.
DECISION
YNARES-SANTIAGO, J.:
Petitioner Commissioner of Internal Revenue (CIR) appeals from the January 18, 2002 Decision 1 of the Court of Appeals
in CA-G.R. SP No. 59794, which granted the tax refund of respondent Juliane Baier-Nickel and reversed the June 28,
2000 Decision2 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 5633. Petitioner also assails the May 8, 2002
Resolution3 of the Court of Appeals denying its motion for reconsideration.
The facts show that respondent Juliane Baier-Nickel, a non-resident German citizen, is the President of JUBANITEX, Inc.,
a domestic corporation engaged in "[m]anufacturing, marketing on wholesale only, buying or otherwise acquiring,
holding, importing and exporting, selling and disposing embroidered textile products." 4 Through JUBANITEXs General
Manager, Marina Q. Guzman, the corporation appointed and engaged the services of respondent as commission agent.
It was agreed that respondent will receive 10% sales commission on all sales actually concluded and collected through
her efforts.5
In 1995, respondent received the amount of P1,707,772.64, representing her sales commission income from which
JUBANITEX withheld the corresponding 10% withholding tax amounting to P170,777.26, and remitted the same to the
Bureau of Internal Revenue (BIR). On October 17, 1997, respondent filed her 1995 income tax return reporting a
taxable income of P1,707,772.64 and a tax due of P170,777.26. 6
On April 14, 1998, respondent filed a claim to refund the amount of P170,777.26 alleged to have been mistakenly
withheld and remitted by JUBANITEX to the BIR. Respondent contended that her sales commission income is not
taxable in the Philippines because the same was a compensation for her services rendered in Germany and therefore
considered as income from sources outside the Philippines.
The next day, April 15, 1998, she filed a petition for review with the CTA contending that no action was taken by the
BIR on her claim for refund.7 On June 28, 2000, the CTA rendered a decision denying her claim. It held that the
commissions received by respondent were actually her remuneration in the performance of her duties as President of
JUBANITEX and not as a mere sales agent thereof. The income derived by respondent is therefore an income taxable in
the Philippines because JUBANITEX is a domestic corporation.
On petition with the Court of Appeals, the latter reversed the Decision of the CTA, holding that respondent received the
commissions as sales agent of JUBANITEX and not as President thereof. And since the "source" of income means the
activity or service that produce the income, the sales commission received by respondent is not taxable in the
Philippines because it arose from the marketing activities performed by respondent in Germany. The dispositive portion
of the appellate courts Decision, reads:
WHEREFORE, premises considered, the assailed decision of the Court of Tax Appeals dated June 28, 2000 is hereby
REVERSED and SET ASIDE and the respondent court is hereby directed to grant petitioner a tax refund in the amount
of Php 170,777.26.
SO ORDERED.8
Petitioner filed a motion for reconsideration but was denied. 9 Hence, the instant recourse.
Petitioner maintains that the income earned by respondent is taxable in the Philippines because the source thereof is
JUBANITEX, a domestic corporation located in the City of Makati. It thus implied that source of income means the
physical source where the income came from. It further argued that since respondent is the President of JUBANITEX,
any remuneration she received from said corporation should be construed as payment of her overall managerial
services to the company and should not be interpreted as a compensation for a distinct and separate service as a
sales commission agent.
Respondent, on the other hand, claims that the income she received was payment for her marketing services. She
contended that income of nonresident aliens like her is subject to tax only if the source of the income is within the
Philippines. Source, according to respondent is the situs of the activity which produced the income. And since the
source of her income were her marketing activities in Germany, the income she derived from said activities is not
subject to Philippine income taxation.
The issue here is whether respondents sales commission income is taxable in the Philippines.
Pertinent portion of the National Internal Revenue Code (NIRC), states:
SEC. 25. Tax on Nonresident Alien Individual.
(A) Nonresident Alien Engaged in Trade or Business Within the Philippines.
(1) In General. A nonresident alien individual engaged in trade or business in the Philippines shall be subject to an
income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received
from all sources within the Philippines. A nonresident alien individual who shall come to the Philippines and stay
therein for an aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed
a nonresident alien doing business in the Philippines, Section 22(G) of this Code notwithstanding.
xxxx
(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. There shall be levied,
collected and paid for each taxable year upon the entire income received from all sources within the Philippines by
every nonresident alien individual not engaged in trade or business within the Philippines x x x a tax equal to twentyfive percent (25%) of such income. x x x
Pursuant to the foregoing provisions of the NIRC, non-resident aliens, whether or not engaged in trade or business, are
subject to Philippine income taxation on their income received from all sources within the Philippines. Thus, the
keyword in determining the taxability of non-resident aliens is the incomes "source." In construing the meaning of
"source" in Section 25 of the NIRC, resort must be had on the origin of the provision.
The first Philippine income tax law enacted by the Philippine Legislature was Act No. 2833, 10 which took effect on
January 1, 1920.11 Under Section 1 thereof, nonresident aliens are likewise subject to tax on income "from all sources
within the Philippine Islands," thus
SECTION 1. (a) There shall be levied, assessed, collected, and paid annually upon the entire net income received in the
preceding calendar year from all sources by every individual, a citizen or resident of the Philippine Islands, a tax of two
per centum upon such income; and a like tax shall be levied, assessed, collected, and paid annually upon the entire
net income received in the preceding calendar year from all sources within the Philippine Islands by every individual, a
nonresident alien, including interest on bonds, notes, or other interest-bearing obligations of residents, corporate or
otherwise.
Act No. 2833 substantially reproduced the United States (U.S.) Revenue Law of 1916 as amended by U.S. Revenue Law
of 1917.12 Being a law of American origin, the authoritative decisions of the official charged with enforcing it in the U.S.
have peculiar persuasive force in the Philippines. 13
The Internal Revenue Code of the U.S. enumerates specific types of income to be treated as from sources within the
U.S. and specifies when similar types of income are to be treated as from sources outside the U.S. 14 Under the said
Code, compensation for labor and personal services performed in the U.S., is generally treated as income from U.S.
sources; while compensation for said services performed outside the U.S., is treated as income from sources outside
the U.S.15 A similar provision is found in Section 42 of our NIRC, thus:
SEC. 42. x x x
(A) Gross Income From Sources Within the Philippines. x x x
xxxx
(3) Services. Compensation for labor or personal services performed in the Philippines;
xxxx
(C) Gross Income From Sources Without the Philippines. x x x
xxxx
(3) Compensation for labor or personal services performed without the Philippines;
The following discussions on sourcing of income under the Internal Revenue Code of the U.S., are instructive:
The Supreme Court has said, in a definition much quoted but often debated, that income may be derived from three
possible sources only: (1) capital and/or (2) labor; and/or (3) the sale of capital assets. While the three elements of this
attempt at definition need not be accepted as all-inclusive, they serve as useful guides in any inquiry into whether a
particular item is from "sources within the United States" and suggest an investigation into the nature and location of
the activities or property which produce the income.
If the income is from labor the place where the labor is done should be decisive; if it is done in this country, the income
should be from "sources within the United States." If the income is from capital, the place where the capital is
employed should be decisive; if it is employed in this country, the income should be from "sources within the United
States." If the income is from the sale of capital assets, the place where the sale is made should be likewise decisive.
Much confusion will be avoided by regarding the term "source" in this fundamental light. It is not a place, it is an
activity or property. As such, it has a situs or location, and if that situs or location is within the United States the
resulting income is taxable to nonresident aliens and foreign corporations.
The intention of Congress in the 1916 and subsequent statutes was to discard the 1909 and 1913 basis of taxing
nonresident aliens and foreign corporations and to make the test of taxability the "source," or situs of the activities or
property which produce the income. The result is that, on the one hand, nonresident aliens and nonresident foreign
corporations are prevented from deriving income from the United States free from tax, and, on the other hand, there is
no undue imposition of a tax when the activities do not take place in, and the property producing income is not
employed in, this country. Thus, if income is to be taxed, the recipient thereof must be resident within the jurisdiction,
or the property or activities out of which the income issues or is derived must be situated within the jurisdiction so that
the source of the income may be said to have a situs in this country.
The underlying theory is that the consideration for taxation is protection of life and property and that the income
rightly to be levied upon to defray the burdens of the United States Government is that income which is created by
activities and property protected by this Government or obtained by persons enjoying that protection. 16
The important factor therefore which determines the source of income of personal services is not the residence of the
payor, or the place where the contract for service is entered into, or the place of payment, but the place where the
services were actually rendered.17
In Alexander Howden & Co., Ltd. v. Collector of Internal Revenue, 18 the Court addressed the issue on the applicable
source rule relating to reinsurance premiums paid by a local insurance company to a foreign insurance company in
respect of risks located in the Philippines. It was held therein that the undertaking of the foreign insurance company to
indemnify the local insurance company is the activity that produced the income. Since the activity took place in the
Philippines, the income derived therefrom is taxable in our jurisdiction. Citing Mertens, The Law of Federal Income
Taxation, the Court emphasized that the technical meaning of source of income is the property, activity or service that
produced the same. Thus:
The source of an income is the property, activity or service that produced the income. The reinsurance premiums
remitted to appellants by virtue of the reinsurance contracts, accordingly, had for their source the undertaking to
indemnify Commonwealth Insurance Co. against liability. Said undertaking is the activity that produced the reinsurance
premiums, and the same took place in the Philippines. x x x the reinsured, the liabilities insured and the risk originally
underwritten by Commonwealth Insurance Co., upon which the reinsurance premiums and indemnity were based, were
all situated in the Philippines. x x x19
In Commissioner of Internal Revenue v. British Overseas Airways Corporation (BOAC),20 the issue was whether BOAC, a
foreign airline company which does not maintain any flight to and from the Philippines is liable for Philippine income
taxation in respect of sales of air tickets in the Philippines, through a general sales agent relating to the carriage of
passengers and cargo between two points both outside the Philippines. Ruling in the affirmative, the Court applied the
case of Alexander Howden & Co., Ltd. v. Collector of Internal Revenue, and reiterated the rule that the source of
income is that "activity" which produced the income. It was held that the "sale of tickets" in the Philippines is the
"activity" that produced the income and therefore BOAC should pay income tax in the Philippines because it undertook
an income producing activity in the country.
Both the petitioner and respondent cited the case of Commissioner of Internal Revenue v. British Overseas Airways
Corporation in support of their arguments, but the correct interpretation of the said case favors the theory of
respondent that it is the situs of the activity that determines whether such income is taxable in the Philippines. The
conflict between the majority and the dissenting opinion in the said case has nothing to do with the underlying
principle of the law on sourcing of income. In fact, both applied the case of Alexander Howden & Co., Ltd. v. Collector
of Internal Revenue. The divergence in opinion centered on whether the sale of tickets in the Philippines is to be
construed as the "activity" that produced the income, as viewed by the majority, or merely the physical source of the
income, as ratiocinated by Justice Florentino P. Feliciano in his dissent. The majority, through Justice Ameurfina
Melencio-Herrera, as ponente, interpreted the sale of tickets as a business activity that gave rise to the income of
BOAC. Petitioner cannot therefore invoke said case to support its view that source of income is the physical source of
the money earned. If such was the interpretation of the majority, the Court would have simply stated that source of
income is not the business activity of BOAC but the place where the person or entity disbursing the income is located
or where BOAC physically received the same. But such was not the import of the ruling of the Court. It even explained
in detail the business activity undertaken by BOAC in the Philippines to pinpoint the taxable activity and to justify its
conclusion that BOAC is subject to Philippine income taxation. Thus
BOAC, during the periods covered by the subject assessments, maintained a general sales agent in the Philippines.
That general sales agent, from 1959 to 1971, "was engaged in (1) selling and issuing tickets; (2) breaking down the
whole trip into series of trips each trip in the series corresponding to a different airline company; (3) receiving the
fare from the whole trip; and (4) consequently allocating to the various airline companies on the basis of their
participation in the services rendered through the mode of interline settlement as prescribed by Article VI of the
Resolution No. 850 of the IATA Agreement." Those activities were in exercise of the functions which are normally
incident to, and are in progressive pursuit of, the purpose and object of its organization as an international air carrier.
In fact, the regular sale of tickets, its main activity, is the very lifeblood of the airline business, the generation of sales
being the paramount objective. There should be no doubt then that BOAC was "engaged in" business in the Philippines
through a local agent during the period covered by the assessments. x x x 21
xxxx
The source of an income is the property, activity or service that produced the income. For the source of income to be
considered as coming from the Philippines, it is sufficient that the income is derived from activity within the
Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that produces the income. The tickets
exchanged hands here and payments for fares were also made here in Philippine currency. The situs of the source of
payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying the
protection accorded by the Philippine government. In consideration of such protection, the flow of wealth should share
the burden of supporting the government.
A transportation ticket is not a mere piece of paper. When issued by a common carrier, it constitutes the contract
between the ticket-holder and the carrier. It gives rise to the obligation of the purchaser of the ticket to pay the fare
and the corresponding obligation of the carrier to transport the passenger upon the terms and conditions set forth
thereon. The ordinary ticket issued to members of the traveling public in general embraces within its terms all the
elements to constitute it a valid contract, binding upon the parties entering into the relationship. 22
The Court reiterates the rule that "source of income" relates to the property, activity or service that produced the
income. With respect to rendition of labor or personal service, as in the instant case, it is the place where the labor or
service was performed that determines the source of the income. There is therefore no merit in petitioners
interpretation which equates source of income in labor or personal service with the residence of the payor or the place
of payment of the income.
Having disposed of the doctrine applicable in this case, we will now determine whether respondent was able to
establish the factual circumstances showing that her income is exempt from Philippine income taxation.
The decisive factual consideration here is not the capacity in which respondent received the income, but the
sufficiency of evidence to prove that the services she rendered were performed in Germany. Though not raised as an
issue, the Court is clothed with authority to address the same because the resolution thereof will settle the vital
question posed in this controversy.23
The settled rule is that tax refunds are in the nature of tax exemptions and are to be construed strictissimi juris against
the taxpayer.24 To those therefore, who claim a refund rest the burden of proving that the transaction subjected to tax
is actually exempt from taxation.
In the instant case, the appointment letter of respondent as agent of JUBANITEX stipulated that the activity or the
service which would entitle her to 10% commission income, are "sales actually concluded and collected through [her]
efforts."25 What she presented as evidence to prove that she performed income producing activities abroad, were
copies of documents she allegedly faxed to JUBANITEX and bearing instructions as to the sizes of, or designs and
fabrics to be used in the finished products as well as samples of sales orders purportedly relayed to her by clients.
However, these documents do not show whether the instructions or orders faxed ripened into concluded or collected
sales in Germany. At the very least, these pieces of evidence show that while respondent was in Germany, she sent
instructions/orders to JUBANITEX. As to whether these instructions/orders gave rise to consummated sales and whether
these sales were truly concluded in Germany, respondent presented no such evidence. Neither did she establish
reasonable connection between the orders/instructions faxed and the reported monthly sales purported to have
transpired in Germany.
The paucity of respondents evidence was even noted by Atty. Minerva Pacheco, petitioners counsel at the hearing
before the Court of Tax Appeals. She pointed out that respondent presented no contracts or orders signed by the
customers in Germany to prove the sale transactions therein. 26 Likewise, in her Comment to the Formal Offer of
respondents evidence, she objected to the admission of the faxed documents bearing instruction/orders marked as
Exhibits "R,"27 "V," "W", and "X,"28 for being self serving.29 The concern raised by petitioners counsel as to the absence
of substantial evidence that would constitute proof that the sale transactions for which respondent was paid
commission actually transpired outside the Philippines, is relevant because respondent stayed in the Philippines for 89
days in 1995. Except for the months of July and September 1995, respondent was in the Philippines in the months of
March, May, June, and August 1995,30 the same months when she earned commission income for services allegedly
performed abroad. Furthermore, respondent presented no evidence to prove that JUBANITEX does not sell embroidered
products in the Philippines and that her appointment as commission agent is exclusively for Germany and other
European markets.
In sum, we find that the faxed documents presented by respondent did not constitute substantial evidence, or that
relevant evidence that a reasonable mind might accept as adequate to support the conclusion 31 that it was in Germany
where she performed the income producing service which gave rise to the reported monthly sales in the months of
March and May to September of 1995. She thus failed to discharge the burden of proving that her income was from
sources outside the Philippines and exempt from the application of our income tax law. Hence, the claim for tax refund
should be denied.
The Court notes that in Commissioner of Internal Revenue v. Baier-Nickel,32 a previous case for refund of income
withheld from respondents remunerations for services rendered abroad, the Court in a Minute Resolution dated
February 17, 2003,33 sustained the ruling of the Court of Appeals that respondent is entitled to refund the sum withheld
from her sales commission income for the year 1994. This ruling has no bearing in the instant controversy because
the subject matter thereof is the income of respondent for the year 1994 while, the instant case deals with her income
in 1995. Otherwise, stated, res judicata has no application here. Its elements are: (1) there must be a final judgment
or order; (2) the court that rendered the judgment must have jurisdiction over the subject matter and the parties; (3) it
must be a judgment on the merits; (4) there must be between the two cases identity of parties, of subject matter, and
of causes of action. 34 The instant case, however, did not satisfy the fourth requisite because there is no identity as to
the subject matter of the previous and present case of respondent which deals with income earned and activities
performed for different taxable years.
WHEREFORE, the petition is GRANTED and the January 18, 2002 Decision and May 8, 2002 Resolution of the Court of
Appeals in CA-G.R. SP No. 59794, are REVERSED and SET ASIDE. The June 28, 2000 Decision of the Court of Tax
Appeals in C.T.A. Case No. 5633, which denied respondents claim for refund of income tax paid for the year 1995 is
REINSTATED.
SO ORDERED.
G.R. No. 109289 October 3, 1994

RUFINO R. TAN, petitioner,
vs.
RAMON R. DEL ROSARIO, JR., as SECRETARY OF FINANCE & JOSE U. ONG, as COMMISSIONER OF INTERNAL
REVENUE, respondents.
G.R. No. 109446 October 3, 1994
CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES, CARLO A. CARAG, MANUELITO O. CABALLES,
ELPIDIO C. JAMORA, JR. and BENJAMIN A. SOMERA, JR., petitioners,
vs.
RAMON R. DEL ROSARIO, in his capacity as SECRETARY OF FINANCE and JOSE U. ONG, in his capacity as
COMMISSIONER OF INTERNAL REVENUE, respondents.
Rufino R. Tan for and in his own behalf.
Carag, Caballes, Jamora & Zomera Law Offices for petitioners in G.R. 109446.
VITUG, J.:
These two consolidated special civil actions for prohibition challenge, in G.R. No. 109289, the constitutionality of
Republic Act No. 7496, also commonly known as the Simplified Net Income Taxation Scheme ("SNIT"), amending
certain provisions of the National Internal Revenue Code and, in
G.R. No. 109446, the validity of Section 6, Revenue Regulations No. 2-93, promulgated by public respondents pursuant
to said law.
Petitioners claim to be taxpayers adversely affected by the continued implementation of the amendatory legislation.
In G.R. No. 109289, it is asserted that the enactment of Republic Act
No. 7496 violates the following provisions of the Constitution:
Article VI, Section 26(1) Every bill passed by the Congress shall embrace only one subject which
shall be expressed in the title thereof.
Article VI, Section 28(1) The rule of taxation shall be uniform and equitable. The Congress shall
evolve a progressive system of taxation.
Article III, Section 1 No person shall be deprived of . . . property without due process of law, nor shall
any person be denied the equal protection of the laws.
In G.R. No. 109446, petitioners, assailing Section 6 of Revenue Regulations No. 2-93, argue that public respondents
have exceeded their rule-making authority in applying SNIT to general professional partnerships.
The Solicitor General espouses the position taken by public respondents.
The Court has given due course to both petitions. The parties, in compliance with the Court's directive, have filed their
respective memoranda.
G.R. No. 109289
Petitioner contends that the title of House Bill No. 34314, progenitor of Republic Act No. 7496, is a misnomer or, at
least, deficient for being merely entitled, "Simplified Net Income Taxation Scheme for the Self-Employed
and Professionals Engaged in the Practice of their Profession" (Petition in G.R. No. 109289).
The full text of the title actually reads:
An Act Adopting the Simplified Net Income Taxation Scheme For The Self-Employed and Professionals
Engaged In The Practice of Their Profession, Amending Sections 21 and 29 of the National Internal
Revenue Code, as Amended.
The pertinent provisions of Sections 21 and 29, so referred to, of the National Internal Revenue Code, as now
amended, provide:
Sec. 21. Tax on citizens or residents.
xxx xxx xxx

(f) Simplified Net Income Tax for the Self-Employed and/or Professionals Engaged in the Practice of
Profession. A tax is hereby imposed upon the taxable net income as determined in Section 27
received during each taxable year from all sources, other than income covered by paragraphs (b), (c),
(d) and (e) of this section by every individual whether
a citizen of the Philippines or an alien residing in the Philippines who is self-employed or practices his
profession herein, determined in accordance with the following schedule:
Not over P10,000 3%
Over P10,000 P300 + 9%
but not over P30,000 of excess over P10,000
Over P30,000 P2,100 + 15%
Over P120,000 P15,600 + 20%
Over P350,000 P61,600 + 30%
of excess over P350,000
Sec. 29. Deductions from gross income. In computing taxable income subject to tax under Sections
21(a), 24(a), (b) and (c); and 25 (a)(1), there shall be allowed as deductions the items specified in
paragraphs (a) to (i) of this section: Provided, however, That in computing taxable income subject to
tax under Section 21 (f) in the case of individuals engaged in business or practice of profession, only
the following direct costs shall be allowed as deductions:
(a) Raw materials, supplies and direct labor;
(b) Salaries of employees directly engaged in activities in the course of or pursuant to the business or
practice of their profession;
(c) Telecommunications, electricity, fuel, light and water;
(d) Business rentals;
(e) Depreciation;
(f) Contributions made to the Government and accredited relief organizations for the rehabilitation of
calamity stricken areas declared by the President; and
(g) Interest paid or accrued within a taxable year on loans contracted from accredited financial
institutions which must be proven to have been incurred in connection with the conduct of a taxpayer's
profession, trade or business.
For individuals whose cost of goods sold and direct costs are difficult to determine, a maximum of forty
per cent (40%) of their gross receipts shall be allowed as deductions to answer for business or
professional expenses as the case may be.
On the basis of the above language of the law, it would be difficult to accept petitioner's view that the amendatory law
should be considered as having now adopted a gross income, instead of as having still retained the net income,
taxation scheme. The allowance for deductible items, it is true, may have significantly been reduced by the questioned
law in comparison with that which has prevailed prior to the amendment; limiting, however, allowable deductions from
gross income is neither discordant with, nor opposed to, the net income tax concept. The fact of the matter is still that
various deductions, which are by no means inconsequential, continue to be well provided under the new law.
Article VI, Section 26(1), of the Constitution has been envisioned so as (a) to prevent log-rolling legislation intended to
unite the members of the legislature who favor any one of unrelated subjects in support of the whole act, (b) to avoid
surprises or even fraud upon the legislature, and (c) to fairly apprise the people, through such publications of its
proceedings as are usually made, of the subjects of legislation. 1 The above objectives of the fundamental law appear
to us to have been sufficiently met. Anything else would be to require a virtual compendium of the law which could not
have been the intendment of the constitutional mandate.
Petitioner intimates that Republic Act No. 7496 desecrates the constitutional requirement that taxation "shall be
uniform and equitable" in that the law would now attempt to tax single proprietorships and professionals differently
from the manner it imposes the tax on corporations and partnerships. The contention clearly forgets, however, that
such a system of income taxation has long been the prevailing rule even prior to Republic Act No. 7496.
Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects or objects of
taxation, similarly situated, are to be treated alike both in privileges and liabilities (Juan Luna Subdivision vs.
Sarmiento, 91 Phil. 371). Uniformity does not forfend classification as long as: (1) the standards that are used therefor
are substantial and not arbitrary, (2) the categorization is germane to achieve the legislative purpose, (3) the law
applies, all things being equal, to both present and future conditions, and (4) the classification applies equally well to
all those belonging to the same class (Pepsi Cola vs. City of Butuan, 24 SCRA 3; Basco vs. PAGCOR, 197 SCRA 52).
What may instead be perceived to be apparent from the amendatory law is the legislative intent to increasingly shift
the income tax system towards the schedular approach 2 in the income taxation of individual taxpayers and to
maintain, by and large, the present global treatment 3 on taxable corporations. We certainly do not view this
classification to be arbitrary and inappropriate.
Petitioner gives a fairly extensive discussion on the merits of the law, illustrating, in the process, what he believes to
be an imbalance between the tax liabilities of those covered by the amendatory law and those who are not. With the
legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate), coverage
(subjects) and situs (place) of taxation. This court cannot freely delve into those matters which, by constitutional fiat,
rightly rest on legislative judgment. Of course, where a tax measure becomes so unconscionable and unjust as to
amount to confiscation of property, courts will not hesitate to strike it down, for, despite all its plenitude, the power to
tax cannot override constitutional proscriptions. This stage, however, has not been demonstrated to have been
reached within any appreciable distance in this controversy before us.
Having arrived at this conclusion, the plea of petitioner to have the law declared unconstitutional for being violative of
due process must perforce fail. The due process clause may correctly be invoked only when there is a clear
contravention of inherent or constitutional limitations in the exercise of the tax power. No such transgression is so
evident to us.
G.R. No. 109446
The several propositions advanced by petitioners revolve around the question of whether or not public respondents
have exceeded their authority in promulgating Section 6, Revenue Regulations No. 2-93, to carry out Republic Act No.
7496.
The questioned regulation reads:
Sec. 6. General Professional Partnership The general professional partnership (GPP) and the partners
comprising the GPP are covered by R. A. No. 7496. Thus, in determining the net profit of the
partnership, only the direct costs mentioned in said law are to be deducted from partnership income.
Also, the expenses paid or incurred by partners in their individual capacities in the practice of their
profession which are not reimbursed or paid by the partnership but are not considered as direct cost,
are not deductible from his gross income.
The real objection of petitioners is focused on the administrative interpretation of public respondents that would apply
SNIT to partners in general professional partnerships. Petitioners cite the pertinent deliberations in Congress during its
enactment of Republic Act No. 7496, also quoted by the Honorable Hernando B. Perez, minority floor leader of the
House of Representatives, in the latter's privilege speech by way of commenting on the questioned implementing
regulation of public respondents following the effectivity of the law, thusly:
MR. ALBANO, Now Mr. Speaker, I would like to get the correct impression of this bill. Do
we speak here of individuals who are earning, I mean, who earn through business
enterprises and therefore, should file an income tax return?
MR. PEREZ. That is correct, Mr. Speaker. This does not apply to corporations. It applies
only to individuals.
(See Deliberations on H. B. No. 34314, August 6, 1991, 6:15 P.M.; Emphasis ours).
Other deliberations support this position, to wit:
MR. ABAYA . . . Now, Mr. Speaker, did I hear the Gentleman from Batangas say that this
bill is intended to increase collections as far as individuals are concerned and to make
collection of taxes equitable?
MR. PEREZ. That is correct, Mr. Speaker.
(Id. at 6:40 P.M.; Emphasis ours).
In fact, in the sponsorship speech of Senator Mamintal Tamano on the Senate version of the SNITS, it is
categorically stated, thus:
This bill, Mr. President, is not applicable to business corporations or to partnerships; it
is only with respect to individuals and professionals. (Emphasis ours)
The Court, first of all, should like to correct the apparent misconception that general professional partnerships are
subject to the payment of income tax or that there is a difference in the tax treatment between individuals engaged in
business or in the practice of their respective professions and partners in general professional partnerships. The fact of
the matter is that a general professional partnership, unlike an ordinary business partnership (which is treated as a
corporation for income tax purposes and so subject to the corporate income tax), is not itself an income taxpayer. The
income tax is imposed not on the professional partnership, which is tax exempt, but on the partners themselves in
their individual capacity computed on their distributive shares of partnership profits. Section 23 of the Tax Code, which
has not been amended at all by Republic Act 7496, is explicit:
Sec. 23. Tax liability of members of general professional partnerships. (a) Persons exercising a
common profession in general partnership shall be liable for income tax only in their individual
capacity, and the share in the net profits of the general professional partnership to which any taxable
partner would be entitled whether distributed or otherwise, shall be returned for taxation and the tax
paid in accordance with the provisions of this Title.
(b) In determining his distributive share in the net income of the partnership, each partner
(1) Shall take into account separately his distributive share of the partnership's
income, gain, loss, deduction, or credit to the extent provided by the pertinent
provisions of this Code, and
(2) Shall be deemed to have elected the itemized deductions, unless he declares his
distributive share of the gross income undiminished by his share of the deductions.
There is, then and now, no distinction in income tax liability between a person who practices his profession alone or
individually and one who does it through partnership (whether registered or not) with others in the exercise of a
common profession. Indeed, outside of the gross compensation income tax and the final tax on passive investment
income, under the present income tax system all individuals deriving income from any source whatsoever are treated
in almost invariably the same manner and under a common set of rules.
We can well appreciate the concern taken by petitioners if perhaps we were to consider Republic Act No. 7496 as an
entirely independent, not merely as an amendatory, piece of legislation. The view can easily become myopic, however,
when the law is understood, as it should be, as only forming part of, and subject to, the whole income tax concept and
precepts long obtaining under the National Internal Revenue Code. To elaborate a little, the phrase "income taxpayers"
is an all embracing term used in the Tax Code, and it practically covers all persons who derive taxable income. The
law, in levying the tax, adopts the most comprehensive tax situs of nationality and residence of the taxpayer (that
renders citizens, regardless of residence, and resident aliens subject to income tax liability on their income from all
sources) and of the generally accepted and internationally recognized income taxable base (that can subject nonresident aliens and foreign corporations to income tax on their income from Philippine sources). In the process, the
Code classifies taxpayers into four main groups, namely: (1) Individuals, (2) Corporations, (3) Estates under Judicial
Settlement and (4) Irrevocable Trusts (irrevocable both as to corpus and as to income).
Partnerships are, under the Code, either "taxable partnerships" or "exempt partnerships." Ordinarily, partnerships, no
matter how created or organized, are subject to income tax (and thus alluded to as "taxable partnerships") which, for
purposes of the above categorization, are by law assimilated to be within the context of, and so legally contemplated
as, corporations. Except for few variances, such as in the application of the "constructive receipt rule" in the derivation
of income, the income tax approach is alike to both juridical persons. Obviously, SNIT is not intended or envisioned, as
so correctly pointed out in the discussions in Congress during its deliberations on Republic Act 7496, aforequoted, to
cover corporations and partnerships which are independently subject to the payment of income tax.
"Exempt partnerships," upon the other hand, are not similarly identified as corporations nor even considered as
independent taxable entities for income tax purposes. A general professional partnership is such an example. 4 Here,
the partners themselves, not the partnership (although it is still obligated to file an income tax return [mainly for
administration and data]), are liable for the payment of income tax in their individual capacity computed on their
respective and distributive shares of profits. In the determination of the tax liability, a partner does so as an individual,
and there is no choice on the matter. In fine, under the Tax Code on income taxation, the general professional
partnership is deemed to be no more than a mere mechanism or a flow-through entity in the generation of income by,
and the ultimate distribution of such income to, respectively, each of the individual partners.
Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the above standing rule as now so
modified by Republic Act
No. 7496 on basically the extent of allowable deductions applicable to all individual income taxpayers on their noncompensation income. There is no evident intention of the law, either before or after the amendatory legislation, to
place in an unequal footing or in significant variance the income tax treatment of professionals who practice their
respective professions individually and of those who do it through a general professional partnership.
WHEREFORE, the petitions are DISMISSED. No special pronouncement on costs.
SO ORDERED.
G.R. No. 180066

vs.
PHILIPPINE AIRLINES, INC., Respondent.
DECISION
CHICO-NAZARIO, J.:
Before this Court is a Petition for Review on Certiorari, under Rule 45 of the Revised Rules of Court, seeking the
reversal and setting aside of the Decision1 dated 9 August 2007 and Resolution2 dated 11 October 2007 of the Court of
Tax Appeals (CTA) en banc in CTA E.B. No. 246. The CTA en banc affirmed the Decision 3 dated 31 July 2006 of the CTA
Second Division in C.T.A. Case No. 7010, ordering the cancellation and withdrawal of Preliminary Assessment Notice
(PAN) No. INC FY-3-31-01-000094 dated 3 September 2003 and Formal Letter of Demand dated 12 January 2004,
issued by the Bureau of Internal Revenue (BIR) against respondent Philippine Airlines, Inc. (PAL), for the payment of
Minimum Corporate Income Tax (MCIT) in the amount of P272,421,886.58.
There is no dispute as to the antecedent facts of this case.
PAL is a domestic corporation organized under the corporate laws of the Republic of the Philippines; declared the
national flag carrier of the country; and the grantee under Presidential Decree No. 1590 4 of a franchise to establish,
operate, and maintain transport services for the carriage of passengers, mail, and property by air, in and between any
and all points and places throughout the Philippines, and between the Philippines and other countries. 5
For its fiscal year ending 31 March 2001 (FY 2000-2001), PAL allegedly incurred zero taxable income, 6 which left it with
unapplied creditable withholding tax7 in the amount of P2,334,377.95. PAL did not pay any MCIT for the period.
In a letter dated 12 July 2002, addressed to petitioner Commissioner of Internal Revenue (CIR), PAL requested for the
refund of its unapplied creditable withholding tax for FY 2000-2001. PAL attached to its letter the following: (1)
Schedule of Creditable Tax Withheld at Source for FY 2000-2001; (2) Certificates of Creditable Taxes Withheld; and (3)
Audited Financial Statements.1avvphi1
Acting on the aforementioned letter of PAL, the Large Taxpayers Audit and Investigation Division 1 (LTAID 1) of the BIR
Large Taxpayers Service (LTS), issued on 16 August 2002, Tax Verification Notice No. 00201448, authorizing Revenue
Officer Jacinto Cueto, Jr. (Cueto) to verify the supporting documents and pertinent records relative to the claim of PAL
for refund of its unapplied creditable withholding tax for FY 2000-20001. In a letter dated 19 August 2003, LTAID 1
Chief Armit S. Linsangan invited PAL to an informal conference at the BIR National Office in Diliman, Quezon City, on 27
August 2003, at 10:00 a.m., to discuss the results of the investigation conducted by Revenue Officer Cueto, supervised
by Revenue Officer Madelyn T. Sacluti.
BIR officers and PAL representatives attended the scheduled informal conference, during which the former relayed to
the latter that the BIR was denying the claim for refund of PAL and, instead, was assessing PAL for deficiency MCIT for
FY 2000-2001. The PAL representatives argued that PAL was not liable for MCIT under its franchise. The BIR officers
then informed the PAL representatives that the matter would be referred to the BIR Legal Service for opinion.
The LTAID 1 issued, on 3 September 2003, PAN No. INC FY-3-31-01-000094, which was received by PAL on 23 October
2003. LTAID 1 assessed PAL for P262,474,732.54, representing deficiency MCIT for FY 2000-2001, plus interest and
compromise penalty, computed as follows:
Sales/Revenues from Operation
P 38,798,721,685.00
Less: Cost of Services
30,316,679,013.00
Gross Income from Operation
8,482,042,672.00
Add: Non-operating income
465,111,368.00
Total Gross Income for MCIT purposes
9,947,154,040.008
Rate of Tax
2%
Tax Due
178,943,080.80
Add: 20% interest (8-16-00 to 10-31-03)
83,506,651.74
Compromise Penalty
25,000.00
Total Amount Due
P 262,474,732.549
PAL protested PAN No. INC FY-3-31-01-000094 through a letter dated 4 November 2003 to the BIR LTS.
On 12 January 2004, the LTAID 1 sent PAL a Formal Letter of Demand for deficiency MCIT for FY 2000-2001 in the
amount of P271,421,88658, based on the following calculation:
Sales/Revenues from Operation
P 38,798,721,685.00
Less: Cost of Services

Direct Costs -
P 30,749,761,017.00
Less: Non-deductible
interest expense
433,082,004.00
30,316,679,013.00
Gross Income from Operation
P 8,482,042,672.00
Add: Non-operating Income
465,111,368.00
Total Gross Income for MCIT purposes
P 9,947,154,040.00
MCIT tax due
P 178,943,080.80
Interest 20% per annum 7/16/01 to 02/15/04
92,453,805.78
Compromise Penalty
25,000.00
Total MCIT due and demandable
P 271,421,886.5810
PAL received the foregoing Formal Letter of Demand on 12 February 2004, prompting it to file with the BIR LTS a formal
written protest dated 13 February 2004.
The BIR LTS rendered on 7 May 2004 its Final Decision on Disputed Assessment, which was received by PAL on 26 May
2004. Invoking Revenue Memorandum Circular (RMC) No. 66-2003, the BIR LTS denied with finality the protest of PAL
and reiterated the request that PAL immediately pay its deficiency MCIT for FY 2000-2001, inclusive of penalties
incident to delinquency.1avvphi1
PAL filed a Petition for Review with the CTA, which was docketed as C.T.A. Case No. 7010 and raffled to the CTA Second
Division. The CTA Second Division promulgated its Decision on 31 July 2006, ruling in favor of PAL. The dispositive
portion of the judgment of the CTA Second Division reads:
WHEREFORE, premises considered, the instant Petition for Review is hereby GRANTED. Accordingly, Assessment Notice
No. INC FY-3-31-01-000094 and Formal Letter of Demand for the payment of deficiency Minimum Corporate Income Tax
in the amount of P272,421,886.58 are hereby CANCELLED and WITHDRAWN.11
In a Resolution dated 2 January 2007, the CTA Second Division denied the Motion for Reconsideration of the CIR.
It was then the turn of the CIR to file a Petition for Review with the CTA en banc, docketed as C.T.A. E.B. No. 246. The
CTA en banc found that "the cited legal provisions and jurisprudence are teeming with life with respect to the grant of
tax exemption too vivid to pass unnoticed," and that "the Court in Division correctly ruled in favor of the respondent
[PAL] granting its petition for the cancellation of Assessment Notice No. INC FY-3-31-01-000094 and Formal Letter of
Demand for the deficiency MCIT in the amount of P272,421,886.58."12 Consequently, the CTA en banc denied the
Petition of the CIR for lack of merit. The CTA en banc likewise denied the Motion for Reconsideration of the CIR in a
Resolution dated 11 October 2007.
Hence, the CIR comes before this Court via the instant Petition for Review on Certiorari, based on the grounds stated
hereunder:
THE COURT OF TAX APPEALS ERRED ON A QUESTION OF LAW IN ITS ASSAILED DECISION BECAUSE:
(1) [PAL] CLEARLY OPTED TO BE COVERED BY THE INCOME TAX PROVISION OF THE NATIONAL INTERNAL
REVENUE CODE OF 1997 (NIRC OF 1997). (sic) AS AMENDED; HENCE, IT IS COVERED BY THE MCIT PROVISION
OF THE SAME CODE.
(2) THE MCIT DOES NOT BELONG TO THE CATEGORY OF "OTHER TAXES" WHICH WOULD ENABLE RESPONDENT
TO AVAIL ITSELF OF THE "IN LIEU" (sic) OF ALL OTHER TAXES" CLAUSE UNDER SECTION 13 OF P.D. NO. 1590
("CHARTER").
(3) THE MCIT PROVISION OF THE NIRC OF 1997 IS NOT AN AMENDMENT OF [PALS] CHARTER.
(4) PAL IS NOT ONLY GIVEN THE PRIVILEGE TO CHOOSE BETWEEN WHAT WILL GIVE IT THE BENEFIT OF A
LOWER TAX, BUT ALSO THE RESPONSIBILITY OF PAYING ITS SHARE OF THE TAX BURDEN, AS IS EVIDENT IN
SECTION 22 OF RA NO. 9337.
(5) A CLAIM FOR EXEMPTION FROM TAXATION IS NEVER PRESUMED; [PAL] IS LIABLE FOR THE DEFICIENCY
MCIT.13
There is only one vital issue that the Court must resolve in the Petition at bar, i.e., whether PAL is liable for deficiency
MCIT for FY 2000-2001.
The Court answers in the negative.
Presidential Decree No. 1590, the franchise of PAL, contains provisions specifically governing the taxation of said
corporation, to wit:
Section 13. In consideration of the franchise and rights hereby granted, the grantee shall pay to the Philippine
Government during the life of this franchise whichever of subsections (a) and (b) hereunder will result in a lower tax:
(a) The basic corporate income tax based on the grantee's annual net taxable income computed in accordance
with the provisions of the National Internal Revenue Code; or
(b) A franchise tax of two per cent (2%) of the gross revenues derived by the grantee from all sources, without
distinction as to transport or nontransport operations; provided, that with respect to international air-transport
service, only the gross passenger, mail, and freight revenues from its outgoing flights shall be subject to this
tax.
The tax paid by the grantee under either of the above alternatives shall be in lieu of all other taxes, duties, royalties,
registration, license, and other fees and charges of any kind, nature, or description, imposed, levied, established,
assessed, or collected by any municipal, city, provincial, or national authority or government agency, now or in the
future, including but not limited to the following:
1. All taxes, duties, charges, royalties, or fees due on local purchases by the grantee of aviation gas, fuel, and
oil, whether refined or in crude form, and whether such taxes, duties, charges, royalties, or fees are directly
due from or imposable upon the purchaser or the seller, producer, manufacturer, or importer of said petroleum
products but are billed or passed on to the grantee either as part of the price or cost thereof or by mutual
agreement or other arrangement; provided, that all such purchases by, sales or deliveries of aviation gas, fuel,
and oil to the grantee shall be for exclusive use in its transport and nontransport operations and other
activities incidental thereto;
2. All taxes, including compensating taxes, duties, charges, royalties, or fees due on all importations by the
grantee of aircraft, engines, equipment, machinery, spare parts, accessories, commissary and catering
supplies, aviation gas, fuel, and oil, whether refined or in crude form and other articles, supplies, or materials;
provided, that such articles or supplies or materials are imported for the use of the grantee in its transport and
nontransport operations and other activities incidental thereto and are not locally available in reasonable
quantity, quality, or price;
3. All taxes on lease rentals, interest, fees, and other charges payable to lessors, whether foreign or domestic,
of aircraft, engines, equipment, machinery, spare parts, and other property rented, leased, or chartered by the
grantee where the payment of such taxes is assumed by the grantee;
4. All taxes on interest, fees, and other charges on foreign loans obtained and other obligations incurred by the
grantee where the payment of such taxes is assumed by the grantee;
5. All taxes, fees, and other charges on the registration, licensing, acquisition, and transfer of aircraft,
equipment, motor vehicles, and all other personal and real property of the grantee; and
6. The corporate development tax under Presidential Decree No. 1158-A.
The grantee, shall, however, pay the tax on its real property in conformity with existing law.
For purposes of computing the basic corporate income tax as provided herein, the grantee is authorized:
(a) To depreciate its assets to the extent of not more than twice as fast the normal rate of depreciation; and
(b) To carry over as a deduction from taxable income any net loss incurred in any year up to five years
following the year of such loss.
Section 14. The grantee shall pay either the franchise tax or the basic corporate income tax on quarterly basis to the
Commissioner of Internal Revenue. Within sixty (60) days after the end of each of the first three quarters of the taxable
calendar or fiscal year, the quarterly franchise or income-tax return shall be filed and payment of either the franchise
or income tax shall be made by the grantee.
A final or an adjustment return covering the operation of the grantee for the preceding calendar or fiscal year shall be
filed on or before the fifteenth day of the fourth month following the close of the calendar or fiscal year. The amount of
the final franchise or income tax to be paid by the grantee shall be the balance of the total franchise or income tax
shown in the final or adjustment return after deducting therefrom the total quarterly franchise or income taxes already
paid during the preceding first three quarters of the same taxable year.
Any excess of the total quarterly payments over the actual annual franchise of income tax due as shown in the final or
adjustment franchise or income-tax return shall either be refunded to the grantee or credited against the grantee's
quarterly franchise or income-tax liability for the succeeding taxable year or years at the option of the grantee.
The term "gross revenues" is herein defined as the total gross income earned by the grantee from; (a) transport,
nontransport, and other services; (b) earnings realized from investments in money-market placements, bank deposits,
investments in shares of stock and other securities, and other investments; (c) total gains net of total losses realized
from the disposition of assets and foreign-exchange transactions; and (d) gross income from other sources. (Emphases
ours.)
According to the afore-quoted provisions, the taxation of PAL, during the lifetime of its franchise, shall be governed by
two fundamental rules, particularly: (1) PAL shall pay the Government either basic corporate income tax or franchise
tax, whichever is lower; and (2) the tax paid by PAL, under either of these alternatives, shall be in lieu of all other
taxes, duties, royalties, registration, license, and other fees and charges, except only real property tax.
The basic corporate income tax of PAL shall be based on its annual net taxable income, computed in accordance with
the National Internal Revenue Code (NIRC). Presidential Decree No. 1590 also explicitly authorizes PAL, in the
computation of its basic corporate income tax, to (1) depreciate its assets twice as fast the normal rate of
depreciation;14 and (2) carry over as a deduction from taxable income any net loss incurred in any year up to five years
following the year of such loss.15
Franchise tax, on the other hand, shall be two per cent (2%) of the gross revenues derived by PAL from all sources,
whether transport or nontransport operations. However, with respect to international air-transport service, the
franchise tax shall only be imposed on the gross passenger, mail, and freight revenues of PAL from its outgoing flights.
In its income tax return for FY 2000-2001, filed with the BIR, PAL reported no net taxable income for the period,
resulting in zero basic corporate income tax, which would necessarily be lower than any franchise tax due from PAL for
the same period.
The CIR, though, assessed PAL for MCIT for FY 2000-2001. It is the position of the CIR that the MCIT is income tax for
which PAL is liable. The CIR reasons that Section 13(a) of Presidential Decree No. 1590 provides that the corporate
income tax of PAL shall be computed in accordance with the NIRC. And, since the NIRC of 1997 imposes MCIT, and PAL
has not applied for relief from the said tax, then PAL is subject to the same.
The Court is not persuaded. The arguments of the CIR are contrary to the plain meaning and obvious intent of
Presidential Decree No. 1590, the franchise of PAL.
Income tax on domestic corporations is covered by Section 27 of the NIRC of 1997, 16 pertinent provisions of which are
reproduced below for easy reference:
SEC. 27. Rates of Income Tax on Domestic Corporations.
(A) In General Except as otherwise provided in this Code, an income tax of thirty-five percent (35%) is hereby
imposed upon the taxable income derived during each taxable year from all sources within and without the Philippines
by every corporation, as defined in Section 22(B) of this Code and taxable under this Title as a corporation, organized
in, or existing under the laws of the Philippines: Provided, That effective January 1, 1998, the rate of income tax shall
be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective
January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%).
xxxx
(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 income tax is greater than the tax computed under Subsection (A) of this Section for the taxable year.
Hence, a domestic corporation must pay whichever is higher of: (1) the income tax under Section 27(A) of the NIRC of
1997, computed by applying the tax rate therein to the taxable income of the corporation; or (2) the MCIT under
Section 27(E), also of the NIRC of 1997, equivalent to 2% of the gross income of the corporation. Although this may be
the general rule in determining the income tax due from a domestic corporation under the NIRC of 1997, it can only be
applied to PAL to the extent allowed by the provisions in the franchise of PAL specifically governing its taxation.
After a conscientious study of Section 13 of Presidential Decree No. 1590, in relation to Sections 27(A) and 27(E) of the
NIRC of 1997, the Court, like the CTA en banc and Second Division, concludes that PAL cannot be subjected to MCIT for
FY 2000-2001.
First, Section 13(a) of Presidential Decree No. 1590 refers to "basic corporate income tax." In Commissioner of Internal
Revenue v. Philippine Airlines, Inc.,17 the Court already settled that the "basic corporate income tax," under Section
13(a) of Presidential Decree No. 1590, relates to the general rate of 35% (reduced to 32% by the year 2000) as
stipulated in Section 27(A) of the NIRC of 1997.
Section 13(a) of Presidential Decree No. 1590 requires that the basic corporate income tax be computed in accordance
with the NIRC. This means that PAL shall compute its basic corporate income tax using the rate and basis prescribed by
the NIRC of 1997 for the said tax. There is nothing in Section 13(a) of Presidential Decree No. 1590 to support the
contention of the CIR that PAL is subject to the entire Title II of the NIRC of 1997, entitled "Tax on Income."
Second, Section 13(a) of Presidential Decree No. 1590 further provides that the basic corporate income tax of PAL shall
be based on its annual net taxable income. This is consistent with Section 27(A) of the NIRC of 1997, which provides
that the rate of basic corporate income tax, which is 32% beginning 1 January 2000, shall be imposed on the taxable
income of the domestic corporation.
Taxable income is defined under Section 31 of the NIRC of 1997 as the pertinent items of gross income specified in the
said Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income
by the same Code or other special laws. The gross income, referred to in Section 31, is described in Section 32 of the
NIRC of 1997 as income from whatever source, including compensation for services; the conduct of trade or business
or the exercise of profession; dealings in property; interests; rents; royalties; dividends; annuities; prizes and winnings;
pensions; and a partners distributive share in the net income of a general professional partnership.
Pursuant to the NIRC of 1997, the taxable income of a domestic corporation may be arrived at by subtracting from
gross income deductions authorized, not just by the NIRC of 1997, 18 but also by special laws. Presidential Decree No.
1590 may be considered as one of such special laws authorizing PAL, in computing its annual net taxable income, on
which its basic corporate income tax shall be based, to deduct from its gross income the following: (1) depreciation of
assets at twice the normal rate; and (2) net loss carry-over up to five years following the year of such loss.
In comparison, the 2% MCIT under Section 27(E) of the NIRC of 1997 shall be based on the gross income of the
domestic corporation. The Court notes that gross income, as the basis for MCIT, is given a special definition under
Section 27(E)(4) of the NIRC of 1997, different from the general one under Section 34 of the same Code.
According to the last paragraph of Section 27(E)(4) of the NIRC of 1997, gross income of a domestic corporation
engaged in the sale of service means gross receipts, less sales returns, allowances, discounts and cost of services.
"Cost of services" refers to all direct costs and expenses necessarily incurred to provide the services required by the
customers and clients including (a) salaries and employee benefits of personnel, consultants, and specialists directly
rendering the service; and (b) cost of facilities directly utilized in providing the service, such as depreciation or rental
of equipment used and cost of supplies.19 Noticeably, inclusions in and exclusions/deductions from gross income for
MCIT purposes are limited to those directly arising from the conduct of the taxpayers business. It is, thus, more limited
than the gross income used in the computation of basic corporate income tax.
In light of the foregoing, there is an apparent distinction under the NIRC of 1997 between taxable income, which is the
basis for basic corporate income tax under Section 27(A); and gross income, which is the basis for the MCIT under
Section 27(E). The two terms have their respective technical meanings, and cannot be used interchangeably. The same
reasons prevent this Court from declaring that the basic corporate income tax, for which PAL is liable under Section
13(a) of Presidential Decree No. 1590, also covers MCIT under Section 27(E) of the NIRC of 1997, since the basis for the
first is the annual net taxable income, while the basis for the second is gross income.
Third, even if the basic corporate income tax and the MCIT are both income taxes under Section 27 of the NIRC of
1997, and one is paid in place of the other, the two are distinct and separate taxes.
The Court again cites Commissioner of Internal Revenue v. Philippine Airlines, Inc., 20 wherein it held that income tax on
the passive income21 of a domestic corporation, under Section 27(D) of the NIRC of 1997, is different from the basic
corporate income tax on the taxable income of a domestic corporation, imposed by Section 27(A), also of the NIRC of
1997. Section 13 of Presidential Decree No. 1590 gives PAL the option to pay basic corporate income tax or franchise
tax, whichever is lower; and the tax so paid shall be in lieu of all other taxes, except real property tax. The income tax
on the passive income of PAL falls within the category of "all other taxes" from which PAL is exempted, and which, if
already collected, should be refunded to PAL.
The Court herein treats MCIT in much the same way. Although both are income taxes, the MCIT is different from the
basic corporate income tax, not just in the rates, but also in the bases for their computation. Not being covered by
Section 13(a) of Presidential Decree No. 1590, which makes PAL liable only for basic corporate income tax, then MCIT is
included in "all other taxes" from which PAL is exempted.
That, under general circumstances, the MCIT is paid in place of the basic corporate income tax, when the former is
higher than the latter, does not mean that these two income taxes are one and the same. The said taxes are merely
paid in the alternative, giving the Government the opportunity to collect the higher amount between the two. The
situation is not much different from Section 13 of Presidential Decree No. 1590, which reversely allows PAL to pay,
whichever is lower of the basic corporate income tax or the franchise tax. It does not make the basic corporate income
tax indistinguishable from the franchise tax.
Given the fundamental differences between the basic corporate income tax and the MCIT, presented in the preceding
discussion, it is not baseless for this Court to rule that, pursuant to the franchise of PAL, said corporation is subject to
the first tax, yet exempted from the second.
Fourth, the evident intent of Section 13 of Presidential Decree No. 1520 is to extend to PAL tax concessions not
ordinarily available to other domestic corporations. Section 13 of Presidential Decree No. 1520 permits PAL to pay
whichever is lower of the basic corporate income tax or the franchise tax; and the tax so paid shall be in lieu of all
other taxes, except only real property tax. Hence, under its franchise, PAL is to pay the least amount of tax possible.
Section 13 of Presidential Decree No. 1520 is not unusual. A public utility is granted special tax treatment (including
tax exceptions/exemptions) under its franchise, as an inducement for the acceptance of the franchise and the
rendition of public service by the said public utility. 22 In this case, in addition to being a public utility providing airtransport service, PAL is also the official flag carrier of the country.
The imposition of MCIT on PAL, as the CIR insists, would result in a situation that contravenes the objective of Section
13 of Presidential Decree No. 1590. In effect, PAL would not just have two, but three tax alternatives, namely, the basic
corporate income tax, MCIT, or franchise tax. More troublesome is the fact that, as between the basic corporate
income tax and the MCIT, PAL shall be made to pay whichever is higher, irrefragably, in violation of the avowed
intention of Section 13 of Presidential Decree No. 1590 to make PAL pay for the lower amount of tax.
Fifth, the CIR posits that PAL may not invoke in the instant case the "in lieu of all other taxes" clause in Section 13 of
Presidential Decree No. 1520, if it did not pay anything at all as basic corporate income tax or franchise tax. As a
result, PAL should be made liable for "other taxes" such as MCIT. This line of reasoning has been dubbed as the
Substitution Theory, and this is not the first time the CIR raised the same. The Court already rejected the Substitution
Theory in Commissioner of Internal Revenue v. Philippine Airlines, Inc., 23 to wit:
"Substitution Theory"
of the CIR Untenable
A careful reading of Section 13 rebuts the argument of the CIR that the "in lieu of all other taxes" proviso is a mere
incentive that applies only when PAL actually pays something. It is clear that PD 1590 intended to give respondent the
option to avail itself of Subsection (a) or (b) as consideration for its franchise. Either option excludes the payment of
other taxes and dues imposed or collected by the national or the local government. PAL has the option to choose the
alternative that results in lower taxes. It is not the fact of tax payment that exempts it, but the exercise of its option.
Under Subsection (a), the basis for the tax rate is respondents annual net taxable income, which (as earlier discussed)
is computed by subtracting allowable deductions and exemptions from gross income. By basing the tax rate on the
annual net taxable income, PD 1590 necessarily recognized the situation in which taxable income may result in a
negative amount and thus translate into a zero tax liability.
Notably, PAL was owned and operated by the government at the time the franchise was last amended. It can
reasonably be contemplated that PD 1590 sought to assist the finances of the government corporation in the form of
lower taxes. When respondent operates at a loss (as in the instant case), no taxes are due; in this instances, it has a
lower tax liability than that provided by Subsection (b).
The fallacy of the CIRs argument is evident from the fact that the payment of a measly sum of one peso would suffice
to exempt PAL from other taxes, whereas a zero liability arising from its losses would not. There is no substantial
distinction between a zero tax and a one-peso tax liability. (Emphasis ours.)
Based on the same ratiocination, the Court finds the Substitution Theory unacceptable in the present Petition.
The CIR alludes as well to Republic Act No. 9337, for reasons similar to those behind the Substitution Theory. Section
22 of Republic Act No. 9337, more popularly known as the Expanded Value Added Tax (E-VAT) Law, abolished the
franchise tax imposed by the charters of particularly identified public utilities, including Presidential Decree No. 1590
of PAL. PAL may no longer exercise its options or alternatives under Section 13 of Presidential Decree No. 1590, and is
now liable for both corporate income tax and the 12% VAT on its sale of services. The CIR alleges that Republic Act No.
9337 reveals the intention of the Legislature to make PAL share the tax burden of other domestic corporations.
The CIR seems to lose sight of the fact that the Petition at bar involves the liability of PAL for MCIT for the fiscal year
ending 31 March 2001. Republic Act No. 9337, which took effect on 1 July 2005, cannot be applied retroactively 24 and
any amendment introduced by said statute affecting the taxation of PAL is immaterial in the present case.
And sixth, Presidential Decree No. 1590 explicitly allows PAL, in computing its basic corporate income tax, to carry over
as deduction any net loss incurred in any year, up to five years following the year of such loss. Therefore, Presidential
Decree No. 1590 does not only consider the possibility that, at the end of a taxable period, PAL shall end up with zero
annual net taxable income (when its deductions exactly equal its gross income), as what happened in the case at bar,
but also the likelihood that PAL shall incur net loss (when its deductions exceed its gross income). If PAL is subjected to
MCIT, the provision in Presidential Decree No. 1590 on net loss carry-over will be rendered nugatory. Net loss carryover is material only in computing the annual net taxable income to be used as basis for the basic corporate income
tax of PAL; but PAL will never be able to avail itself of the basic corporate income tax option when it is in a net loss
position, because it will always then be compelled to pay the necessarily higher MCIT.
Consequently, the insistence of the CIR to subject PAL to MCIT cannot be done without contravening Presidential
Decree No. 1520.
Between Presidential Decree No. 1520, on one hand, which is a special law specifically governing the franchise of PAL,
issued on 11 June 1978; and the NIRC of 1997, on the other, which is a general law on national internal revenue taxes,
that took effect on 1 January 1998, the former prevails. The rule is that on a specific matter, the special law shall
prevail over the general law, which shall be resorted to only to supply deficiencies in the former. In addition, where
there are two statutes, the earlier special and the later general the terms of the general broad enough to include the
matter provided for in the special the fact that one is special and the other is general creates a presumption that the
special is to be considered as remaining an exception to the general, one as a general law of the land, the other as the
law of a particular case. It is a canon of statutory construction that a later statute, general in its terms and not
expressly repealing a prior special statute, will ordinarily not affect the special provisions of such earlier statute. 25
Neither can it be said that the NIRC of 1997 repealed or amended Presidential Decree No. 1590.
While Section 16 of Presidential Decree No. 1590 provides that the franchise is granted to PAL with the understanding
that it shall be subject to amendment, alteration, or repeal by competent authority when the public interest so
requires, Section 24 of the same Decree also states that the franchise or any portion thereof may only be modified,
amended, or repealed expressly by a special law or decree that shall specifically modify, amend, or repeal said
franchise or any portion thereof. No such special law or decree exists herein.
The CIR cannot rely on Section 7(B) of Republic Act No. 8424, which amended the NIRC in 1997 and reads as follows:
Section 7. Repealing Clauses.
xxxx
(B) The provisions of the National Internal Revenue Code, as amended, and all other laws, including charters of
government-owned or controlled corporations, decrees, orders, or regulations or parts thereof, that are inconsistent
with this Act are hereby repealed or amended accordingly.
The CIR reasons that PAL was a government-owned and controlled corporation when Presidential Decree No. 1590, its
franchise or charter, was issued in 1978. Since PAL was still operating under the very same charter when Republic Act
No. 8424 took effect in 1998, then the latter can repeal or amend the former by virtue of Section 7(B).
The Court disagrees.
A brief recount of the history of PAL is in order. PAL was established as a private corporation under the general law of
the Republic of the Philippines in February 1941. In November 1977, the government, through the Government Service
Insurance System (GSIS), acquired the majority shares in PAL. PAL was privatized in January 1992 when the local
consortium PR Holdings acquired a 67% stake therein. 26
It is true that when Presidential Decree No. 1590 was issued on 11 June 1978, PAL was then a government-owned and
controlled corporation; but when Republic Act No. 8424, amending the NIRC, took effect on 1 January 1998, PAL was
already a private corporation for six years. The repealing clause under Section 7(B) of Republic Act No. 8424 simply
refers to charters of government-owned and controlled corporations, which would simply and plainly mean
corporations under the ownership and control of the government at the time of effectivity of said statute. It is already a
stretch for the Court to read into said provision charters, issued to what were then government-owned and controlled
corporations that are now private, but still operating under the same charters.
That the Legislature chose not to amend or repeal Presidential Decree No. 1590, even after PAL was privatized, reveals
the intent of the Legislature to let PAL continue enjoying, as a private corporation, the very same rights and privileges
under the terms and conditions stated in said charter. From the moment PAL was privatized, it had to be treated as a
private corporation, and its charter became that of a private corporation. It would be completely illogical to say that
PAL is a private corporation still operating under a charter of a government-owned and controlled corporation.
The alternative argument of the CIR that the imposition of the MCIT is pursuant to the amendment of the NIRC, and
not of Presidential Decree No. 1590 is just as specious. As has already been settled by this Court, the basic corporate
income tax under Section 13(a) of Presidential Decree No. 1590 relates to the general tax rate under Section 27(A) of
the NIRC of 1997, which is 32% by the year 2000, imposed on taxable income. Thus, only provisions of the NIRC of
1997 necessary for the computation of the basic corporate income tax apply to PAL. And even though Republic Act No.
8424 amended the NIRC by introducing the MCIT, in what is now Section 27(E) of the said Code, this amendment is
actually irrelevant and should not affect the taxation of PAL, since the MCIT is clearly distinct from the basic corporate
income tax referred to in Section 13(a) of Presidential Decree No. 1590, and from which PAL is consequently exempt
under the "in lieu of all other taxes" clause of its charter.
The CIR calls the attention of the Court to RMC No. 66-2003, on "Clarifying the Taxability of Philippine Airlines (PAL) for
Income Tax Purposes As Well As Other Franchise Grantees Similarly Situated." According to RMC No. 66-2003:
Section 27(E) of the Code, as implemented by Revenue Regulations No. 9-98, provides that MCIT of two percent (2%)
of the gross income as of the end of the taxable year (whether calendar or fiscal year, depending on the accounting
period employed) is imposed upon any domestic corporation beginning the 4th taxable year immediately following the
taxable year in which such corporation commenced its business operations. The MCIT shall be imposed whenever such
corporation has zero or negative taxable income or whenever the amount of MCIT is greater than the normal income
tax due from such corporation.
With the advent of such provision beginning January 1, 1998, it is certain that domestic corporations subject to normal
income tax as well as those choose to be subject thereto, such as PAL, are bound to pay income tax regardless of
whether they are operating at a profit or loss.
Thus, in case of operating loss, PAL may either opt to subject itself to minimum corporate income tax or to the 2%
franchise tax, whichever is lower. On the other hand, if PAL is operating at a profit, the income tax liability shall be the
lower amount between:
(1) normal income tax or MCIT whichever is higher; and
(2) 2% franchise tax.
The CIR attempts to sway this Court to adopt RMC No. 66-2003 since the "[c]onstruction by an executive branch of
government of a particular law although not binding upon the courts must be given weight as the construction comes
from the branch of the government called upon to implement the law."27
But the Court is unconvinced.
It is significant to note that RMC No. 66-2003 was issued only on 14 October 2003, more than two years after FY 20002001 of PAL ended on 31 March 2001. This violates the well-entrenched principle that statutes, including
administrative rules and regulations, operate prospectively only, unless the legislative intent to the contrary is
manifest by express terms or by necessary implication. 28
Moreover, despite the claims of the CIR that RMC No. 66-2003 is just a clarificatory and internal issuance, the Court
observes that RMC No. 66-2003 does more than just clarify a previous regulation and goes beyond mere internal
administration. It effectively increases the tax burden of PAL and other taxpayers who are similarly situated, making
them liable for a tax for which they were not liable before. Therefore, RMC No. 66-2003 cannot be given effect without
previous notice or publication to those who will be affected thereby. In Commissioner of Internal Revenue v. Court of
Appeals,29 the Court ratiocinated that:
It should be understandable that when an administrative rule is merely interpretative in nature, its applicability needs
nothing further than its bare issuance for it gives no real consequence more than what the law itself has already
prescribed. When, upon the other hand, the administrative rule goes beyond merely providing for the means that can
facilitate or render least cumbersome the implementation of the law but substantially adds to or increases the burden
of those governed, it behooves the agency to accord at least to those directly affected a chance to be heard, and
thereafter to be duly informed, before that new issuance is given the force and effect of law.
A reading of RMC 37-93, particularly considering the circumstances under which it has been issued, convinces us that
the circular cannot be viewed simply as a corrective measure (revoking in the process the previous holdings of past
Commissioners) or merely as construing Section 142(c)(1) of the NIRC, as amended, but has, in fact and most
importantly, been made in order to place "Hope Luxury," "Premium More" and "Champion" within the classification of
locally manufactured cigarettes bearing foreign brands and to thereby have them covered by RA 7654. Specifically, the
new law would have its amendatory provisions applied to locally manufactured cigarettes which at the time of its
effectivity were not so classified as bearing foreign brands. Prior to the issuance of the questioned circular, "Hope
Luxury," "Premium More," and "Champion" cigarettes were in the category of locally manufactured cigarettes not
bearing foreign brand subject to 45% ad valorem tax. Hence, without RMC 37-93, the enactment of RA 7654, would
have had no new tax rate consequence on private respondent's products. Evidently, in order to place "Hope Luxury,"
"Premium More," and "Champion" cigarettes within the scope of the amendatory law and subject them to an increased
tax rate, the now disputed RMC 37-93 had to be issued. In so doing, the BIR not simply interpreted the law; verily, it
legislated under its quasi-legislative authority. The due observance of the requirements of notice, of hearing, and of
publication should not have been then ignored.
Indeed, the BIR itself, in its RMC 10-86, has observed and provided:
"RMC NO. 10-86
Effectivity of Internal Revenue Rules and Regulations "It has been observed that one of the problem areas bearing on
compliance with Internal Revenue Tax rules and regulations is lack or insufficiency of due notice to the tax paying
public. Unless there is due notice, due compliance therewith may not be reasonably expected. And most importantly,
their strict enforcement could possibly suffer from legal infirmity in the light of the constitutional provision on 'due
process of law' and the essence of the Civil Code provision concerning effectivity of laws, whereby due notice is a basic
requirement (Sec. 1, Art. IV, Constitution; Art. 2, New Civil Code).
"In order that there shall be a just enforcement of rules and regulations, in conformity with the basic element of due
process, the following procedures are hereby prescribed for the drafting, issuance and implementation of the said
Revenue Tax Issuances:
"(1). This Circular shall apply only to (a) Revenue Regulations; (b) Revenue Audit Memorandum Orders; and (c)
Revenue Memorandum Circulars and Revenue Memorandum Orders bearing on internal revenue tax rules and
regulations.
"(2). Except when the law otherwise expressly provides, the aforesaid internal revenue tax issuances shall not begin to
be operative until after due notice thereof may be fairly presumed.
"Due notice of the said issuances may be fairly presumed only after the following procedures have been taken:
"xxx xxx xxx "(5). Strict compliance with the foregoing procedures is enjoined.13
Nothing on record could tell us that it was either impossible or impracticable for the BIR to observe and comply with
the above requirements before giving effect to its questioned circular. (Emphases ours.)
The Court, however, stops short of ruling on the validity of RMC No. 66-2003, for it is not among the issues raised in
the instant Petition. It only wishes to stress the requirement of prior notice to PAL before RMC No. 66-2003 could have
become effective. Only after RMC No. 66-2003 was issued on 14 October 2003 could PAL have been given notice of
said circular, and only following such notice to PAL would RMC No. 66-2003 have taken effect. Given this sequence, it is
not possible to say that RMC No. 66-2003 was already in effect and should have been strictly complied with by PAL for
its fiscal year which ended on 31 March 2001.
Even conceding that the construction of a statute by the CIR is to be given great weight, the courts, which include the
CTA, are not bound thereby if such construction is erroneous or is clearly shown to be in conflict with the governing
statute or the Constitution or other laws. "It is the role of the Judiciary to refine and, when necessary, correct
constitutional (and/or statutory) interpretation, in the context of the interactions of the three branches of the
government."30 It is furthermore the rule of long standing that this Court will not set aside lightly the conclusions
reached by the CTA which, by the very nature of its functions, is dedicated exclusively to the resolution of tax problems
and has, accordingly, developed an expertise on the subject, unless there has been an abuse or improvident exercise
of authority.31 In the Petition at bar, the CTA en banc and in division both adjudged that PAL is not liable for MCIT under
Presidential Decree No. 1590, and this Court has no sufficient basis to reverse them.
As to the assertions of the CIR that exemption from tax is not presumed, and the one claiming it must be able to show
that it indubitably exists, the Court recalls its pronouncements in Commissioner of Internal Revenue v. Court of
Appeals32:
We disagree. Petitioner Commissioner of Internal Revenue erred in applying the principles of tax exemption without
first applying the well-settled doctrine of strict interpretation in the imposition of taxes. It is obviously both illogical and
impractical to determine who are exempted without first determining who are covered by the aforesaid provision. The
Commissioner should have determined first if private respondent was covered by Section 205, applying the rule of
strict interpretation of laws imposing taxes and other burdens on the populace, before asking Ateneo to prove its
exemption therefrom. The Court takes this occasion to reiterate the hornbook doctrine in the interpretation of tax laws
that "(a) statute will not be construed as imposing a tax unless it does so clearly, expressly, and unambiguously. x x x
(A) tax cannot be imposed without clear and express words for that purpose. Accordingly, the general rule of requiring
adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing
act are not to be extended by implication." Parenthetically, in answering the question of who is subject to tax statutes,
it is basic that "in case of doubt, such statutes are to be construed most strongly against the government and in favor
of the subjects or citizens because burdens are not to be imposed nor presumed to be imposed beyond what statutes
expressly and clearly import." (Emphases ours.)
For two decades following the grant of its franchise by Presidential Decree No. 1590 in 1978, PAL was only being held
liable for the basic corporate income tax or franchise tax, whichever was lower; and its payment of either tax was in
lieu of all other taxes, except real property tax, in accordance with the plain language of Section 13 of the charter of
PAL. Therefore, the exemption of PAL from "all other taxes" was not just a presumption, but a previously established,
accepted, and respected fact, even for the BIR.
The MCIT was a new tax introduced by Republic Act No. 8424. Under the doctrine of strict interpretation, the burden is
upon the CIR to primarily prove that the new MCIT provisions of the NIRC of 1997, clearly, expressly, and
unambiguously extend and apply to PAL, despite the latters existing tax exemption. To do this, the CIR must convince
the Court that the MCIT is a basic corporate income tax, 33 and is not covered by the "in lieu of all other taxes" clause of
Presidential Decree No. 1590. Since the CIR failed in this regard, the Court is left with no choice but to consider the
MCIT as one of "all other taxes," from which PAL is exempt under the explicit provisions of its charter.
Not being liable for MCIT in FY 2000-2001, it necessarily follows that PAL need not apply for relief from said tax as the
CIR maintains.
WHEREFORE, premises considered, the instant Petition for Review is hereby DENIED, and the Decision dated 9 August
2007 and Resolution dated 11 October 2007 of the Court of Tax Appeals en banc in CTA E.B. No. 246 is hereby
AFFIRMED. No costs.
SO ORDERED.
G.R. No. 195909
September 26, 2012
COMMISSIONER OF INTERNAL REVENUE, PETITIONER,

vs.
ST. LUKE'S MEDICAL CENTER, INC., RESPONDENT.
x-----------------------x
G.R. No. 195960
ST. LUKE'S MEDICAL CENTER, INC., PETITIONER,
vs.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
DECISION
CARPIO, J.:
The Case
These are consolidated 1 petitions for review on certiorari under Rule 45 of the Rules of Court assailing the Decision of
19 November 2010 of the Court of Tax Appeals (CTA) En Banc and its Resolution 2 of 1 March 2011 in CTA Case No.
6746. This Court resolves this case on a pure question of law, which involves the interpretation of Section 27(B) vis-vis Section 30(E) and (G) of the National Internal Revenue Code of the Philippines (NIRC), on the income tax treatment
of proprietary non-profit hospitals.
The Facts
St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a non-stock and non-profit corporation. Under its
articles of incorporation, among its corporate purposes are:
(a) To establish, equip, operate and maintain a non-stock, non-profit Christian, benevolent, charitable and
scientific hospital which shall give curative, rehabilitative and spiritual care to the sick, diseased and disabled
persons; provided that purely medical and surgical services shall be performed by duly licensed physicians and
surgeons who may be freely and individually contracted by patients;
(b) To provide a career of health science education and provide medical services to the community through
organized clinics in such specialties as the facilities and resources of the corporation make possible;
(c) To carry on educational activities related to the maintenance and promotion of health as well as provide
facilities for scientific and medical researches which, in the opinion of the Board of Trustees, may be justified
by the facilities, personnel, funds, or other requirements that are available;
(d) To cooperate with organized medical societies, agencies of both government and private sector; establish
rules and regulations consistent with the highest professional ethics;
xxxx
On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St. Luke's deficiency taxes amounting to
P76,063,116.06 for 1998, comprised of deficiency income tax, value-added tax, withholding tax on compensation and
expanded withholding tax. The BIR reduced the amount to P63,935,351.57 during trial in the First Division of the CTA. 4
On 14 January 2003, St. Luke's filed an administrative protest with the BIR against the deficiency tax assessments. The
BIR did not act on the protest within the 180-day period under Section 228 of the NIRC. Thus, St. Luke's appealed to
the CTA.
The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a 10% preferential tax rate on the
income of proprietary non-profit hospitals, should be applicable to St. Luke's. According to the BIR, Section 27(B),
introduced in 1997, "is a new provision intended to amend the exemption on non-profit hospitals that were previously
categorized as non-stock, non-profit corporations under Section 26 of the 1997 Tax Code x x x." 5 It is a specific
provision which prevails over the general exemption on income tax granted under Section 30(E) and (G) for non-stock,
non-profit charitable institutions and civic organizations promoting social welfare. 6
The BIR claimed that St. Luke's was actually operating for profit in 1998 because only 13% of its revenues came from
charitable purposes. Moreover, the hospital's board of trustees, officers and employees directly benefit from its profits
and assets. St. Luke's had total revenues of P1,730,367,965 or approximately P1.73 billion from patient services in
1998. 7
St. Luke's contended that the BIR should not consider its total revenues, because its free services to patients was
P218,187,498 or 65.20% of its 1998 operating income (i.e., total revenues less operating expenses) of P334,642,615.
St. Luke's also claimed that its income does not inure to the benefit of any individual.
St. Luke's maintained that it is a non-stock and non-profit institution for charitable and social welfare purposes under
Section 30(E) and (G) of the NIRC. It argued that the making of profit per se does not destroy its income tax exemption.
The petition of the BIR before this Court in G.R. No. 195909 reiterates its arguments before the CTA that Section 27(B)
applies to St. Luke's. The petition raises the sole issue of whether the enactment of Section 27(B) takes proprietary
non-profit hospitals out of the income tax exemption under Section 30 of the NIRC and instead, imposes a preferential
rate of 10% on their taxable income. The BIR prays that St. Luke's be ordered to pay P57,659,981.19 as deficiency
income and expanded withholding tax for 1998 with surcharges and interest for late payment.
The petition of St. Luke's in G.R. No. 195960 raises factual matters on the treatment and withholding of a part of its
income, 9 as well as the payment of surcharge and delinquency interest. There is no ground for this Court to undertake
such a factual review. Under the Constitution 10 and the Rules of Court, 11 this Court's review power is generally limited
to "cases in which only an error or question of law is involved." 12 This Court cannot depart from this limitation if a
party fails to invoke a recognized exception.
The Ruling of the Court of Tax Appeals
The CTA En Banc Decision on 19 November 2010 affirmed in toto the CTA First Division Decision dated 23 February
2009 which held:
WHEREFORE, the Amended Petition for Review [by St. Luke's] is hereby PARTIALLY GRANTED. Accordingly, the 1998
deficiency VAT assessment issued by respondent against petitioner in the amount of P110,000.00 is hereby
CANCELLED and WITHDRAWN. However, petitioner is hereby ORDERED to PAY deficiency income tax and deficiency
expanded withholding tax for the taxable year 1998 in the respective amounts of P5,496,963.54 and P778,406.84 or in
the sum of P6,275,370.38, x x x.
xxxx
In addition, petitioner is hereby ORDERED to PAY twenty percent (20%) delinquency interest on the total amount of
P6,275,370.38 counted from October 15, 2003 until full payment thereof, pursuant to Section 249(C)(3) of the NIRC of
1997.
SO ORDERED.
13
The deficiency income tax of P5,496,963.54, ordered by the CTA En Banc to be paid, arose from the failure of St. Luke's
to prove that part of its income in 1998 (declared as "Other Income-Net") 14 came from charitable activities. The CTA
cancelled the remainder of the P63,113,952.79 deficiency assessed by the BIR based on the 10% tax rate under
Section 27(B) of the NIRC, which the CTA En Banc held was not applicable to St. Luke's. 15
The CTA ruled that St. Luke's is a non-stock and non-profit charitable institution covered by Section 30(E) and (G) of
the NIRC. This ruling would exempt all income derived by St. Luke's from services to its patients, whether paying or
non-paying. The CTA reiterated its earlier decision in St. Luke's Medical Center, Inc. v. Commissioner of Internal
Revenue, 16 which examined the primary purposes of St. Luke's under its articles of incorporation and various
documents 17 identifying St. Luke's as a charitable institution.
The CTA adopted the test in Hospital de San Juan de Dios, Inc. v. Pasay City, 18 which states that "a charitable
institution does not lose its charitable character and its consequent exemption from taxation merely because
recipients of its benefits who are able to pay are required to do so, where funds derived in this manner are devoted to
the charitable purposes of the institution x x x." 19 The generation of income from paying patients does not per se
destroy the charitable nature of St. Luke's.
Hospital de San Juan cited Jesus Sacred Heart College v. Collector of Internal Revenue, 20 which ruled that the old NIRC
(Commonwealth Act No. 466, as amended) 21 "positively exempts from taxation those corporations or associations
which, otherwise, would be subject thereto, because of the existence of x x x net income." 22 The NIRC of 1997
substantially reproduces the provision on charitable institutions of the old NIRC. Thus, in rejecting the argument that
tax exemption is lost whenever there is net income, the Court in Jesus Sacred Heart College declared: "[E]very
responsible organization must be run to at least insure its existence, by operating within the limits of its own
resources, especially its regular income. In other words, it should always strive, whenever possible, to have a surplus."
23
The CTA held that Section 27(B) of the present NIRC does not apply to St. Luke's. 24 The CTA explained that to apply the
10% preferential rate, Section 27(B) requires a hospital to be "non-profit." On the other hand, Congress specifically
used the word "non-stock" to qualify a charitable "corporation or association" in Section 30(E) of the NIRC. According to
the CTA, this is unique in the present tax code, indicating an intent to exempt this type of charitable organization from
income tax. Section 27(B) does not require that the hospital be "non-stock." The CTA stated, "it is clear that non-stock,
non-profit hospitals operated exclusively for charitable purpose are exempt from income tax on income received by
them as such, applying the provision of Section 30(E) of the NIRC of 1997, as amended." 25
The Issue
The sole issue is whether St. Luke's is liable for deficiency income tax in 1998 under Section 27(B) of the NIRC, which
imposes a preferential tax rate of 10% on the income of proprietary non-profit hospitals.
The Ruling of the Court
St. Luke's Petition in G.R. No. 195960
As a preliminary matter, this Court denies the petition of St. Luke's in G.R. No. 195960 because the petition raises
factual issues. Under Section 1, Rule 45 of the Rules of Court, "[t]he petition shall raise only questions of law which
must be distinctly set forth." St. Luke's cites Martinez v. Court of Appeals 26 which permits factual review "when the
Court of Appeals [in this case, the CTA] manifestly overlooked certain relevant facts not disputed by the parties and
which, if properly considered, would justify a different conclusion." 27
This Court does not see how the CTA overlooked relevant facts. St. Luke's itself stated that the CTA "disregarded the
testimony of [its] witness, Romeo B. Mary, being allegedly self-serving, to show the nature of the 'Other Income-Net' x
x x." 28 This is not a case of overlooking or failing to consider relevant evidence. The CTA obviously considered the
evidence and concluded that it is self-serving. The CTA declared that it has "gone through the records of this case and
found no other evidence aside from the self-serving affidavit executed by [the] witnesses [of St. Luke's] x x x." 29
The deficiency tax on "Other Income-Net" stands. Thus, St. Luke's is liable to pay the 25% surcharge under Section
248(A)(3) of the NIRC. There is "[f]ailure to pay the deficiency tax within the time prescribed for its payment in the
notice of assessment[.]" 30 St. Luke's is also liable to pay 20% delinquency interest under Section 249(C)(3) of the
NIRC. 31 As explained by the CTA En Banc, the amount of P6,275,370.38 in the dispositive portion of the CTA First
Division Decision includes only deficiency interest under Section 249(A) and (B) of the NIRC and not delinquency
interest. 32
The Main Issue
The issue raised by the BIR is a purely legal one. It involves the effect of the introduction of Section 27(B) in the NIRC
of 1997 vis--vis Section 30(E) and (G) on the income tax exemption of charitable and social welfare institutions. The
10% income tax rate under Section 27(B) specifically pertains to proprietary educational institutions and proprietary
non-profit hospitals. The BIR argues that Congress intended to remove the exemption that non-profit hospitals
previously enjoyed under Section 27(E) of the NIRC of 1977, which is now substantially reproduced in Section 30(E) of
the NIRC of 1997. 33 Section 27(B) of the present NIRC provides:
SEC. 27. Rates of Income Tax on Domestic Corporations. xxxx
(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions and hospitals which are
non-profit shall pay a tax of ten percent (10%) on their taxable income except those covered by Subsection (D) hereof:
Provided, That if the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the
total gross income derived by such educational institutions or hospitals from all sources, the tax prescribed in
Subsection (A) hereof shall be imposed on the entire taxable income. For purposes of this Subsection, the term
'unrelated trade, business or other activity' means any trade, business or other activity, the conduct of which is not
substantially related to the exercise or performance by such educational institution or hospital of its primary purpose
or function. A 'proprietary educational institution' is any private school maintained and administered by private
individuals or groups with an issued permit to operate from the Department of Education, Culture and Sports (DECS),
or the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA),
as the case may be, in accordance with existing laws and regulations. (Emphasis supplied)
St. Luke's claims tax exemption under Section 30(E) and (G) of the NIRC. It contends that it is a charitable institution
and an organization promoting social welfare. The arguments of St. Luke's focus on the wording of Section 30(E)
exempting from income tax non-stock, non-profit charitable institutions. 34 St. Luke's asserts that the legislative intent
of introducing Section 27(B) was only to remove the exemption for "proprietary non-profit" hospitals.
provisions of Section 30 state:
35
The relevant
SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed under this Title in
respect to income received by them as such:
xxxx
(E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic,
or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to
the benefit of any member, organizer, officer or any specific person;
xxxx
(G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare;
xxxx
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the
foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit
regardless of the disposition made of such income, shall be subject to tax imposed under this Code. (Emphasis
supplied)
The Court partly grants the petition of the BIR but on a different ground. We hold that Section 27(B) of the NIRC does
not remove the income tax exemption of proprietary non-profit hospitals under Section 30(E) and (G). Section 27(B) on
one hand, and Section 30(E) and (G) on the other hand, can be construed together without the removal of such tax
exemption. The effect of the introduction of Section 27(B) is to subject the taxable income of two specific institutions,
namely, proprietary non-profit educational institutions 36 and proprietary non-profit hospitals, among the institutions
covered by Section 30, to the 10% preferential rate under Section 27(B) instead of the ordinary 30% corporate rate
under the last paragraph of Section 30 in relation to Section 27(A)(1).
Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary non-profit educational
institutions and (2) proprietary non-profit hospitals. The only qualifications for hospitals are that they must be
proprietary and non-profit. "Proprietary" means private, following the definition of a "proprietary educational
institution" as "any private school maintained and administered by private individuals or groups" with a government
permit. "Non-profit" means no net income or asset accrues to or benefits any member or specific person, with all the
net income or asset devoted to the institution's purposes and all its activities conducted not for profit.
"Non-profit" does not necessarily mean "charitable." In Collector of Internal Revenue v. Club Filipino Inc. de Cebu, 37
this Court considered as non-profit a sports club organized for recreation and entertainment of its stockholders and
members. The club was primarily funded by membership fees and dues. If it had profits, they were used for overhead
expenses and improving its golf course. 38 The club was non-profit because of its purpose and there was no evidence
that it was engaged in a profit-making enterprise. 39
The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not charitable. The Court defined "charity" in
Lung Center of the Philippines v. Quezon City 40 as "a gift, to be applied consistently with existing laws, for the benefit
of an indefinite number of persons, either by bringing their minds and hearts under the influence of education or
religion, by assisting them to establish themselves in life or [by] otherwise lessening the burden of government." 41 A
non-profit club for the benefit of its members fails this test. An organization may be considered as non-profit if it does
not distribute any part of its income to stockholders or members. However, despite its being a tax exempt institution,
any income such institution earns from activities conducted for profit is taxable, as expressly provided in the last
paragraph of Section 30.
To be a charitable institution, however, an organization must meet the substantive test of charity in Lung Center. The
issue in Lung Center concerns exemption from real property tax and not income tax. However, it provides for the test
of charity in our jurisdiction. Charity is essentially a gift to an indefinite number of persons which lessens the burden of
government. In other words, charitable institutions provide for free goods and services to the public which would
otherwise fall on the shoulders of government. Thus, as a matter of efficiency, the government forgoes taxes which
should have been spent to address public needs, because certain private entities already assume a part of the burden.
This is the rationale for the tax exemption of charitable institutions. The loss of taxes by the government is
compensated by its relief from doing public works which would have been funded by appropriations from the Treasury.
42
Charitable institutions, however, are not ipso facto entitled to a tax exemption. The requirements for a tax exemption
are specified by the law granting it. The power of Congress to tax implies the power to exempt from tax. Congress can
create tax exemptions, subject to the constitutional provision that "[n]o law granting any tax exemption shall be
passed without the concurrence of a majority of all the Members of Congress." 43 The requirements for a tax exemption
are strictly construed against the taxpayer 44 because an exemption restricts the collection of taxes necessary for the
existence of the government.
The Court in Lung Center declared that the Lung Center of the Philippines is a charitable institution for the purpose of
exemption from real property taxes. This ruling uses the same premise as Hospital de San Juan 45 and Jesus Sacred
Heart College 46 which says that receiving income from paying patients does not destroy the charitable nature of a
hospital.
As a general principle, a charitable institution does not lose its character as such and its exemption from taxes simply
because it derives income from paying patients, whether out-patient, or confined in the hospital, or receives subsidies
from the government, so long as the money received is devoted or used altogether to the charitable object which it is
intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution.
47
For real property taxes, the incidental generation of income is permissible because the test of exemption is the use of
the property. The Constitution provides that "[c]haritable institutions, churches and personages or convents
appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly,
and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation." 48 The test of
exemption is not strictly a requirement on the intrinsic nature or character of the institution. The test requires that the
institution use the property in a certain way, i.e. for a charitable purpose. Thus, the Court held that the Lung Center of
the Philippines did not lose its charitable character when it used a portion of its lot for commercial purposes. The effect
of failing to meet the use requirement is simply to remove from the tax exemption that portion of the property not
devoted to charity.
The Constitution exempts charitable institutions only from real property taxes. In the NIRC, Congress decided to extend
the exemption to income taxes. However, the way Congress crafted Section 30(E) of the NIRC is materially different
from Section 28(3), Article VI of the Constitution. Section 30(E) of the NIRC defines the corporation or association that
is exempt from income tax. On the other hand, Section 28(3), Article VI of the Constitution does not define a charitable
institution, but requires that the institution "actually, directly and exclusively" use the property for a charitable
purpose.
Section 30(E) of the NIRC provides that a charitable institution must be:
(1) A non-stock corporation or association;
(2) Organized exclusively for charitable purposes;
(3) Operated exclusively for charitable purposes; and
(4) No part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or
any specific person.
Thus, both the organization and operations of the charitable institution must be devoted "exclusively" for charitable
purposes. The organization of the institution refers to its corporate form, as shown by its articles of incorporation, bylaws and other constitutive documents. Section 30(E) of the NIRC specifically requires that the corporation or
association be non-stock, which is defined by the Corporation Code as "one where no part of its income is distributable
as dividends to its members, trustees, or officers" 49 and that any profit "obtain[ed] as an incident to its operations
shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation
was organized." 50 However, under Lung Center, any profit by a charitable institution must not only be plowed back
"whenever necessary or proper," but must be "devoted or used altogether to the charitable object which it is intended
to achieve." 51
The operations of the charitable institution generally refer to its regular activities. Section 30(E) of the NIRC requires
that these operations be exclusive to charity. There is also a specific requirement that "no part of [the] net income or
asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person." The use of lands,
buildings and improvements of the institution is but a part of its operations.
There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable institution. However, this does
not automatically exempt St. Luke's from paying taxes. This only refers to the organization of St. Luke's. Even if St.
Luke's meets the test of charity, a charitable institution is not ipso facto tax exempt. To be exempt from real property
taxes, Section 28(3), Article VI of the Constitution requires that a charitable institution use the property "actually,
directly and exclusively" for charitable purposes. To be exempt from income taxes, Section 30(E) of the NIRC requires
that a charitable institution must be "organized and operated exclusively" for charitable purposes. Likewise, to be
exempt from income taxes, Section 30(G) of the NIRC requires that the institution be "operated exclusively" for social
welfare.
However, the last paragraph of Section 30 of the NIRC qualifies the words "organized and operated exclusively" by
providing that:
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the
foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit
regardless of the disposition made of such income, shall be subject to tax imposed under this Code. (Emphasis
supplied)
In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution conducts "any" activity for
profit, such activity is not tax exempt even as its not-for-profit activities remain tax exempt. This paragraph qualifies
the requirements in Section 30(E) that the "[n]on-stock corporation or association [must be] organized and operated
exclusively for x x x charitable x x x purposes x x x." It likewise qualifies the requirement in Section 30(G) that the civic
organization must be "operated exclusively" for the promotion of social welfare.
Thus, even if the charitable institution must be "organized and operated exclusively" for charitable purposes, it is
nevertheless allowed to engage in "activities conducted for profit" without losing its tax exempt status for its not-forprofit activities. The only consequence is that the "income of whatever kind and character" of a charitable institution
"from any of its activities conducted for profit, regardless of the disposition made of such income, shall be subject to
tax." Prior to the introduction of Section 27(B), the tax rate on such income from for-profit activities was the ordinary
corporate rate under Section 27(A). With the introduction of Section 27(B), the tax rate is now 10%.
In 1998, St. Luke's had total revenues of P1,730,367,965 from services to paying patients. It cannot be disputed that a
hospital which receives approximately P1.73 billion from paying patients is not an institution "operated exclusively" for
charitable purposes. Clearly, revenues from paying patients are income received from "activities conducted for profit."
52
Indeed, St. Luke's admits that it derived profits from its paying patients. St. Luke's declared P1,730,367,965 as
"Revenues from Services to Patients" in contrast to its "Free Services" expenditure of P218,187,498. In its Comment in
G.R. No. 195909, St. Luke's showed the following "calculation" to support its claim that 65.20% of its "income after
expenses was allocated to free or charitable services" in 1998. 53
REVENUES FROM SERVICES TO PATIENTS
P1,730,367,965.00
OPERATING EXPENSES
Professional care of patients
P1,016,608,394.00
Administrative
287,319,334.00
Household and Property
91,797,622.00
P1,395,725,350.00
INCOME FROM OPERATIONS
P334,642,615.00
100%
Free Services
-218,187,498.00
-65.20%
INCOME FROM OPERATIONS, Net of FREE SERVICES
P116,455,117.00
34.80%
OTHER INCOME
17,482,304.00
EXCESS OF REVENUES OVER EXPENSES
P133,937,421.00
In Lung Center, this Court declared:

"[e]xclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment;
and "exclusively" is defined, "in a manner to exclude; as enjoying a privilege exclusively." x x x The words "dominant
use" or "principal use" cannot be substituted for the words "used exclusively" without doing violence to the
Constitution and the law. Solely is synonymous with exclusively. 54
The Court cannot expand the meaning of the words "operated exclusively" without violating the NIRC. Services to
paying patients are activities conducted for profit. They cannot be considered any other way. There is a "purpose to
make profit over and above the cost" of services. 55 The P1.73 billion total revenues from paying patients is not even
incidental to St. Luke's charity expenditure of P218,187,498 for non-paying patients.
St. Luke's claims that its charity expenditure of P218,187,498 is 65.20% of its operating income in 1998. However, if a
part of the remaining 34.80% of the operating income is reinvested in property, equipment or facilities used for
services to paying and non-paying patients, then it cannot be said that the income is "devoted or used altogether to
the charitable object which it is intended to achieve." 56 The income is plowed back to the corporation not entirely for
charitable purposes, but for profit as well. In any case, the last paragraph of Section 30 of the NIRC expressly qualifies
that income from activities for profit is taxable "regardless of the disposition made of such income."
Jesus Sacred Heart College declared that there is no official legislative record explaining the phrase "any activity
conducted for profit." However, it quoted a deposition of Senator Mariano Jesus Cuenco, who was a member of the
Committee of Conference for the Senate, which introduced the phrase "or from any activity conducted for profit."
P. Cuando ha hablado de la Universidad de Santo Toms que tiene un hospital, no cree Vd. que es una actividad
esencial dicho hospital para el funcionamiento del colegio de medicina de dicha universidad?
xxxx
R. Si el hospital se limita a recibir enformos pobres, mi contestacin seria afirmativa; pero considerando que el hospital
tiene cuartos de pago, y a los mismos generalmente van enfermos de buena posicin social econmica, lo que se paga
por estos enfermos debe estar sujeto a 'income tax', y es una de las razones que hemos tenido para insertar las
palabras o frase 'or from any activity conducted for profit.' 57
The question was whether having a hospital is essential to an educational institution like the College of Medicine of the
University of Santo Tomas. Senator Cuenco answered that if the hospital has paid rooms generally occupied by people
of good economic standing, then it should be subject to income tax. He said that this was one of the reasons Congress
inserted the phrase "or any activity conducted for profit."
The question in Jesus Sacred Heart College involves an educational institution. 58 However, it is applicable to charitable
institutions because Senator Cuenco's response shows an intent to focus on the activities of charitable institutions.
Activities for profit should not escape the reach of taxation. Being a non-stock and non-profit corporation does not, by
this reason alone, completely exempt an institution from tax. An institution cannot use its corporate form to prevent its
profitable activities from being taxed.
The Court finds that St. Luke's is a corporation that is not "operated exclusively" for charitable or social welfare
purposes insofar as its revenues from paying patients are concerned. This ruling is based not only on a strict
interpretation of a provision granting tax exemption, but also on the clear and plain text of Section 30(E) and (G).
Section 30(E) and (G) of the NIRC requires that an institution be "operated exclusively" for charitable or social welfare
purposes to be completely exempt from income tax. An institution under Section 30(E) or (G) does not lose its tax
exemption if it earns income from its for-profit activities. Such income from for-profit activities, under the last
paragraph of Section 30, is merely subject to income tax, previously at the ordinary corporate rate but now at the
preferential 10% rate pursuant to Section 27(B).
A tax exemption is effectively a social subsidy granted by the State because an exempt institution is spared from
sharing in the expenses of government and yet benefits from them. Tax exemptions for charitable institutions should
therefore be limited to institutions beneficial to the public and those which improve social welfare. A profit-making
entity should not be allowed to exploit this subsidy to the detriment of the government and other taxpayers.1wphi1
St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely tax exempt from all
its income. However, it remains a proprietary non-profit hospital under Section 27(B) of the NIRC as long as it does not
distribute any of its profits to its members and such profits are reinvested pursuant to its corporate purposes. St.
Luke's, as a proprietary non-profit hospital, is entitled to the preferential tax rate of 10% on its net income from its forprofit activities.
St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC. However, St. Luke's has
good reasons to rely on the letter dated 6 June 1990 by the BIR, which opined that St. Luke's is "a corporation for
purely charitable and social welfare purposes"59 and thus exempt from income tax. 60 In Michael J. Lhuillier, Inc. v.
Commissioner of Internal Revenue, 61 the Court said that "good faith and honest belief that one is not subject to tax on
the basis of previous interpretation of government agencies tasked to implement the tax law, are sufficient justification
to delete the imposition of surcharges and interest." 62
WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No. 195909 is PARTLY GRANTED. The
Decision of the Court of Tax Appeals En Banc dated 19 November 2010 and its Resolution dated 1 March 2011 in CTA
Case No. 6746 are MODIFIED. St. Luke's Medical Center, Inc. is ORDERED TO PAY the deficiency income tax in 1998
based on the 10% preferential income tax rate under Section 27(B) of the National Internal Revenue Code. However, it
is not liable for surcharges and interest on such deficiency income tax under Sections 248 and 249 of the National
Internal Revenue Code. All other parts of the Decision and Resolution of the Court of Tax Appeals are AFFIRMED.
The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for violating Section 1, Rule 45 of the Rules
of Court.
SO ORDERED.
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.:
Does the twenty percent (20%) final withholding tax (FWT) on a bank's passive income 1 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 CA-G.R. SP No. 52707 2 affirming the Court of Tax Appeals (CTA) Decision3 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 Court of Appeals Decision dated
November 22, 1999 in CA-G.R. SP No. 512484 reversing the CTA Decision5 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 income are subject to a 20% FWT, 6 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)
5%
Medium-term maturity (over two [2] years but not exceeding four [4]
years)
3%
Long-term maturity
(1) Over four (4) years but not exceeding seven (7) years
1%
(2) Over seven (7) years
0%
(b) On dividends
0%
(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 long-term 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.
Meanwhile, on January 30, 1996, the CTA, in Asian Bank Corporation v. Commissioner of Internal Revenue 7 (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.
On the same date, Citytrust filed a petition for review with the CTA, which eventually granted its claim. 8
On appeal by the Commissioner, the Court of Appeals affirmed the CTA Decision, citing as main bases Commissioner of
Internal Revenue v. Tours Specialist Inc.9 and Commissioner of Internal Revenue v. Manila Jockey Club,10 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 ten-peso 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.
On February 3, 1999, the CTA allowed refund in the reduced amount of P1,345,743.01, 11 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;
third, the ruling by this Court in Manila Jockey Club,12 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.
In its Resolution13 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 all items of income actually received; and, second,
this Court's ruling in Manila Jockey Club14 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 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,15 Commissioner of Internal Revenue v. Solidbank Corporation,16
Commissioner of Internal Revenue v. Bank of Commerce,17 and the latest, Commissioner of Internal Revenue v. Bank of
the Philippine Islands.18
The above cases are unanimous in defining "gross receipts" as "the entire receipts without any deduction." We
quote the Court's enlightening ratiocination in Bank of the Philippines Islands,19 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."
In China Banking Corporation,20 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 No. 3921 and throughout its successive re-enactments,22 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. 12-80 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 Commissioner of Internal Revenue v. Solidbank Corporation,23 "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 actually received or merely
accrued, to form part of the bank's taxable gross receipts. 2
Moreover, this Court, in Bank of Commerce,25 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 with the same kind of character of tax. 26 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 from each other. In Solidbank
Corporation,27 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.
Now, both Asianbank and Citytrust rely on Manila Jockey Club28 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.
The Manila Jockey Club29 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 constructive possession
and not subject to any reservation, the withholding agent being merely a conduit in the collection process. 30 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. 76573 September 14, 1989

MARUBENI CORPORATION (formerly Marubeni Iida, Co., Ltd.), petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX APPEALS, respondents.
Melquiades C. Gutierrez for petitioner.
The Solicitor General for respondents.
FERNAN, C.J.:
Petitioner, Marubeni Corporation, representing itself as a foreign corporation duly organized and existing under the
laws of Japan and duly licensed to engage in business under Philippine laws with branch office at the 4th Floor, FEEMI
Building, Aduana Street, Intramuros, Manila seeks the reversal of the decision of the Court of Tax Appeals 1 dated
February 12, 1986 denying its claim for refund or tax credit in the amount of P229,424.40 representing alleged
overpayment of branch profit remittance tax withheld from dividends by Atlantic Gulf and Pacific Co. of Manila (AG&P).
The following facts are undisputed: Marubeni Corporation of Japan has equity investments in AG&P of Manila. For the
first quarter of 1981 ending March 31, AG&P declared and paid cash dividends to petitioner in the amount of P849,720
and withheld the corresponding 10% final dividend tax thereon. Similarly, for the third quarter of 1981 ending
September 30, AG&P declared and paid P849,720 as cash dividends to petitioner and withheld the corresponding 10%
final dividend tax thereon. 2
AG&P directly remitted the cash dividends to petitioner's head office in Tokyo, Japan, net not only of the 10% final
dividend tax in the amounts of P764,748 for the first and third quarters of 1981, but also of the withheld 15% profit
remittance tax based on the remittable amount after deducting the final withholding tax of 10%. A schedule of
dividends declared and paid by AG&P to its stockholder Marubeni Corporation of Japan, the 10% final intercorporate
dividend tax and the 15% branch profit remittance tax paid thereon, is shown below:
1981
FIRST QUARTER
(three months
ended 3.31.81)
(In Pesos)
THIRD
QUARTER
(three months
ended 9.30.81)
TOTAL OF FIRST
and THIRD
quarters
849,720.44
849,720.00
1,699,440.00
84,972.00
84,972.00
169,944.00
Cash Dividend net of

10% Dividend Tax
Withheld
764,748.00
764,748.00
1,529,496.00
15% Branch Profit

Remittance Tax Withheld
114,712.20
114,712.20
229,424.40
Cash Dividends Paid
10% Dividend Tax

Withheld
Net Amount Remitted to

Petitioner
650,035.80
650,035.80
1,300,071.60
The 10% final dividend tax of P84,972 and the 15% branch profit remittance tax of P114,712.20 for the first quarter of
1981 were paid to the Bureau of Internal Revenue by AG&P on April 20, 1981 under Central Bank Receipt No. 6757880.
Likewise, the 10% final dividend tax of P84,972 and the 15% branch profit remittance tax of P114,712 for the third
quarter of 1981 were paid to the Bureau of Internal Revenue by AG&P on August 4, 1981 under Central Bank
Confirmation Receipt No. 7905930. 4
Thus, for the first and third quarters of 1981, AG&P as withholding agent paid 15% branch profit remittance on cash
dividends declared and remitted to petitioner at its head office in Tokyo in the total amount of P229,424.40 on April 20
and August 4, 1981. 5
In a letter dated January 29, 1981, petitioner, through the accounting firm Sycip, Gorres, Velayo and Company, sought
a ruling from the Bureau of Internal Revenue on whether or not the dividends petitioner received from AG&P are
effectively connected with its conduct or business in the Philippines as to be considered branch profits subject to the
15% profit remittance tax imposed under Section 24 (b) (2) of the National Internal Revenue Code as amended by
Presidential Decrees Nos. 1705 and 1773.
In reply to petitioner's query, Acting Commissioner Ruben Ancheta ruled:
Pursuant to Section 24 (b) (2) of the Tax Code, as amended, only profits remitted abroad by a branch
office to its head office which are effectively connected with its trade or business in the Philippines are
subject to the 15% profit remittance tax. To be effectively connected it is not necessary that the
income be derived from the actual operation of taxpayer-corporation's trade or business; it is sufficient
that the income arises from the business activity in which the corporation is engaged. For example, if a
resident foreign corporation is engaged in the buying and selling of machineries in the Philippines and
invests in some shares of stock on which dividends are subsequently received, the dividends thus
earned are not considered 'effectively connected' with its trade or business in this country. (Revenue
Memorandum Circular No. 55-80).
In the instant case, the dividends received by Marubeni from AG&P are not income arising from the
business activity in which Marubeni is engaged. Accordingly, said dividends if remitted abroad are not
considered branch profits for purposes of the 15% profit remittance tax imposed by Section 24 (b) (2)
of the Tax Code, as amended . . . 6
Consequently, in a letter dated September 21, 1981 and filed with the Commissioner of Internal Revenue on
September 24, 1981, petitioner claimed for the refund or issuance of a tax credit of P229,424.40 "representing profit
tax remittance erroneously paid on the dividends remitted by Atlantic Gulf and Pacific Co. of Manila (AG&P) on April 20
and August 4, 1981 to ... head office in Tokyo. 7
On June 14, 1982, respondent Commissioner of Internal Revenue denied petitioner's claim for refund/credit of
P229,424.40 on the following grounds:
While it is true that said dividends remitted were not subject to the 15% profit remittance tax as the
same were not income earned by a Philippine Branch of Marubeni Corporation of Japan; and neither is
it subject to the 10% intercorporate dividend tax, the recipient of the dividends, being a non-resident
stockholder, nevertheless, said dividend income is subject to the 25 % tax pursuant to Article 10 (2)
(b) of the Tax Treaty dated February 13, 1980 between the Philippines and Japan.
Inasmuch as the cash dividends remitted by AG&P to Marubeni Corporation, Japan is subject to 25 %
tax, and that the taxes withheld of 10 % as intercorporate dividend tax and 15 % as profit remittance
tax totals (sic) 25 %, the amount refundable offsets the liability, hence, nothing is left to be refunded.
Petitioner appealed to the Court of Tax Appeals which affirmed the denial of the refund by the Commissioner of Internal
Revenue in its assailed judgment of February 12, 1986. 9
In support of its rejection of petitioner's claimed refund, respondent Tax Court explained:
Whatever the dialectics employed, no amount of sophistry can ignore the fact that the dividends in
question are income taxable to the Marubeni Corporation of Tokyo, Japan. The said dividends were
distributions made by the Atlantic, Gulf and Pacific Company of Manila to its shareholder out of its
profits on the investments of the Marubeni Corporation of Japan, a non-resident foreign corporation.
The investments in the Atlantic Gulf & Pacific Company of the Marubeni Corporation of Japan were
directly made by it and the dividends on the investments were likewise directly remitted to and
received by the Marubeni Corporation of Japan. Petitioner Marubeni Corporation Philippine Branch has
no participation or intervention, directly or indirectly, in the investments and in the receipt of the
dividends. And it appears that the funds invested in the Atlantic Gulf & Pacific Company did not come
out of the funds infused by the Marubeni Corporation of Japan to the Marubeni Corporation Philippine
Branch. As a matter of fact, the Central Bank of the Philippines, in authorizing the remittance of the
foreign exchange equivalent of (sic) the dividends in question, treated the Marubeni Corporation of
Japan as a non-resident stockholder of the Atlantic Gulf & Pacific Company based on the supporting
documents submitted to it.
Subject to certain exceptions not pertinent hereto, income is taxable to the person who earned it.
Admittedly, the dividends under consideration were earned by the Marubeni Corporation of Japan, and
hence, taxable to the said corporation. While it is true that the Marubeni Corporation Philippine Branch
is duly licensed to engage in business under Philippine laws, such dividends are not the income of the
Philippine Branch and are not taxable to the said Philippine branch. We see no significance thereto in
the identity concept or principal-agent relationship theory of petitioner because such dividends are the
income of and taxable to the Japanese corporation in Japan and not to the Philippine branch. 10
Hence, the instant petition for review.
It is the argument of petitioner corporation that following the principal-agent relationship theory, Marubeni Japan is
likewise a resident foreign corporation subject only to the 10 % intercorporate final tax on dividends received from a
domestic corporation in accordance with Section 24(c) (1) of the Tax Code of 1977 which states:
Dividends received by a domestic or resident foreign corporation liable to tax under this Code (1)
Shall be subject to a final tax of 10% on the total amount thereof, which shall be collected and paid as
provided in Sections 53 and 54 of this Code ....
Public respondents, however, are of the contrary view that Marubeni, Japan, being a non-resident foreign corporation
and not engaged in trade or business in the Philippines, is subject to tax on income earned from Philippine sources at
the rate of 35 % of its gross income under Section 24 (b) (1) of the same Code which reads:
(b) Tax on foreign corporations (1) Non-resident corporations. A foreign corporation not engaged
in trade or business in the Philippines shall pay a tax equal to thirty-five per cent of the gross income
received during each taxable year from all sources within the Philippines as ... dividends ....
but expressly made subject to the special rate of 25% under Article 10(2) (b) of the Tax Treaty of 1980 concluded
between the Philippines and Japan. 11 Thus:
Article 10 (1) Dividends paid by a company which is a resident of a Contracting State to a resident of
the other Contracting State may be taxed in that other Contracting State.
(2) However, such dividends may also be taxed in the Contracting State of which the company paying
the dividends is a resident, and according to the laws of that Contracting State, but if the recipient is
the beneficial owner of the dividends the tax so charged shall not exceed;
(a) . . .
(b) 25 per cent of the gross amount of the dividends in all other cases.
Central to the issue of Marubeni Japan's tax liability on its dividend income from Philippine sources is therefore the
determination of whether it is a resident or a non-resident foreign corporation under Philippine laws.
Under the Tax Code, a resident foreign corporation is one that is "engaged in trade or business" within the Philippines.
Petitioner contends that precisely because it is engaged in business in the Philippines through its Philippine branch
that it must be considered as a resident foreign corporation. Petitioner reasons that since the Philippine branch and the
Tokyo head office are one and the same entity, whoever made the investment in AG&P, Manila does not matter at all. A
single corporate entity cannot be both a resident and a non-resident corporation depending on the nature of the
particular transaction involved. Accordingly, whether the dividends are paid directly to the head office or coursed
through its local branch is of no moment for after all, the head office and the office branch constitute but one
corporate entity, the Marubeni Corporation, which, under both Philippine tax and corporate laws, is a resident foreign
corporation because it is transacting business in the Philippines.
The Solicitor General has adequately refuted petitioner's arguments in this wise:
The general rule that a foreign corporation is the same juridical entity as its branch office in the
Philippines cannot apply here. This rule is based on the premise that the business of the foreign
corporation is conducted through its branch office, following the principal agent relationship theory. It
is understood that the branch becomes its agent here. So that when the foreign corporation transacts
business in the Philippines independently of its branch, the principal-agent relationship is set aside.
The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer
is the foreign corporation, not the branch or the resident foreign corporation.
Corollarily, if the business transaction is conducted through the branch office, the latter becomes the
taxpayer, and not the foreign corporation. 12
In other words, the alleged overpaid taxes were incurred for the remittance of dividend income to the head office in
Japan which is a separate and distinct income taxpayer from the branch in the Philippines. There can be no other
logical conclusion considering the undisputed fact that the investment (totalling 283.260 shares including that of
nominee) was made for purposes peculiarly germane to the conduct of the corporate affairs of Marubeni Japan, but
certainly not of the branch in the Philippines. It is thus clear that petitioner, having made this independent investment
attributable only to the head office, cannot now claim the increments as ordinary consequences of its trade or
business in the Philippines and avail itself of the lower tax rate of 10 %.
But while public respondents correctly concluded that the dividends in dispute were neither subject to the 15 % profit
remittance tax nor to the 10 % intercorporate dividend tax, the recipient being a non-resident stockholder, they
grossly erred in holding that no refund was forthcoming to the petitioner because the taxes thus withheld totalled the
25 % rate imposed by the Philippine-Japan Tax Convention pursuant to Article 10 (2) (b).
To simply add the two taxes to arrive at the 25 % tax rate is to disregard a basic rule in taxation that each tax has a
different tax basis. While the tax on dividends is directly levied on the dividends received, "the tax base upon which
the 15 % branch profit remittance tax is imposed is the profit actually remitted abroad." 13
Public respondents likewise erred in automatically imposing the 25 % rate under Article 10 (2) (b) of the Tax Treaty as if
this were a flat rate. A closer look at the Treaty reveals that the tax rates fixed by Article 10 are the maximum rates as
reflected in the phrase "shall not exceed." This means that any tax imposable by the contracting state concerned
should not exceed the 25 % limitation and that said rate would apply only if the tax imposed by our laws exceeds the
same. In other words, by reason of our bilateral negotiations with Japan, we have agreed to have our right to tax
limited to a certain extent to attain the goals set forth in the Treaty.
Petitioner, being a non-resident foreign corporation with respect to the transaction in question, the applicable provision
of the Tax Code is Section 24 (b) (1) (iii) in conjunction with the Philippine-Japan Treaty of 1980. Said section provides:
(b) Tax on foreign corporations. (1) Non-resident corporations ... (iii) On dividends received from a
domestic corporation liable to tax under this Chapter, the tax shall be 15% of the dividends received,
which shall be collected and paid as provided in Section 53 (d) of this Code, subject to the condition
that the country in which the non-resident foreign corporation is domiciled shall allow a credit against
the tax due from the non-resident foreign corporation, taxes deemed to have been paid in the
Philippines equivalent to 20 % which represents the difference between the regular tax (35 %) on
corporations and the tax (15 %) on dividends as provided in this Section; ....
Proceeding to apply the above section to the case at bar, petitioner, being a non-resident foreign corporation, as a
general rule, is taxed 35 % of its gross income from all sources within the Philippines. [Section 24 (b) (1)].
However, a discounted rate of 15% is given to petitioner on dividends received from a domestic corporation (AG&P) on
the condition that its domicile state (Japan) extends in favor of petitioner, a tax credit of not less than 20 % of the
dividends received. This 20 % represents the difference between the regular tax of 35 % on non-resident foreign
corporations which petitioner would have ordinarily paid, and the 15 % special rate on dividends received from a
domestic corporation.
Consequently, petitioner is entitled to a refund on the transaction in question to be computed as follows:
Total cash dividend paid ................P1,699,440.00

less 15% under Sec. 24
(b) (1) (iii ) .........................................254,916.00
-----------------Cash dividend net of 15 % tax
due petitioner ...............................P1,444.524.00
less net amount
actually remitted .............................1,300,071.60
------------------Amount to be refunded to petitioner
representing overpayment of
taxes on dividends remitted ..............P 144 452.40
===========
It is readily apparent that the 15 % tax rate imposed on the dividends received by a foreign non-resident stockholder
from a domestic corporation under Section 24 (b) (1) (iii) is easily within the maximum ceiling of 25 % of the gross
amount of the dividends as decreed in Article 10 (2) (b) of the Tax Treaty.
There is one final point that must be settled. Respondent Commissioner of Internal Revenue is laboring under the
impression that the Court of Tax Appeals is covered by Batas Pambansa Blg. 129, otherwise known as the Judiciary
Reorganization Act of 1980. He alleges that the instant petition for review was not perfected in accordance with Batas
Pambansa Blg. 129 which provides that "the period of appeal from final orders, resolutions, awards, judgments, or
decisions of any court in all cases shall be fifteen (15) days counted from the notice of the final order, resolution,
award, judgment or decision appealed from ....
This is completely untenable. The cited BP Blg. 129 does not include the Court of Tax Appeals which has been created
by virtue of a special law, Republic Act No. 1125. Respondent court is not among those courts specifically mentioned in
Section 2 of BP Blg. 129 as falling within its scope.
Thus, under Section 18 of Republic Act No. 1125, a party adversely affected by an order, ruling or decision of the Court
of Tax Appeals is given thirty (30) days from notice to appeal therefrom. Otherwise, said order, ruling, or decision shall
become final.
Records show that petitioner received notice of the Court of Tax Appeals's decision denying its claim for refund on April
15, 1986. On the 30th day, or on May 15, 1986 (the last day for appeal), petitioner filed a motion for reconsideration
which respondent court subsequently denied on November 17, 1986, and notice of which was received by petitioner
on November 26, 1986. Two days later, or on November 28, 1986, petitioner simultaneously filed a notice of appeal
with the Court of Tax Appeals and a petition for review with the Supreme Court. 14 From the foregoing, it is evident that
the instant appeal was perfected well within the 30-day period provided under R.A. No. 1125, the whole 30-day period
to appeal having begun to run again from notice of the denial of petitioner's motion for reconsideration.
WHEREFORE, the questioned decision of respondent Court of Tax Appeals dated February 12, 1986 which affirmed the
denial by respondent Commissioner of Internal Revenue of petitioner Marubeni Corporation's claim for refund is hereby
REVERSED. The Commissioner of Internal Revenue is ordered to refund or grant as tax credit in favor of petitioner the
amount of P144,452.40 representing overpayment of taxes on dividends received. No costs.
So ordered.
[G.R. No. L-26145. February 20, 1984.]

THE MANILA WINE MERCHANTS, INC., Petitioner, v. THE COMMISSIONER OF INTERNAL REVENUE,
Respondent.
Rafael D. Salcedo for Petitioner.
The Solicitor General for Respondent.
DECISION
GUERRERO, J.:
In this Petition for Review on Certiorari, Petitioner, the Manila Wine Merchants, Inc., disputes the decision of the Court
of Tax Appeals ordering it (petitioner) to pay respondent, the Commissioner of Internal Revenue, the amount of
P86,804.38 as 25% surtax plus interest which represents the additional tax due petitioner for improperly accumulating
profits or surplus in the taxable year 1957 under Sec. 25 of the National Internal Revenue Code.chanrobles
virtualawlibrary chanrobles.com:chanrobles.com.ph
The Court of Tax Appeals made the following finding of facts, to wit:jgc:chanrobles.com.ph
"Petitioner, a domestic corporation organized in 1937, is principally engaged in the importation and sale of whisky,
wines, liquors and distilled spirits. Its original subscribed and paid capital was P500,000.00. Its capital of P500,000.00
was reduced to P250,000.00 in 1950 with the approval of the Securities and Exchange Commission but the reduction
of the capital was never implemented. On June 21, 1958, petitioners capital was increased to P1,000,000.00 with the
approval of the said Commission.
On December 31, 1957, herein respondent caused the examination of herein petitioners book of account and found
the latter of having unreasonably accumulated surplus of P428,934.32 for the calendar year 1947 to 1957, in excess of
the reasonable needs of the business subject to the 25% surtax imposed by Section 25 of the Tax Code.
On February 26, 1963, the Commissioner of Internal Revenue demanded upon the Manila Wine Merchants, Inc.
payment of P126,536.12 as 25% surtax and interest on the latters unreasonable accumulation of profits and surplus
for the year 1957, computed as follows:chanrob1es virtual 1aw library
Unreasonable accumulation of surtax P428,934.42
25% surtax due thereon P107,234.00

Add: 1/2% monthly interest from June 20,
1959 to June 20, 1962 19,302.12
TOTAL AMOUNT DUE AND COLLECTIBLE P126,536.12

=========
Respondent contends that petitioner has accumulated earnings beyond the reasonable needs of its business because
the average ratio of the cash dividends declared and paid by petitioner from 1947 to 1957 was 40.33% of the total
surplus available for distribution at the end of each calendar year. On the other hand, petitioner contends that in 1957,
it distributed 100% of its net earnings after income tax and part of the surplus for prior years. Respondent further
submits that the accumulated earnings tax should be based on 25% of the total surplus available at the end of each
calendar year while petitioner maintains that the 25% surtax is imposed on the total surplus or net income for the year
after deducting therefrom the income tax due.
The records show the following analysis of petitioners net income, cash dividends and earned surplus for the years
1946 to 1957: 1
Percentage of
Dividends to
Net Income Total Cash Net Income Balance
After Income Dividends After of Earned
Year Tax Paid Income Tax Surplus
1946 P 613,790.00 P 200,000. 32.58% P 234,104.81
1947 425,719.87 360,000. 84.56% 195,167.10
1948 415,591.83 375,000. 90.23% 272,991.38
1949 335,058.06 200,000. 59.69% 893,113.42
1950 399,698.09 600,000. 150.11% 234,987.07

1951 346,257.26 300,000. 86.64% 281,244.33
1952 196,161.97 200,000. 101.96% 277,406.30
1953 169,714.04 200,000. 117.85% 301,138.84
1954 238,124.85 250,000. 104.99% 289,262.69
1955 312,284.74 200,000. 64.04% 401,548.43
1956 374,240.28 300,000. 80.16% 475,788.71
1957 353,145.71 400,000. 113.27% 428,934.42

P4,179,787.36 P3,585.000. 85.77% P3,785.688.50
========== ========= ======= ==========
Another basis of respondent in assessing petitioner for accumulated earnings tax is its substantial investment of
surplus or profits in unrelated business. These investments are itemized as follows:chanrob1es virtual 1aw library
1. Acme Commercial Co., Inc. P 27,501.00
2. Union Insurance Society
of Canton 1,145.76
3. U.S.A. Treasury Bond 347,217.50
4. Wack Wack Golf &
Country Club 1.00
375,865.26
=========
As to the investment of P27,501.00 made by petitioner in the Acme Commercial Co., Inc., Mr. N.R.E. Hawkins, president
of the petitioner corporation 2 explained as follows:chanrob1es virtual 1aw library
The first item consists of shares of Acme Commercial Co., Inc. which the Company acquired in 1947 and 1949. In the
said years, we thought it prudent to invest in a business which patronizes us. As a supermarket, Acme Commercial Co.,
Inc. is one of our best customers. The investment has proven to be beneficial to the stockholders of this Company. As
an example, the Company received cash dividends in 1961 totalling P16,875.00 which was included in its income tax
return for the said year.
As to the investments of petitioner in Union Insurance Society of Canton and Wack Wack Golf Club in the sums of
P1,145.76 and P1.00, respectively, the same official of the petitioner-corporation stated that: 3
The second and fourth items are small amounts which we believe would not affect this case substantially. As regards
the Union Insurance Society of Canton shares, this was a pre-war investment, when Wise & Co., Inc., Manila Wine
Merchants and the said insurance firm were common stockholders of the Wise Bldg. Co.,, Inc. and the three companies
were all housed in the same building. Union Insurance invested in Wise Bldg. Co., Inc. but invited Manila Wine
Merchants, Inc. to buy a few of its shares.
As to the U.S.A. Treasury Bonds amounting to P347,217.50, Mr. Hawkins explained as follows: 4
With regards to the U.S.A. Treasury Bills in the amount of P347,217.50, in 1950, our balance sheet for the said year
shows the Company had deposited in current account in various banks P629,403.64 which was not earning any
interest. We decided to utilize part of this money as reserve to finance our importations and to take care of future
expansion including acquisition of a lot and the construction of our own office building and bottling plant.
At that time, we believed that a dollar reserve abroad would be useful to the Company in meeting immediate urgent
orders of its local customers. In order that the money may earn interest, the Company, on May 31, 1951 purchased US
Treasury bills with 90-day maturity and earning approximately 1% interest with the face value of US$175,000.00. US
Treasury Bills are easily convertible into cash and for the said reason they may be better classified as cash rather than
investments.
The Treasury Bills in question were held as such for many years in view of our expectation that the Central Bank inspite
of the controls would allow no-dollar licenses importations. However, since the Central Bank did not relax its policy
with respect thereto, we decided sometime in 1957 to hold the bills for a few more years in view of our plan to buy a
lot and construct a building of our own. According to the lease agreement over the building formerly occupied by us in
Dasmarias St., the lease was to expire sometime in 1957. At that time, the Company was not yet qualified to own real
property in the Philippines. We therefore waited until 60% of the stocks of the Company would be owned by Filipino
citizens before making definite plans. Then in 1959 when the Company was already more than 60% Filipino owned, we
commenced looking for a suitable location and then finally in 1961, we bought the man lot with an old building on Otis
St., Paco, our present site, for P665,000.00. Adjoining smaller lots were bought later. After the purchase of the main
property, we proceeded with the remodelling of the old building and the construction of additions, which were
completed at a cost of P143,896.00 in April, 1962.
In view of the needs of the business of this Company and the purchase of the Otis lots and the construction of the
improvements thereon, most of its available funds including the Treasury Bills had been utilized, but inspite of the said
expenses the Company consistently declared dividends to its stockholders. The Treasury Bills were liquidated on
February 15, 1962.
Respondent found that the accumulated surplus in question were invested to unrelated business which were not
considered in the immediate needs of the Company such that the 25% surtax be imposed therefrom."cralaw
virtua1aw library
Petitioner appealed to the Court of Tax Appeals.
On the basis of the tabulated figures, supra, the Court of Tax Appeals found that the average percentage of cash
dividends distributed was 85.77% for a period of 11 years from 1946 to 1957 and not only 40.33% of the total surplus
available for distribution at the end of each calendar year actually distributed by the petitioner to its stockholders,
which is indicative of the view that the Manila Wine Merchants, Inc. was not formed for the purpose of preventing the
imposition of income tax upon its shareholders. 5
With regards to the alleged substantial investment of surplus or profits in unrelated business, the Court of Tax Appeals
held that the investment of petitioner with Acme Commercial Co., Inc., Union Insurance Society of Canton and with the
Wack Wack Golf and Country Club are harmless accumulation of surplus and, therefore, not subject to the 25% surtax
provided in Section 25 of the Tax Code. 6
As to the U.S.A. Treasury Bonds amounting to P347,217.50, the Court of Tax Appeals ruled that its purchase was in no
way related to petitioners business of importing and selling wines, whisky, liquors and distilled spirits. Respondent
Court was convinced that the surplus of P347,217.50 which was invested in the U.S.A. Treasury Bonds was availed of
by petitioner for the purpose of preventing the imposition of the surtax upon petitioners shareholders by permitting its
earnings and profits to accumulate beyond the reasonable needs of business. Hence, the Court of Tax Appeals
modified respondents decision by imposing upon petitioner the 25% surtax for 1957 only in the amount of P86,804.38
computed as follows:chanrob1es virtual 1aw library
Unreasonable accumulation
of surplus P347,217.50
25% surtax due thereon P 86,804.38 7

On May 30, 1966, the Court of Tax Appeals denied the motion for reconsideration filed by petitioner on March 30, 1966.
Hence, this petition.
Petition assigns the following errors:chanrob1es virtual 1aw library
I
The Court of Tax Appeals erred in holding that petitioner was availed of for the purpose of preventing the imposition of
a surtax on its shareholders.
II
The Court of Tax Appeals erred in holding that petitioners purchase of U.S.A. Treasury Bills in 1951 was an investment
in unrelated business subject to the 25% surtax in 1957 as surplus profits improperly accumulated in the latter years.
III
The Court of Tax Appeals erred in not finding that petitioner did not accumulate its surplus profits improperly in 1957,
and in not holding that such surplus profits, including the so-called unrelated investments, were necessary for its
reasonable business needs.
IV
The Court of Tax Appeals erred in not holding that petitioner had overcome the prima facie presumption provided for in
Section 25(c) of the Revenue Code.
V
The Court of Tax Appeals erred in finding petition liable for the payment of the surtax of P86,804.38 and in denying
petitioners Motion for Reconsideration and/or New Trial.
The issues in this case can be summarized as follows: (1) whether the purchase of the U.S.A. Treasury bonds by
petitioner in 1951 can be construed as an investment to an unrelated business and hence, such was availed of by
petitioner for the purpose of preventing the imposition of the surtax upon petitioners shareholders by permitting its
earnings and profits to accumulate beyond the reasonable needs of the business, and if so, (2) whether the penalty tax
of twenty-five percent (25%) can be imposed on such improper accumulation in 1957 despite the fact that the
accumulation occurred in 1951.chanrobles virtualawlibrary chanrobles.com:chanrobles.com.ph
The pertinent provision of the National Internal Revenue Code reads as follows:jgc:chanrobles.com.ph
"Sec. 25. Additional tax on corporations improperly accumulating profits or surplus. (a) Imposition of Tax. If any
corporation, except banks, insurance companies, or personal holding companies whether domestic or foreign, is
formed or availed of for the purpose of preventing the imposition of the tax upon its shareholders or members or the
shareholders or members of another corporation, through the medium of permitting its gains and profits to accumulate
instead of being divided or distributed, there is levied and assessed against such corporation, for each taxable year, a
tax equal to twenty-five per centum of the undistributed portion of its accumulated profits or surplus which shall be in
addition to the tax imposed by section twenty-four and shall be computed, collected and paid in the same manner and
subject to the same provisions of law, including penalties, as that tax: Provided, that no such tax shall be levied upon
any accumulated profits or surplus, if they are invested in any dollar-producing or dollar-saving industry or in the
purchase of bonds issued by the Central Bank of the Philippines.
x
(c) Evidence determinative of purpose. The fact that the earnings of profits of a corporation are permitted to
accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the tax upon
its shareholders or members unless the corporation, by clear preponderance of evidence, shall prove the contrary." (As
amended by Republic Act No. 1823).
As correctly pointed out by the Court of Tax Appeals, inasmuch as the provisions of Section 25 of the National Internal
Revenue Code were bodily lifted from Section 102 of the U.S. Internal Revenue Code of 1939, including the regulations
issued in connection therewith, it would be proper to resort to applicable cases decided by the American Federal
Courts for guidance and enlightenment.chanrobles virtual lawlibrary
A prerequisite to the imposition of the tax has been that the corporation be formed or availed of for the purpose of
avoiding the income tax (or surtax) on its shareholders, or on the shareholders of any other corporation by permitting
the earnings and profits of the corporation to accumulate instead of dividing them among or distributing them to the
shareholders. If the earnings and profits were distributed, the shareholders would be required to pay an income tax
thereon whereas, if the distribution were not made to them, they would incur no tax in respect to the undistributed
earnings and profits of the corporation. 8 The touchstone of liability is the purpose behind the accumulation of the
income and not the consequences of the accumulation. 9 Thus, if the failure to pay dividends is due to some other
cause, such as the use of undistributed earnings and profits for the reasonable needs of the business, such purpose
does not fall within the interdiction of the statute. 10
An accumulation of earnings or profits (including undistributed earnings or profits of prior years) is unreasonable if it is
not required for the purpose of the business, considering all the circumstances of the case. 11
In purchasing the U.S.A. Treasury Bonds, in 1951, petitioner argues that these bonds were so purchased (1) in order to
finance their importation; and that a dollar reserve abroad would be useful to the Company in meeting urgent orders of
its local customers and (2) to take care of future expansion including the acquisition of a lot and the construction of
their office building and bottling plant.
We find no merit in the petition.
To avoid the twenty-five percent (25%) surtax, petitioner has to prove that the purchase of the U.S.A. Treasury Bonds in
1951 with a face value of $175,000.00 was an investment within the reasonable needs of the Corporation.
To determine the "reasonable needs" of the business in order to justify an accumulation of earnings, the Courts of the
United States have invented the so-called "Immediacy Test" which construed the words "reasonable needs of the
business" to mean the immediate needs of the business, and it was generally held that if the corporation did not prove
an immediate need for the accumulation of the earnings and profits, the accumulation was not for the reasonable
needs of the business, and the penalty tax would apply. 12 American cases likewise hold that investment of the
earnings and profits of the corporation in stock or securities of an unrelated business usually indicates an
accumulation beyond the reasonable needs of the business. 13
The finding of the Court of Tax Appeals that the purchase of the U.S.A. Treasury bonds were in no way related to
petitioners business of importing and selling wines whisky, liquors and distilled spirits, and thus construed as an
investment beyond the reasonable needs of the business 14 is binding on Us, the same being factual. 15 Furthermore,
the wisdom behind thus finding cannot be doubted, The case of J.M. Perry & Co. v. Commissioner of Internal Revenue
16 supports the same. In that case, the U.S. Court said the following:jgc:chanrobles.com.ph
"It appears that the taxpayer corporation was engaged in the business of cold storage and wareshousing in Yahima,
Washington. It maintained a cold storage plant, divided into four units, having a total capacity of 490,000 boxes of
fruits. It presented evidence to the effect that various alterations and repairs to its plant were contemplated in the tax
years, . . .
It also appeared that in spite of the fact that the taxpayer contended that it needed to maintain this large cash reserve
on hand, it proceeded to make various investments which had no relation to its storage business. In 1934, it purchased
mining stock which it sold in 1935 at a profit of US $47,995.29. . . .
All these things may reasonably have appealed to the Board as incompatible with a purpose to strengthen the financial
position of the taxpayer and to provide for needed alteration."cralaw virtua1aw library
The records further reveal that from May 1951 when petitioner purchased the U.S.A. Treasury shares, until 1962 when
it finally liquidated the same, it (petitioner) never had the occasion to use the said shares in aiding or financing its
importation. This militates against the purpose enunciated earlier by petitioner that the shares were purchased to
finance its importation business. To justify an accumulation of earnings and profits for the reasonably anticipated
future needs, such accumulation must be used within a reasonable time after the close of the taxable year. 17
Petitioner advanced the argument that the U.S.A. Treasury shares were held for a few more years from 1957, in view of
a plan to buy a lot and construct a building of their own; that at that time (1957), the Company was not yet qualified to
own real property in the Philippines, hence it (petitioner) had to wait until sixty percent (60%) of the stocks of the
Company would be owned by Filipino citizens before making definite plans. 18
These arguments of petitioner indicate that it considers the U.S.A. Treasury shares not only for the purpose of aiding or
financing its importation but likewise for the purpose of buying a lot and constructing a building thereon in the near
future, but conditioned upon the completion of the 60% citizenship requirement of stock ownership of the Company in
order to qualify it to purchase and own a lot. The time when the company would be able to establish itself to meet the
said requirement and the decision to pursue the same are dependent upon various future contingencies. Whether
these contingencies would unfold favorably to the Company and if so, whether the Company would decide later to
utilize the U.S.A. Treasury shares according to its plan, remains to be seen. From these assertions of petitioner, We
cannot gather anything definite or certain. This, We cannot approve.chanrobles law library
In order to determine whether profits are accumulated for the reasonable needs of the business as to avoid the surtax
upon shareholders, the controlling intention of the taxpayer is that which is manifested at the time of accumulation not
subsequently declared intentions which are merely the product of afterthought. 19 A speculative and indefinite
purpose will not suffice. The mere recognition of a future problem and the discussion of possible and alternative
solutions is not sufficient. Definiteness of plan coupled with action taken towards its consummation are essential. 20
The Court of Tax Appeals correctly made the following ruling: 21
"As to the statement of Mr. Hawkins in Exh. "B" regarding the expansion program of the petitioner by purchasing a lot
and building of its own, we find no justifiable reason for the retention in 1957 or thereafter of the US Treasury Bonds
which were purchased in 1951.
x
"Moreover, if there was any thought for the purchase of a lot and building for the needs of petitioners business, the
corporation may not with impunity permit its earnings to pile up merely because at some future time certain outlays
would have to be made. Profits may only be accumulated for the reasonable needs of the business, and implicit in this
is further requirement of a reasonable time."cralaw virtua1aw library
Viewed on the foregoing analysis and tested under the "immediacy doctrine," We are convinced that the Court of Tax
Appeals is correct in finding that the investment made by petitioner in the U.S.A. Treasury shares in 1951 was an
accumulation of profits in excess of the reasonable needs of petitioners business.
Finally, petitioner asserts that the surplus profits allegedly accumulated in the form of U.S.A. Treasury shares in 1951
by it (petitioner) should not be subject to the surtax in 1957. In other words, petitioner claims that the surtax of 25%
should be based on the surplus accumulated in 1951 and not in 1957.
This is devoid of merit.
The rule is now settled in Our jurisprudence that undistributed earnings or profits of prior years are taken into
consideration in determining unreasonable accumulation for purposes of the 25% surtax. 22 The case of Basilan
Estates, Inc. v. Commissioner of Internal Revenue 23 further strengthen this rule, and We quote:jgc:chanrobles.com.ph
"Petitioner questions why the examiner covered the period from 1948-1953 when the taxable year on review was
1953. The surplus of P347,507.01 was taken by the examiner from the balance sheet of the petitioner for 1953. To
check the figure arrived at, the examiner traced the accumulation process from 1947 until 1953, and petitioners figure
stood out to be correct. There was no error in the process applied, for previous accumulations should be considered in
determining unreasonable accumulation for the year concerned.In determining whether accumulations of earnings or
profits in a particular year are within the reasonable needs of a corporation, it is necessary to take into account prior
accumulations, since accumulations prior to the year involved may have been sufficient to cover the business needs
and additional accumulations during the year involved would not reasonably be necessary."
chanroblesvirtuallawlibrary
WHEREFORE, IN VIEW OF THE FOREGOING, the decision of the Court of Tax Appeals is AFFIRMED in toto, with costs
against petitioner.
SO ORDERED.
G.R. No. 108067
January 20, 2000
CYANAMID PHILIPPINES, INC., petitioner,

vs.
THE COURT OF APPEALS, THE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE,
respondent.
QUISUMBING, J.:
Petitioner disputes the decision1 of the Court of Appeals which affirmed the decision 2 of the Court of Tax Appeals,
ordering petitioner to pay respondent Commissioner of Internal Revenue the amount of three million, seven hundred
seventy-four thousand, eight hundred sixty seven pesos and fifty centavos (P3,774,867.50) as 25% surtax on improper
accumulation of profits for 1981, plus 10% surcharge and 20% annual interest from January 30, 1985 to January 30,
1987, under Sec. 25 of the National Internal Revenue Code.1wphi1.nt
The Court of Tax Appeals made the following factual findings:
Petitioner, Cyanamid Philippines, Inc., a corporation organized under Philippine laws, is a wholly owned subsidiary of
American Cyanamid Co. based in Maine, USA. It is engaged in the manufacture of pharmaceutical products and
chemicals, a wholesaler of imported finished goods, and an importer/indentor.
On February 7, 1985, the CIR sent an assessment letter to petitioner and demanded the payment of deficiency income
tax of one hundred nineteen thousand eight hundred seventeen (P119,817.00) pesos for taxable year 1981, as follows:
Net income disclosed by the return as audited
14,575,210.00
Add: Discrepancies:
Professional fees/yr.
17018
per investigation
261,877.00
110,399.37
Total Adjustment
152,477.00
Net income per Investigation
14,727,687.00
Less: Personal and additional exemptions

Amount subject to tax
Income tax due thereon . . . 25% Surtax
14,727,687.00
2,385,231.50
3,237,495.00
Less: Amount already assessed
5,161,788.00
BALANCE
75,709.00
monthly interest from
1,389,639.00
44,108.00
3,774,867.50
119,817.003
Compromise penalties
TOTAL AMOUNT DUE
On March 4, 1985, petitioner protested the assessments particularly, (1) the 25% Surtax Assessment of P3,774,867.50;
(2) 1981 Deficiency Income Assessment of P119,817.00; and 1981 Deficiency Percentage Assessment of P8,846.72. 4
Petitioner, through its external accountant, Sycip, Gorres, Velayo & Co., claimed, among others, that the surtax for the
undue accumulation of earnings was not proper because the said profits were retained to increase petitioner's working
capital and it would be used for reasonable business needs of the company. Petitioner contended that it availed of the
tax amnesty under Executive Order No. 41, hence enjoyed amnesty from civil and criminal prosecution granted by the
law.
On October 20, 1987, the CIR in a letter addressed to SGV & Co., refused to allow the cancellation of the assessment
notices and rendered its resolution, as follows:
It appears that your client availed of Executive Order No. 41 under File No. 32A-F-000455-41B as certified and
confirmed by our Tax Amnesty Implementation Office on October 6, 1987.
In reply thereto, I have the honor to inform you that the availment of the tax amnesty under Executive Order
No. 41, as amended is sufficient basis, in appropriate cases, for the cancellation of the assessment issued after
August 21, 1986. (Revenue Memorandum Order No. 4-87) Said availment does not, therefore, result in
cancellation of assessments issued before August 21, 1986. as in the instant case. In other words, the
assessments in this case issued on January 30, 1985 despite your client's availment of the tax amnesty under
Executive Order No. 41, as amended still subsist.
Such being the case, you are therefore, requested to urge your client to pay this Office the aforementioned
deficiency income tax and surtax on undue accumulation of surplus in the respective amounts of P119,817.00
and P3,774,867.50 inclusive of interest thereon for the year 1981, within thirty (30) days from receipt hereof,
otherwise this office will be constrained to enforce collection thereof thru summary remedies prescribed by
law.
This constitutes the final decision of this Office on this matter. 5
Petitioner appealed to the Court of Tax Appeals. During the pendency of the case, however, both parties agreed to
compromise the 1981 deficiency income tax assessment of P119,817.00. Petitioner paid a reduced amount twentysix thousand, five hundred seventy-seven pesos (P26,577.00) as compromise settlement. However, the surtax on
improperly accumulated profits remained unresolved.
Petitioner claimed that CIR's assessment representing the 25% surtax on its accumulated earnings for the year 1981
had no legal basis for the following reasons: (a) petitioner accumulated its earnings and profits for reasonable business
requirements to meet working capital needs and retirement of indebtedness; (b) petitioner is a wholly owned
subsidiary of American Cyanamid Company, a corporation organized under the laws of the State of Maine, in the
United States of America, whose shares of stock are listed and traded in New York Stock Exchange. This being the
case, no individual shareholder income taxes by petitioner's accumulation of earnings and profits, instead of
distribution of the same.
In denying the petition, the Court of Tax Appeals made the following pronouncements:
Petitioner contends that it did not declare dividends for the year 1981 in order to use the accumulated
earnings as working capital reserve to meet its "reasonable business needs". The law permits a stock
corporation to set aside a portion of its retained earnings for specified purposes (citing Section 43, paragraph 2
of the Corporation Code of the Philippines). In the case at bar, however, petitioner's purpose for accumulating
its earnings does not fall within the ambit of any of these specified purposes.
More compelling is the finding that there was no need for petitioner to set aside a portion of its retained
earnings as working capital reserve as it claims since it had considerable liquid funds. A thorough review of
petitioner's financial statement (particularly the Balance Sheet, p. 127, BIR Records) reveals that the
corporation had considerable liquid funds consisting of cash accounts receivable, inventory and even its sales
for the period is adequate to meet the normal needs of the business. This can be determined by computing the
current asset to liability ratio of the company:
current ratio
= current assets/ current liabilities

= P 47,052,535.00 / P21,275,544.00
= 2.21: 1
========
The significance of this ratio is to serve as a primary test of a company's solvency to meet current obligations
from current assets as a going concern or a measure of adequacy of working capital.
xxx
xxx
xxx
We further reject petitioner's argument that "the accumulated earnings tax does not apply to a publicly-held
corporation" citing American jurisprudence to support its position. The reference finds no application in the
case at bar because under Section 25 of the NIRC as amended by Section 5 of P.D. No. 1379 [1739] (dated
September 17, 1980), the exceptions to the accumulated earnings tax are expressly enumerated, to wit: Bank,
non-bank financial intermediaries, corporations organized primarily, and authorized by the Central Bank of the
Philippines to hold shares of stock of banks, insurance companies, or personal holding companies, whether
domestic or foreign. The law on the matter is clear and specific. Hence, there is no need to resort to applicable
cases decided by the American Federal Courts for guidance and enlightenment as to whether the provision of
Section 25 of the NIRC should apply to petitioner.
Equally clear and specific are the provisions of E.O. 41 particularly with respect to its effectivity and
coverage . . .
. . . Said availment does not result in cancellation of assessments issued before August 21, 1986 as petitioner
seeks to do in the case at bar. Therefore, the assessments in this case, issued on January 30, 1985 despite
petitioner's availment of the tax amnesty under E.O. 41 as amended, still subsist.
xxx
xxx
xxx
WHEREFORE, petitioner Cyanamid Philippines, Inc., is ordered to pay respondent Commissioner of Internal
Revenue the sum of P3,774,867.50 representing 25% surtax on improper accumulation of profits for 1981, plus
10% surcharge and 20% annual interest from January 30, 1985 to January 30, 1987. 6
Petitioner appealed the Court of Tax Appeal's decision to the Court of Appeals. Affirming the CTA decision, the
appellate court said:
In reviewing the instant petition and the arguments raised herein, We find no compelling reason to reverse the
findings of the respondent Court. The respondent Court's decision is supported by evidence, such as petitioner
corporation's financial statement and balance sheets (p. 127, BIR Records). On the other hand the petitioner
corporation could only come up with an alternative formula lifted from a decision rendered by a foreign court
(Bardahl Mfg. Corp. vs. Commissioner, 24 T.C.M. [CCH] 1030). Applying said formula to its particular financial
position, the petitioner corporation attempts to justify its accumulated surplus earnings. To Our mind, the
petitioner corporation's alternative formula cannot overturn the persuasive findings and conclusion of the
respondent Court based, as it is, on the applicable laws and jurisprudence, as well as standards in the
computation of taxes and penalties practiced in this jurisdiction.
WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED and the decision of the Court
of Tax Appeals dated August 6, 1992 in C.T.A. Case No. 4250 is AFFIRMED in toto.7
Hence, petitioner now comes before us and assigns as sole issue:
WHETHER THE RESPONDENT COURT ERRED IN HOLDING THAT THE PETITIONER IS LIABLE FOR THE
ACCUMULATED EARNINGS TAX FOR THE YEAR 1981. 8
Sec. 259 of the old National Internal Revenue Code of 1977 states:
Sec. 25. Additional tax on corporation improperly accumulating profits or surplus
(a) Imposition of tax. If any corporation is formed or availed of for the purpose of preventing the imposition
of the tax upon its shareholders or members or the shareholders or members of another corporation, through
the medium of permitting its gains and profits to accumulate instead of being divided or distributed, there is
levied and assessed against such corporation, for each taxable year, a tax equal to twenty-five per-centum of
the undistributed portion of its accumulated profits or surplus which shall be in addition to the tax imposed by
section twenty-four, and shall be computed, collected and paid in the same manner and subject to the same
provisions of law, including penalties, as that tax.
(b) Prima facie evidence. The fact that any corporation is mere holding company shall be prima facie
evidence of a purpose to avoid the tax upon its shareholders or members. Similar presumption will lie in the
case of an investment company where at any time during the taxable year more than fifty per centum in value
of its outstanding stock is owned, directly or indirectly, by one person.
(c) Evidence determinative of purpose. The fact that the earnings or profits of a corporation are permitted to
accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the
tax upon its shareholders or members unless the corporation, by clear preponderance of evidence, shall prove
the contrary.
(d) Exception. The provisions of this sections shall not apply to banks, non-bank financial intermediaries,
corporation organized primarily, and authorized by the Central Bank of the Philippines to hold shares of stock
of banks, insurance companies, whether domestic or foreign.
The provision discouraged tax avoidance through corporate surplus accumulation. When corporations do not declare
dividends, income taxes are not paid on the undeclared dividends received by the shareholders. The tax on improper
accumulation of surplus is essentially a penalty tax designed to compel corporations to distribute earnings so that the
said earnings by shareholders could, in turn, be taxed.
Relying on decisions of the American Federal Courts, petitioner stresses that the accumulated earnings tax does not
apply to Cyanamid, a wholly owned subsidiary of a publicly owned company. 10 Specifically, petitioner cites Golconda
Mining Corp. vs. Commissioner, 507 F.2d 594, whereby the U.S. Ninth Circuit Court of Appeals had taken the position
that the accumulated earnings tax could only apply to a closely held corporation.
A review of American taxation history on accumulated earnings tax will show that the application of the accumulated
earnings tax to publicly held corporations has been problematic. Initially, the Tax Court and the Court of Claims held
that the accumulated earnings tax applies to publicly held corporations. Then, the Ninth Circuit Court of Appeals ruled
in Golconda that the accumulated earnings tax could only apply to closely held corporations. Despite Golconda, the
Internal Revenue Service asserted that the tax could be imposed on widely held corporations including those not
controlled by a few shareholders or groups of shareholders. The Service indicated it would not follow the Ninth Circuit
regarding publicly held corporations.11 In 1984, American legislation nullified the Ninth Circuit's Golconda ruling and
made it clear that the accumulated earnings tax is not limited to closely held corporations. 12 Clearly, Golconda is no
longer a reliable precedent.
The amendatory provision of Section 25 of the 1977 NIRC, which was PD 1739, enumerated the corporations exempt
from the imposition of improperly accumulated tax: (a) banks; (b) non-bank financial intermediaries; (c) insurance
companies; and (d) corporations organized primarily and authorized by the Central Bank of the Philippines to hold
shares of stocks of banks. Petitioner does not fall among those exempt classes. Besides, the rule on enumeration is
that the express mention of one person, thing, act, or consequence is construed to exclude all others. 13 Laws granting
exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. 14
Taxation is the rule and exemption is the exception.15 The burden of proof rests upon the party claiming exemption to
prove that it is, in fact, covered by the exemption so claimed, 16 a burden which petitioner here has failed to discharge.
Another point raised by the petitioner in objecting to the assessment, is that increase of working capital by a
corporation justifies accumulating income. Petitioner asserts that respondent court erred in concluding that Cyanamid
need not infuse additional working capital reserve because it had considerable liquid funds based on the 2.21:1 ratio of
current assets to current liabilities. Petitioner relies on the so-called "Bardahl" formula, which allowed retention, as
working capital reserve, sufficient amounts of liquid assets to carry the company through one operating cycle. The
"Bardahl"17 formula was developed to measure corporate liquidity. The formula requires an examination of whether the
taxpayer has sufficient liquid assets to pay all of its current liabilities and any extraordinary expenses reasonably
anticipated, plus enough to operate the business during one operating cycle. Operating cycle is the period of time it
takes to convert cash into raw materials, raw materials into inventory, and inventory into sales, including the time it
takes to collect payment for the
sales.18
Using this formula, petitioner contends, Cyanamid needed at least P33,763,624.00 pesos as working capital. As of
1981, its liquid asset was only P25,776,991.00. Thus, petitioner asserts that Cyanamid had a working capital deficit of
P7,986,633.00.19 Therefore, the P9,540,926.00 accumulated income as of 1981 may be validly accumulated to
increase the petitioner's working capital for the succeeding year.
We note, however, that the companies where the "Bardahl" formula was applied, had operating cycles much shorter
than that of petitioner. In Atlas Tool Co., Inc, vs. CIR,20 the company's operating cycle was only 3.33 months or 27.75%
of the year. In Cataphote Corp. of Mississippi vs. United States,21 the corporation's operating cycle was only 56.87
days, or 15.58% of the year. In the case of Cyanamid, the operating cycle was 288.35 days, or 78.55% of a year,
reflecting that petitioner will need sufficient liquid funds, of at least three quarters of the year, to cover the operating
costs of the business. There are variations in the application of the "Bardahl" formula, such as average operating cycle
or peak operating cycle. In times when there is no recurrence of a business cycle, the working capital needs cannot be
predicted with accuracy. As stressed by American authorities, although the "Bardahl" formula is well-established and
routinely applied by the courts, it is not a precise rule. It is used only for administrative convenience. 22 Petitioner's
application of the "Bardahl" formula merely creates a false illusion of exactitude.
Other formulas are also used, e.g. the ratio of current assets to current liabilities and the adoption of the industry
standard.23 The ratio of current assets to current liabilities is used to determine the sufficiency of working capital.
Ideally, the working capital should equal the current liabilities and there must be 2 units of current assets for every
unit of current liability, hence the so-called "2 to 1" rule. 24
As of 1981 the working capital of Cyanamid was P25,776,991.00, or more than twice its current liabilities. That current
ratio of Cyanamid, therefore, projects adequacy in working capital. Said working capital was expected to increase
further when more funds were generated from the succeeding year's sales. Available income covered expenses or
indebtedness for that year, and there appeared no reason to expect an impending "working capital deficit" which could
have necessitated an increase in working capital, as rationalized by petitioner.
In Basilan Estates, Inc. vs. Commissioner of Internal Revenue,25 we held that:
. . . [T]here is no need to have such a large amount at the beginning of the following year because during the
year, current assets are converted into cash and with the income realized from the business as the year goes,
these expenses may well be taken care of. [citation omitted]. Thus, it is erroneous to say that the taxpayer is
entitled to retain enough liquid net assets in amounts approximately equal to current operating needs for the
year to cover "cost of goods sold and operating expenses:" for "it excludes proper consideration of funds
generated by the collection of notes receivable as trade accounts during the course of the year." 26
If the CIR determined that the corporation avoided the tax on shareholders by permitting earnings or profits to
accumulate, and the taxpayer contested such a determination, the burden of proving the determination wrong,
together with the corresponding burden of first going forward with evidence, is on the taxpayer. This applies even if
the corporation is not a mere holding or investment company and does not have an unreasonable accumulation of
earnings or profits.27
In order to determine whether profits are accumulated for the reasonable needs to avoid the surtax upon shareholders,
it must be shown that the controlling intention of the taxpayer is manifest at the time of accumulation, not intentions
declared subsequently, which are mere afterthoughts.28 Furthermore, the accumulated profits must be used within a
reasonable time after the close of the taxable year. In the instant case, petitioner did not establish, by clear and
convincing evidence, that such accumulation of profit was for the immediate needs of the business.
In Manila Wine Merchants, Inc. vs. Commissioner of Internal Revenue,29 we ruled:
To determine the "reasonable needs" of the business in order to justify an accumulation of earnings, the Courts
of the United States have invented the so-called "Immediacy Test" which construed the words "reasonable
needs of the business" to mean the immediate needs of the business, and it was generally held that if the
corporation did not prove an immediate need for the accumulation of the earnings and profits, the
accumulation was not for the reasonable needs of the business, and the penalty tax would apply. (Mertens.
Law of Federal Income Taxation, Vol. 7, Chapter 39, p, 103). 30
In the present case, the Tax Court opted to determine the working capital sufficiency by using the ratio between
current assets to current liabilities. The working capital needs of a business depend upon nature of the business, its
credit policies, the amount of inventories, the rate of the turnover, the amount of accounts receivable, the collection
rate, the availability of credit to the business, and similar factors. Petitioner, by adhering to the "Bardahl" formula,
failed to impress the tax court with the required definiteness envisioned by the statute. We agree with the tax court
that the burden of proof to establish that the profits accumulated were not beyond the reasonable needs of the
company, remained on the taxpayer. This Court will not set aside lightly the conclusion reached by the Court of Tax
Appeals which, by the very nature of its function, is dedicated exclusively to the consideration of tax problems and has
necessarily developed an expertise on the subject, unless there has been an abuse or improvident exercise of
authority.31 Unless rebutted, all presumptions generally are indulged in favor of the correctness of the CIR's
assessment against the taxpayer. With petitioner's failure to prove the CIR incorrect, clearly and conclusively, this
Court is constrained to uphold the correctness of tax court's ruling as affirmed by the Court of Appeals.
WHEREFORE, the instant petition is DENIED, and the decision of the Court of Appeals, sustaining that of the Court of
Tax Appeals, is hereby AFFIRMED. Costs against petitioner.1wphi1.nt
SO ORDERED.
G.R. No. 124043 October 14, 1998

vs.
COURT OF APPEALS, COURT OF TAX APPEALS and YOUNG MEN'S CHRISTIAN ASSOCIATION OF THE
PHILIPPINES, INC., respondents.
PANGANIBAN, J.:
Is the income derived from rentals of real property owned by the Young Men's Christian Association of the Philippines,
Inc. (YMCA) established as "a welfare, educational and charitable non-profit corporation" subject to income tax
under the National Internal Revenue Code (NIRC) and the Constitution?
The Case
This is the main question raised before us in this petition for review on certiorari challenging two Resolutions issued by
the Court of Appeals 1 on September 28, 1995 2 and February 29, 1996 3 in CA-GR SP No. 32007. Both Resolutions
affirmed the Decision of the Court of Tax Appeals (CTA) allowing the YMCA to claim tax exemption on the latter's
income from the lease of its real property.
The Facts
The facts are undisputed. 4 Private Respondent YMCA is a non-stock, non-profit institution, which conducts various
programs and activities that are beneficial to the public, especially the young people, pursuant to its religious,
educational and charitable objectives.
In 1980, private respondent earned, among others, an income of P676,829.80 from leasing out a portion of its
premises to small shop owners, like restaurants and canteen operators, and P44,259.00 from parking fees collected
from non-members. On July 2, 1984, the commissioner of internal revenue (CIR) issued an assessment to private
respondent, in the total amount of P415,615.01 including surcharge and interest, for deficiency income tax, deficiency
expanded withholding taxes on rentals and professional fees and deficiency withholding tax on wages. Private
respondent formally protested the assessment and, as a supplement to its basic protest, filed a letter dated October 8,
1985. In reply, the CIR denied the claims of YMCA.
Contesting the denial of its protest, the YMCA filed a petition for review at the Court of Tax Appeals (CTA) on March 14,
1989. In due course, the CTA issued this ruling in favor of the YMCA:
. . . [T]he leasing of [private respondent's] facilities to small shop owners, to restaurant and canteen
operators and the operation of the parking lot are reasonably incidental to and reasonably necessary
for the accomplishment of the objectives of the [private respondents]. It appears from the testimonies
of the witnesses for the [private respondent] particularly Mr. James C. Delote, former accountant of
YMCA, that these facilities were leased to members and that they have to service the needs of its
members and their guests. The rentals were minimal as for example, the barbershop was only charged
P300 per month. He also testified that there was actually no lot devoted for parking space but the
parking was done at the sides of the building. The parking was primarily for members with stickers on
the windshields of their cars and they charged P.50 for non-members. The rentals and parking fees
were just enough to cover the costs of operation and maintenance only. The earning[s] from these
rentals and parking charges including those from lodging and other charges for the use of the
recreational facilities constitute [the] bulk of its income which [is] channeled to support its many
activities and attainment of its objectives. As pointed out earlier, the membership dues are very
insufficient to support its program. We find it reasonably necessary therefore for [private respondent]
to make [the] most out [of] its existing facilities to earn some income. It would have been different if
under the circumstances, [private respondent] will purchase a lot and convert it to a parking lot to
cater to the needs of the general public for a fee, or construct a building and lease it out to the highest
bidder or at the market rate for commercial purposes, or should it invest its funds in the buy and sell of
properties, real or personal. Under these circumstances, we could conclude that the activities are
already profit oriented, not incidental and reasonably necessary to the pursuit of the objectives of the
association and therefore, will fall under the last paragraph of Section 27 of the Tax Code and any
income derived therefrom shall be taxable.
Considering our findings that [private respondent] was not engaged in the business of operating or
contracting [a] parking lot, we find no legal basis also for the imposition of [a] deficiency fixed tax and
[a] contractor's tax in the amount[s] of P353.15 and P3,129.73, respectively.
xxx xxx xxx
WHEREFORE, in view of all the foregoing, the following assessments are hereby dismissed for lack of
merit:
1980 Deficiency Fixed Tax P353,15;
1980 Deficiency Contractor's Tax P3,129.23;
1980 Deficiency Income Tax P372,578.20.
While the following assessments are hereby sustained:
1980 Deficiency Expanded Withholding Tax P1,798.93;
1980 Deficiency Withholding Tax on Wages P33,058.82
plus 10% surcharge and 20% interest per annum from July 2, 1984 until fully paid but not to exceed
three (3) years pursuant to Section 51(e)(2) & (3) of the National Internal Revenue Code effective as of
1984. 5
Dissatisfied with the CTA ruling, the CIR elevated the case to the Court of Appeals (CA). In its Decision of February 16,
1994, the CA 6 initially decided in favor of the CIR and disposed of the appeal in the following manner:
Following the ruling in the afore-cited cases of Province of Abra vs. Hernando and Abra Valley College
Inc. vs. Aquino, the ruling of the respondent Court of Tax Appeals that "the leasing of petitioner's
(herein respondent's) facilities to small shop owners, to restaurant and canteen operators and the
operation of the parking lot are reasonably incidental to and reasonably necessary for the
accomplishment of the objectives of the petitioners, and the income derived therefrom are tax exempt,
must be reversed.
WHEREFORE, the appealed decision is hereby REVERSED in so far as it dismissed the assessment for:
1980 Deficiency Income Tax P 353.15
1980 Deficiency Contractor's Tax P 3,129.23, &
1980 Deficiency Income Tax P 372,578.20
but the same is AFFIRMED in all other respect.
Aggrieved, the YMCA asked for reconsideration based on the following grounds:
I
The findings of facts of the Public Respondent Court of Tax Appeals being supported by substantial
evidence [are] final and conclusive.
II
The conclusions of law of [p]ublic [r]espondent exempting [p]rivate [r]espondent from the income on
rentals of small shops and parking fees [are] in accord with the applicable law and jurisprudence. 8
Finding merit in the Motion for Reconsideration filed by the YMCA, the CA reversed itself and promulgated on
September 28, 1995 its first assailed Resolution which, in part, reads:
The Court cannot depart from the CTA's findings of fact, as they are supported by evidence beyond
what is considered as substantial.
xxx xxx xxx
The second ground raised is that the respondent CTA did not err in saying that the rental from small
shops and parking fees do not result in the loss of the exemption. Not even the petitioner would hazard
the suggestion that YMCA is designed for profit. Consequently, the little income from small shops and
parking fees help[s] to keep its head above the water, so to speak, and allow it to continue with its
laudable work.
The Court, therefore, finds the second ground of the motion to be meritorious and in accord with law
and jurisprudence.
WHEREFORE, the motion for reconsideration is GRANTED; the respondent CTA's decision is AFFIRMED
in toto. 9
The internal revenue commissioner's own Motion for Reconsideration was denied by Respondent Court in its second
assailed Resolution of February 29, 1996. Hence, this petition for review under Rule 45 of the Rules of Court. 10
The Issues
Before us, petitioner imputes to the Court of Appeals the following errors:
I
In holding that it had departed from the findings of fact of Respondent Court of Tax Appeals when it
rendered its Decision dated February 16, 1994; and
II
In affirming the conclusion of Respondent Court of Tax Appeals that the income of private respondent
from rentals of small shops and parking fees [is] exempt from taxation. 11
This Court's Ruling
The petition is meritorious.
First Issue:
Factual Findings of the CTA
Private respondent contends that the February 16, 1994 CA Decision reversed the factual findings of the CTA. On the
other hand, petitioner argues that the CA merely reversed the "ruling of the CTA that the leasing of private
respondent's facilities to small shop owners, to restaurant and canteen operators and the operation of parking lots are
reasonably incidental to and reasonably necessary for the accomplishment of the objectives of the private respondent
and that the income derived therefrom are tax exempt." 12 Petitioner insists that what the appellate court reversed was
the legal conclusion, not the factual finding, of the CTA. 13 The commissioner has a point.
Indeed, it is a basic rule in taxation that the factual findings of the CTA, when supported by substantial evidence, will
be disturbed on appeal unless it is shown that the said court committed gross error in the appreciation of facts. 14 In
the present case, this Court finds that the February 16, 1994 Decision of the CA did not deviate from this rule. The
latter merely applied the law to the facts as found by the CTA and ruled on the issue raised by the CIR: "Whether or not
the collection or earnings of rental income from the lease of certain premises and income earned from parking fees
shall fall under the last paragraph of Section 27 of the National Internal Revenue Code of 1977, as amended." 15
Clearly, the CA did not alter any fact or evidence. It merely resolved the aforementioned issue, as indeed it was
expected to. That it did so in a manner different from that of the CTA did not necessarily imply a reversal of factual
findings.
The distinction between a question of law and a question of fact is clear-cut. It has been held that "[t]here is a question
of law in a given case when the doubt or difference arises as to what the law is on a certain state of facts; there is a
question of fact when the doubt or difference arises as to the truth or falsehood of alleged facts." 16 In the present
case, the CA did not doubt, much less change, the facts narrated by the CTA. It merely applied the law to the facts.
That its interpretation or conclusion is different from that of the CTA is not irregular or abnormal.
Second Issue:
Is the Rental Income of the YMCA Taxable?
We now come to the crucial issue: Is the rental income of the YMCA from its real estate subject to tax? At the outset,
we set forth the relevant provision of the NIRC:
Sec. 27. Exemptions from tax on corporations. The following organizations shall not be taxed under
this Title in respect to income received by them as such
xxx xxx xxx
(g) Civic league or organization not organized for profit but operated exclusively for the promotion of
social welfare;
(h) Club organized and operated exclusively for pleasure, recreation, and other non-profitable
purposes, no part of the net income of which inures to the benefit of any private stockholder or
member;
xxx xxx xxx
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from any of
their activities conducted for profit, regardless of the disposition made of such income, shall be subject
to the tax imposed under this Code. (as amended by Pres. Decree No. 1457)
Petitioner argues that while the income received by the organizations enumerated in Section 27 (now Section 26) of
the NIRC is, as a rule, exempted from the payment of tax "in respect to income received by them as such," the
exemption does not apply to income derived ". . . from any of their properties, real or personal, or from any of their
activities conducted for profit, regardless of the disposition made of such income . . . ."
Petitioner adds that "rental income derived by a tax-exempt organization from the lease of its properties, real or
personal, [is] not, therefore, exempt from income taxation, even if such income [is] exclusively used for the
accomplishment of its objectives." 17 We agree with the commissioner.
Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict in interpretation in
construing tax exemptions. 18 Furthermore, a claim of statutory exemption from taxation should be manifest. and
unmistakable from the language of the law on which it is based. Thus, the claimed exemption "must expressly be
granted in a statute stated in a language too clear to be mistaken." 19
In the instant case, the exemption claimed by the YMCA is expressly disallowed by the very wording of the last
paragraph of then Section 27 of the NIRC which mandates that the income of exempt organizations (such as the YMCA)
from any of their properties, real or personal, be subject to the tax imposed by the same Code. Because the last
paragraph of said section unequivocally subjects to tax the rent income of the YMCA from its real property, 20 the Court
is duty-bound to abide strictly by its literal meaning and to refrain from resorting to any convoluted attempt at
construction.
It is axiomatic that where the language of the law is clear and unambiguous, its express terms must be applied. 21
Parenthetically, a consideration of the question of construction must not even begin, particularly when such question is
on whether to apply a strict construction or a liberal one on statutes that grant tax exemptions to "religious, charitable
and educational propert[ies] or institutions." 22
The last paragraph of Section 27, the YMCA argues, should be "subject to the qualification that the income from the
properties must arise from activities 'conducted for profit' before it may be considered taxable." 23 This argument is
erroneous. As previously stated, a reading of said paragraph ineludibly shows that the income from any property of
exempt organizations, as well as that arising from any activity it conducts for profit, is taxable. The phrase "any of their
activities conducted for profit" does not qualify the word "properties." This makes from the property of the organization
taxable, regardless of how that income is used whether for profit or for lofty non-profit purposes.
Verba legis non est recedendum. Hence, Respondent Court of Appeals committed reversible error when it allowed, on
reconsideration, the tax exemption claimed by YMCA on income it derived from renting out its real property, on the
solitary but unconvincing ground that the said income is not collected for profit but is merely incidental to its
operation. The law does not make a distinction. The rental income is taxable regardless of whence such income is
derived and how it is used or disposed of. Where the law does not distinguish, neither should we.
Constitutional Provisions
On Taxation
Invoking not only the NIRC but also the fundamental law, private respondent submits that Article VI, Section 28 of par.
3 of the 1987 Constitution, 24 exempts "charitable institutions" from the payment not only of property taxes but also of
income tax from any source. 25 In support of its novel theory, it compares the use of the words "charitable institutions,"
"actually" and "directly" in the 1973 and the 1987 Constitutions, on the one hand; and in Article VI, Section 22, par. 3
of the 1935 Constitution, on the other hand. 26
Private respondent enunciates three points. First, the present provision is divisible into two categories: (1) "[c]haritable
institutions, churches and parsonages or convents appurtenant thereto, mosques and non-profit cemeteries," the
incomes of which are, from whatever source, all tax-exempt; 27 and (2) "[a]ll lands, buildings and improvements
actually and directly used for religious, charitable or educational purposes," which are exempt only from property
taxes. 28 Second, Lladoc v. Commissioner of Internal Revenue, 29 which limited the exemption only to the payment of
property taxes, referred to the provision of the 1935 Constitution and not to its counterparts in the 1973 and the 1987
Constitutions. 30 Third, the phrase "actually, directly and exclusively used for religious, charitable or educational
purposes" refers not only to "all lands, buildings and improvements," but also to the above-quoted first category which
includes charitable institutions like the private respondent. 31
The Court is not persuaded. The debates, interpellations and expressions of opinion of the framers of the Constitution
reveal their intent which, in turn, may have guided the people in ratifying the Charter. 32 Such intent must be
effectuated.
Accordingly, Justice Hilario G. Davide, Jr., a former constitutional commissioner, who is now a member of this Court,
stressed during the Concom debates that ". . . what is exempted is not the institution itself . . .; those exempted from
real estate taxes are lands, buildings and improvements actually, directly and exclusively used for religious, charitable
or educational
purposes." 33 Father Joaquin G. Bernas, an eminent authority on the Constitution and also a member of the Concom,
adhered to the same view that the exemption created by said provision pertained only to property taxes. 34
In his treatise on taxation, Mr. Justice Jose C. Vitug concurs, stating that "[t]he tax exemption covers property taxes
only." 35 Indeed, the income tax exemption claimed by private respondent finds no basis in Article VI, Section 26, par. 3
of the Constitution.
Private respondent also invokes Article XIV, Section 4, par. 3 of the Character, 36 claiming that the YMCA "is a nonstock, non-profit educational institution whose revenues and assets are used actually, directly and exclusively for
educational purposes so it is exempt from taxes on its properties and income." 37 We reiterate that private respondent
is exempt from the payment of property tax, but not income tax on the rentals from its property. The bare allegation
alone that it is a non-stock, non-profit educational institution is insufficient to justify its exemption from the payment of
income tax.
As previously discussed, laws allowing tax exemption are construed strictissimi juris. Hence, for the YMCA to be
granted the exemption it claims under the aforecited provision, it must prove with substantial evidence that (1) it falls
under the classification non-stock, non-profit educational institution; and (2) the income it seeks to be exempted from
taxation is used actually, directly, and exclusively for educational purposes. However, the Court notes that not a
scintilla of evidence was submitted by private respondent to prove that it met the said requisites.
Is the YMCA an educational institution within the purview of Article XIV, Section 4, par. 3 of the Constitution? We rule
that it is not. The term "educational institution" or "institution of learning" has acquired a well-known technical
meaning, of which the members of the Constitutional Commission are deemed cognizant. 38 Under the Education Act of
1982, such term refers to schools. 39 The school system is synonymous with formal education, 40 which "refers to the
hierarchically structured and chronologically graded learnings organized and provided by the formal school system and
for which certification is required in order for the learner to progress through the grades or move to the higher levels."
41
The Court has examined the "Amended Articles of Incorporation" and "By-Laws" 43 of the YMCA, but found nothing in
them that even hints that it is a school or an educational institution. 44
Furthermore, under the Education Act of 1982, even non-formal education is understood to be school-based and
"private auspices such as foundations and civic-spirited organizations" are ruled out. 45 It is settled that the term
"educational institution," when used in laws granting tax exemptions, refers to a ". . . school seminary, college or
educational establishment . . . ." 46 Therefore, the private respondent cannot be deemed one of the educational
institutions covered by the constitutional provision under consideration.
. . . Words used in the Constitution are to be taken in their ordinary acceptation. While in its broadest
and best sense education embraces all forms and phases of instruction, improvement and
development of mind and body, and as well of religious and moral sentiments, yet in the common
understanding and application it means a place where systematic instruction in any or all of the useful
branches of learning is given by methods common to schools and institutions of learning. That we
conceive to be the true intent and scope of the term [educational institutions,] as used in the
Constitution. 47
Moreover, without conceding that Private Respondent YMCA is an educational institution, the Court also notes that the
former did not submit proof of the proportionate amount of the subject income that was actually, directly and
exclusively used for educational purposes. Article XIII, Section 5 of the YMCA by-laws, which formed part of the
evidence submitted, is patently insufficient, since the same merely signified that "[t]he net income derived from the
rentals of the commercial buildings shall be apportioned to the Federation and Member Associations as the National
Board may decide." 48 In sum, we find no basis for granting the YMCA exemption from income tax under the
constitutional provision invoked.
Cases Cited by Private
Respondent Inapplicable
The cases 49 relied on by private respondent do not support its cause. YMCA of Manila v. Collector of Internal Revenue
50
and Abra Valley College, Inc. v. Aquino 51 are not applicable, because the controversy in both cases involved
exemption from the payment of property tax, not income tax. Hospital de San Juan de Dios, Inc. v. Pasay City 52 is not
in point either, because it involves a claim for exemption from the payment of regulatory fees, specifically electrical
inspection fees, imposed by an ordinance of Pasay City an issue not at all related to that involved in a claimed
exemption from the payment of income taxes imposed on property leases. In Jesus Sacred Heart College v. Com. of
Internal Revenue, 53 the party therein, which claimed an exemption from the payment of income tax, was an
educational institution which submitted substantial evidence that the income subject of the controversy had been
devoted or used solely for educational purposes. On the other hand, the private respondent in the present case has
not given any proof that it is an educational institution, or that part of its rent income is actually, directly and
exclusively used for educational purposes.
Epilogue
In deliberating on this petition, the Court expresses its sympathy with private respondent. It appreciates the nobility of
its cause. However, the Court's power and function are limited merely to applying the law fairly and objectively. It
cannot change the law or bend it to suit its sympathies and appreciations. Otherwise, it would be overspilling its role
and invading the realm of legislation.
We concede that private respondent deserves the help and the encouragement of the government. It needs laws that
can facilitate, and not frustrate, its humanitarian tasks. But the Court regrets that, given its limited constitutional
authority, it cannot rule on the wisdom or propriety of legislation. That prerogative belongs to the political departments
of government. Indeed, some of the members of the Court may even believe in the wisdom and prudence of granting
more tax exemptions to private respondent. But such belief, however well-meaning and sincere, cannot bestow upon
the Court the power to change or amend the law.
WHEREFORE, the petition is GRANTED. The Resolutions of the Court of Appeals dated September 28, 1995 and
February 29, 1996 are hereby REVERSED and SET ASIDE. The Decision of the Court of Appeals dated February 16,
1995 is REINSTATED, insofar as it ruled that the income derived by petitioner from rentals of its real property is subject
to income tax. No pronouncement as to costs.
SO ORDERED.
G.R. No. 147188
September 14, 2004

vs.
THE ESTATE OF BENIGNO P. TODA, JR., Represented by Special Co-administrators Lorna Kapunan and
Mario Luza Bautista, respondents.
DECISION
DAVIDE, JR., C.J.:
This Court is called upon to determine in this case whether the tax planning scheme adopted by a corporation
constitutes tax evasion that would justify an assessment of deficiency income tax.
The petitioner seeks the reversal of the Decision1 of the Court of Appeals of 31 January 2001 in CA-G.R. SP No. 57799
affirming the 3 January 2000 Decision2 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 5328, 3 which held that the
respondent Estate of Benigno P. Toda, Jr. is not liable for the deficiency income tax of Cibeles Insurance Corporation
(CIC) in the amount of P79,099,999.22 for the year 1989, and ordered the cancellation and setting aside of the
assessment issued by Commissioner of Internal Revenue Liwayway Vinzons-Chato on 9 January 1995.
The case at bar stemmed from a Notice of Assessment sent to CIC by the Commissioner of Internal Revenue for
deficiency income tax arising from an alleged simulated sale of a 16-storey commercial building known as Cibeles
Building, situated on two parcels of land on Ayala Avenue, Makati City.
On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of its issued and outstanding
capital stock, to sell the Cibeles Building and the two parcels of land on which the building stands for an amount of not
less than P90 million.4
On 30 August 1989, Toda purportedly sold the property for P100 million to Rafael A. Altonaga, who, in turn, sold the
same property on the same day to Royal Match Inc. (RMI) for P200 million. These two transactions were evidenced by
Deeds of Absolute Sale notarized on the same day by the same notary public. 5
For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of P10 million.6
On 16 April 1990, CIC filed its corporate annual income tax return 7 for the year 1989, declaring, among other things, its
gain from the sale of real property in the amount of P75,728.021. After crediting withholding taxes of P254,497.00, it
paid P26,341,2078 for its net taxable income of P75,987,725.
On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for P12.5 million, as evidenced by a
Deed of Sale of Shares of Stocks.9 Three and a half years later, or on 16 January 1994, Toda died.
On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an assessment notice 10 and demand letter to the CIC for
deficiency income tax for the year 1989 in the amount of P79,099,999.22.
The new CIC asked for a reconsideration, asserting that the assessment should be directed against the old CIC, and not
against the new CIC, which is owned by an entirely different set of stockholders; moreover, Toda had undertaken to
hold the buyer of his stockholdings and the CIC free from all tax liabilities for the fiscal years 1987-1989. 11
On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by special co-administrators Lorna Kapunan and
Mario Luza Bautista, received a Notice of Assessment 12 dated 9 January 1995 from the Commissioner of Internal
Revenue for deficiency income tax for the year 1989 in the amount of P79,099,999.22, computed as follows:
Income Tax 1989
Net Income per return
P75,987,725.00
Add: Additional gain on sale of real property taxable

under ordinary corporate income but were substituted
with individual capital gains(P200M 100M)
Total Net Taxable Income per investigation
Tax Due thereof at 35%
Less: Payment already made
100,000,000.00
P175,987,725.00
P 61,595,703.75
1. Per return
P26,595,704.00
2. Thru Capital Gains Tax made

by R.A. Altonaga
10,000,000.00
36,595,704.00
Balance of tax
due
P 24,999,999.75
Add: 50% Surcharge
12,499,999.88
25% Surcharge
6,249,999.94
Total
P 43,749,999.57
Add: Interest 20% from

4/16/90-4/30/94 (.808)
TOTAL AMT. DUE & COLLECTIBLE
35,349,999.65
P 79,099,999.22
===========
===
The Estate thereafter filed a letter of protest.13

In the letter dated 19 October 1995,14 the Commissioner dismissed the protest, stating that a fraudulent scheme was
deliberately perpetuated by the CIC wholly owned and controlled by Toda by covering up the additional gain of P100
million, which resulted in the change in the income structure of the proceeds of the sale of the two parcels of land and
the building thereon to an individual capital gains, thus evading the higher corporate income tax rate of 35%.
On 15 February 1996, the Estate filed a petition for review 15 with the CTA alleging that the Commissioner erred in
holding the Estate liable for income tax deficiency; that the inference of fraud of the sale of the properties is
unreasonable and unsupported; and that the right of the Commissioner to assess CIC had already prescribed.
In his Answer16 and Amended Answer,17 the Commissioner argued that the two transactions actually constituted a
single sale of the property by CIC to RMI, and that Altonaga was neither the buyer of the property from CIC nor the
seller of the same property to RMI. The additional gain of P100 million (the difference between the second simulated
sale for P200 million and the first simulated sale for P100 million) realized by CIC was taxed at the rate of only 5%
purportedly as capital gains tax of Altonaga, instead of at the rate of 35% as corporate income tax of CIC. The income
tax return filed by CIC for 1989 with intent to evade payment of the tax was thus false or fraudulent. Since such falsity
or fraud was discovered by the BIR only on 8 March 1991, the assessment issued on 9 January 1995 was well within
the prescriptive period prescribed by Section 223 (a) of the National Internal Revenue Code of 1986, which provides
that tax may be assessed within ten years from the discovery of the falsity or fraud. With the sale being tainted with
fraud, the separate corporate personality of CIC should be disregarded. Toda, being the registered owner of the
99.991% shares of stock of CIC and the beneficial owner of the remaining 0.009% shares registered in the name of the
individual directors of CIC, should be held liable for the deficiency income tax, especially because the gains realized
from the sale were withdrawn by him as cash advances or paid to him as cash dividends. Since he is already dead, his
estate shall answer for his liability.
In its decision18 of 3 January 2000, the CTA held that the Commissioner failed to prove that CIC committed fraud to
deprive the government of the taxes due it. It ruled that even assuming that a pre-conceived scheme was adopted by
CIC, the same constituted mere tax avoidance, and not tax evasion. There being no proof of fraudulent transaction, the
applicable period for the BIR to assess CIC is that prescribed in Section 203 of the NIRC of 1986, which is three years
after the last day prescribed by law for the filing of the return. Thus, the governments right to assess CIC prescribed
on 15 April 1993. The assessment issued on 9 January 1995 was, therefore, no longer valid. The CTA also ruled that the
mere ownership by Toda of 99.991% of the capital stock of CIC was not in itself sufficient ground for piercing the
separate corporate personality of CIC. Hence, the CTA declared that the Estate is not liable for deficiency income tax of
P79,099,999.22 and, accordingly, cancelled and set aside the assessment issued by the Commissioner on 9 January
1995.
In its motion for reconsideration,19 the Commissioner insisted that the sale of the property owned by CIC was the result
of the connivance between Toda and Altonaga. She further alleged that the latter was a representative, dummy, and a
close business associate of the former, having held his office in a property owned by CIC and derived his salary from a
foreign corporation (Aerobin, Inc.) duly owned by Toda for representation services rendered. The CTA denied 20 the
motion for reconsideration, prompting the Commissioner to file a petition for review 21 with the Court of Appeals.
In its challenged Decision of 31 January 2001, the Court of Appeals affirmed the decision of the CTA, reasoning that the
CTA, being more advantageously situated and having the necessary expertise in matters of taxation, is "better
situated to determine the correctness, propriety, and legality of the income tax assessments assailed by the Toda
Estate."22
Unsatisfied with the decision of the Court of Appeals, the Commissioner filed the present petition invoking the
following grounds:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT COMMITTED NO FRAUD WITH INTENT TO
EVADE THE TAX ON THE SALE OF THE PROPERTIES OF CIBELES INSURANCE CORPORATION.
II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE SEPARATE CORPORATE PERSONALITY OF
CIBELES INSURANCE CORPORATION.
III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF PETITIONER TO ASSESS RESPONDENT FOR
DEFICIENCY INCOME TAX FOR THE YEAR 1989 HAD PRESCRIBED.
The Commissioner reiterates her arguments in her previous pleadings and insists that the sale by CIC of the Cibeles
property was in connivance with its dummy Rafael Altonaga, who was financially incapable of purchasing it. She
further points out that the documents themselves prove the fact of fraud in that (1) the two sales were done
simultaneously on the same date, 30 August 1989; (2) the Deed of Absolute Sale between Altonaga and RMI was
notarized ahead of the alleged sale between CIC and Altonaga, with the former registered in the Notarial Register of
Jocelyn H. Arreza Pabelana as Doc. 91, Page 20, Book I, Series of 1989; and the latter, as Doc. No. 92, Page 20, Book I,
Series of 1989, of the same Notary Public; (3) as early as 4 May 1989, CIC received P40 million from RMI, and not from
Altonaga. The said amount was debited by RMI in its trial balance as of 30 June 1989 as investment in Cibeles Building.
The substantial portion of P40 million was withdrawn by Toda through the declaration of cash dividends to all its
stockholders.
For its part, respondent Estate asserts that the Commissioner failed to present the income tax return of Altonaga to
prove that the latter is financially incapable of purchasing the Cibeles property.
To resolve the grounds raised by the Commissioner, the following questions are pertinent:
1. Is this a case of tax evasion or tax avoidance?
2. Has the period for assessment of deficiency income tax for the year 1989 prescribed? and
3. Can respondent Estate be held liable for the deficiency income tax of CIC for the year 1989, if any?
We shall discuss these questions in seriatim.
Is this a case of tax evasion or tax avoidance?
Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation. Tax
avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayer in
good faith and at arms length. Tax evasion, on the other hand, is a scheme used outside of those lawful means and
when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities. 23
Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less than that
known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; (2) an
accompanying state of mind which is described as being "evil," in "bad faith," "willfull," or "deliberate and not
accidental"; and (3) a course of action or failure of action which is unlawful. 24
All these factors are present in the instant case. It is significant to note that as early as 4 May 1989, prior to the
purported sale of the Cibeles property by CIC to Altonaga on 30 August 1989, CIC received P40 million from RMI,25 and
not from Altonaga. That P40 million was debited by RMI and reflected in its trial balance 26 as "other inv. Cibeles Bldg."
Also, as of 31 July 1989, another P40 million was debited and reflected in RMIs trial balance as "other inv. Cibeles
Bldg." This would show that the real buyer of the properties was RMI, and not the intermediary Altonaga.lavvphi1.net
The investigation conducted by the BIR disclosed that Altonaga was a close business associate and one of the many
trusted corporate executives of Toda. This information was revealed by Mr. Boy Prieto, the assistant accountant of CIC
and an old timer in the company.27 But Mr. Prieto did not testify on this matter, hence, that information remains to be
hearsay and is thus inadmissible in evidence. It was not verified either, since the letter-request for investigation of
Altonaga was unserved,28 Altonaga having left for the United States of America in January 1990. Nevertheless, that
Altonaga was a mere conduit finds support in the admission of respondent Estate that the sale to him was part of the
tax planning scheme of CIC. That admission is borne by the records. In its Memorandum, respondent Estate declared:
Petitioner, however, claims there was a "change of structure" of the proceeds of sale. Admitted one hundred
percent. But isnt this precisely the definition of tax planning? Change the structure of the funds and pay a
lower tax. Precisely, Sec. 40 (2) of the Tax Code exists, allowing tax free transfers of property for stock,
changing the structure of the property and the tax to be paid. As long as it is done legally, changing the
structure of a transaction to achieve a lower tax is not against the law. It is absolutely allowed.
Tax planning is by definition to reduce, if not eliminate altogether, a tax. Surely petitioner [sic] cannot be
faulted for wanting to reduce the tax from 35% to 5%.29 [Underscoring supplied].
The scheme resorted to by CIC in making it appear that there were two sales of the subject properties, i.e., from CIC to
Altonaga, and then from Altonaga to RMI cannot be considered a legitimate tax planning. Such scheme is tainted with
fraud.
Fraud in its general sense, "is deemed to comprise anything calculated to deceive, including all acts, omissions, and
concealment involving a breach of legal or equitable duty, trust or confidence justly reposed, resulting in the damage
to another, or by which an undue and unconscionable advantage is taken of another." 30
Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid especially that
the transfer from him to RMI would then subject the income to only 5% individual capital gains tax, and not the 35%
corporate income tax. Altonagas sole purpose of acquiring and transferring title of the subject properties on the same
day was to create a tax shelter. Altonaga never controlled the property and did not enjoy the normal benefits and
burdens of ownership. The sale to him was merely a tax ploy, a sham, and without business purpose and economic
substance. Doubtless, the execution of the two sales was calculated to mislead the BIR with the end in view of
reducing the consequent income tax liability.lavvphi1.net
In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was prompted more on the mitigation of
tax liabilities than for legitimate business purposes constitutes one of tax evasion. 31
Generally, a sale or exchange of assets will have an income tax incidence only when it is consummated. 32 The
incidence of taxation depends upon the substance of a transaction. The tax consequences arising from gains from a
sale of property are not finally to be determined solely by the means employed to transfer legal title. Rather, the
transaction must be viewed as a whole, and each step from the commencement of negotiations to the consummation
of the sale is relevant. A sale by one person cannot be transformed for tax purposes into a sale by another by using
the latter as a conduit through which to pass title. To permit the true nature of the transaction to be disguised by mere
formalisms, which exist solely to alter tax liabilities, would seriously impair the effective administration of the tax
policies of Congress.33
To allow a taxpayer to deny tax liability on the ground that the sale was made through another and distinct entity
when it is proved that the latter was merely a conduit is to sanction a circumvention of our tax laws. Hence, the sale to
Altonaga should be disregarded for income tax purposes. 34 The two sale transactions should be treated as a single
direct sale by CIC to RMI.
Accordingly, the tax liability of CIC is governed by then Section 24 of the NIRC of 1986, as amended (now 27 (A) of the
Tax Reform Act of 1997), which stated as follows:
Sec. 24. Rates of tax on corporations. (a) Tax on domestic corporations.- A tax is hereby imposed upon the
taxable net income received during each taxable year from all sources by every corporation organized in, or
existing under the laws of the Philippines, and partnerships, no matter how created or organized but not
including general professional partnerships, in accordance with the following:
Twenty-five percent upon the amount by which the taxable net income does not exceed one hundred
thousand pesos; and
Thirty-five percent upon the amount by which the taxable net income exceeds one hundred thousand
pesos.
CIC is therefore liable to pay a 35% corporate tax for its taxable net income in 1989. The 5% individual capital gains
tax provided for in Section 34 (h) of the NIRC of 198635 (now 6% under Section 24 (D) (1) of the Tax Reform Act of
1997) is inapplicable. Hence, the assessment for the deficiency income tax issued by the BIR must be upheld.
Has the period of assessment prescribed?

No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform Act of 1997) read:
Sec. 269. Exceptions as to period of limitation of assessment and collection of taxes.-(a) In the case of a false
or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a
proceeding in court after the collection of such tax may be begun without assessment, at any time within ten
years after the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has
become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal
action for collection thereof .
Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3) failure to file a
return, the period within which to assess tax is ten years from discovery of the fraud, falsification or omission, as the
case may be.
It is true that in a query dated 24 August 1989, Altonaga, through his counsel, asked the Opinion of the BIR on the tax
consequence of the two sale transactions.36 Thus, the BIR was amply informed of the transactions even prior to the
execution of the necessary documents to effect the transfer. Subsequently, the two sales were openly made with the
execution of public documents and the declaration of taxes for 1989. However, these circumstances do not negate the
existence of fraud. As earlier discussed those two transactions were tainted with fraud. And even assuming arguendo
that there was no fraud, we find that the income tax return filed by CIC for the year 1989 was false. It did not reflect
the true or actual amount gained from the sale of the Cibeles property. Obviously, such was done with intent to evade
or reduce tax liability.
As stated above, the prescriptive period to assess the correct taxes in case of false returns is ten years from the
discovery of the falsity. The false return was filed on 15 April 1990, and the falsity thereof was claimed to have been
discovered only on 8 March 1991.37 The assessment for the 1989 deficiency income tax of CIC was issued on 9 January
1995. Clearly, the issuance of the correct assessment for deficiency income tax was well within the prescriptive period.
Is respondent Estate liable for the 1989 deficiency income tax of Cibeles Insurance Corporation?
A corporation has a juridical personality distinct and separate from the persons owning or composing it. Thus, the
owners or stockholders of a corporation may not generally be made to answer for the liabilities of a corporation and
vice versa. There are, however, certain instances in which personal liability may arise. It has been held in a number of
cases that personal liability of a corporate director, trustee, or officer along, albeit not necessarily, with the corporation
may validly attach when:
1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross negligence in directing
its affairs, or (c) conflict of interest, resulting in damages to the corporation, its stockholders, or other persons;
2. He consents to the issuance of watered down stocks or, having knowledge thereof, does not forthwith file
with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made, by specific provision of law, to personally answer for his corporate action. 38
It is worth noting that when the late Toda sold his shares of stock to Le Hun T. Choa, he knowingly and voluntarily held
himself personally liable for all the tax liabilities of CIC and the buyer for the years 1987, 1988, and 1989. Paragraph g
of the Deed of Sale of Shares of Stocks specifically provides:
g. Except for transactions occurring in the ordinary course of business, Cibeles has no liabilities or obligations,
contingent or otherwise, for taxes, sums of money or insurance claims other than those reported in its audited
financial statement as of December 31, 1989, attached hereto as "Annex B" and made a part hereof. The
business of Cibeles has at all times been conducted in full compliance with all applicable laws, rules and
regulations. SELLER undertakes and agrees to hold the BUYER and Cibeles free from any and all
income tax liabilities of Cibeles for the fiscal years 1987, 1988 and 1989. 39 [Underscoring Supplied].
When the late Toda undertook and agreed "to hold the BUYER and Cibeles free from any all income tax liabilities of
Cibeles for the fiscal years 1987, 1988, and 1989," he thereby voluntarily held himself personally liable therefor.
Respondent estate cannot, therefore, deny liability for CICs deficiency income tax for the year 1989 by invoking the
separate corporate personality of CIC, since its obligation arose from Todas contractual undertaking, as contained in
the Deed of Sale of Shares of Stock.
WHEREFORE, in view of all the foregoing, the petition is hereby GRANTED. The decision of the Court of Appeals of 31
January 2001 in CA-G.R. SP No. 57799 is REVERSED and SET ASIDE, and another one is hereby rendered ordering
respondent Estate of Benigno P. Toda Jr. to pay P79,099,999.22 as deficiency income tax of Cibeles Insurance
Corporation for the year 1989, plus legal interest from 1 May 1994 until the amount is fully paid.
Costs against respondent.
SO ORDERED.
G.R. No. 166377
November 28, 2008
MA. ISABEL T. SANTOS, represented by ANTONIO P. SANTOS,petitioner,

vs.
SERVIER PHILIPPINES, INC. and NATIONAL LABOR RELATIONS COMMISSION, respondents.
DECISION
NACHURA, J.:
Before this Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, seeking to set aside the
Court of Appeals (CA) Decision,1 dated August 12, 2004 and its Resolution2 dated December 17, 2004, in CA-G.R. SP
No. 75706.
The facts, as culled from the records, are as follows:
Petitioner Ma. Isabel T. Santos was the Human Resource Manager of respondent Servier Philippines, Inc. since 1991
until her termination from service in 1999. On March 26 and 27, 1998, petitioner attended a meeting 3 of all human
resource managers of respondent, held in Paris, France. Since the last day of the meeting coincided with the
graduation of petitioners only child, she arranged for a European vacation with her family right after the meeting. She,
thus, filed a vacation leave effective March 30, 1998. 4
On March 29, 1998, petitioner, together with her husband Antonio P. Santos, her son, and some friends, had dinner at
Leon des Bruxelles, a Paris restaurant known for mussels 5 as their specialty. While having dinner, petitioner
complained of stomach pain, then vomited. Eventually, she was brought to the hospital known as Centre Chirurgical
de LQuest where she fell into coma for 21 days; and later stayed at the Intensive Care Unit (ICU) for 52 days. The
hospital found that the probable cause of her sudden attack was "alimentary allergy," as she had recently ingested a
meal of mussels which resulted in a concomitant uticarial eruption. 6
During the time that petitioner was confined at the hospital, her husband and son stayed with her in Paris. Petitioners
hospitalization expenses, as well as those of her husband and son, were paid by respondent. 7
In June 1998, petitioners attending physicians gave a prognosis of the formers condition; and, with the consent of her
family, allowed her to go back to the Philippines for the continuation of her medical treatment. She was then confined
at the St. Lukes Medical Center for rehabilitation.8 During the period of petitioners rehabilitation, respondent
continued to pay the formers salaries; and to assist her in paying her hospital bills.
In a letter dated May 14, 1999, respondent informed the petitioner that the former had requested the latters physician
to conduct a thorough physical and psychological evaluation of her condition, to determine her fitness to resume her
work at the company. Petitioners physician concluded that the former had not fully recovered mentally and physically.
Hence, respondent was constrained to terminate petitioners services effective August 31, 1999. 9
As a consequence of petitioners termination from employment, respondent offered a retirement package which
consists of:
Retirement Plan Benefits:
P 1,063,841.76
Insurance Pension at 20,000.00/month

for 60 months from company-sponsored
group life policy:
Educational assistance:
Medical and Health Care:
P 1,200,000.00
P 465,000.00
P 200,000.0010
Of the promised retirement benefits amounting to P1,063,841.76, only P701,454.89 was released to petitioners
husband, the balance11 thereof was withheld allegedly for taxation purposes. Respondent also failed to give the other
benefits listed above.12
Petitioner, represented by her husband, instituted the instant case for unpaid salaries; unpaid separation pay; unpaid
balance of retirement package plus interest; insurance pension for permanent disability; educational assistance for her
son; medical assistance; reimbursement of medical and rehabilitation expenses; moral, exemplary, and actual
damages, plus attorneys fees. The case was docketed as NLRC-NCR (SOUTH) Case No. 30-06-02520-01.
On September 28, 2001, Labor Arbiter Aliman D. Mangandog rendered a Decision 13 dismissing petitioners complaint.
The Labor Arbiter stressed that respondent had been generous in giving financial assistance to the petitioner. 14 He
likewise noted that there was a retirement plan for the benefit of the employees. In denying petitioners claim for
separation pay, the Labor Arbiter ratiocinated that the same had already been integrated in the retirement plan
established by respondent. Thus, petitioner could no longer collect separation pay over and above her retirement
benefits.15 The arbiter refused to rule on the legality of the deductions made by respondent from petitioners total
retirement benefits for taxation purposes, as the issue was beyond the jurisdiction of the NLRC. 16 On the matter of
educational assistance, the Labor Arbiter found that the same may be granted only upon the submission of a
certificate of enrollment.17 Lastly, as to petitioners claim for damages and attorneys fees, the Labor Arbiter denied the
same as the formers dismissal was not tainted with bad faith. 18
On appeal to the National Labor Relations Commission (NLRC), the tribunal set aside the Labor Arbiters decision,
ruling that:
WHEREFORE, premises considered, Complainants appeal is partly GRANTED. The Labor Arbiters decision in
the above-entitled case is hereby SET ASIDE. Respondent is ordered to pay Complainants portion of her
separation pay covering the following: 1) P200,000.00 for medical and health care from September 1999 to
April 2001; and 2) P35,000.00 per year for her sons high school (second year to fourth year) education and
P45,000.00 per semester for the latters four-year college education, upon presentation of any applicable
certificate of enrollment.
SO ORDERED.19
The NLRC emphasized that petitioner was not retired from the service pursuant to law, collective bargaining
agreement (CBA) or other employment contract; rather, she was dismissed from employment due to a
disease/disability under Article 28420 of the Labor Code.21 In view of her non-entitlement to retirement benefits, the
amounts received by petitioner should then be treated as her separation pay. 22 Though not legally obliged to give the
other benefits, i.e., educational assistance, respondent volunteered to grant them, for humanitarian consideration. The
NLRC therefore ordered the payment of the other benefits promised by the respondent. 23 Lastly, it sustained the denial
of petitioners claim for damages for the latters failure to substantiate the same. 24
Unsatisfied, petitioner elevated the matter to the Court of Appeals which affirmed the NLRC decision. 25
Hence, the instant petition.
At the outset, the Court notes that initially, petitioner raised the issue of whether she was entitled to separation pay,
retirement benefits, and damages. In support of her claim for separation pay, she cited Article 284 of the Labor Code,
as amended. However, in coming to this Court via a petition for review on certiorari, she abandoned her original
position and alleged that she was, in fact, not dismissed from employment based on the above provision. She argued
that her situation could not be characterized as a disease; rather, she became disabled. In short, in her petition before
us, she now changes her theory by saying that she is not entitled to separation pay but to retirement pay pursuant to
Section 4,26 Article V of the Retirement Plan, on disability retirement. She, thus, prayed for the full payment of her
retirement benefits by giving back to her the amount deducted for taxation purposes.
In our Resolution27 dated November 23, 2005 requiring the parties to submit their respective memoranda, we
specifically stated:
No new issues may be raised by a party in the Memorandum and the issues raised in the pleadings but not
included in the Memorandum shall be deemed waived or abandoned.
Being summations of the parties previous pleadings, the Court may consider the Memoranda alone in deciding
or resolving this petition.
Pursuant to the above resolution, any argument raised in her petition, but not raised in her Memorandum, 28 is deemed
abandoned.29 Hence, the only issue proper for determination is the propriety of deducting P362,386.87 from her total
benefits, for taxation purposes. Nevertheless, in order to resolve the legality of the deduction, it is imperative that we
settle, once and for all, the ground relied upon by respondent in terminating the services of the petitioner, as well as
the nature of the benefits given to her after such termination. Only then can we decide whether the amount deducted
by the respondent should be paid to the petitioner.
Respondent dismissed the petitioner from her employment based on Article 284 of the Labor Code, as amended, which
reads:
Art. 284. DISEASE AS GROUND FOR TERMINATION
An employer may terminate the services of an employee who has been found to be suffering from any disease
and whose continued employment is prohibited by law or is prejudicial to his health as well as to the health of
his co-employees: Provided, That he is paid separation pay equivalent to at least one (1) month salary or to
one-half (1/2) month salary for every year of service, whichever is greater, a fraction of at least six (6) months
being considered as one (1) whole year.
As she was dismissed on the abovementioned ground, the law gives the petitioner the right to demand separation pay.
However, respondent established a retirement plan in favor of all its employees which specifically provides for
"disability retirement," to wit:
Sec. 4. DISABILITY RETIREMENT
In the event that a Member is retired by the Company due to permanent total incapacity or disability, as
determined by a competent physician appointed by the Company, his disability retirement benefit shall be the
Full Members Account Balance determined as of the last valuation date. x x x. 30
On the basis of the above-mentioned retirement plan, respondent offered the petitioner a retirement package which
consists of retirement plan benefits, insurance pension, and educational assistance. 31 The amount of P1,063,841.76
represented the disability retirement benefit provided for in the plan; while the insurance pension was to be paid by
their insurer; and the educational assistance was voluntarily undertaken by the respondent as a gesture of compassion
to the petitioner.32
We have declared in Aquino v. National Labor Relations Commission33 that the receipt of retirement benefits does not
bar the retiree from receiving separation pay. Separation pay is a statutory right designed to provide the employee
with the wherewithal during the period that he/she is looking for another employment. On the other hand, retirement
benefits are intended to help the employee enjoy the remaining years of his life, lessening the burden of worrying
about his financial support, and are a form of reward for his loyalty and service to the employer. 34 Hence, they are not
mutually exclusive. However, this is only true if there is no specific prohibition against the payment of both benefits in
the retirement plan and/or in the Collective Bargaining Agreement (CBA). 35
In the instant case, the Retirement Plan bars the petitioner from claiming additional benefits on top of that provided for
in the Plan. Section 2, Article XII of the Retirement Plan provides:
Section 2. NO DUPLICATION OF BENEFITS
No other benefits other than those provided under this Plan shall be payable from the Fund. Further, in the
event the Member receives benefits under the Plan, he shall be precluded from receiving any other benefits
under the Labor Code or under any present or future legislation under any other contract or Collective
Bargaining Agreement with the Company.36
There being such a provision, as held in Cruz v. Philippine Global Communications, Inc.,37 petitioner is entitled only to
either the separation pay under the law or retirement benefits under the Plan, and not both.
Clearly, the benefits received by petitioner from the respondent represent her retirement benefits under the Plan. The
question that now confronts us is whether these benefits are taxable. If so, respondent correctly made the deduction
for tax purposes. Otherwise, the deduction was illegal and respondent is still liable for the completion of petitioners
retirement benefits.
Respondent argues that the legality of the deduction from petitioners total benefits cannot be taken cognizance of by
this Court since the issue was not raised during the early stage of the proceedings. 38
We do not agree.
Records reveal that as early as in petitioners position paper filed with the Labor Arbiter, she already raised the legality
of said deduction, albeit designated as "unpaid balance of the retirement package." Petitioner specifically averred that
P362,386.87 was not given to her by respondent as it was allegedly a part of the formers taxable income. 39 This is
likewise evident in the Labor Arbiter and the NLRCs decisions although they ruled that the issue was beyond the
tribunals jurisdiction. They even suggested that petitioners claim for illegal deduction could be addressed by filing a
tax refund with the Bureau of Internal Revenue.40
Contrary to the Labor Arbiter and NLRCs conclusions, petitioners claim for illegal deduction falls within the tribunals
jurisdiction. It is noteworthy that petitioner demanded the completion of her retirement benefits, including the amount
withheld by respondent for taxation purposes. The issue of deduction for tax purposes is intertwined with the main
issue of whether or not petitioners benefits have been fully given her. It is, therefore, a money claim arising from the
employer-employee relationship, which clearly falls within the jurisdiction 41 of the Labor Arbiter and the NLRC.
This is not the first time that the labor tribunal is faced with the issue of illegal deduction. In Intercontinental
Broadcasting Corporation (IBC) v. Amarilla,42 IBC withheld the salary differentials due its retired employees to offset the
tax due on their retirement benefits. The retirees thus lodged a complaint with the NLRC questioning said withholding.
They averred that their retirement benefits were exempt from income tax; and IBC had no authority to withhold their
salary differentials. The Labor Arbiter took cognizance of the case, and this Court made a definitive ruling that
retirement benefits are exempt from income tax, provided that certain requirements are met.
Nothing, therefore, prevents us from deciding this main issue of whether the retirement benefits are taxable.
We answer in the affirmative.
Section 32 (B) (6) (a) of the New National Internal Revenue Code (NIRC) provides for the exclusion of retirement
benefits from gross income, thus:
(6) Retirement Benefits, Pensions, Gratuities, etc.
a) Retirement benefits received under Republic Act 7641 and those received by officials and employees of
private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained
by the employer: Provided, That the retiring official or employee has been in the service of the same employer
for at least ten (10) years and is not less than fifty (50) years of age at the time of his retirement: Provided
further, That the benefits granted under this subparagraph shall be availed of by an official or employee only
once. x x x.
Thus, for the retirement benefits to be exempt from the withholding tax, the taxpayer is burdened to prove the
concurrence of the following elements: (1) a reasonable private benefit plan is maintained by the employer; (2) the
retiring official or employee has been in the service of the same employer for at least ten (10) years; (3) the retiring
official or employee is not less than fifty (50) years of age at the time of his retirement; and (4) the benefit had been
availed of only once.43
As discussed above, petitioner was qualified for disability retirement. At the time of such retirement, petitioner was
only 41 years of age; and had been in the service for more or less eight (8) years. As such, the above provision is not
applicable for failure to comply with the age and length of service requirements. Therefore, respondent cannot be
faulted for deducting from petitioners total retirement benefits the amount of P362,386.87, for taxation purposes.
WHEREFORE, the petition is DENIED for lack of merit. The Court of Appeals Decision dated August 12, 2004 and its
Resolution dated December 17, 2004, in CA-G.R. SP No. 75706 are AFFIRMED.
SO ORDERED.
G.R. No. 162775
October 27, 2006
INTERCONTINENTAL BROADCASTING CORPORATION (IBC), represented by ATTY. RENATOQ. BELLO, in his

capacity as CEO and President, petitioner,
vs.
NOEMI B. AMARILLA, CORSINI R. LAGAHIT, ANATOLIO G. OTADOY, and CANDIDO C. QUIONES, JR.,
respondents.
DECISION
CALLEJO, SR., J.:

Before us is a Petition for Review on Certiorari filed by petitioner Intercontinental Broadcasting Corporation (IBC)
assailing the Decision1 of the Court of Appeals in CA-G.R. SP No. 72414, which in turn affirmed the Decision 2 of the
National Labor Relations Commission (NLRC) in NLRC Case No. V-000660-2000.
On various dates, petitioner employed the following persons at its Cebu station: Candido C. Quiones, Jr.; on February
1, 1975;3 Corsini R. Lagahit, as Studio Technician, also on February 1, 1975; 4 Anatolio G. Otadoy, as Collector, on April
1, 1975;5 and Noemi Amarilla, as Traffic Clerk, on July 1, 1975. 6 On March 1, 1986, the government sequestered the
station, including its properties, funds and other assets, and took over its management and operations from its owner,
Roberto Benedicto.7 However, in December 1986, the government and Benedicto entered into a temporary agreement
under which the latter would retain its management and operation. On November 3, 1990, the Presidential
Commission on Good Government (PCGG) and Benedicto executed a Compromise Agreement, 8 where Benedicto
transferred and assigned all his rights, shares and interests in petitioner station to the government. The PCGG
submitted the Agreement to the Sandiganbayan in Civil Case No. 0034 entitled "Republic of the Philippines v. Roberto
S. Benedicto, et al."9
In the meantime, the four (4) employees retired from the company and received, on staggered basis, their retirement
benefits under the 1993 Collective Bargaining Agreement (CBA) between petitioner and the bargaining unit of its
employees.
Name of Employee
Date of Retirement
Retirement Benefit
Candido C. Quiones, Jr.
October 16, 1995
Noemi B. Amarilla
April 16, 1998
P 1,134,239.47
Corsini R. Lagahit
April 16, 1998
P 1,298,879.50
Anatolio G. Otadoy
February 29, 1996
P 766,532.97
P 751,914.30
In the meantime, a P1,500.00 salary increase was given to all employees of the company, current and retired, effective
July 1994. However, when the four retirees demanded theirs, petitioner refused and instead informed them via a letter
that their differentials would be used to offset the tax due on their retirement benefits in accordance with the National
Internal Revenue Code (NIRC). Amarilla was informed that the P71,480.00 of the amount due to her would be used to
offset her tax liability of P340,641.42.10 Otadoy was also informed in a letter dated July 5, 1999, that his salary
differential of P170,250.61 would be used to pay his tax liability which amounted to P127,987.57. Since no tax liability
was withheld from his retirement benefits, he even owed the company P17,727.26 after the offsetting. Quiones was
informed that he should have retired compulsorily in 1992 at age 55 as provided in the CBA, and that since he was
already 58 when he retired, he was no longer entitled to receive salary increases from 1992 to 1995. Consequently, he
was overpaid by P137,932.22 for the "extension" of his employment from 1992 to 1995, which amount he was obliged
to return to the company. In any event, his claim for salary differentials had expired pursuant to Article 291 of the
Labor Code of the Philippines.11 Lagahits claim for salary differential of P73,165.23 was rejected by petitioner in a
letter dated July 6, 1999, on the ground that he had a tax liability of P396,619.03; since the amount would be used as
partial payment for his tax liability, he still owed the company P323,453.80.12
The four (4) retirees filed separate complaints13 against IBC TV-13 Cebu and Station Manager Louella F. Cabaero for
unfair labor practice and non-payment of backwages before the NLRC, Regional Arbitration Branch VII. As all of the
complainants had the same causes of action, their complaints were docketed as NLRC RAB-VII Case No. 10-1625-99.
The complainants averred that their retirement benefits are exempt from income tax under Article 32 of the NIRC.
Sections 28 and 72 of the NIRC, which petitioner relied upon in withholding their differentials, do not apply to them
since these provisions deal with the applicable income tax rates on foreign corporations and suits to recover taxes
based on false or fraudulent returns. They pointed out that, under Article VIII of the CBA, only those employees who
reached the age of 60 were considered retired, and those under 60 had the option to retire, like Quiones and Otadoy
who retired at ages 58 and 51, respectively. They prayed that they be paid their salary differentials, as follows:
Otadoy
P 170,250.61
Quiones
P 170,250.61
Lagahit
P 73,165.23
Amarilla
P 71,480.0014
For its part, petitioner averred that under Section 21 of the NIRC, the retirement benefits received by employees from
their employers constitute taxable income. While retirement benefits are exempt from taxes under Section 28(b) of
said Code, the law requires that such benefits received should be in accord with a reasonable retirement plan duly
registered with the Bureau of Internal Revenue (BIR) after compliance with the requirements therein enumerated.
Since its retirement plan in the 1993 CBA was not approved by the BIR, complainants were liable for income tax on
their retirement benefits. Petitioner claimed that it was mandated to withhold the income tax due from the retirement
benefits of said complainants. It was not estopped from correcting the mistakes of its former officers. Under the law,
complainants are obliged to return what had been mistakenly delivered to them. 15
In reply, complainants averred that the claims for the retirement salary differentials of Quiones and Otadoy had not
prescribed because the said CBA was implemented only in 1997. They pointed out that they filed their claims with
petitioner on April 3, 1999. They maintained that they availed of the optional retirement because of petitioners
inducement that there would be no tax deductions. Petitioner IBC did not commit any mistake in not withholding the
taxes due on their retirement benefits as shown by the fact that the PCCG, the Commission on Audit (COA) and the
Bureau of Internal Revenue (BIR) did not even require them to explain such mistake. They pointed out that petitioner
paid their retirement benefits on a staggered basis, and nonetheless failed to deduct any amount as taxes. 16
Petitioner countered that the retirement benefits received by the complainants were based on the CBA between it and
its bargaining units. Under Sections 72 and 73 of the NIRC, it is obliged to deduct and withhold taxes determined in
accordance with the rules and regulations to be prepared by the Secretary of Finance. It was its duty to withhold the
taxes on complainants retirement benefits, otherwise, it would be held civilly and criminally liable under Sections 251,
254 and 255 of the NIRC.
On February 14, 2000, the Labor Arbiter rendered judgment in favor of the retirees. The fallo of the decision reads:
WHEREFORE, premises considered, judgment is hereby rendered ordering the respondent Intercontinental
Broadcasting Corporation (IBC TV-13 Cebu) to pay the complainants Noemi Amarilla and Corsini Lagahit as
follows:
1. Noemi E. Amarilla
P26,423.00
2. Corsino R. Lagahit
P26,423.00
Total
P52,846.00
The claim of complainants Anatolio Otadoy and Candido Quiones and the case against respondent Louella F.
Cabaero are dismissed for lack of merit.
SO ORDERED.17
The Labor Arbiter ruled that the claims of Quiones and Otadoy had prescribed. The retirement benefits of
complainants Lagahit and Amarilla, on the other hand, were exempt from income tax under Section 28(b) of the NIRC.
However, the differentials due to the two complainants were computed three years backwards due to the law on
prescription.
Petitioner appealed the decision of the Labor Arbiter to the NLRC, arguing that the retirement benefits of Amarilla and
Lagahit are not tax exempt. It insisted that the Labor Arbiter erred in declaring as unlawful the act of withholding the
employees salary differentials as payment for the latters tax liabilities.
Otadoy and Quiones no longer appealed the decision.
On May 21, 2002, the NLRC rendered its decision dismissing the appeal and affirming that of the Labor Arbiter. The
fallo of the decision reads:
WHEREFORE, the Decision of the Labor Arbiter dated February 14, 2000 is hereby AFFIRMED. Respondents
appeal is dismissed for lack of merit.
SO ORDERED.18
The NLRC held that the benefits of the retirement plan under the CBAs between petitioner and its union members were
subject to tax as the scheme was not approved by the BIR. However, it had also been the practice of petitioner to give
retiring employees their retirement pay without tax deductions and there was no justifiable reason for the respondent
to deviate from such practice. The NLRC concluded that petitioner was deemed to have assumed the tax liabilities of
the complainants on their retirement benefits, hence, had no right to deduct taxes from their salary differentials. The
NLRC thus ratiocinated:
The sole concern of the law is that tax shall be imposed on retirement benefits. The employer assuming the
payment of tax on behalf of the retiring employee to make the retirement attractive, does not contravene the
tax law, because it is not contrary to the law or public policy, morals and good customs. It is significant to note
that respondent did not refute the complainants allegations in their Position Papers, to wit:
"Complainants Amarilla and Lagahit availed themselves of the offer of the respondent company when
they were induced and were made to believe that respondent companys employees who avail of such
early retirement can avail of that exemption on their retirement benefits. Were it not for the offer of no
tax liability, complainants would not have availed of such optional or early retirement."
It is worthy to note that the retirement benefits of the complainants did not suffer any tax deductions when
they were given at the first instance. It is only after they claimed the salary differentials when the respondent
withheld the backwages for the payment of tax liabilities.
"From the facts it can be shown that the disbursement of retirement benefits of the complainants were
made on staggered basis, three (3) and four (4) times. So, if the company, as it claimed, is really vent
on deducting the alleged taxes due the complainants, they have three or four opportunities to do so."
The respondents history reveals that it was paying retirement pays to its retiring employees without tax
deductions as a matter of practice. There is no justifiable reason for the respondent to deviate from that
practice now. It is deemed to have assumed the tax liabilities of the complainants. 19
Aggrieved, petitioner elevated the decision before the CA on the following grounds:
1. THE HONORABLE NLRC GRAVELY ABUSED ITS DISCRETION TANTAMOUNT TO LACK OF JURISDICTION WHEN IT
RULED THAT WHILE PETITIONER MAY NOT HAVE A RETIREMENT PLAN WHOSE BENEFITS THEREFROM ARE
EXEMPTED FROM TAXES UNDER SECTION 28 OF THE NIRC, BY VIRTUE OF ITS PREVIOUS PRACTICE THAT IT
ASSUMED THE PAYMENT OF TAX LIABILITES, IT IS DEEMED TO HAVE ANSWERED FOR THE TAX LIABILITES OF
THE COMPLAINANTS, WHICH ULTIMATE CONSEQUENCE, IF NOT RECTIFIED, SHALL CAUSE IRREPARABLE
DAMAGE AND INJURY TO THE PETITIONER CORPORATION.
2. THE HONORABLE NLRC GRAVELY ABUSED ITS DISCRETION TANTAMOUNT TO LACK OR EXCESS OF
JURISDICTION IN AFFIRMING THE DECISION RENDERED BY THE LABOR ARBITER ON FEBRUARY 14, 2000 WHICH
GRANTED RETIREMENT DIFFERENTIAL TO RESPONDENTS AMARILLA AND LAGAHIT AS THESE ARE CONTRARY
TO THE FACTS AND RETIREMENT LAWS PARTICULARLY THE PROVISIONS EMBODIED IN SECTIONS 21, 27, 28 OF
THE NATIONAL INTERNAL REVENUE CODE AND R.A. 7641 IMPLEMENTING ARTICLE 287 OF THE LABOR CODE AS
WELL AS SECTION 6 OF THE IMPLEMENTING RULES OF RA 7641.
3. CONSEQUENT TO NLRCS RULING GRANTING RETIREMENT DIFFERENTIAL TO RESPONDENTS AMARILLA AND
LAGAHIT, THE HONORABLE NLRC GRAVELY ABUSED ITS DISCRETION TANTAMOUNT TO LACK OR EXCESS OF
JURISDICTION IN HOLDING THAT PETITIONERS ACT OF WITHHOLDING COMPLAINANTS BACKWAGES AS
PAYMENT OF THEIR TAX LIABILITIES IS ILLEGAL. 20
On December 3, 2003, the CA rendered judgment dismissing the petition for lack of merit.
The appellate court declared that the salary differentials of the respondents are part of their taxable gross
income, considering that the CBA was not approved, much less submitted to the BIR. However, petitioner could
not withhold the corresponding tax liabilities of respondents due to the then existing CBA, providing that such
retirement benefits would not be subjected to any tax deduction, and that any such taxes would be for its
account. The appellate court relied on the allegations of respondents in their Position Paper before the Labor
Arbiter which petitioner failed to refute.
Petitioner filed a motion for reconsideration, which the appellate court denied. Hence, the present petition,
where petitioner avers that:
WITH ALL DUE RESPECT, THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR WHEN IT RULED THAT
SINCE IT HAS BEEN THE PURPORTED PRACTICE OF PETITIONER IBC-13 NOT TO WITHHOLD TAXES DUE ON THE
SALARY DIFFERENTIAL AND THE RETIREMENT BENEFITS, PETITIONER IBC-13 NECESSARILY ASSUMED PAYMENT
OF THE TAXES AND COULD NOT THEREFORE WITHHOLD THE SAME NOTWITHSTANDING THE SUBSEQUENT
DISCOVERY THAT THE FAILURE TO WITHHOLD THE TAXES WAS DONE DUE TO THE OMISSION, MISTAKE, FRAUD
OR IRREGULARITY COMMITTED BY PREVIOUS MANAGEMENT.
WITH ALL DUE RESPECT, THE HONORABLE COURT OF APPEALS GLOSSED OVER THE FACT AND COMMITTED
REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF THE NATIONAL LABOR RELATIONS COMMISSION
DATED MAY 21, 2002 WHICH ORDERED PETITIONER IBC-13 TO PAY RETIREMENT DIFFERENTIAL TO
RESPONDENTS AMARILLA AND LAGAHIT AS THESE ARE CONTRARY TO THE FACTS AND RETIREMENT LAWS
PARTICULARLY THE PROVISIONS EMBODIED IN SECTIONS 21, 27, 28 OF THE NATIONAL INTERNAL REVENUE
CODE (AS AMENDED BY PRESIDENTIAL DECREE NO. 1994) 21
Petitioner insists that respondents are liable for taxes on their retirement benefits because the retirement plan under
the CBA was not approved by the BIR. It insisted that it failed to comply with the requisites of Section 32 of the NIRC
and Rule II, Section 6 of the Rules Implementing the New Retirement Law which provides that retirement pay shall be
tax exempt upon compliance with the requirements under Section 2(b) of Revenue Regulation No. 12-86 dated August
1, 1986.
Petitioner maintains that respondents failed to present any document as proof that petitioner bound and obliged itself
to pay the withholding taxes on their retirement benefits. In fact, the Labor Arbiter did not make any finding that
petitioner had obliged itself to pay the withholding taxes on respondents retirement benefits. The NLRCs reliance on
the statements in its Position Paper that it undertook to pay for respondents withholding taxes is misplaced.
While petitioner admits that its "previous directors" had paid the withholding taxes on the retirement benefits of
respondents, it explains that this practice was stopped when the new management took over. The new management
could not be expected to enforce and follow through the illegal policy of the old management which is adverse to the
interests of the petitioner; hence, the decisions of the NLRC and the CA affirming such undertaking should be reversed.
It points out that it is a government corporation, and as such, its officials and employees may be held liable for
violation of Section 3(a) of Republic Act Nos. 3019, and 6713. 22 Moreover, its officers and employees are mandated to
preserve the companys assets, and may, likewise be held liable for failure to do so under Section 31 of the
Corporation Code.
The issues are (1) whether the retirement benefits of respondents are part of their gross income; and (2) whether
petitioner is estopped from reneging on its agreement with respondent to pay for the taxes on said retirement
benefits.
We agree with petitioners contention that, under the CBA, it is not obliged to pay for the taxes on the respondents
retirement benefits. We have carefully reviewed the CBA and find no provision where petitioner obliged itself to pay
the taxes on the retirement benefits of its employees.
We also agree with petitioners contention that, under the NIRC, the retirement benefits of respondents are part of
their gross income subject to taxes. Section 28 (b) (7) (A) of the NIRC of 1986 23 provides:
Sec. 28. Gross Income.
xxxx
(b) Exclusions from gross income. - The following items shall not be included in gross income and shall be
exempt from taxation under this Title:
xxxx
(7) Retirement benefits, pensions, gratuities, etc. - (A) Retirement benefits received by officials and employees
of private firms whether individuals or corporate, in accordance with a reasonable private benefit plan
maintained by the employer: Provided, That the retiring official or employee has been in the service of the
same employer for at least ten (10) years and is not less than fifty years of age at the time of his retirement:
Provided, further, That the benefits granted under this subparagraph shall be availed of by an official or
employee only once. For purposes of this subsection, the term "reasonable private benefit plan" means a
pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all
of his officials or employees, where contributions are made by such employer for officials or employees, or
both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus
accumulated, and wherein it is provided in said plan that at no time shall any part of the corpus or income of
the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said official and
employees.
Revenue Regulation No. 12-86, the implementing rules of the foregoing provisions, provides:
(b) Pensions, retirements and separation pay. Pensions, retirement and separation pay constitute
compensation subject to withholding tax, except the following:
(1) Retirement benefit received by official and employees of private firms under a reasonable private benefit
plan maintained by the employer, if the following requirements are met:
(i) The retirement plan must be approved by the Bureau of Internal Revenue;
(ii) The retiring official or employees must have been in the service of the same employer for at least
ten (10) years and is not less than fifty (50) years of age at the time of retirement; and
(iii) The retiring official or employee shall not have previously availed of the privilege under the
retirement benefit plan of the same or another employer.
Thus, for the retirement benefits to be exempt from the withholding tax, the taxpayer is burdened to prove the
concurrence of the following elements: (1) a reasonable private benefit plan is maintained by the employer; (2) the
retiring official or employee has been in the service of the same employer for at least 10 years; (3) the retiring official
or employee is not less than 50 years of age at the time of his retirement; and (4) the benefit had been availed of only
once.
Article VIII of the 1993 CBA provides for two kinds of retirement plans - compulsory and optional. Thus:
ARTICLE VIII
RETIREMENT
Section 1: Compulsory Retirement Any employee who has reached the age of Fifty Five (55) years shall be retired
from the COMPANY and shall be paid a retirement pay in accordance with the following schedule:
LENGTH OF SERVICE
RETIREMENT BENEFITS
1 year below 5 yrs.
15 days for every year of service
5 years 9 years
10 years 14 years
15 years 19 years
20 years or more
A supervisor who reached the age of Fifty (50) may at his/her option retire with the same retirement benefits provided
above.
Section 2: Optional Retirement Any covered employee, regardless of age, who has rendered at least five (5) years of
service to the COMPANY may voluntarily retire and the COMPANY agrees to pay Long Service Pay to said covered
employee in accordance with the following schedule:
LENGTH OF SERVICE
RETIREMENT BENEFITS
5 9 years
10 14 years
15 19 years
20 years and above
Section 3: Fraction of a Year In computing the retirement under Section 1 and 2 of this Article, a fraction of at least
six (6) months shall be considered as one whole year. Moreover, the COMPANY may exercise the option of extending
the employment of an employee.
Section 4: Severance of Employment Due to Illness When a supervisor suffers from disease and/or permanent
disability and her/his continued employment is prohibited by law or prejudicial to her/his health of the health of his coemployees, the COMPANY shall not terminate the employment of the subject supervisor unless there is a certification
by a competent public health authority that the disease is of such a nature or at such stage that it can not be cured
within a period of six (6) months even with proper medical treatment. The supervisor may be separated upon payment
by the COMPANY of separation pay pursuant to law, unless the supervisor falls within the purview of either Sections 1
or 2 hereof. In which case, the retirement benefits indicated therein shall apply, whichever is higher.
Section 5: Loyalty Recognition The COMPANY shall recognize the services of the supervisor/director who have
reached the following number of years upon retirement by granting him/her a plaque of appreciation and any lasting
gift:
10 years but below 15 years
(P 3,000.00) worth
15 years but below 20 years
(P 7,000.00) worth
20 years and more
(P10,000.00) worth
Respondents were qualified to retire optionally from their employment with petitioner. However, there is no evidence
on record that the 1993 CBA had been approved or was ever presented to the BIR; hence, the retirement benefits of
respondents are taxable.
Under Section 80 of the NIRC, petitioner, as employer, was obliged to withhold the taxes on said benefits and remit the
same to the BIR.
Section 80. Liability for Tax.
(A) Employer. The employer shall be liable for the withholding and remittance of the correct amount of tax
required to be deducted and withheld under this Chapter. If the employer fails to withhold and remit the
correct amount of tax as required to be withheld under the provision of this Chapter, such tax shall be
collected from the employer together with the penalties or additions to the tax otherwise applicable in respect
to such failure to withhold and remit.
However, we agree with respondents contention that petitioner did not withhold the taxes due on their retirement
benefits because it had obliged itself to pay the taxes due thereon. This was done to induce respondents to agree to
avail of the optional retirement scheme. Thus, in its petition in this case, petitioner averred that:
While it may indeed be conceded that the previous dispensation of petitioner IBC-13 footed the bill for the
withholding taxes, upon discovery by the new management, this was stopped altogether as this was grossly
prejudicial to the interest of the petitioner IBC-13. The policy of withholding the taxes due on the differentials
as a remedial measure was a matter of sound business judgment and dictates of good governance aimed at
protecting the interests of the government. Necessarily, the newly-appointed board and officers of the
petitioner, who learned about this grossly disadvantageous mistake committed by the former management of
petitioner IBC-13 cannot be expected to just follow suit blindly. An illegal act simply cannot give rise to an
obligation. Accordingly, the new officers were correct in not honoring this highly suspect practice and it is now
their duty to rectify this anomalous occurrence, otherwise, they become remiss in the performance of their
sworn responsibilities.
It need not be stressed that as board members and officers of the acquired asset of the government, they are
committed to preserve the assets thereof. Their concomitant obligations spring not only from their fiduciary
responsibility as corporate officers but as well as public officers. 24
Respondents received their retirement benefits from the petitioner in three staggered installments without any tax
deduction for the simple reason that petitioner had remitted the same to the BIR with the use of its own funds
conformably with its agreement with the retirees. It was only when respondents demanded the payment of their salary
differentials that petitioner alleged, for the first time, that it had failed to present the 1993 CBA to the BIR for approval,
rendering such retirement benefits not exempt from taxes; consequently, they were obliged to refund to it the
amounts it had remitted to the BIR in payment of their taxes. Petitioner used this "failure" as an afterthought, as an
excuse for its refusal to remit to the respondents their salary differentials. Patently, petitioner is estopped from doing
so. It cannot renege on its commitment to pay the taxes on respondents retirement benefits on the pretext that the
"new management" had found the policy disadvantageous.
It must be stressed that the parties are free to enter into any contract stipulation provided it is not illegal or contrary to
public morals. When such agreement freely and voluntarily entered into turns out to be advantageous to a party, the
courts cannot "rescue" the other party without violating the constitutional right to contract. Courts are not authorized
to extricate the parties from the consequences of their acts. Thus, the fact that the contract stipulations of the parties
may turn out to be financially disadvantageous to them will not relieve them of their obligation under the agreement. 25
An agreement to pay the taxes on the retirement benefits as an incentive to prospective retirees and for them to avail
of the optional retirement scheme is not contrary to law or to public morals. Petitioner had agreed to shoulder such
taxes to entice them to voluntarily retire early, on its belief that this would prove advantageous to it. Respondents
agreed and relied on the commitment of petitioner. For petitioner to renege on its contract with respondents simply
because its new management had found the same disadvantageous would amount to a breach of contract. There is
even no evidence that any "new management" was ever installed by petitioner after respondents retirement; nor is
there evidence that the Board of Directors of petitioner resolved to renege on its contract with respondents and
demand the reimbursement for the amounts remitted by it to the BIR.
The well-entrenched rule is that estoppel may arise from a making of a promise if it was intended that the promise
should be relied upon and, in fact, was relied upon, and if a refusal to sanction the perpetration of fraud would result to
injustice. The mere omission by the promisor to do whatever he promises to do is sufficient forbearance to give rise to
a promissory estoppel.26
Petitioner cannot hide behind the fact that, under the compromise agreement between the PCGG and Benedicto, the
latter had assigned and conveyed to the Republic of the Philippines his shares, interests and rights in petitioner.
Respondents retired only after the Court affirmed the validity of the Compromise Agreement 27 and the execution by
petitioner and the union of their 1993 CBA while Civil Case No. 0034 was still pending in the Sandiganbayan. There is
no showing that before respondents demanded the payment of their salary differentials, petitioner had rejected its
commitment to shoulder the taxes on respondents retirement benefits and sought its nullification before the court;
nor is there any showing that petitioners "new management" filed any criminal or administrative charges against the
former officers/board of directors comprising the "old management" relative to the payment of the taxes on
respondents retirement benefits.
IN VIEW OF ALL THE FOREGOING, the petition is DENIED for lack of merit. The Decision of the Court of Appeals in
CA-G.R. SP No. 72414 is AFFIRMED. Costs against the petitioner.
SO ORDERED.
G.R. No. L-26911 January 27, 1981

ATLAS CONSOLIDATED MINING & DEVELOPMENT CORPORATION, petitioner,
vs.
G.R. No. L-26924 January 27, 1981

vs.
ATLAS CONSOLIDATED MINING & DEVELOPMENT CORPORATION and COURT OF TAX APPEALS, respondents.
DE CASTRO, J.:
These are two (2) petitions for review from the decision of the Court of Tax Appeals of October 25, 1966 in CTA Case
No. 1312 entitled "Atlas Consolidated Mining and Development Corporation vs. Commissioner of Internal Revenue."
One (L-26911) was filed by the Atlas Consolidated Mining & Development Corporation, and in the other L-26924), the
Commissioner of Internal Revenue is the petitioner.
This tax case (CTA No. 1312) arose from the 1957 and 1958 deficiency income tax assessments made by the
Commissioner of Internal Revenue, hereinafter referred to as Commissioner, where the Atlas Consolidated Mining and
Development Corporation, hereinafter referred to as Atlas, was assessed P546,295.16 for 1957 and P215,493.96 for
1958 deficiency income taxes.
Atlas is a corporation engaged in the mining industry registered under the laws of the Philippines. On August 20, 1962,
the Commissioner assessed against Atlas the sum of P546,295.16 and P215,493.96 or a total of P761,789.12 as
deficiency income taxes for the years 1957 and 1958. For the year 1957, it was the opinion of the Commissioner that
Atlas is not entitled to exemption from the income tax under Section 4 of Republic Act 909 1 because same covers only
gold mines, the provision of which reads:
New mines, and old mines which resume operation, when certified to as such by the Secretary of
Agriculture and Natural Resources upon the recommendation of the Director of Mines, shall be exempt
from the payment of income tax during the first three (3) years of actual commercial production.
Provided that, any such mine and/or mines making a complete return of its capital investment at any
time within the said period, shall pay income tax from that year.
For the year 1958, the assessment of deficiency income tax of P761,789.12 covers the disallowance of items claimed
by Atlas as deductible from gross income.
On October 9, 1962, Atlas protested the assessment asking for its reconsideration and cancellation.
protest, the Commissioner conducted a reinvestigation of the case.
Acting on the
On October 25, 1962, the Secretary of Finance ruled that the exemption provided in Republic Act 909 embraces all new
mines and old mines whether gold or other minerals. 3 Accordingly, the Commissioner recomputed Atlas deficiency
income tax liabilities in the light of the ruling of the Secretary of Finance. On June 9, 1964, the Commissioner issued a
revised assessment entirely eliminating the assessment of P546,295.16 for the year 1957. The assessment for 1958
was reduced from P215,493.96 to P39,646.82 from which Atlas appealed to the Court of Tax Appeals, assailing the
disallowance of the following items claimed as deductible from its gross income for 1958:
Transfer agent's fee.........................................................P59,477.42
Stockholders relation service fee....................................25,523.14
U.S. stock listing expenses..................................................8,326.70
Suit expenses..........................................................................6,666.65
Provision for contingencies..................................... .........60,000.00
Total....................................................................P159,993.91
After hearing, the Court of Tax Appeals rendered a decision on October 25, 1966 allowing the above mentioned
disallowed items, except the items denominated by Atlas as stockholders relation service fee and suit expenses.
Pertinent portions of the decision of the Court of Tax Appeals read as follows:
Under the facts, circumstances and applicable law in this case, the unallowable deduction from
petitioner's gross income in 1958 amounted to P32,189.79.
Stockholders relation service fee.................................... P25,523.14
Suit and litigation expenses................................................ 6,666.65
Total................................................................................... P32,189.79
As the exemption of petitioner from the payment of corporate income tax under Section 4, Republic
Act 909, was good only up to the Ist quarter of 1958 ending on March 31 of the same year, only threefourth (3/4) of the net taxable income of petitioner is subject to income tax, computed as follows:
1958
Total net income for 1958.................................P1,968,898.27
Net income corresponding to
taxable period April 1 to
Dec. 31, 1958, 3/4 of
P1,968,898.27..........................................................1,476,673.70
Add: 3/4 of promotion fees
of P25,523.14..............................................................P19,142.35
Litigation
expenses.........................................................................6, 666.65
Net income per decision..........................................11, 02,4 2.70
Tax due thereon.........................................................412,695.00
Less: Amount already assessed .............................405,468.00
DEFICIENCY INCOME TAX DUE............................P7,227.00
Add: 1/2 % monthly interest
from 6-20-59 to 6-20-62 (18%)....................................P1,300.89
TOTAL AMOUNT DUE & COLLECTIBLE............P8,526.22
From the Court of Tax Appeals' decision of October 25, 1966, both parties appealed to this Court by way of two (2)
separate petitions for review docketed as G. R. No. L-26911 (Atlas, petitioner) and G. R. No. L-29924 (Commissioner,
petitioner).
G. R. No. L-26911Atlas appealed only that portion of the Court of Tax Appeals' decision disallowing the deduction
from gross income of the so-called stockholders relation service fee amounting to P25,523.14, making a lone
assignment of error that
THE COURT OF TAX APPEALS ERRED IN ITS CONCLUSION THAT THE EXPENSE IN THE AMOUNT OF
P25,523.14 PAID BY PETITIONER IN 1958 AS ANNUAL PUBLIC RELATIONS EXPENSES WAS INCURRED
FOR ACQUISITION OF ADDITIONAL CAPITAL, THE SAME NOT BEING SUPPORTED BY THE EVIDENCE.
It is the contention of Atlas that the amount of P25,523.14 paid in 1958 as annual public relations expenses is a
deductible expense from gross income under Section 30 (a) (1) of the National Internal Revenue Code. Atlas claimed
that it was paid for services of a public relations firm, P.K Macker & Co., a reputable public relations consultant in New
York City, U.S.A., hence, an ordinary and necessary business expense in order to compete with other corporations also
interested in the investment market in the United States. 5 It is the stand of Atlas that information given out to the
public in general and to the stockholder in particular by the P.K MacKer & Co. concerning the operation of the Atlas was
aimed at creating a favorable image and goodwill to gain or maintain their patronage.
The decisive question, therefore, in this particular appeal taken by Atlas to this Court is whether or not the expenses
paid for the services rendered by a public relations firm P.K MacKer & Co. labelled as stockholders relation service fee
is an allowable deduction as business expense under Section 30 (a) (1) of the National Internal Revenue Code.
The principle is recognized that when a taxpayer claims a deduction, he must point to some specific provision of the
statute in which that deduction is authorized and must be able to prove that he is entitled to the deduction which the
law allows. As previously adverted to, the law allowing expenses as deduction from gross income for purposes of the
income tax is Section 30 (a) (1) of the National Internal Revenue which allows a deduction of "all the ordinary and
necessary expenses paid or incurred during the taxable year in carrying on any trade or business." An item of
expenditure, in order to be deductible under this section of the statute, must fall squarely within its language.
We come, then, to the statutory test of deductibility where it is axiomatic that to be deductible as a business expense,
three conditions are imposed, namely: (1) the expense must be ordinary and necessary, (2) it must be paid or incurred
within the taxable year, and (3) it must be paid or incurred in carrying in a trade or business. 6 In addition, not only
must the taxpayer meet the business test, he must substantially prove by evidence or records the deductions claimed
under the law, otherwise, the same will be disallowed. The mere allegation of the taxpayer that an item of expense is
ordinary and necessary does not justify its deduction. 7
While it is true that there is a number of decisions in the United States delving on the interpretation of the terms
"ordinary and necessary" as used in the federal tax laws, no adequate or satisfactory definition of those terms is
possible. Similarly, this Court has never attempted to define with precision the terms "ordinary and necessary." There
are however, certain guiding principles worthy of serious consideration in the proper adjudication of conflicting claims.
Ordinarily, an expense will be considered "necessary" where the expenditure is appropriate and helpful in the
development of the taxpayer's business. 8 It is "ordinary" when it connotes a payment which is normal in relation to
the business of the taxpayer and the surrounding circumstances. 9 The term "ordinary" does not require that the
payments be habitual or normal in the sense that the same taxpayer will have to make them often; the payment may
be unique or non-recurring to the particular taxpayer affected. 10
There is thus no hard and fast rule on the matter. The right to a deduction depends in each case on the particular facts
and the relation of the payment to the type of business in which the taxpayer is engaged. The intention of the
taxpayer often may be the controlling fact in making the determination. 11 Assuming that the expenditure is ordinary
and necessary in the operation of the taxpayer's business, the answer to the question as to whether the expenditure is
an allowable deduction as a business expense must be determined from the nature of the expenditure itself, which in
turn depends on the extent and permanency of the work accomplished by the expenditure. 12
It appears that on December 27, 1957, Atlas increased its capital stock from P15,000,000 to P18,325,000. 13 It was
claimed by Atlas that its shares of stock worth P3,325,000 were sold in the United States because of the services
rendered by the public relations firm, P. K. Macker & Company. The Court of Tax Appeals ruled that the information
about Atlas given out and played up in the mass communication media resulted in full subscription of the additional
shares issued by Atlas; consequently, the questioned item, stockholders relation service fee, was in effect spent for the
acquisition of additional capital, ergo, a capital expenditure.
We sustain the ruling of the tax court that the expenditure of P25,523.14 paid to P.K. Macker & Co. as compensation for
services carrying on the selling campaign in an effort to sell Atlas' additional capital stock of P3,325,000 is not an
ordinary expense in line with the decision of U.S. Board of Tax Appeals in the case of Harrisburg Hospital Inc. vs.
Commissioner of Internal Revenue. 14 Accordingly, as found by the Court of Tax Appeals, the said expense is not
deductible from Atlas gross income in 1958 because expenses relating to recapitalization and reorganization of the
corporation (Missouri-Kansas Pipe Line vs. Commissioner of Internal Revenue, 148 F. (2d), 460; Skenandos Rayon Corp.
vs. Commissioner of Internal Revenue, 122 F. (2d) 268, Cert. denied 314 U.S. 6961), the cost of obtaining stock
subscription (Simons Co., 8 BTA 631), promotion expenses (Beneficial Industrial Loan Corp. vs. Handy, 92 F. (2d) 74),
and commission or fees paid for the sale of stock reorganization (Protective Finance Corp., 23 BTA 308) are capital
expenditures.
That the expense in question was incurred to create a favorable image of the corporation in order to gain or maintain
the public's and its stockholders' patronage, does not make it deductible as business expense. As held in the case of
Welch vs. Helvering, 15 efforts to establish reputation are akin to acquisition of capital assets and, therefore, expenses
related thereto are not business expense but capital expenditures.
We do not agree with the contention of Atlas that the conclusion of the Court of Tax Appeals in holding that the
expense of P25,523.14 was incurred for acquisition of additional capital is not supported by the evidence. The burden
of proof that the expenses incurred are ordinary and necessary is on the taxpayer 16 and does not rest upon the
Government. To avail of the claimed deduction under Section 30(a) (1) of the National Internal Revenue Code, it is
incumbent upon the taxpayer to adduce substantial evidence to establish a reasonably proximate relation petition
between the expenses to the ordinary conduct of the business of the taxpayer. A logical link or nexus between the
expense and the taxpayer's business must be established by the taxpayer.
G. R. No. L-26924-In his petition for review, the Commissioner of Internal Revenue assigned as errors the following:
I
THE COURT OF TAX APPEALS ERRED IN ALLOWING THE DEDUCTION FROM GROSS INCOME OF THE SOCALLED TRANSFER AGENT'S FEES ALLEGEDLY PAID BY RESPONDENT;
II
THE COURT OF TAX APPEALS ERRED IN ALLOWING THE DEDUCTION FROM GROSS INCOME OF LISTING
EXPENSES ALLEGEDLY INCURRED BY RESPONDENT;
III
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE AMOUNT OF P60,000 REPRESENTED BY
RESPONDENT AS "PROVISION FOR CONTINGENCIES" WAS ADDED BACK BY RESPONDENT TO ITS GROSS
INCOME IN COMPUTING THE INCOME TAX DUE FROM IT FOR 1958;
IV
THE COURT OF TAX APPEALS ERRED IN DISALLOWING ONLY THE AMOUNT OF P6,666.65 AS SUIT
EXPENSES, THE CORRECT AMOUNT THAT SHOULD HAVE BEEN DISALLOWED BEING P17,499.98.
It is well to note that only in the Court of Tax Appeals did the Commissioner raise for the first time (in his
memorandum) the question of whether or not the business expenses deducted from Atlas gross income in 1958 may
be allowed in the absence of proof of payments. 17 Before this Court, the Commissioner reiterated the same as ground
against deductibility when he claimed that the Court of Tax Appeals erred in allowing the deduction of transfer agent's
fee and stock listing fee from gross income in the absence of proof of payment thereof.
The Commissioner contended that under Section 30 (a) (1) of the National Internal Revenue Code, it is a requirement
for an expense to be deductible from gross income that it must have been "paid or incurred during the year" for which
it is claimed; that in the absence of convincing and satisfactory evidence of payment, the deduction from gross income
for the year 1958 income tax return cannot be sustained; and that the best evidence to prove payment, if at all any
has been made, would be the vouchers or receipts issued therefor which ATLAS failed to present.
Atlas admitted that it failed to adduce evidence of payment of the deduction claimed in its 1958 income tax return, but
explains the failure with the allegation that the Commissioner did not raise that question of fact in his pleadings, or
even in the report of the investigating examiner and/or letters of demand and assessment notices of ATLAS which gave
rise to its appeal to the Court of Tax Appeal. 18 It was emphasized by Atlas that it went to trial and finally submitted this
case for decision on the assumption that inasmuch as the fact of payment was never raised as a vital issue by the
Commissioner in his answer to the petition for review in the Court of Tax Appeal, the issues is limited only to pure
question of lawwhether or not the expenses deducted by petitioner from its gross income for 1958 are sanctioned by
Section 30 (a) (1) of the National Internal Revenue Code.
On this issue of whether or not the Commissioner can raise the fact of payment for the first time on appeal in its
memorandum in the Court of Tax Appeal, we fully agree with the ruling of the tax court that the Commissioner on
appeal cannot be allowed to adopt a theory distinct and different from that he has previously pursued, as shown by the
BIR records and the answer to the amended petition for review. 19 As this Court said in the case of Commissioner of
Customs vs. Valencia 20 such change in the nature of the case may not be made on appeal, specially when the purpose
of the latter is to seek a review of the action taken by an administrative body, forming part of a coordinate branch of
the Government, such as the Executive department. In the case at bar, the Court of Tax Appeal found that the fact of
payment of the claimed deduction from gross income was never controverted by the Commissioner even during the
initial stages of routinary administrative scrutiny conducted by BIR examiners. 21 Specifically, in his answer to the
amended petition for review in the Court of Tax Appeal, the Commissioner did not deny the fact of payment, merely
contesting the legitimacy of the deduction on the ground that same was not ordinary and necessary business
expenses. 22
As consistently ruled by this Court, the findings of facts by the Court of Tax Appeal will not be reviewed in the absence
of showing of gross error or abuse. 23 We, therefore, hold that it was too late for the Commissioner to raise the issue of
fact of payment for the first time in his memorandum in the Court of Tax Appeals and in this instant appeal to the
Supreme Court. If raised earlier, the matter ought to have been seriously delved into by the Court of Tax Appeals. On
this ground, we are of the opinion that under all the attendant circumstances of the case, substantial justice would be
served if the Commissioner be held as precluded from now attempting to raise an issue to disallow deduction of the
item in question at this stage. Failure to assert a question within a reasonable time warrants a presumption that the
party entitled to assert it either has abandoned or declined to assert it.
On the second assignment of error, aside from alleging lack of proof of payment of the expense deducted, the
Commissioner contended that such expense should be disallowed for not being ordinary and necessary and not
incurred in trade or business, as required under Section 30 (a) (1) of the National Internal Revenue Code. He asserted
that said fees were therefore incurred not for the production of income but for the acquisition petition of capital in view
of the definition that an expense is deemed to be incurred in trade or business if it was incurred for the production of
income, or in the expectation of producing income for the business. In support of his contention, the Commissioner
cited the ruling in Dome Mines, Ltd vs. Commisioner of Internal Revenue 24 involving the same issue as in the case at
bar where the U.S. Board of Tax Appeal ruled that expenses for listing capital stock in the stock exchange are not
ordinary and necessary expenses incurred in carrying on the taxpayer's business which was gold mining and selling,
which business is strikingly similar to Atlas.
On the other hand, the Court of Tax Appeal relied on the ruling in the case of Chesapeake Corporation of Virginia vs.
Commissioner of Internal Revenue 25 where the Tax Court allowed the deduction of stock exchange fee in dispute,
which is an annually recurring cost for the annual maintenance of the listing.
We find the Chesapeake decision controlling with the facts and circumstances of the instant case. In Dome Mines, Ltd
case the stock listing fee was disallowed as a deduction not only because the expenditure did not meet the statutory
test but also because the same was paid only once, and the benefit acquired thereby continued indefinitely, whereas,
in the Chesapeake Corporation case, fee paid to the stock exchange was annual and recurring. In the instant case, we
deal with the stock listing fee paid annually to a stock exchange for the privilege of having its stock listed. It must be
noted that the Court of Tax Appeal rejected the Dome Mines case because it involves a payment made only once,
hence, it was held therein that the single payment made to the stock exchange was a capital expenditure, as
distinguished from the instant case, where payments were made annually. For this reason, we hold that said listing fee
is an ordinary and necessary business expense
On the third assignment of error, the Commissioner contended that the Court of Tax Appeal erred when it held that
the amount of P60,000 as "provisions for contingencies" was in effect added back to Atlas income.
On this issue, this Court has consistently ruled in several cases adverted to earlier, that in the absence of grave abuse
of discretion or error on the part of the tax court its findings of facts may not be disturbed by the Supreme Court. 26 It
is not within the province of this Court to resolve whether or not the P60,000 representing "provision for contingencies"
was in fact added to or deducted from the taxable income. As ruled by the Court of Tax Appeals, the said amount was
in effect added to Atlas taxable income. 27 The same being factual in nature and supported by substantial evidence,
such findings should not be disturbed in this appeal.
Finally, in its fourth assignment of error, the Commissioner contended that the CTA erred in disallowing only the
amount of P6,666.65 as suit expenses instead of P17,499.98.
It appears that petitioner deducted from its 1958 gross income the amount of P23,333.30 as attorney's fees and
litigation expenses in the defense of title to the Toledo Mining properties purchased by Atlas from Mindanao Lode
Mines Inc. in Civil Case No. 30566 of the Court of First Instance of Manila for annulment of the sale of said mining
properties. On the ground that the litigation expense was a capital expenditure under Section 121 of the Revenue
Regulation No. 2, the investigating revenue examiner recommended the disallowance of P13,333.30. The
Commissioner, however, reduced this amount of P6,666.65 which latter amount was affirmed by the respondent Court
of Tax Appeals on appeal.
There is no question that, as held by the Court of Tax Ap- peals, the litigation expenses under consideration were
incurred in defense of Atlas title to its mining properties. In line with the decision of the U.S. Tax Court in the case of
Safety Tube Corp. vs. Commissioner of Internal Revenue, 28 it is well settled that litigation expenses incurred in defense
or protection of title are capital in nature and not deductible. Likewise, it was ruled by the U.S. Tax Court that
expenditures in defense of title of property constitute a part of the cost of the property, and are not deductible as
expense. 29
Surprisingly, however, the investigating revenue examiner recommended a partial disallowance of P13,333.30 instead
of the entire amount of P23,333.30, which, upon review, was further reduced by the Commissioner of Internal
Revenue. Whether it was due to mistake, negligence or omission of the officials concerned, the arithmetical error
committed herein should not prejudice the Government. This Court will pass upon this particular question since there
is a clear error committed by officials concerned in the computation of the deductible amount. As held in the case of
Vera vs. Fernandez, 30 this Court emphatically said that taxes are the lifeblood of the Government and their prompt and
certain availability are imperious need. Upon taxation depends the Government's ability to serve the people for whose
benefit taxes are collected. To safeguard such interest, neglect or omission of government officials entrusted with the
collection of taxes should not be allowed to bring harm or detriment to the people, in the same manner as private
persons may be made to suffer individually on account of his own negligence, the presumption being that they take
good care of their personal affair. This should not hold true to government officials with respect to matters not of their
own personal concern. This is the philosophy behind the government's exception, as a general rule, from the operation
of the principle of estoppel. 31
WHEREFORE, judgment appealed from is hereby affirmed with modification that the amount of P17,499.98 (3/4 of
P23,333.00) representing suit expenses be disallowed as deduction instead of P6,666.65 only. With this amount as part
of the net income, the corresponding income tax shall be paid thereon, with interest of 6% per annum from June 20,
1959 to June 20,1962.
SO ORDERED.
G.R. Nos. L-28508-9 July 7, 1989

ESSO STANDARD EASTERN, INC., (formerly, Standard-Vacuum Oil Company), petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
Padilla Law Office for petitioner.
CRUZ, J.:
On appeal before us is the decision of the Court of Tax Appeals 1 denying petitioner's claims for refund of overpaid
income taxes of P102,246.00 for 1959 and P434,234.93 for 1960 in CTA Cases No. 1251 and 1558 respectively.
I
In CTA Case No. 1251, petitioner ESSO deducted from its gross income for 1959, as part of its ordinary and necessary
business expenses, the amount it had spent for drilling and exploration of its petroleum concessions. This claim was
disallowed by the respondent Commissioner of Internal Revenue on the ground that the expenses should be
capitalized and might be written off as a loss only when a "dry hole" should result. ESSO then filed an amended return
where it asked for the refund of P323,279.00 by reason of its abandonment as dry holes of several of its oil wells. Also
claimed as ordinary and necessary expenses in the same return was the amount of P340,822.04, representing margin
fees it had paid to the Central Bank on its profit remittances to its New York head office.
On August 5, 1964, the CIR granted a tax credit of P221,033.00 only, disallowing the claimed deduction for the margin
fees paid.
In CTA Case No. 1558, the CR assessed ESSO a deficiency income tax for the year 1960, in the amount of P367,994.00,
plus 18% interest thereon of P66,238.92 for the period from April 18,1961 to April 18, 1964, for a total of P434,232.92.
The deficiency arose from the disallowance of the margin fees of Pl,226,647.72 paid by ESSO to the Central Bank on its
profit remittances to its New York head office.
ESSO settled this deficiency assessment on August 10, 1964, by applying the tax credit of P221,033.00 representing
its overpayment on its income tax for 1959 and paying under protest the additional amount of P213,201.92. On August
13, 1964, it claimed the refund of P39,787.94 as overpayment on the interest on its deficiency income tax. It argued
that the 18% interest should have been imposed not on the total deficiency of P367,944.00 but only on the amount of
P146,961.00, the difference between the total deficiency and its tax credit of P221,033.00.
This claim was denied by the CIR, who insisted on charging the 18% interest on the entire amount of the deficiency
tax. On May 4,1965, the CIR also denied the claims of ESSO for refund of the overpayment of its 1959 and 1960
income taxes, holding that the margin fees paid to the Central Bank could not be considered taxes or allowed as
deductible business expenses.
ESSO appealed to the CTA and sought the refund of P102,246.00 for 1959, contending that the margin fees were
deductible from gross income either as a tax or as an ordinary and necessary business expense. It also claimed an
overpayment of its tax by P434,232.92 in 1960, for the same reason. Additionally, ESSO argued that even if the
amount paid as margin fees were not legally deductible, there was still an overpayment by P39,787.94 for 1960,
representing excess interest.
After trial, the CTA denied petitioner's claim for refund of P102,246.00 for 1959 and P434,234.92 for 1960 but
sustained its claim for P39,787.94 as excess interest. This portion of the decision was appealed by the CIR but was
affirmed by this Court in Commissioner of Internal Revenue v. ESSO, G.R. No. L-28502- 03, promulgated on April 18,
1989. ESSO for its part appealed the CTA decision denying its claims for the refund of the margin fees P102,246.00 for
1959 and P434,234.92 for 1960. That is the issue now before us.
II
The first question we must settle is whether R.A. 2009, entitled An Act to Authorize the Central Bank of the Philippines
to Establish a Margin Over Banks' Selling Rates of Foreign Exchange, is a police measure or a revenue measure. If it is
a revenue measure, the margin fees paid by the petitioner to the Central Bank on its profit remittances to its New York
head office should be deductible from ESSO's gross income under Sec. 30(c) of the National Internal Revenue Code.
This provides that all taxes paid or accrued during or within the taxable year and which are related to the taxpayer's
trade, business or profession are deductible from gross income.
The petitioner maintains that margin fees are taxes and cites the background and legislative history of the Margin Fee
Law showing that R.A. 2609 was nothing less than a revival of the 17% excise tax on foreign exchange imposed by R.A.
601. This was a revenue measure formally proposed by President Carlos P. Garcia to Congress as part of, and in order
to balance, the budget for 1959-1960. It was enacted by Congress as such and, significantly, properly originated in the
House of Representatives. During its two and a half years of existence, the measure was one of the major sources of
revenue used to finance the ordinary operating expenditures of the government. It was, moreover, payable out of the
General Fund.
On the claimed legislative intent, the Court of Tax Appeals, quoting established principles, pointed out that
We are not unmindful of the rule that opinions expressed in debates, actual proceedings of the legislature, steps taken
in the enactment of a law, or the history of the passage of the law through the legislature, may be resorted to as an
aid in the interpretation of a statute which is ambiguous or of doubtful meaning. The courts may take into
consideration the facts leading up to, coincident with, and in any way connected with, the passage of the act, in order
that they may properly interpret the legislative intent. But it is also well-settled jurisprudence that only in extremely
doubtful matters of interpretation does the legislative history of an act of Congress become important. As a matter of
fact, there may be no resort to the legislative history of the enactment of a statute, the language of which is plain and
unambiguous, since such legislative history may only be resorted to for the purpose of solving doubt, not for the
purpose of creating it. [50 Am. Jur. 328.]
Apart from the above consideration, there are at least two cases where we have held that a margin fee is not a tax but
an exaction designed to curb the excessive demands upon our international reserve.
In Caltex (Phil.) Inc. v. Acting Commissioner of Customs,
the Court stated through Justice Jose P. Bengzon:
A margin levy on foreign exchange is a form of exchange control or restriction designed to discourage
imports and encourage exports, and ultimately, 'curtail any excessive demand upon the international
reserve' in order to stabilize the currency. Originally adopted to cope with balance of payment
pressures, exchange restrictions have come to serve various purposes, such as limiting non-essential
imports, protecting domestic industry and when combined with the use of multiple currency rates
providing a source of revenue to the government, and are in many developing countries regarded as a
more or less inevitable concomitant of their economic development programs. The different measures
of exchange control or restriction cover different phases of foreign exchange transactions, i.e., in
quantitative restriction, the control is on the amount of foreign exchange allowable. In the case of the
margin levy, the immediate impact is on the rate of foreign exchange; in fact, its main function is to
control the exchange rate without changing the par value of the peso as fixed in the Bretton Woods
Agreement Act. For a member nation is not supposed to alter its exchange rate (at par value) to
correct a merely temporary disequilibrium in its balance of payments. By its nature, the margin levy is
part of the rate of exchange as fixed by the government.
As to the contention that the margin levy is a tax on the purchase of foreign exchange and hence should not form part
of the exchange rate, suffice it to state that We have already held the contrary for the reason that a tax is levied to
provide revenue for government operations, while the proceeds of the margin fee are applied to strengthen our
country's international reserves.
Earlier, in Chamber of Agriculture and Natural Resources of the Philippines v. Central Bank,
expressed, though in connection with a different levy, through Justice J.B.L. Reyes:
the same idea was
Neither do we find merit in the argument that the 20% retention of exporter's foreign exchange
constitutes an export tax. A tax is a levy for the purpose of providing revenue for government
operations, while the proceeds of the 20% retention, as we have seen, are applied to strengthen the
Central Bank's international reserve.
We conclude then that the margin fee was imposed by the State in the exercise of its police power and not the power
of taxation.
Alternatively, ESSO prays that if margin fees are not taxes, they should nevertheless be considered necessary and
ordinary business expenses and therefore still deductible from its gross income. The fees were paid for the remittance
by ESSO as part of the profits to the head office in the Unites States. Such remittance was an expenditure necessary
and proper for the conduct of its corporate affairs.
The applicable provision is Section 30(a) of the National Internal Revenue Code reading as follows:
SEC. 30. Deductions from gross income in computing net income there shall be allowed as deductions
(a) Expenses:
(1) In general. All the ordinary and necessary expenses paid or incurred during the taxable year in
carrying on any trade or business, including a reasonable allowance for salaries or other compensation
for personal services actually rendered; traveling expenses while away from home in the pursuit of a
trade or business; and rentals or other payments required to be made as a condition to the continued
use or possession, for the purpose of the trade or business, of property to which the taxpayer has not
taken or is not taking title or in which he has no equity.
(2) Expenses allowable to non-resident alien individuals and foreign corporations. In the case of a
non-resident alien individual or a foreign corporation, the expenses deductible are the necessary
expenses paid or incurred in carrying on any business or trade conducted within the Philippines
exclusively.
In the case of Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal Revenue,
Court laid down the rules on the deductibility of business expenses, thus:
the
The principle is recognized that when a taxpayer claims a deduction, he must point to some specific
provision of the statute in which that deduction is authorized and must be able to prove that he is
entitled to the deduction which the law allows. As previously adverted to, the law allowing expenses as
deduction from gross income for purposes of the income tax is Section 30(a) (1) of the National
Internal Revenue which allows a deduction of 'all the ordinary and necessary expenses paid or incurred
during the taxable year in carrying on any trade or business.' An item of expenditure, in order to be
deductible under this section of the statute, must fall squarely within its language.
We come, then, to the statutory test of deductibility where it is axiomatic that to be deductible as a
business expense, three conditions are imposed, namely: (1) the expense must be ordinary and
necessary, (2) it must be paid or incurred within the taxable year, and (3) it must be paid or incurred in
carrying on a trade or business. In addition, not only must the taxpayer meet the business test, he
must substantially prove by evidence or records the deductions claimed under the law, otherwise, the
same will be disallowed. The mere allegation of the taxpayer that an item of expense is ordinary and
necessary does not justify its deduction.
While it is true that there is a number of decisions in the United States delving on the interpretation of
the terms 'ordinary and necessary' as used in the federal tax laws, no adequate or satisfactory
definition of those terms is possible. Similarly, this Court has never attempted to define with precision
the terms 'ordinary and necessary.' There are however, certain guiding principles worthy of serious
consideration in the proper adjudication of conflicting claims. Ordinarily, an expense will be considered
'necessary' where the expenditure is appropriate and helpful in the development of the taxpayer's
business. It is 'ordinary' when it connotes a payment which is normal in relation to the business of the
taxpayer and the surrounding circumstances. The term 'ordinary' does not require that the payments
be habitual or normal in the sense that the same taxpayer will have to make them often; the payment
may be unique or non-recurring to the particular taxpayer affected.
There is thus no hard and fast rule on the matter. The right to a deduction depends in each case on the
particular facts and the relation of the payment to the type of business in which the taxpayer is
engaged. The intention of the taxpayer often may be the controlling fact in making the determination.
Assuming that the expenditure is ordinary and necessary in the operation of the taxpayer's business,
the answer to the question as to whether the expenditure is an allowable deduction as a business
expense must be determined from the nature of the expenditure itself, which in turn depends on the
extent and permanency of the work accomplished by the expenditure.
In the light of the above explanation, we hold that the Court of Tax Appeals did not err when it held on this issue as
follows:
Considering the foregoing test of what constitutes an ordinary and necessary deductible expense, it
may be asked: Were the margin fees paid by petitioner on its profit remittance to its Head Office in
New York appropriate and helpful in the taxpayer's business in the Philippines? Were the margin fees
incurred for purposes proper to the conduct of the affairs of petitioner's branch in the Philippines? Or
were the margin fees incurred for the purpose of realizing a profit or of minimizing a loss in the
Philippines? Obviously not. As stated in the Lopez case, the margin fees are not expenses in
connection with the production or earning of petitioner's incomes in the Philippines. They were
expenses incurred in the disposition of said incomes; expenses for the remittance of funds after they
have already been earned by petitioner's branch in the Philippines for the disposal of its Head Office in
New York which is already another distinct and separate income taxpayer.
xxx
Since the margin fees in question were incurred for the remittance of funds to petitioner's Head Office
in New York, which is a separate and distinct income taxpayer from the branch in the Philippines, for its
disposal abroad, it can never be said therefore that the margin fees were appropriate and helpful in the
development of petitioner's business in the Philippines exclusively or were incurred for purposes
proper to the conduct of the affairs of petitioner's branch in the Philippines exclusively or for the
purpose of realizing a profit or of minimizing a loss in the Philippines exclusively. If at all, the margin
fees were incurred for purposes proper to the conduct of the corporate affairs of Standard Vacuum Oil
Company in New York, but certainly not in the Philippines.
ESSO has not shown that the remittance to the head office of part of its profits was made in furtherance of its own
trade or business. The petitioner merely presumed that all corporate expenses are necessary and appropriate in the
absence of a showing that they are illegal or ultra vires. This is error. The public respondent is correct when it asserts
that "the paramount rule is that claims for deductions are a matter of legislative grace and do not turn on mere
equitable considerations ... . The taxpayer in every instance has the burden of justifying the allowance of any
deduction claimed." 5
It is clear that ESSO, having assumed an expense properly attributable to its head office, cannot now claim this as an
ordinary and necessary expense paid or incurred in carrying on its own trade or business.
WHEREFORE, the decision of the Court of Tax Appeals denying the petitioner's claims for refund of P102,246.00 for
1959 and P434,234.92 for 1960, is AFFIRMED, with costs against the petitioner.
SO ORDERED.
G.R. No. 143672
April 24, 2003

vs.
GENERAL FOODS (PHILS.), INC., respondent.
CORONA, J.:
Petitioner Commissioner of Internal Revenue (Commissioner) assails the resolution 1 of the Court of Appeals reversing
the decision2 of the Court of Tax Appeals which in turn denied the protest filed by respondent General Foods (Phils.),
Inc., regarding the assessment made against the latter for deficiency taxes.
The records reveal that, on June 14, 1985, respondent corporation, which is engaged in the manufacture of beverages
such as "Tang," "Calumet" and "Kool-Aid," filed its income tax return for the fiscal year ending February 28, 1985. In
said tax return, respondent corporation claimed as deduction, among other business expenses, the amount of
P9,461,246 for media advertising for "Tang."
On May 31, 1988, the Commissioner disallowed 50% or P4,730,623 of the deduction claimed by respondent
corporation. Consequently, respondent corporation was assessed deficiency income taxes in the amount of P2,635,
141.42. The latter filed a motion for reconsideration but the same was denied.
On September 29, 1989, respondent corporation appealed to the Court of Tax Appeals but the appeal was dismissed:
With such a gargantuan expense for the advertisement of a singular product, which even excludes "other
advertising and promotions" expenses, we are not prepared to accept that such amount is reasonable "to
stimulate the current sale of merchandise" regardless of Petitioners explanation that such expense "does not
connote unreasonableness considering the grave economic situation taking place after the Aquino
assassination characterized by capital fight, strong deterioration of the purchasing power of the Philippine peso
and the slacking demand for consumer products" (Petitioners Memorandum, CTA Records, p. 273). We are not
convinced with such an explanation. The staggering expense led us to believe that such expenditure was
incurred "to create or maintain some form of good will for the taxpayers trade or business or for the industry
or profession of which the taxpayer is a member." The term "good will" can hardly be said to have any precise
signification; it is generally used to denote the benefit arising from connection and reputation (Words and
Phrases, Vol. 18, p. 556 citing Douhart vs. Loagan, 86 III. App. 294). As held in the case of Welch vs. Helvering,
efforts to establish reputation are akin to acquisition of capital assets and, therefore, expenses related thereto
are not business expenses but capital expenditures. (Atlas Mining and Development Corp. vs. Commissioner of
Internal Revenue, supra). For sure such expenditure was meant not only to generate present sales but more
for future and prospective benefits. Hence, "abnormally large expenditures for advertising are usually to be
spread over the period of years during which the benefits of the expenditures are received" (Mertens, supra,
citing Colonial Ice Cream Co., 7 BTA 154).
WHEREFORE, in all the foregoing, and finding no error in the case appealed from, we hereby RESOLVE to
DISMISS the instant petition for lack of merit and ORDER the Petitioner to pay the respondent Commissioner
the assessed amount of P2,635,141.42 representing its deficiency income tax liability for the fiscal year ended
February 28, 1985."3
Aggrieved, respondent corporation filed a petition for review at the Court of Appeals which rendered a decision
reversing and setting aside the decision of the Court of Tax Appeals:
Since it has not been sufficiently established that the item it claimed as a deduction is excessive, the same
should be allowed.
WHEREFORE, the petition of petitioner General Foods (Philippines), Inc. is hereby GRANTED. Accordingly, the
Decision, dated 8 February 1994 of respondent Court of Tax Appeals is REVERSED and SET ASIDE and the
letter, dated 31 May 1988 of respondent Commissioner of Internal Revenue is CANCELLED.
SO ORDERED.4
Thus, the instant petition, wherein the Commissioner presents for the Courts consideration a lone issue: whether or
not the subject media advertising expense for "Tang" incurred by respondent corporation was an ordinary and
necessary expense fully deductible under the National Internal Revenue Code (NIRC).
It is a governing principle in taxation that tax exemptions must be construed in strictissimi juris against the taxpayer
and liberally in favor of the taxing authority;5 and he who claims an exemption must be able to justify his claim by the
clearest grant of organic or statute law. An exemption from the common burden cannot be permitted to exist upon
vague implications.6
Deductions for income tax purposes partake of the nature of tax exemptions; hence, if tax exemptions are strictly
construed, then deductions must also be strictly construed.
We then proceed to resolve the singular issue in the case at bar. Was the media advertising expense for "Tang" paid or
incurred by respondent corporation for the fiscal year ending February 28, 1985 "necessary and ordinary," hence, fully
deductible under the NIRC? Or was it a capital expenditure, paid in order to create "goodwill and reputation" for
respondent corporation and/or its products, which should have been amortized over a reasonable period?
Section 34 (A) (1), formerly Section 29 (a) (1) (A), of the NIRC provides:
(A) Expenses.(1) Ordinary and necessary trade, business or professional expenses.(a) In general.- There shall be allowed as deduction from gross income all ordinary and necessary
expenses paid or incurred during the taxable year in carrying on, or which are directly attributable to,
the development, management, operation and/or conduct of the trade, business or exercise of a
profession.
Simply put, to be deductible from gross income, the subject advertising expense must comply with the following
requisites: (a) the expense must be ordinary and necessary; (b) it must have been paid or incurred during the taxable
year; (c) it must have been paid or incurred in carrying on the trade or business of the taxpayer; and (d) it must be
supported by receipts, records or other pertinent papers. 7
The parties are in agreement that the subject advertising expense was paid or incurred within the corresponding
taxable year and was incurred in carrying on a trade or business. Hence, it was necessary. However, their views
conflict as to whether or not it was ordinary. To be deductible, an advertising expense should not only be necessary but
also ordinary. These two requirements must be met.
The Commissioner maintains that the subject advertising expense was not ordinary on the ground that it failed the two
conditions set by U.S. jurisprudence: first, "reasonableness" of the amount incurred and second, the amount incurred
must not be a capital outlay to create "goodwill" for the product and/or private respondents business. Otherwise, the
expense must be considered a capital expenditure to be spread out over a reasonable time.
We agree.
There is yet to be a clear-cut criteria or fixed test for determining the reasonableness of an advertising expense. There
being no hard and fast rule on the matter, the right to a deduction depends on a number of factors such as but not
limited to: the type and size of business in which the taxpayer is engaged; the volume and amount of its net earnings;
the nature of the expenditure itself; the intention of the taxpayer and the general economic conditions. It is the
interplay of these, among other factors and properly weighed, that will yield a proper evaluation.
In the case at bar, the P9,461,246 claimed as media advertising expense for "Tang" alone was almost one-half of its
total claim for "marketing expenses." Aside from that, respondent-corporation also claimed P2,678,328 as "other
advertising and promotions expense" and another P1,548,614, for consumer promotion.
Furthermore, the subject P9,461,246 media advertising expense for "Tang" was almost double the amount of
respondent corporations P4,640,636 general and administrative expenses.
We find the subject expense for the advertisement of a single product to be inordinately large. Therefore, even if it is
necessary, it cannot be considered an ordinary expense deductible under then Section 29 (a) (1) (A) of the NIRC.
Advertising is generally of two kinds: (1) advertising to stimulate the current sale of merchandise or use of services
and (2) advertising designed to stimulate the future sale of merchandise or use of services. The second type involves
expenditures incurred, in whole or in part, to create or maintain some form of goodwill for the taxpayers trade or
business or for the industry or profession of which the taxpayer is a member. If the expenditures are for the advertising
of the first kind, then, except as to the question of the reasonableness of amount, there is no doubt such expenditures
are deductible as business expenses. If, however, the expenditures are for advertising of the second kind, then
normally they should be spread out over a reasonable period of time.
We agree with the Court of Tax Appeals that the subject advertising expense was of the second kind. Not only was the
amount staggering; the respondent corporation itself also admitted, in its letter protest 8 to the Commissioner of
Internal Revenues assessment, that the subject media expense was incurred in order to protect respondent
corporations brand franchise, a critical point during the period under review.
The protection of brand franchise is analogous to the maintenance of goodwill or title to ones property. This is a
capital expenditure which should be spread out over a reasonable period of time. 9
Respondent corporations venture to protect its brand franchise was tantamount to efforts to establish a reputation.
This was akin to the acquisition of capital assets and therefore expenses related thereto were not to be considered as
business expenses but as capital expenditures.10
True, it is the taxpayers prerogative to determine the amount of advertising expenses it will incur and where to apply
them.11 Said prerogative, however, is subject to certain considerations. The first relates to the extent to which the
expenditures are actually capital outlays; this necessitates an inquiry into the nature or purpose of such
expenditures.12 The second, which must be applied in harmony with the first, relates to whether the expenditures are
ordinary and necessary. Concomitantly, for an expense to be considered ordinary, it must be reasonable in amount.
The Court of Tax Appeals ruled that respondent corporation failed to meet the two foregoing limitations.
We find said ruling to be well founded. Respondent corporation incurred the subject advertising expense in order to
protect its brand franchise. We consider this as a capital outlay since it created goodwill for its business and/or
product. The P9,461,246 media advertising expense for the promotion of a single product, almost one-half of petitioner
corporations entire claim for marketing expenses for that year under review, inclusive of other advertising and
promotion expenses of P2,678,328 and P1,548,614 for consumer promotion, is doubtlessly unreasonable.
It has been a long standing policy and practice of the Court to respect the conclusions of quasi-judicial agencies such
as the Court of Tax Appeals, a highly specialized body specifically created for the purpose of reviewing tax cases. The
CTA, by the nature of its functions, is dedicated exclusively to the study and consideration of tax problems. It has
necessarily developed an expertise on the subject. We extend due consideration to its opinion unless there is an abuse
or improvident exercise of authority.13 Since there is none in the case at bar, the Court adheres to the findings of the
CTA.
Accordingly, we find that the Court of Appeals committed reversible error when it declared the subject media
advertising expense to be deductible as an ordinary and necessary expense on the ground that "it has not been
established that the item being claimed as deduction is excessive." It is not incumbent upon the taxing authority to
prove that the amount of items being claimed is unreasonable. The burden of proof to establish the validity of claimed
deductions is on the taxpayer.14 In the present case, that burden was not discharged satisfactorily.
WHEREFORE, premises considered, the instant petition is GRANTED. The assailed decision of the Court of Appeals is
hereby REVERSED and SET ASIDE. Pursuant to Sections 248 and 249 of the Tax Code, respondent General Foods
(Phils.), Inc. is hereby ordered to pay its deficiency income tax in the amount of P2,635,141.42, plus 25% surcharge for
late payment and 20% annual interest computed from August 25, 1989, the date of the denial of its protest, until the
same is fully paid.
SO ORDERED.
G.R. No. L-24059
November 28, 1969
C. M. HOSKINS & CO., INC., petitioner,

vs.
Ross, Salcedo, Del Rosario, Bito and Misa for petitioner.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R. Rosete and Special Attorney
Michaelina R. Balasbas for respondent.
TEEHANKEE, J.:
We uphold in this taxpayer's appeal the Tax Court's ruling that payment by the taxpayer to its controlling stockholder
of 50% of its supervision fees or the amount of P99,977.91 is not a deductible ordinary and necessary expense and
should be treated as a distribution of earnings and profits of the taxpayer.
Petitioner, a domestic corporation engaged in the real estate business as brokers, managing agents and
administrators, filed its income tax return for its fiscal year ending September 30, 1957 showing a net income of
P92,540.25 and a tax liability due thereon of P18,508.00, which it paid in due course. Upon verification of its return,
respondent Commissioner of Internal Revenue, disallowed four items of deduction in petitioner's tax returns and
assessed against it an income tax deficiency in the amount of P28,054.00 plus interests. The Court of Tax Appeals
upon reviewing the assessment at the taxpayer's petition, upheld respondent's disallowance of the principal item of
petitioner's having paid to Mr. C. M. Hoskins, its founder and controlling stockholder the amount of P99,977.91
representing 50% of supervision fees earned by it and set aside respondent's disallowance of three other minor items.
The Tax Court therefore determined petitioner's tax deficiency to be in the amount of P27,145.00 and on November 8,
1964 rendered judgment against it, as follows:
WHEREFORE, premises considered, the decision of the respondent is hereby modified. Petitioner is ordered to
pay to the latter or his representative the sum of P27,145.00, representing deficiency income tax for the year
1957, plus interest at 1/2% per month from June 20, 1959 to be computed in accordance with the provisions of
Section 51(d) of the National Internal Revenue Code. If the deficiency tax is not paid within thirty (30) days
from the date this decision becomes final, petitioner is also ordered to pay surcharge and interest as provided
for in Section 51 (e) of the Tax Code, without costs.
Petitioner questions in this appeal the Tax Court's findings that the disallowed payment to Hoskins was an inordinately
large one, which bore a close relationship to the recipient's dominant stockholdings and therefore amounted in law to a
distribution of its earnings and profits.
We find no merit in petitioner's appeal.
As found by the Tax Court, "petitioner was founded by Mr. C. M. Hoskins in 1937, with a capital stock of 1,000 shares at
a par value of P1.00 each share; that of these 1,000 shares, Mr. C. M. Hoskins owns 996 shares (the other 4 shares
being held by the other four officers of the corporation), which constitute exactly 99.6% of the total authorized capital
stock (p. 92, t.s.n.); that during the first four years of its existence, Mr. C. M. Hoskins was the President, but during the
taxable period in question, that is, from October 1, 1956 to September 30, 1957, he was the chairman of the Board of
Directors and salesman-broker for the company (p. 93, t.s.n.); that as chairman of the Board of Directors, he received a
salary of P3,750.00 a month, plus a salary bonus of about P40,000.00 a year (p. 94, t.s.n.); that he was also a
stockholder and officer of the Paradise Farms, Inc. and Realty Investments, Inc., from which petitioner derived a large
portion of its income in the form of supervision fees and commissions earned on sales of lots (pp. 97-99, t.s.n.;
Financial Statements, attached to Exhibit '1', p. 11, BIR rec.); that as chairman of the Board of Directors of petitioner,
his duties were: "To act as a salesman; as a director, preside over meetings and to get all of the real estate business I
could for the company by negotiating sales, purchases, making appraisals, raising funds to finance real estate
operations where that was necessary' (p. 96, t.s.n.); that he was familiar with the contract entered into by the
petitioner with the Paradise Farms, Inc. and the Realty Investments, Inc. by the terms of which petitioner was 'to
program the development, arrange financing, plan the proposed subdivision as outlined in the prospectus of Paradise
Farms, Inc., arrange contract for road constructions, with the provision of water supply to all of the lots and in general
to serve as managing agents for the Paradise Farms, Inc. and subsequently for the Realty Investment, Inc." (pp. 96-97.
t.s.n.)
Considering that in addition to being Chairman of the board of directors of petitioner corporation, which bears his
name, Hoskins, who owned 99.6% of its total authorized capital stock while the four other officers-stockholders of the
firm owned a total of four-tenths of 1%, or one-tenth of 1% each, with their respective nominal shareholdings of one
share each was also salesman-broker for his company, receiving a 50% share of the sales commissions earned by
petitioner, besides his monthly salary of P3,750.00 amounting to an annual compensation of P45,000.00 and an
annual salary bonus of P40,000.00, plus free use of the company car and receipt of other similar allowances and
benefits, the Tax Court correctly ruled that the payment by petitioner to Hoskins of the additional sum of P99,977.91 as
his equal or 50% share of the 8% supervision fees received by petitioner as managing agents of the real estate,
subdivision projects of Paradise Farms, Inc. and Realty Investments, Inc. was inordinately large and could not be
accorded the treatment of ordinary and necessary expenses allowed as deductible items within the purview of Section
30 (a) (i) of the Tax Code.
If such payment of P99,977.91 were to be allowed as a deductible item, then Hoskins would receive on these three
items alone (salary, bonus and supervision fee) a total of P184,977.91, which would be double the petitioner's reported
net income for the year of P92,540.25. As correctly observed by respondent. If independently, a one-time P100,000.00fee to plan and lay down the rules for supervision of a subdivision project were to be paid to an experienced realtor
such as Hoskins, its fairness and deductibility by the taxpayer could be conceded; but here 50% of the supervision fee
of petitioner was being paid by it to Hoskins every year since 1955 up to 1963 and for as long as its contract with the
subdivision owner subsisted, regardless of whether services were actually rendered by Hoskins, since his services to
petitioner included such planning and supervision and were already handsomely paid for by petitioner.
The fact that such payment was authorized by a standing resolution of petitioner's board of directors, since "Hoskins
had personally conceived and planned the project" cannot change the picture. There could be no question that as
Chairman of the board and practically an absolutely controlling stockholder of petitioner, holding 99.6% of its stock,
Hoskins wielded tremendous power and influence in the formulation and making of the company's policies and
decisions. Even just as board chairman, going by petitioner's own enumeration of the powers of the office, Hoskins,
could exercise great power and influence within the corporation, such as directing the policy of the corporation,
delegating powers to the president and advising the corporation in determining executive salaries, bonus plans and
pensions, dividend policies, etc.1
Petitioner's invoking of its policy since its incorporation of sharing equally sales commissions with its salesmen, in
accordance with its board resolution of June 18, 1946, is equally untenable. Petitioner's Sales Regulations provide:
Compensation of Salesmen
8. Schedule I In the case of sales to prospects discovered and worked by a salesman, even though the
closing is done by or with the help of the Sales Manager or other members of the staff, the salesmen get onehalf (1/2) of the total commission received by the Company, but not exceeding five percent (5%). In the case
of subdivisions, when the office commission covers general supervision, the 1/2-rule does not apply, the
salesman's share being stipulated in the case of each subdivision. In most cases the salesman's share is 4%.
(Exh. "N-1").2
It will be readily seen therefrom that when the petitioner's commission covers general supervision, it is provided that
the 1/2 rule of equal sharing of the sales commissions does not apply and that the salesman's share is stipulated in the
case of each subdivision. Furthermore, what is involved here is not Hoskins' salesman's share in the petitioner's 12%
sales commission, which he presumably collected also from petitioner without respondent's questioning it, but a 50%
share besides in petitioner's planning and supervision fee of 8% of the gross sales, as mentioned above. This is evident
from petitioner's board's resolution of July 14, 1953 (Exhibit 7), wherein it is recited that in addition to petitioner's sales
commission of 12% of gross sales, the subdivision owners were paying to petitioner 8% of gross sales as supervision
fee, and a collection fee of 5% of gross collections, or total fees of 25% of gross sales.
The case before us is similar to previous cases of disallowances as deductible items of officers' extra fees, bonuses and
commissions, upheld by this Court as not being within the purview of ordinary and necessary expenses and not
passing the test of reasonable compensation.3 In Kuenzle & Streiff, Inc. vs. Commissioner of Internal Revenue decided
by this Court on May 29, 1969,4 we reaffirmed the test of reasonableness, enunciated in the earlier 1967 case
involving the same parties, that: "It is a general rule that 'Bonuses to employees made in good faith and as additional
compensation for the services actually rendered by the employees are deductible, provided such payments, when
added to the stipulated salaries, do not exceed a reasonable compensation for the services rendered' (4 Mertens Law
of Federal Income Taxation, Sec. 25.50, p. 410). The conditions precedent to the deduction of bonuses to employees
are: (1) the payment of the bonuses is in fact compensation; (2) it must be for personal services actually rendered; and
(3) the bonuses, when added to the salaries, are 'reasonable . . . when measured by the amount and quality of the
services performed with relation to the business of the particular taxpayer' (Idem., Sec. 25, 44, p. 395).
"There is no fixed test for determining the reasonableness of a given bonus as compensation. This depends upon many
factors, one of them being 'the amount and quality of the services performed with relation to the business.' Other tests
suggested are: payment must be 'made in good faith'; 'the character of the taxpayer's business, the volume and
amount of its net earnings, its locality, the type and extent of the services rendered, the salary policy of the
corporation'; 'the size of the particular business'; 'the employees' qualifications and contributions to the business
venture'; and 'general economic conditions' (4 Mertens, Law of Federal Income Taxation, Secs. 25.44, 25.49, 25.50,
25.51, pp. 407-412). However, 'in determining whether the particular salary or compensation payment is reasonable,
the situation must be considered as whole. Ordinarily, no single factor is decisive. . . . it is important to keep in mind
that it seldom happens that the application of one test can give satisfactory answer, and that ordinarily it is the
interplay of several factors, properly weighted for the particular case, which must furnish the final answer."
Petitioner's case fails to pass the test. On the right of the employer as against respondent Commissioner to fix the
compensation of its officers and employees, we there held further that while the employer's right may be conceded,
the question of the allowance or disallowance thereof as deductible expenses for income tax purposes is subject to
determination by respondent Commissioner of Internal Revenue. Thus: "As far as petitioner's contention that as
employer it has the right to fix the compensation of its officers and employees and that it was in the exercise of such
right that it deemed proper to pay the bonuses in question, all that We need say is this: that right may be conceded,
but for income tax purposes the employer cannot legally claim such bonuses as deductible expenses unless they are
shown to be reasonable. To hold otherwise would open the gate of rampant tax evasion.
"Lastly, We must not lose sight of the fact that the question of allowing or disallowing as deductible expenses the
amounts paid to corporate officers by way of bonus is determined by respondent exclusively for income tax purposes.
Concededly, he has no authority to fix the amounts to be paid to corporate officers by way of basic salary, bonus or
additional remuneration a matter that lies more or less exclusively within the sound discretion of the corporation
itself. But this right of the corporation is, of course, not absolute. It cannot exercise it for the purpose of evading
payment of taxes legitimately due to the State."
Finally, it should be noted that we have here a case practically of a sole proprietorship of C. M. Hoskins, who however
chose to incorporate his business with himself holding virtually absolute control thereof with 99.6% of its stock with
four other nominal shareholders holding one share each. Having chosen to use the corporate form with its legal
advantages of a separate corporate personality as distinguished from his individual personality, the corporation so
created, i.e., petitioner, is bound to comport itself in accordance with corporate norms and comply with its corporate
obligations. Specifically, it is bound to pay the income tax imposed by law on corporations and may not legally be
permitted, by way of corporate resolutions authorizing payment of inordinately large commissions and fees to its
controlling stockholder, to dilute and diminish its corresponding corporate tax liability.
ACCORDINGLY, the decision appealed from is hereby affirmed, with costs in both instances against petitioner.
G.R. No. 125508
July 19, 2000
CHINA BANKING CORPORATION, petitioner,

vs.
COURT OF APPEALS, COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.
DECISION
VITUG, J.:
The Commissioner of Internal Revenue denied the deduction from gross income of "securities becoming worthless"
claimed by China Banking Corporation ("CBC"). The Commissioners disallowance was sustained by the Court of Tax
Appeals ("CTA"). When the ruling was appealed to the Court of Appeals ("CA"), the appellate court upheld the CTA. The
case is now before us on a Petition for Review on Certiorari.
Sometime in 1980, petitioner China Banking Corporation made a 53% equity investment in the First CBC Capital (Asia)
Ltd., a Hongkong subsidiary engaged in financing and investment with "deposit-taking" function. The investment
amounted to P16,227,851.80, consisting of 106,000 shares with a par Value of P100 per share.
In the course of the regular examination of the financial books and investment portfolios of petitioner conducted by
Bangko Sentral in 1986, it was shown that First CBC Capital (Asia), Ltd., has become insolvent. With the approval of
Bangko Sentral, petitioner wrote-off as being worthless its investment in First CBC Capital (Asia), Ltd., in its 1987
Income Tax Return and treated it as a bad debt or as an ordinary loss deductible from its gross income.
Respondent Commissioner of internal Revenue disallowed the deduction and assessed petitioner for income tax
deficiency in the amount of P8,533,328.04, inclusive of surcharge, interest and compromise penalty. The disallowance
of the deduction was made on the ground that the investment should not be classified as being "worthless" and that,
although the Hongkong Banking Commissioner had revoked the license of First CBC Capital as a "deposit-taping"
company, the latter could still exercise, however, its financing and investment activities. Assuming that the securities
had indeed become worthless, respondent Commissioner of Internal Revenue held the view that they should then be
classified as "capital loss," and not as a bad debt expense there being no indebtedness to speak of between petitioner
and its subsidiary.
Petitioner contested the ruling of respondent Commissioner before the CTA. The tax court sustained the Commissioner,
holding that the securities had not indeed become worthless and ordered petitioner to pay its deficiency income tax
for 1987 of P8,533,328.04 plus 20% interest per annum until fully paid. When the decision was appealed to the Court
of Appeals, the latter upheld the CTA. In its instant petition for review on certiorari, petitioner bank assails the CA
decision.
The petition must fail.
The claim of petitioner that the shares of stock in question have become worthless is based on a Profit and Loss
Account for the Year-End 31 December 1987, and the recommendation of Bangko Sentral that the equity investment
be written-off due to the insolvency of the subsidiary. While the matter may not be indubitable (considering that
certain classes of intangibles, like franchises and goodwill, are not always given corresponding values in financial
statements1 , there may really be no need, however, to go of length into this issue since, even to assume the
worthlessness of the shares, the deductibility thereof would still be nil in this particular case. At all events, the Court is
not prepared to hold that both the tax court and the appellate court are utterly devoid of substantial basis for their
own factual findings.
Subject to certain exceptions, such as the compensation income of individuals and passive income subject to final tax,
as well as income of non-resident aliens and foreign corporations not engaged in trade or business in the Philippines,
the tax on income is imposed on the net income allowing certain specified deductions from gross income to be claimed
by the taxpayer. Among the deductible items allowed by the National Internal Revenue Code ("NIRC") are bad debts
and losses.2
An equity investment is a capital, not ordinary, asset of the investor the sale or exchange of which results in either a
capital gain or a capital loss. The gain or the loss is ordinary when the property sold or exchanged is not a capital
asset.3 A capital asset is defined negatively in Section 33(1) of the NIRC; viz:
(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
twenty-nine; or real property used in the trade or business of the taxpayer."
Thus, shares of stock; like the other securities defined in Section 20(t) 4 of the NIRC, would be ordinary assets only to
a dealer in securities or a person engaged in the purchase and sale of, or an active trader (for his own
account) in, securities. Section 20(u) of the NIRC defines a dealer in securities thus:
"(u) The term 'dealer in securities' means a merchant of stocks or securities, whether an individual, partnership or
corporation, with an established place of business, regularly engaged in the purchase of securities and their resale to
customers; that is, one who as a merchant buys securities and sells them to customers with a view to the gains and
profits that may be derived therefrom."
In the hands, however, of another who holds the shares of stock by way of an investment, the shares to him would be
capital assets. When the shares held by such investor become worthless, the loss is deemed to be a loss
from the sale or exchange of capital assets. Section 29(d)(4)(B) of the NIRC states:
"(B) Securities becoming worthless. - If securities as defined in Section 20 become worthless during the tax" year and
are capital assets, the loss resulting therefrom shall, for the purposes of his Title, be considered as a loss from the sale
or exchange, on the last day of such taxable year, of capital assets."
The above provision conveys that the loss sustained by the holder of the securities, which are capital assets (to him),
is to be treated as a capital loss as if incurred from a sale or exchange transaction. A capital gain or a capital
loss normally requires the concurrence of two conditions for it to result: (1) There is a sale or exchange; and (2) the
thing sold or exchanged is a capital asset. When securities become worthless, there is strictly no sale or exchange but
the law deems the loss anyway to be "a loss from the sale or exchange of capital assets." 5 A similar kind of treatment
is given, by the NIRC on the retirement of certificates of indebtedness with interest coupons or in registered form, short
sales and options to buy or sell property where no sale or exchange strictly exists. 6 In these cases, the NIRC dispenses,
in effect, with the standard requirement of a sale or exchange for the application of the capital gain and loss provisions
of the code.
Capital losses are allowed to be deducted only to the extent of capital gains, i.e., gains derived from the
sale or exchange of capital assets, and not from any other income of the taxpayer.
In the case at bar, First CBC Capital (Asia), Ltd., the investee corporation, is a subsidiary corporation of petitioner bank
whose shares in said investee corporation are not intended for purchase or sale but as an investment. Unquestionably
then, any loss therefrom would be a capital loss, not an ordinary loss, to the investor.
Section 29(d)(4)(A), of the NIRC expresses:
"(A) Limitations. - Losses from sales or exchanges of capital assets shall be allowed only to the extent provided in
Section 33."
The pertinent provisions of Section 33 of the NIRC referred to in the aforesaid Section 29(d)(4)(A), read:
"Section 33. Capital gains and losses. "x x x
xxx
xxx
"(c) Limitation on capital losses. - Losses from sales or exchange of capital assets shall be allowed only to the
extent of the gains from such sales or exchanges. If a bank or trust company incorporated under the laws of the
Philippines, a substantial part of whose business is the receipt of deposits, sells any bond, debenture, note, or
certificate or other evidence of indebtedness issued by any corporation (including one issued by a government or
political subdivision thereof), with interest coupons or in registered form, any loss resulting from such sale shall
not be subject to the foregoing limitation an shall not be included in determining the applicability of such limitation to
other losses."
The exclusionary clause found in the foregoing text of the law does not include all forms of securities but specifically
covers only bonds, debentures, notes, certificates or other evidence of indebtedness, with interest
coupons or in registered form, which are the instruments of credit normally dealt with in the usual lending
operations of a financial institution. Equity holdings cannot come close to being, within the purview of "evidence of
indebtedness" under the second sentence of the aforequoted paragraph. Verily, it is for a like thesis that the loss of
petitioner bank in its equity in vestment in the Hongkong subsidiary cannot also be deductible as a bad debt.
The shares of stock in question do not constitute a loan extended by it to its subsidiary (First CBC Capital) or a debt
subject to obligatory repayment by the latter, essential elements to constitute a bad debt, but a long term investment
made by CBC.
One other item. Section 34(c)(1) of the NIRC , states that the entire amount of the gain or loss upon the sale or
exchange of property, as the case may be, shall be recognized. The complete text reads:
"SECTION 34. Determination of amount of and recognition of gain or loss."(a) Computation of gain or loss. - The gain from the sale or other disposition of property shall be the excess of
the amount realized therefrom over the basis or adjusted basis for determining gain and the loss shall be the
excess of the basis or adjusted basis for determining loss over the amount realized. The amount realized from
the sale or other disposition of property shall be to sum of money received plus the fair market value of the
property (other than money) received. (As amended by E.O. No. 37)
"(b) Basis for determining gain or loss from sale or disposition of property. - The basis of property shall be - (1)
The cost thereof in cases of property acquired on or before March 1, 1913, if such property was acquired by
purchase; or
"(2) The fair market price or value as of the date of acquisition if the same was acquired by
inheritance; or
"(3) If the property was acquired by gift the basis shall be the same as if it would be in the hands of the
donor or the last preceding owner by whom it was not acquired by gift, except that if such basis is
greater than the fair market value of the property at the time of the gift, then for the purpose of
determining loss the basis shall be such fair market value; or
"(4) If the property, other than capital asset referred to in Section 21 (e), was acquired for less than an
adequate consideration in money or moneys worth, the basis of such property is (i) the amount paid by
the transferee for the property or (ii) the transferor's adjusted basis at the time of the transfer
whichever is greater.
"(5) The basis as defined in paragraph (c) (5) of this section if the property was acquired in a
transaction where gain or loss is not recognized under paragraph (c) (2) of this section. (As amended
by E.O. No. 37)
"(c) Exchange of property.
"(1) General rule.- Except as herein provided, upon the sale or exchange of property, the entire amount
of the gain or loss, as the case may be, shall be recognized.
"(2) Exception. - No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation
(a) a corporation which is a party to a merger or consolidation exchanges property solely for stock in a
corporation which is, a party to the merger or consolidation, (b) a shareholder exchanges stock in a
corporation which is a party to the merger or consolidation solely for the stock in another corporation
also a party to the merger or consolidation, or (c) a security holder of a corporation which is a party to
the merger or consolidation exchanges his securities in such corporation solely for stock or securities
in another corporation, a party to the merger or consolidation.
"No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for stock in
such corporation of which as a result of such exchange said person, alone or together with others, not exceeding four
persons, gains control of said corporation: Provided, That stocks issued for services shall not be considered as issued in
return of property."
The above law should be taken within context on the general subject of the determination, and recognition of gain or
loss; it is not preclusive of, let alone renders completely inconsequential, the more specific provisions of the code.
Thus, pursuant, to the same section of the law, no such recognition shall be made if the sale or exchange is made in
pursuance of a plan of corporate merger or consolidation or, if as a result of an exchange of property for stocks, the
exchanger, alone or together with others not exceeding four, gains control of the corporation. 7 Then, too, how the
resulting gain might be taxed, or whether or not the loss would be deductible and how, are matters properly dealt with
elsewhere in various other sections of the NIRC.8 At all events, it may not be amiss to once again stress that the basic
rule is still that any capital loss can be deducted only from capital gains under Section 33(c) of the NIRC.
In sum (a) The equity investment in shares of stock held by CBC of approximately 53% in its Hongkong subsidiary, the
First CBC Capital (Asia), Ltd., is not an indebtedness, and it is a capital, not an ordinary, asset.91wphi1
(b) Assuming that the equity investment of CBC has indeed become "worthless," the loss sustained is a
capital, not an ordinary, loss.10
(c) The capital loss sustained by CBC can only be deducted from capital gains if any derived by it during the
same taxable year that the securities have become "worthless."11
WHEREFORE, the Petition is DENIED. The decision of the Court of Appeals disallowing the claimed deduction of
P16,227,851.80 is AFFIRMED.
SO ORDERED.
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 1 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.
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 2

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" and "interest expense" are legal and allowable deductions. In its decision 3 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 dismissed the same on August 24, 1994 in CA-G.R. SP No. 31190, 4 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 deduction of these thirteen (13) debts should be rejected. 5
1. This pronouncement of respondent Court of Appeals relied on the ruling of this Court in Collector vs. Goodrich
International Rubber Co., 6 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 can be garnished by PRC. 7 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 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
issue of whether or not the debt is deductible through the evidence presented before it. 8
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. 9 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 are open for determination. 10 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 nonpayment 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:
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 adversely
affected. 11
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 the concomitant use of the funds by the taxpayer
beyond the date when he is supposed to have paid them to the Government. 12 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. L-22492
September 5, 1967
BASILAN ESTATES, INC., petitioner,

vs.
THE COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents.
Felix A. Gulfin and Antonio S. Alano for petitioner.
Office of the Solicitor General for respondents.
BENGZON, J.P., J.:

A Philippine corporation engaged in the coconut industry, Basilan Estates, Inc., with principal offices in Basilan City,
filed on March 24, 1954 its income tax returns for 1953 and paid an income tax of P8,028. On February 26, 1959, the
Commissioner of Internal Revenue, per examiners' report of February 19, 1959, assessed Basilan Estates, Inc., a
deficiency income tax of P3,912 for 1953 and P86,876.85 as 25% surtax on unreasonably accumulated profits as of
1953 pursuant to Section 25 of the Tax Code. On non-payment of the assessed amount, a warrant of distraint and levy
was issued but the same was not executed because Basilan Estates, Inc. succeeded in getting the Deputy
Commissioner of Internal Revenue to order the Director of the district in Zamboanga City to hold execution and
maintain constructive embargo instead. Because of its refusal to waive the period of prescription, the corporation's
request for reinvestigation was not given due course, and on December 2, 1960, notice was served the corporation
that the warrant of distraint and levy would be executed.
On December 20, 1960, Basilan Estates, Inc. filed before the Court of Tax Appeals a petition for review of the
Commissioner's assessment, alleging prescription of the period for assessment and collection; error in disallowing
claimed depreciations, travelling and miscellaneous expenses; and error in finding the existence of unreasonably
accumulated profits and the imposition of 25% surtax thereon. On October 31, 1963, the Court of Tax Appeals found
that there was no prescription and affirmed the deficiency assessment in toto.
On February 21, 1964, the case was appealed to Us by the taxpayer, upon the following issues:
1. Has the Commissioner's right to collect deficiency income tax prescribed?
2. Was the disallowance of items claimed as deductible proper?
3. Have there been unreasonably accumulated profits? If so, should the 25% surtax be imposed on the balance of the
entire surplus from 1947-1953, or only for 1953?
4. Is the petitioner exempt from the penalty tax under Republic Act 1823 amending Section 25 of the Tax Code?
PRESCRIPTION
There is no dispute that the assessment of the deficiency tax was made on February 26, 1959; but the petitioner
claims that it never received notice of such assessment or if it did, it received the notice beyond the five-year
prescriptive period. To show prescription, the annotation on the notice (Exhibit 10, No. 52, ACR, p. 54-A of the BIR
records) "No accompanying letter 11/25/" is advanced as indicative of the fact that receipt of the notice was after
March 24, 1959, the last date of the five-year period within which to assess deficiency tax, since the original returns
were filed on March 24, 1954.
Although the evidence is not clear on this point, We cannot accept this interpretation of the petitioner, considering the
presence of circumstances that lead Us to presume regularity in the performance of official functions. The notice of
assessment shows the assessment to have been made on February 26, 1959, well within the five-year period. On the
right side of the notice is also stamped "Feb. 26, 1959" denoting the date of release, according to Bureau of Internal
Revenue practice. The Commissioner himself in his letter (Exh. H, p. 84 of BIR records) answering petitioner's request
to lift, the warrant of distraint and levy, asserts that notice had been sent to petitioner. In the letter of the Regional
Director forwarding the case to the Chief of the Investigation Division which the latter received on March 10, 1959 (p.
71 of the BIR records), notice of assessment was said to have been sent to petitioner. Subsequently, the Chief of the
Investigation Division indorsed on March 18, 1959 (p. 24 of the BIR records) the case to the Chief of the Law Division.
There it was alleged that notice was already sent to petitioner on February 26, 1959. These circumstances pointing to
official performance of duty must necessarily prevail over petitioner's contrary interpretation. Besides, even granting
that notice had been received by the petitioner late, as alleged, under Section 331 of the Tax Code requiring five years
within which to assess deficiency taxes, the assessment is deemed made when notice to this effect is released, mailed
or sent by the Collector to the taxpayer and it is not required that the notice be received by the taxpayer within the
aforementioned five-year period.1
ASSESSMENT
The questioned assessment is as follows:
P40,142.9
0
Add:
Over-claimed depreciation
Mis. expenses disallowed
Officer's travelling expenses
disallowed
P10,500.4
9
6,759.17
2,300.40 19,560.06
20% tax on P59,702.96

Less: Tax already assessed
P59,702.9
6
11,940.00
8,028.00
Deficiency income tax

Add: Additional tax of 25% on P347,507.01
P3,912.00
86,876.75
Net Income per Investigation
P90,788.7
5
======
===
Tax Due & Collectible
The Commissioner disallowed:

Over-claimed depreciation
Miscellaneous expenses
P10,500.49
6,759.17
2,300.40
DEDUCTIONS
A. Depreciation. Basilan Estates, Inc. claimed deductions for the depreciation of its assets up to 1949 on the basis of
their acquisition cost. As of January 1, 1950 it changed the depreciable value of said assets by increasing it to conform
with the increase in cost for their replacement. Accordingly, from 1950 to 1953 it deducted from gross income the
value of depreciation computed on the reappraised value.
In 1953, the year involved in this case, taxpayer claimed the following depreciation deduction:
Reappraised assets
New assets consisting of hospital building and
equipment
Total depreciation
P47,342.5
3
3,910.45
P51,252.9
8
Upon investigation and examination of taxpayer's books and papers, the Commissioner of Internal Revenue found that
the reappraised assets depreciated in 1953 were the same ones upon which depreciation was claimed in 1952. And for
the year 1952, the Commissioner had already determined, with taxpayer's concurrence, the depreciation allowable on
said assets to be P36,842.04, computed on their acquisition cost at rates fixed by the taxpayer. Hence, the
Commissioner pegged the deductible depreciation for 1953 on the same old assets at P36,842.04 and disallowed the
excess thereof in the amount of P10,500.49.
The question for resolution therefore is whether depreciation shall be determined on the acquisition cost or on the
reappraised value of the assets.
Depreciation is the gradual diminution in the useful value of tangible property resulting from wear and tear and normal
obsolescense. The term is also applied to amortization of the value of intangible assets, the use of which in the trade
or business is definitely limited in duration.2 Depreciation commences with the acquisition of the property and its
owner is not bound to see his property gradually waste, without making provision out of earnings for its replacement. It
is entitled to see that from earnings the value of the property invested is kept unimpaired, so that at the end of any
given term of years, the original investment remains as it was in the beginning. It is not only the right of a company to
make such a provision, but it is its duty to its bond and stockholders, and, in the case of a public service corporation,
at least, its plain duty to the public.3 Accordingly, the law permits the taxpayer to recover gradually his capital
investment in wasting assets free from income tax. 4 Precisely, Section 30 (f) (1) which states:
(1)In general. A reasonable allowance for deterioration of property arising out of its use or employment in
the business or trade, or out of its not being used: Provided, That when the allowance authorized under this
subsection shall equal the capital invested by the taxpayer . . . no further allowance shall be made. . . .
allows a deduction from gross income for depreciation but limits the recovery to the capital invested in the asset being
depreciated.
The income tax law does not authorize the depreciation of an asset beyond its acquisition cost. Hence, a deduction
over and above such cost cannot be claimed and allowed. The reason is that deductions from gross income are
privileges,5 not matters of right.6 They are not created by implication but upon clear expression in the law. 7
Moreover, the recovery, free of income tax, of an amount more than the invested capital in an asset will transgress the
underlying purpose of a depreciation allowance. For then what the taxpayer would recover will be, not only the
acquisition cost, but also some profit. Recovery in due time thru depreciation of investment made is the philosophy
behind depreciation allowance; the idea of profit on the investment made has never been the underlying reason for
the allowance of a deduction for depreciation.
Accordingly, the claim for depreciation beyond P36,842.04 or in the amount of P10,500.49 has no justification in the
law. The determination, therefore, of the Commissioner of Internal Revenue disallowing said amount, affirmed by the
Court of Tax Appeals, is sustained.
B. Expenses. The next item involves disallowed expenses incurred in 1953, broken as follows:
Miscellaneous expenses
Total
P6,759.17
2,300.40
P9,059.57
These were disallowed on the ground that the nature of these expenses could not be satisfactorily explained nor could
the same be supported by appropriate papers.
Felix Gulfin, petitioner's accountant, explained the P6,759.17 was actual expenses credited to the account of the
president of the corporation incurred in the interest of the corporation during the president's trip to Manila (pp. 33-34
of TSN of Dec. 5, 1962); he stated that the P2,300.40 was the president's travelling expenses to and from Manila as to
the vouchers and receipts of these, he said the same were made but got burned during the Basilan fire on March 30,
1962 (p. 40 of same TSN). Petitioner further argues that when it sent its records to Manila in February, 1959, the
papers in support of these miscellaneous and travelling expenses were not included for the reason that by February 9,
1959, when the Bureau of Internal Revenue decided to investigate, petitioner had no more obligation to keep the same
since five years had lapsed from the time these expenses were incurred (p. 41 of same TSN). On this ground, the
petitioner may be sustained, for under Section 337 of the Tax Code, receipts and papers supporting such expenses
need be kept by the taxpayer for a period of five years from the last entry. At the time of the investigation, said five
years had lapsed. Taxpayer's stand on this issue is therefore sustained.
UNREASONABLY ACCUMULATED PROFITS
Section 25 of the Tax Code which imposes a surtax on profits unreasonably accumulated, provides:
Sec. 25. Additional tax on corporations improperly accumulating profits or surplus (a) Imposition of tax. If
any corporation, except banks, insurance companies, or personal holding companies, whether domestic or
foreign, is formed or availed of for the purpose of preventing the imposition of the tax upon its shareholders or
members or the shareholders or members of another corporation, through the medium of permitting its gains
and profits to accumulate instead of being divided or distributed, there is levied and assessed against such
corporation, for each taxable year, a tax equal to twenty-five per centum of the undistributed portion of its
accumulated profits or surplus which shall be in addition to the tax imposed by section twenty-four, and shall
be computed, collected and paid in the same manner and subject to the same provisions of law, including
penalties, as that tax.1awphl.nt
The Commissioner found that in violation of the abovequoted section, petitioner had unreasonably accumulated profits
as of 1953 in the amount of P347,507.01, based on the following circumstances (Examiner's Report pp. 62-68 of BIR
records):
1. Strong financial position of the petitioner as of December 31, 1953. Assets were P388,617.00 while the
liabilities amounted to only P61,117.31 or a ratio of 6:1.
2. As of 1953, the corporation had considerable capital adequate to meet the reasonable needs of the business
amounting to P327,499.69 (assets less liabilities).
3. The P200,000 reserved for electrification of drier and mechanization and the P50,000 reserved for malaria
control were reverted to its surplus in 1953.
4. Withdrawal by shareholders, of large sums of money as personal loans.
5. Investment of undistributed earnings in assets having no proximate connection with the business as
hospital building and equipment worth P59,794.72.
6. In 1953, with an increase of surplus amounting to P677,232.01, the capital stock was increased to P500,000
although there was no need for such increase.
Petitioner tried to show that in considering the surplus, the examiner did not take into account the possible expenses
for cultivation, labor, fertilitation, drainage, irrigation, repair, etc. (pp. 235-237 of TSN of Dec. 7, 1962). As aptly
answered by the examiner himself, however, they were already included as part of the working capital (pp. 237-238 of
TSN of Dec. 7, 1962).
In the unreasonable accumulation of P347,507.01 are included P200,000 for electrification of driers and mechanization
and P50,000 for malaria control which were reserved way back in 1948 (p. 67 of the BIR records) but reverted to the
general fund only in 1953. If there were any plans for these amounts to be used in further expansion through projects,
it did not appear in the records as was properly indicated in 1948 when such amounts were reserved. Thus, while in
1948 it was already clear that the money was intended to go to future projects, in 1953 upon reversion to the general
fund, no such intention was shown. Such reversion therefore gave occasion for the Government to consider the same
for tax purposes. The P250,000 reverted to the general fund was sought to be explained as later used elsewhere: "part
of it in the Hilano Industries, Inc. in building the factory site and buildings to house technical men . . . part of it was
spent in the facilities for the waterworks system and for industrialization of the coconut industry" (p. 117 of TSN of
Dec. 6, 1962). This is not sufficient explanation. Persuasive jurisprudence on the matter such as those in the United
States from where our tax law was derived,8 has it that: "In order to determine whether profits were accumulated for
the reasonable needs of the business or to avoid the surtax upon shareholders, the controlling intention of the
taxpayer is that which is manifested at the time of the accumulation, not subsequently declared intentions which are
merely the products of after-thought."9 The reversion here was made because the reserved amount was not enough for
the projects intended, without any intent to channel the same to some particular future projects in mind.
Petitioner argues that since it has P560,717.44 as its expenses for the year 1953, a surplus of P347,507.01 is not
unreasonably accumulated. As rightly contended by the Government, there is no need to have such a large amount at
the beginning of the following year because during the year, current assets are converted into cash and with the
income realized from the business as the year goes, these expenses may well be taken care of (pp. 238 of TSN of Dec.
7, 1962). Thus, it is erroneous to say that the taxpayer is entitled to retain enough liquid net assets in amounts
approximately equal to current operating needs for the year to cover "cost of goods sold and operating expenses" for
"it excludes proper consideration of funds generated by the collection of notes receivable as trade accounts during the
course of the year."10 In fact, just because the fatal accumulations are less than 70% of the annual operating expenses
of the year, it does not mean that the accumulations are reasonable as a matter of law." 11
Petitioner tried to show that investments were made with Basilan Coconut Producers Cooperative Association and
Basilan Hospital (pp. 103-105 of TSN of Dec. 6, 1962) totalling P59,794.72 as of December 31, 1953. This shows all the
more the unreasonable accumulation. As of December 31, 1953 already P59,794.72 was spent yet as of that date
there was still a surplus of P347,507.01.
Petitioner questions why the examiner covered the period from 1948-1953 when the taxable year on review was 1953.
The surplus of P347,507.01 was taken by the examiner from the balance sheet of petitioner for 1953. To check the
figure arrived at, the examiner traced the accumulation process from 1947 until 1953, and petitioner's figure stood out
to be correct. There was no error in the process applied, for previous accumulations should be considered in
determining unreasonable accumulations for the year concerned. "In determining whether accumulations of earnings
or profits in a particular year are within the reasonable needs of a corporation, it is neccessary to take into account
prior accumulations, since accumulations prior to the year involved may have been sufficient to cover the business
needs and additional accumulations during the year involved would not reasonably be necessary." 12
Another factor that stands out to show unreasonable accumulation is the fact that large amounts were withdrawn by or
advanced to the stockholders. For the year 1953 alone these totalled P197,229.26. Yet the surplus of P347,507.01 was
left as of December 31, 1953. We find unacceptable petitioner's explanation that these were advances made in
furtherance of the business purposes of the petitioner. As correctly held by the Court of Tax Appeals, while certain
expenses of the corporation were credited against these amounts, the unspent balance was retained by the
stockholders without refunding them to petitioner at the end of each year. These advances were in fact indirect loans
to the stockholders indicating the unreasonable accumulation of surplus beyond the needs of the business.
ALLEGED EXEMPTION
Petitioner wishes to avail of the exempting proviso in Sec. 25 of the Internal Revenue Code as amended by R.A. 1823,
approved June 22, 1957, whereby accumulated profits or surplus if invested in any dollar-producing or dollar-earning
industry or in the purchase of bonds issued by the Central Bank, may not be subject to the 25% surtax. We have but to
point out that the unreasonable accumulation was in 1953. The exemption was by virtue of Republic Act 1823 which
amended Sec. 25 only on June 22, 1957 more than three years after the period covered by the assessment.
In resume, Basilan Estates, Inc. is liable for the payment of deficiency income tax and surtax for the year 1953 in the
amount of P88,977.42, computed as follows:
Add: Over-claimed depreciation
P40,142.90
10,500.49
Net income per finding
P50,643.39
20% tax on P50,643.39

Less: Tax already assessed
P10,128.67
8,028.00
Deficiency income tax

Add: 25% surtax on P347,507.01
Total tax due and collectible
P2,100.67
86,876.75
P88,977.42
=======
====
WHEREFORE, the judgment appealed from is modified to the extent that petitioner is allowed its deductions for
travelling and miscellaneous expenses, but affirmed insofar as the petitioner is liable for P2,100.67 as deficiency
income tax for 1953 and P86,876.75 as 25% surtax on the unreasonably accumulated profit of P347,507.01. No costs.
So ordered.
G.R. No. 179356
December 14, 2009
KEPCO PHILIPPINES CORPORATION, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
CARPIO MORALES, J.:
Korea Electric Power Corporation (KEPCO) Philippines Corporation (petitioner) is an independent power producer
engaged in selling electricity to the National Power Corporation (NPC).
After its incorporation and registration with the Securities and Exchange Commission on June 15, 1995, petitioner
forged a Rehabilitation Operation Maintenance and Management Agreement with NPC for the rehabilitation and
operation of Malaya Power Plant Complex in Pililia, Rizal. 1
On September 30, 1998, petitioner filed with the Commissioner of Internal Revenue (respondent) administrative claims
for tax refund in the amounts of P4,895,858.01 representing unutilized input Value Added Tax (VAT) payments on
domestic purchases of goods and services for the 3rd quarter of 1996 and P4,084,867.25 representing creditable VAT
withheld from payments received from NPC for the months of April and June 1996.
Petitioner also filed a judicial claim before the Court of Tax Appeals (CTA), docketed as CTA Case No. 5765, also based
on the above-stated amounts.
Petitioner filed before respondent on December 28, 1998 still another claim for refund representing unutilized input
VAT payments attributable to its zero-rated sale transactions with NPC, including input VAT payments on domestic
goods and services in the amount of P13,191,278.00 for the 4th quarter of 1996. Petitioner also filed the same claim
before the CTA on December 29, 1998, docketed as CTA Case No. 5704.
The two petitions before the CTA for a refund in the total amount of P22,172,003.26 were consolidated.
In his report, the court-commissioned auditor, Ruben R. Rubio, concluded that the claimed amount of P20,550,953.93
was properly substantiated for VAT purposes and subject of a valid refund.
By Decision of March 18, 2003, the CTA granted petitioner partial refund with respect to unutilized input VAT
payment on domestic goods and services qualifying as capital goods purchased for the 3rd and 4th quarters
of 1996 in the amount of P8,325,350.35. All other claims were disallowed.
Petitioner filed an urgent motion for reconsideration, claiming an additional amount of P5,012,875.67.
By Resolution of July 8, 2003, 2 the CTA denied petitioners motion, it holding that part of the additional amount prayed
for P1,557,676.13 involved purchases for the year 1997, and with respect to the remaining amount of
P3,455,199.54, it was not recorded under depreciable asset accounts, hence, it cannot be considered as capital goods.
Petitioner appealed under Rule 43 of the Rules of Court before the Court of Appeals, 3 praying only for the refund of
P3,455,199.54, claiming that the purchases represented thereby were used in the rehabilitation of the Malaya Power
Plant Complex which should be considered as capital expense to fall within the purview of capital goods.
The appellate court, by Decision of December 11, 2006, affirmed that of the CTA. In arriving at its decision, the
appellate court considered, among other things, the account vouchers submitted by petitioner which listed the
purchases under inventory accounts as follows:
1) Inventory supplies/materials
2) Inventory supplies/lubricants
3) Inventory supplies/spare parts
4) Inventory supplies/supplies
5) Cost/O&M Supplies
6) Cost/O&M Uniforms and Working Clothes
7) Cost/O&M/Supplies
8) Cost/O&M/Repairs and Maintenance
9) Office Supplies
10) Repair and Maintenance/Mechanics
11) Repair and Maintenance/Common/General
12) Repair and Maintenance/Chemicals
Reconsideration of the appellate courts decision having been denied by Resolution of August 17, 2007, the present
petition for review on certiorari was filed.
In the main, petitioner faults the appellate court for not considering the purchases amounting to P3,455,199.54 as
falling under the definition of "capital goods."
The petition is bereft of merit.
Section 4.106-1 (b) of Revenue Regulations No. 7-95 defines capital goods and its scope in this wise:
xxxx
(b) Capital Goods. Only a VAT-registered person may apply for issuance of a tax credit certificate or refund of input
taxes paid on capital goods imported or locally purchased. The refund shall be allowed to the extent that such input
taxes have not been applied against output taxes. The application should be made within two (2) years after the close
of the taxable quarter when the importation or purchase was made.
Refund of input taxes on capital goods shall be allowed only to the extent that such capital goods are used in VAT
taxable business. If it is also used in exempt operations, the input tax refundable shall only be the ratable portion
corresponding to taxable operations.
"Capital goods or properties" refer to goods or properties with estimated useful life greater that one year and which
are treated as depreciable assets under Section 29 (f) ,4 used directly or indirectly in the production or sale of taxable
goods or services. (underscoring supplied)
For petitioners purchases of domestic goods and services to be considered as "capital goods or properties," three
requisites must concur. First, useful life of goods or properties must exceed one year; second, said goods or properties
are treated as depreciable assets under Section 34 (f) and; third, goods or properties must be used directly or
indirectly in the production or sale of taxable goods and services.
From petitioners evidence, the account vouchers specifically indicate that the disallowed purchases were recorded
under inventory accounts, instead of depreciable accounts. That petitioner failed to indicate under its fixed assets or
depreciable assets account, goods and services allegedly purchased pursuant to the rehabilitation and maintenance of
Malaya Power Plant Complex, militates against its claim for refund. As correctly found by the CTA, the goods or
properties must be recorded and treated as depreciable assets under Section 34 (F) of the NIRC.
Petitioner further contends that since the disallowed items are treated as capital goods in the general ledger and
accounting records, as testified on by its senior accountant, Karen Bulos, before the CTA, this should have been given
more significance than the account vouchers which listed the items under inventory accounts.
A general ledger is a record of a business entitys accounts which make up its financial statements. Information
contained in a general ledger is gathered from source documents such as account vouchers, purchase orders and sales
invoices. In case of variance between the source document and the general ledger, the former is preferred.
The account vouchers presented by petitioner confirm that the purchases cannot qualify as capital goods for they are
held as inventory items and not charged to any depreciable asset account. Petitioner has proffered no explanation why
the disallowed items were not listed under depreciable asset accounts.1avvphi1
It is settled that tax refunds are in the nature of tax exemptions. Laws granting exemptions are construed strictissimi
juris against the taxpayer and liberally in favor of the taxing authority. 5 Where the taxpayer claims a refund, the CTA as
a court of record is required to conduct a formal trial (trial de novo) to prove every minute aspect of the claim.6
By the very nature of its functions, the CTA is dedicated exclusively to the resolution of tax problems and has
consequently developed an expertise on the subject. Absent a showing of abuse or reckless exercise of authority, 7 the
Court appreciates no ground to disturb the appellate courts Decision affirming that of the CTA.
IN FINE, petitioner having failed to establish that the disallowed items should be classified as capital goods, the
assailed Decision of the Court of Appeals must be upheld.
WHEREFORE, the petition is DENIED.
SO ORDERED.
G.R. Nos. L-18843 and L-18844 August 29, 1974

CONSOLIDATED MINES, INC., petitioner,
vs.
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.
G.R. Nos. L-18853 & L-18854 August 29, 1974
vs.
CONSOLIDATED MINES, INC., respondent.
Office of the Solicitor General for Commissioner of Internal Revenue.
Taada, Carreon & Taada for Consolidated Mines, Inc.
MAKALINTAL, C.J.:p
These are appeals from the amended decision of the Court of Tax Appeals dated August 7, 1961, in CTA Cases No. 565
and 578, both entitled "Consolidated Mines, Inc. vs. Commissioner of Internal Revenue," ordering the Consolidated
Mines, Inc., hereinafter referred to as the Company, to pay the Commissioner of Internal Revenue the amounts of
P79,812.93, P51,528.24 and P71,392.82 as deficiency income taxes for the years 1953, 1954 and 1956, respectively,
or the total sum of P202,733.99, plus 5% surcharge and 1% monthly interest from the date of finality of the decision.
The Company, a domestic corporation engaged in mining, had filed its income tax returns for 1951, 1952, 1953 and
1956. In 1957 examiners of the Bureau of Internal Revenue investigated the income tax returns filed by the Company
because on August 10, 1954, its auditor, Felipe Ollada claimed the refund of the sum of P107,472.00 representing
alleged overpayments of income taxes for the year 1951. After the investigation the examiners reported that (A) for
the years 1951 to 1954 (1) the Company had not accrued as an expense the share in the company profits of Benguet
Consolidated Mines as operator of the Company's mines, although for income tax purposes the Company had reported
income and expenses on the accrual basis; (2) depletion and depreciation expenses had been overcharged; and (3)
the claims for audit and legal fees and miscellaneous expenses for 1953 and 1954 had not been properly
substantiated; and that (B) for the year 1956 (1) the Company had overstated its claim for depletion; and (2) certain
claims for miscellaneous expenses were not duly supported by evidence.
In view of said reports the Commissioner of Internal Revenue sent the Company a letter of demand requiring it to pay
certain deficiency income taxes for the years 1951 to 1954, inclusive, and for the year 1956. Deficiency income tax
assessment notices for said years were also sent to the Company. The Company requested a reconsideration of the
assessment, but the Commissioner refused to reconsider, hence the Company appealed to the Court of Tax Appeals.
The assessments for 1951 to 1954 were contested in CTA Case No. 565, while that for 1956 was contested in CTA Case
No. 578. Upon agreement of the parties the two cases were heard and decided jointly.
On May 6, 1961 the Tax Court rendered judgment ordering the Company to pay the amounts of P107,846.56,
P134,033.01 and P71,392.82 as deficiency income taxes for the years 1953, 1954 and 1956, respectively. The Tax
Court nullified the assessments for the years 1951 and 1952 on the ground that they were issued beyond the five-year
period prescribed by Section 331 of the National Internal Revenue Code.
However, on August 7, 1961, upon motion of the Company, the Tax Court reconsidered its decision and further reduced
the deficiency income tax liabilities of the Company to P79,812.93, P51,528.24 and P71,382.82 for the years 1953,
1954 and 1956, respectively. In this amended decision the Tax Court subscribed to the theory of the Company that
Benguet Consolidated Mining Company, hereafter referred to as Benguet, had no right to share in "Accounts
Receivable," hence one-half thereof may not be accrued as an expense of the Company for a given year.
Both the Company and the Commissioner appealed to this Court. The Company questions the rate of mine depletion
adopted by the Court of Tax Appeals and the disallowance of depreciation charges and certain miscellaneous expenses
(G.R. Nos.
L-18843 & L-18844). The Commissioner, on the other hand, questions what he characterizes as the "hybrid" or "mixed"
method of accounting utilized by the Company, and approved by the Tax Court, in treating the share of Benguet in the
net profits from the operation of the mines in connection with its income tax returns (G.R. Nos. L-18853 &
L-18854).
With respect to methods of accounting, the Tax Code states:
Sec. 38. General Rules. The net income shall be computed upon the basis of the taxpayer's annual
accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of
accounting regularly employed in keeping the books of such taxpayer but if no such method of
accounting has been so employed or if the method employed does not clearly reflect the income the
computation shall be made in accordance with such methods as in the opinion of the Commissioner of
Internal Revenue does clearly reflect the income ...
Sec. 39. Period in which items of gross income included. The amount of all items of gross income
shall be included in the gross income for the taxable year in which received by the taxpayer, unless,
under the methods of accounting permitted under section 38, any such amounts are to be properly
accounted for as of a different period ...
Sec. 40. Period for which deductions and credits taken. The deductions provided for in this Title shall
be taken for the taxable year in which "paid or accrued" or "paid or incurred" dependent upon the
method of accounting upon the basis of which the net income is computed, unless in order to clearly
reflect the income the deductions should be taken as of a different period ...
It is said that accounting methods for tax purposes 1 comprise a set of rules for determining when and how to report
income and deductions. The U.S. Internal Revenue Code 2 allows each taxpayer to adopt the accounting method most
suitable to his business, and requires only that taxable income generally be based on the method of accounting
regularly employed in keeping the taxpayer's books, provided that the method clearly reflects income. 3
The Company used the accrual method of accounting in computing its income. One of its expenses is the amount-paid
to Benguet as mine operator, which amount is computed as 50% of "net income." The Company deducts as an
expense 50% of cash receipts minus disbursements, but does not deduct at the end of each calendar year what the
Commissioner alleges is "50% of the share of Benguet" in the "accounts receivable." However, it deducts Benguet's
50% if and when the "accounts receivable" are actually paid. It would seem, therefore, that the Company has been
deducting a portion of this expense (Benguet's share as mine operator) on the "cash & carry" basis. The question is
whether or not the accounting system used by the Company justifies such a treatment of this item; and if not, whether
said method used by the Company, and characterized by the Commissioner as a "hybrid method," may be allowed
under the aforequoted provisions of our tax code. 4
For a proper understanding of the situation the following facts are stated: The Company has certain mining claims
located in Masinloc, Zambales. Because it wanted to relieve itself of the work and expense necessary for developing
the claims, the Company, on July 9, 1934, entered into an agreement (Exhibit L) with Benguet, a domestic anonymous
partnership engaged in the production and marketing of chromite, whereby the latter undertook to "explore, develop,
mine, concentrate and market" the pay ore in said mining claims.
The pertinent provisions of their agreement, as amended by the supplemental agreements of September 14, 1939
(Exhibit L-1) and October 2, 1941 (Exhibit L-2), are as follows:
IV. Benguet further agrees to provide such funds from its own resources as are in its judgment
necessary for the exploration and development of said claims and properties, for the purchase and
construction of said concentrator plant and for the installation of the proper transportation facilities as
provided in paragraphs I, II and III hereof until such time as the said properties are on a profit
producing basis and agrees thereafter to expand additional funds from its own resources, if the income
from the said claims is insufficient therefor, in the exploration and development of said properties or in
the enlargement or extension of said concentration and transportation facilities if in its judgment good
mining practice requires such additional expenditures. Such expenditures from its own resources prior
to the time the said properties are put on a profit producing basis shall be reimbursed as provided in
paragraph VIII hereof. Expenditures from its own resources thereafter shall be charged against the
subsequent gross income of the properties as provided in paragraph X hereof.
VII. As soon as practicable after the close of each month Benguet shall furnish Consolidated with a
statement showing its expenditures made and ore settlements received under this agreement for the
preceding month which statement shall betaken as accepted by Consolidated unless exception is taken
thereto or to any item thereof within ten days in writing in which case the dispute shall be settled by
agreement or by arbitration as provided in paragraph XXII hereof.
VIII. While Benguet is being reimbursed for all its expenditures, advances and disbursements
hereunder as evidenced by said statements of accounts, the net profits resulting from the operation of
the aforesaid claims or properties shall be divided ninety per cent (90%) to Benguet and ten per cent
(10%) to Consolidated. Such division of net profits shall be based on the receipts, and expenditures
during each calendar year, and shall continue until such time as the ninety per cent (90%) of the net
profits pertaining to Benguet hereunder shall equal the amount of such expenditures, advances and
disbursements. The net profits shall be computed as provided in Paragraph X hereof.
X. After Benguet has been fully reimbursed for its expenditures, advances and disbursements as
aforesaid the net profits from the operation shall be divided between Benguet and Consolidated share
and share alike, it being understood however, that the net profits as the term is used in this agreement
shall be computed by deducting from gross income all operating expenses and all disbursements of
any nature whatsoever as may be made in order to carry out the terms of this agreement.
XIII. It is understood that Benguet shall receive no compensation for services rendered as manager or
technical consultants in connection with the carrying out of this agreement. It may, however, charge
against the operation actual additional expenses incurred in its Manila Office in connection with the
carrying out of the terms of this agreement including traveling expenses of consulting staff to the
mines. Such expenses, however, shall not exceed the sum of One Thousand Pesos (P1,000.00) per
month. Otherwise, the sole compensation of Benguet shall be its proportion of the net profits of the
operation as herein above set forth.
XIV. All payments due Consolidated by Benguet under the terms of this agreement with respect to
expenditures made and ore settlements received during the preceding calendar month, shall be
payable on or before the twentieth day of each month.
There is no question with respect to the 90%-10% sharing of profits while Benguet was being reimbursed the expenses
disbursed during the period it was trying to put the mines on a profit-producing basis. 5 It appears that by 1953
Benguet had completely recouped said advances, because they were then dividing the profits share and share alike. .
As heretofore stated the question is: Under the arrangement between the Company and Benguet, when did Benguet's
50% share in the "Accounts Receivable
accrue? 6
The following table (summary, Exhibit A, of examiner's report of January 28, 1967, Exh. 8) prepared for the
Commissioner graphically illustrates the effect of the inclusion of one-half of "Accounts Receivable" as expense in the
computation of the net income of the Company:
SUMMARY:
1951
1952
1953
1954
Original share of
Benguet
1,313,640.26
3,521,751,94
2,340,624.59
2,622,968.58
Additional share
of Rec'bles
383,829.87
677,504.76
577,394.66
282,724.76
Total share of
Benguet
1,697,470.13
4,199,256.70
2,918,009.25
2,905,693.34
Less: Receipts
due from prior
year operation
269,619.00
383,829.87
677,504.76
577,384.66
Share of
Benguet as
adjusted
(Acc'rd)
1,427,851.13
3,815,426.83
2,240,504.49
2,328,308.68
Less:
Participation of
Benguet already
deducted
1,313,640.26
3,521,751.94
2,340,624.59
2,622,968.58
Additional
Expense
(Income)
114,210.87
293,674.89
(100,120.10)
(294,659.90)
In the aforesaid table "Additional share on Rec'bles" is one-half of "Total Rec'bles minus "Total Payables." It indicates,
from the Commissioner's viewpoint, that there were years when the Company had been overstating its income (1951
and 1952) and there were years when it had been understating its income (1953 and 1954). 7 The Commissioner is not
interested in the taxes for 1951 and 1952 (which had prescribed anyway) when the Company had overstated its
income, but in those for 1953 and 1954, in each of which years the amount of the "Accounts Receivable" was less than
that of the previous year, and the Company, therefore, appears to have deducted, as expense, compensation to
Benguet bigger (than what the Commissioner claims is due) by one-half of the difference between the year's "Accounts
Receivable" and the previous year's "Accounts Receivable," thus apparently understating its income to that extent.
According to the agreement between the Company and Benguet the net profits "shall be computed by deducting from
gross income all operating expenses and all expenses of any nature whatsoever." Periodically, Benguet was to furnish
the Company with the statement of accounts for a given month "as soon as practicable after the close" of that month.
The Company had ten days from receipt of the statement to register its objections thereto. Thereafter, the statement
was considered binding on the Company. And all payments due the Company "with respect to the expenditures made
and ore settlements received during the calendar month shall be payable on or before the twentieth of each month."
The agreement does not say that Benguet was to share in "Accounts Receivable." But may this be implied from the
terms of the agreement? The statement of accounts (par. VIII) and the payment part (XIV) that Benguet 8 must make
are both with respect to "expenditures made and ore settlements received." "Expenditures" are payments of money. 9
This is the meaning intended by the parties, considering the provision that Benguet agreed to "provide such funds
from its own resources, etc."; and that "such expenditures from its own resources" were to be reimbursed first as
provided in par. VIII, and later as provided in par. X. "Settlement" does not necessarily mean payment or satisfaction,
though it may mean that; it frequently means adjustment or arrangement. 10 The term "settlement" may be used in
the sense of "payment," or it may be used in the sense of "adjustment" or "ascertainment," or it may be used in the
sense of "adjustment" or "ascertainment of a balance between contending parties," depending upon the
circumstances under which, and the connection in which, use of the term is made. 11 In the term "ore settlements
received," the word "settlement" was not used in the concept of "adjustment," "arrangement" or "ascertainment of a
balance between contending parties," since all these are "made," not "received." "Payment," then, is the more
appropriate equivalent of, and interchangeable with, the term "Settlement." Hence, "ore settlements received" means
"ore payments received," which excludes "Accounts Receivable." Thus, both par. VIII and par. XIV refer to "payment,"
either received or paid by Benguet.
According to par. X, the 50-50 sharing should be on "net profits;" and "net profits" shall be computed "by deducting
from gross income all operating expenses and all disbursements of any nature whatsoever as may be made in order to
carry out the terms of the agreement." The term "gross profit" was not defined. In the accrual method of accounting
"gross income" would include both "cash receipts" and "Accounts Receivable." But the term "gross income" does not
carry a definite and inflexible meaning under all circumstances, and should be defined in such a way as to ascertain
the sense in which the parties have used it in contracting. 12 According to par. VIII 13 the "division of net profits shall be
based on the receipts and expenditures." The term "expenditures" we have already analyzed. As used, receipts"
means "money received." 14 The same par. VIII uses the term "expenditures, advances and disbursements."
"Disbursements" means "payment," 15 while the word "advances" when used in a contract ordinarily means money
furnished with an expectation that it shall be returned. 16 It is thus clear from par. VIII that in the computation of "net
profits" (to be divided on the 90%-10% sharing arrangement) only "cash payments" received and "cash
disbursements" made by Benguet were to be considered. On the presumption that the parties were consistent in the
use of the term, the same meaning must be given to "net profits" as used in par. X, and "gross income," accordingly,
must be equated with "cash receipts." The language used by the parties show their intention to compute Benguet's
50% share on the excess of actual receipts over disbursements, without considering "Accounts Receivable" and
"Accounts Payable" as factors in the computation. Benguet then did not have a right to share in "Accounts Receivable,"
and, correspondingly, the Company did not have the liability to pay Benguet any part of that item. And a deduction
cannot be accrued until an actual liability is incurred, even if payment has not been made. 17
Here we have to distinguish between (1) the method of accounting used by the Company in determining its net
income for tax purposes; and (2) the method of computation agreed upon between the Company and Benguet in
determining the amount of compensation that was to be paid by the former to the latter. The parties, being free to do
so, had contracted that in the method of computing compensation the basis were "cash receipts" and "cash
payments." Once determined in accordance with the stipulated bases and procedure, then the amount due Benguet
for each month accrued at the end of that month, whether the Company had made payment or not (see par. XIV of the
agreement). To make the Company deduct as an expense one-half of the "Accounts Receivable" would, in effect, be
equivalent to giving Benguet a right which it did not have under the contract, and to substitute for the parties' choice a
mode of computation of compensation not contemplated by them. 18
Since Benguet had no right to one-half of the "Accounts Receivable," the Company was correct in not accruing said
one-half as a deduction. The Company was not using a hybrid method of accounting, but was consistent in its use of
the accrual method of accounting. The first issue raised by the Company is with respect to the rate of mine depletion
used by the Court of Tax Appeals. The Tax Code provides that in computing net income there shall be allowed as
deduction, in the case of mines, a reasonable allowance for depletion thereof not to exceed the market value in the
mine of the product thereof which has been mined and sold during the year for which the return is made [Sec. 30(g)
(1) (B)]. 19
The formula
20
for computing the rate of depletion is:
Cost of Mine Property

---------------------- = Rate of Depletion Per Unit Estimated ore Deposit of Product Mined and sold
The Commissioner and the Company do not agree as to the figures corresponding to either factor that affects the rate
of depletion per unit. The figures according to the Commissioner are:
P2,646,878.44 (mine cost) P0.59189 (rate of
------------------------- = depletion per ton)
4,471,892 tons (estimated ore deposit)
while the Company insists they are:
P4,238,974.57 (mine cost) P1.0197 (rate of
------------------------- - = depletion per ton)
4,156,888 tons (estimated
ore deposit)
They agree, however, that the "cost of the mine property" consists of (1) mine cost; and (2) expenses of development
before production. As to mine cost, the parties are practically in agreement the Commissioner says it is P2,515,000
(the Company puts it at P2,500,000). As to expenses of development before production the Commissioner and the
Company widely differ. The Company claims it is P1,738,974.56, while the Commissioner says it is only P131,878.44.
The Company argues that the Commissioner's figure is "a patently insignificant and inadequate figure when one
considers the tens of millions of pesos of revenue and production that petitioner's chromite mine fields have finally
produced."
As an income tax concept, depletion is wholly a creation of the statute 21 "solely a matter of legislative grace." 22
Hence, the taxpayer has the burden of justifying the allowance of any deduction claimed. 23 As in connection with all
other tax controversies, the burden of proof to show that a disallowance of depletion by the Commissioner is incorrect
or that an allowance made is inadequate is upon the taxpayer, and this is true with respect to the value of the property
constituting the basis of the deduction. 24 This burden-of-proof rule has been frequently applied and a value claimed
has been disallowed for lack of evidence. 25
As proof that the amount spent for developing the mines was P1,738,974.56, the Company relies on the testimony of
Eligio S. Garcia and on Exhibits 1, 31 and 38.
Exhibit I is the Company's report to its stockholders for the year 1947. It contains the Company's balance sheet as of
December 31, 1946 (Exhibit I-1). Among the assets listed is "Mines, Improvement & Dev." in the amount of
P4,238,974.57, which, according to the Company, consisted of P2,500,000, purchase price of the mine, and
P1,738,974.56, cost of developing it. The Company also points to the statement therein that "Benguet invested
approximately P2,500,000 to put the property in operation, the greater part of such investment being devoted to the
construction of a 25-kilometer road and the installation of port facilities." This amount of P2,500,000 was only an
estimate. The Company has not explained in detail in what this amount or the lesser amount of P1,738,974.56
consisted. Nor has it explained how that bigger amount became P1,738,974.56 in the balance sheet for December 31,
1946.
According to the Company the total sum of P4,238,974.57 as "Mines, Improvement & Dev." was taken from its pre-war
balance sheet of December 31, 1940. As proof of this it cites the sworn certification (Exhibit 38) executed on October
25, 1946 by R.P. Flood, in his capacity as treasurer of the Company, and attached to other papers of the Company filed
with the Securities and Exchange Commission in compliance with the provisions of Republic Act No. 62 (An Act to
require the presentation of proof of ownership of securities and the reconstruction of corporate and partnership
records, and for other purposes). In said certification there are statements to the effect that "the Statement of Assets
& Liabilities of Consolidated Mines, Incorporated, submitted to the Securities & Exchange Commission as a
requirement for the reconstitution of the records of the said corporation, is as of September 4, 1946;" and that "the
figure P4,238,974.57 representing the value of Mines, Improvements and Developments appearing therein, was taken
from the Balance Sheet as of December 31, 1940, which is the only available source of information of the Corporation
regarding the above and consequently the undersigned considers the stated figure to be only an estimate of the value
of those items at the present time. "This figure, the Company claims, is based on entries made in the ordinary and
regular course of its business dating as far back as before the war. The Company places reliance on Sec. 39, Rule 130,
Revised Rules of Court (formerly Sec. 34, Rule 123), which provides that entries made at, or near the time of the
transactions to which they refer, by a person deceased, outside of the Philippines or unable to testify, who was in a
position to know the facts therein stated, may be received as prima facie evidence, if such person made the entries in
his professional capacity or in the performance of duty and in the ordinary or regular course of business or duty."
Note that Exhibit 38 is not the "entries," covered by the rule. The Company, however, urges, unreasonably, we think,
that it should be afforded the same probative value since it is based on such "entries" meaning the balance sheet of
December 31, 1940, which was not presented in evidence. Even with the presentation of said balance sheet the
Company would still have had to prove (1) that the person who made the entry did so in his professional capacity or in
the performance of a duty; (2) that the entry was made in the ordinary course of business or duty; (3) that the entry
was made at or near the time of the transaction to which it related; (4) that the one who made it was in a position to
know the facts stated in the entry; and (5) that he is dead, outside the Philippines or unable to testify 26
A balance sheet may not be considered as "entries made in the ordinary course of business," which, according to
Moran:
means that the entries have been made regularly, as is usual, in the management of the trade or
business. It is essential, therefore, that there be regularity in the entries. The entry which is being
introduced in evidence should appear to be part of a group of regular entries. ... The regularity of the
entries maybe proved by the form in which they appear in the corresponding book. 27
A balance sheet, as that word is uniformly used by bookkeepers and businessmen, is a paper which shows "a
summation or general balance of all accounts," but not the particular items going to make up the several accounts;
and it is therefore essentially different from a paper embracing "a full and complete statement of all the disbursements
and receipts, showing from what sources such receipts were derived, and for what and to whom such disbursements or
payments were made, and for what object or purpose the same were made;" but such matters may find an appropriate
place in an itemized account. 28 Neither can it be said that a balance sheet complies with the third requisite, since the
entries therein were not made at or near the time of the transactions to which they related.
In order to render admissible books of account it must appear that they are books of original entry,
that the entries were made in the ordinary course of business, contemporaneously with the facts
recorded, and by one who had knowledge of the facts. San Francisco Teaming Co v Gray (1909) 11 CA
314, 104 P 999. See Brown v Ball (1932) 123 CA 758, 12 P2d 28, to the effect that the books must be
kept in the regular course of business. 29
A "ledger" is a book of accounts in which are collected and arranged, each under its appropriate head,
the various transactions scattered throughout the journal or daybook, land is not a "book of original
entries," within the rule making such books competent evidence. First Nat. Building Co. v. Vanderberg,
119 P 224, 227; 29 Okl. 583. 30
Code Iowa, No. 3658, providing that "books of account" are receivable in evidence, etc., means a book
containing charges, and showing a continuous dealing with persons generally. A book, to be
admissible, must be kept as an account book, and the charges made in the usual course of business.
Security Co. v. Graybeal, 52 NW 497, 85 Iowa 543, 39 Am St Rep 311. 31
Books of account may therefore be admissible under the rule. In tax cases, however, this Court appears not to place
too high a probative value on them, considering the statement in the case of Collector of Internal Revenue v. Reyes 32
that "books of account do not prove per se that they are veracious; in fact they may be more consistent than truthful."
Indeed, books of account may be used to carry out a plan of tax evasion. 33
At most, therefore, the presentation of the balance sheet of December 31, 1940 would only prove that the figure
P4,238,974.57 appears therein as corresponding to mine cost. But the Company would still need to present proof to
justify its adoption of that figure. It had burden of establishing the components of the amount of P1,738,974.57: what
were the particular expenses made and the corresponding amount of each, so that it may be determined whether the
expenses were actually made and whether the items are properly part of cost of mine development, or are actually
depreciable items.
In this connection we take up Exhibit 31 of the Commissioner. This is the memorandum of BIR Examiner Cesar P.
Aguirre to the Chief of the Investigating Division of the Bureau of Internal Revenue. According to this report "the
counsel of the taxpayer alleges that the cost of Masinloc Mine properties and improvement is P4,238,974.56 instead of
P2,646,879.44 as taken up in this report," and that the expenses as of 1941 were as follows:
Assets subject to:
1941
1. Depletion P2,646,878.44
2. 10 years depreciation 1,188,987.76
3. 3 years depreciation 78,283.75
4. 20 years depreciation 9,143.63
5. 10% amortization 171,985.00
Less: Cost Chromite Field P4,085,277.58
Expenses by operator 2,515,000.00 P1,570,277.58
The examiner concluded that "in the light of the figures listed above, the counsel for the taxpayer fairly stated the
amount disbursed by the operator until the mine property was put to production in 1939." The Company capitalizes on
this conclusion, completely disregarding the examiner's other statements, as follows:
The counsel, however, is not aware of the fact that the expenses made by the operator are those
which are depreciable and\or amortizable instead of depletable expenditures. The first post-war
Balance Sheet (12/31/46) of the taxpayer shows that its Mines, Improvement & Dev. is P4,328,974.57.
Considering the expenditures incurred by Benguet Consolidated as of 1941 (P1,570,277.58); the
rehabilitation expenses in 1946 (P211,223.72); and the cost of the Masinloc Chromite Field, the total
cost would only be P4,296,501.30. Of the total expenditure of P1,570,277.58 as of 1941,
P1,438,389.124 were spent on depreciable and/or amortizable expenses and P131,878.44 were made
for the direct improvement of the mine property.
In as much as the expenditure of the operator as of 1941 and the cost of the mine property were taken
up in the account Mines, Improvement & Rehabilitation in 1946, all its assets that were rightfully
subject to depletion was P2,646,878.44.
Because of the above qualification a large part of the amount spent by the operator
of depletion deduction, 35 depletion being different from depreciation. 36
34
may not be allowed for purpose
The Company's balance sheet for December 31, 1947 lists the "mine cost" of P2,500,000 as "development cost" and
the amount of P1,738,974.37 as "suspense account (mining properties subject to war losses)." The Company claims
that its accountant, Mr. Calpo, made these errors, because he was then new at the job. Granting that was what had
happened, it does not affect the fact that the, evidence on hand is insufficient to prove the cost of development
alleged by the Company.
Nor can we rely on the statements of Eligio S. Garcia, who was the Company's treasurer and assistant secretary at the
time he testified on August 14, 1959. He admitted that he did not know how the figure P4,238,974.57 was arrived at,
explaining: "I only know that it is the figure appearing on the balance sheet as of December 31, 1946 as certified by
the Company's auditors; and this we made as the basis of the valuation of the depletable value of the mines." (p. 94,
t.s.n.)
We, therefore, have to rely on the Commissioner's assertion that the "development cost" was P131,878.44, broken
down as follows: assessment, P34,092.12; development, P61,484.63; exploration, P13,966.62; and diamond drilling,
P22,335.07.
The question as to which figure should properly correspond to "mine cost" is one of fact. 37 The findings of fact of the
Tax Court, where reasonably supported by evidence, are conclusive upon the Supreme Court. 38
As regards the estimated ore deposit of the Company's mines, the Company's figure is "4,156,888 tons," while that of
the Commissioner is the larger figure "4,471,892 tons." The difference of 315,004 tons was due to the fact that the
Commissioner took into account all the ore that could probably be removed and marketed by the Company, utilizing
the total tonnage shipped before and after the war (933,180 tons) and the total reserve of shipping material pegged at
3,583,712 tons. On the other hand the Company's estimate was arrived at by taking into consideration only the
quantity shipped from solid ore namely, 733,180 tons (deducting from the total tonnage shipped before and after the
war an estimated float of 200,000 tons), and then adding the total recoverable ore which was assessed at 3,423,708
tons.
The above-stated figures were obtained from the report 39 of geologist Paul A. Schaeffer, who had been earlier
commissioned by the Company to conduct a study of the metallurgical possibilities of the Company's mines. In order
to have a fair understanding of how the contending parties arrived at their respective figures, We quote a pertinent
portion of the geologist's report:
Milling Data
Ore mined before the war ............... 336,850 tons
Ore mined after the war ............... 1,779,350 tons
Total ........................................... 2,116,200 tons
x Ore shipped before the war ......... 337,611 tons
xx Ore shipped after the war ............ 595,569 tons
Total ................................................ 933,180 tons
Less an estimated float of .................. 200,000 tons
Total shipped from solid ore .............. 733,180 tons
Proportion shipped 733,180
-------- = ----------mined 2,116,200
or approximately 35% of mine ore is shipped.
Dumps
Material on dumps now total 383,346 tons. Using the above tonnage for ore shipped from mining (excluding float)
there should have been a total of 1,383,020 tons of waste produced of which almost 1,000,00 tons has been removed
from the mining area of the hill. I believe that half still remains as alluviuma long the three principal intermittent
creeks which head in the mining area, and the remaining half million has washed into the river. Of course this is pure
speculation.
x much was float material, probably about one half, leaving about 170.000 tons mined from the hill.
xx some float included.
xxx xxx xxx
Ore Reserve
The A and B ore is considered sufficiently developed by drilling and tunnels to constitute the ore reserve. C ore must
be checked by drilling.
Tons
A . . . . . . . . . . . . . 7,729,800
B . . . . . . . . . . . . . 1,780,500
Total . . . . . . . . . . 9,510,300
C . . . . . . . . . . . . . 2,212,00
Grand Total . . . . 11,722,300
Therefore, the total ore reserve may be considered to be 9,510,300 tons. Based on past experience 35% is shipping
ore.
With the present mill there is considerably more recovery. The ore is mined selectively (between dikes). The results are
about as follows:
Of 1,500 tons mined, 500 tons are sorted and shipped direct, the remaining 1,000 tons going to the mill from which
250 tons ore recovered for shipment. Thus 50% of the selectively mined ore is recovered.
Thus for the reserve tonnage:
Total reserve . . . . . . . . . . . . . . . 9,510,300
Less 20% dike material . . . . . . . 1,902,060
7,608,240
Less 10% low grade ore . . . . . . 760,824
6,847,416
x
.50 =
Total recoverable ore . . . . . . . . . . 3,423,708 tons
It is probable that 30% of the dump material could be recovered by milling. So adding to the above
115,004 ore recoverable from the dumps, we get a total reserve of shipping material of 3,538,712
tons. With the sink float section added to the mill this should be increased by perhaps 20%.
On the basis of the above report the Company faults the Tax Court is sustaining the Commissioner's estimate of the
ore deposit. While the figures corresponding to the total gross tonnage shipped before and after the war have not been
assailed as erroneous, the Company maintains that the estimated float 40 of 200,000 tons as reported in the
geologist's study should have been deducted therefrom, such that the combined total of the ore shipped should have
been placed at a net of 733,180 tons instead of 933,180 tons. The other figure the Company assails as having been
improperly included by the Commissioner in his statement of ore reserve refers to the "Recoverable ore from dump
material 115,004 tons." The Company's argument in this regard runs thus:
... This apparently was included by respondent by virtue of the geologist's report that "it is probable
that 30% of the dump material should be recovered by milling." Actually, however, such recovery from
dump or waste material is problematical and is merely a contingency, and hence, the item of 115,004
tons should not be included in the statement of the ore reserves. Taking out these two items
improperly and erroneously included in respondent Commissioner of Internal Revenue's examiner's
report, to wit, float or waste material of 200,060 tons and supposedly recoverable ore from dump
materials of 115,004 tons, totaling 315,004 tons, from the total figure of 4,471,892 tons given by him,
the figure of 4,156.888 tons results as the proper statement of the total estimated ore as correctly
used by petitioner in its statement of ore reserves for purposes of depletion. 41
We agree with the Company's observation on this point. The geological report appears clear enough: the estimated
float of 200,000 tons consisting of pieces of ore that had broken loose and become detached by erosion from their
original position could hardly be viewed as still forming part of the total estimated ore deposit. Having already been
broken up into numerous small pieces and practically rendered useless for mining purposes, the same could not
appreciably increase the ore potentials of the Company's mines. As to the 115,004 tons which geologist Paul A.
Schaeffer believed could still be recovered by milling from the material on dumps, there are no sufficient data on which
to affirm or deny the accuracy of the said figure. It may, however, be taken as correct, considering that it came from
the Company's own commissioned geologist and that by the Company's own admission 42 by 1957 it had mined and
sold much more than its original estimated ore deposit of 4,156,888 tons. We think that 4,271,892 tons 43 would be a
fair estimate of the ore deposit in the Company's mines.
The correct figures therefore are:
P2,515,000.00 (mine cost proper) + P131,878.44 (development cost)
4,271,892 (estimated ore deposit)
or
P2,646,878.44 (mine cost) = P0.6196 (rate of depletion
4,271,892 (estimated ore per ton)
deposit)
In its second assigned error, the Company questions the disallowance by the Tax Court of the depreciation charges
claimed by the Company as deductions from its gross income 44 The items thus disallowed consist mainly of
depreciation expenses for the years 1953 and 1954 allegedly sustained as a result of the deterioration of some of the
Company's incomplete constructions.
The initial memorandum 45 of the BIR examiner assigned to verify the income tax liabilities of the Company pursuant
to the latter's claim of having overpaid its income taxes states the basic reason why the Company's claimed
depreciation should be disallowed or re-adjusted, thus: since "..., up to its completion (the incomplete asset) has not
been and is not capable of use in the operation, the depreciation claimed could not, in fairness to the Government and
the taxpayer, be considered as proper deduction for income tax purposes as the said asset is still under construction."
Vis-a-Vis the Commissioner's consistent position in this regard the company simply repeatedly requested for time 46
in view of the alleged voluminous working sheets that had to be re-evaluated and recomputed to justify its claimed
depreciation items within which to submit a separate memorandum in itemized form detailing the Company's
objections to the items of depreciation adjustments or disallowances for the years involved. Strangely enough, despite
the period granted, the record is bare that the Company ever submitted its itemized objection as proposed. Inasmuch
as the taxpayer has the burden of justifying the deductions claimed for depreciation, the Company's failure to
discharge the burden prevents this Court, from disturbing the Commissioner's computation. For taxation purposes the
phrase "out of its not being used," with reference to depreciation allowable on assets which are idle or the use of which
is temporarily suspended, should be understood to refer only to property that has once been used in the trade or
business, not to property that has never been actually devoted to the taxpayer's business, particularly incomplete
assets that have yet to be used. .
The Company's third assigned error assails the Court of Tax Appeals in not allowing the deduction from its gross
income of certain miscellaneous business expenditures in the course of its operation for the years 1954 and 1956. For
1954 the deduction claimed amounted to P38,081.20, of which the Court allowed P25,600.00 and disallowed
P13,481.20, 47 "for lack of any supporting paper or evidence." For the year 1956 the claim amounted to P20,050.00 of
which the Court allowed P2,460.00, representing the one-month salary Christmas bonus given to some of the
employees, and upheld the disallowance of P17,590.00 on the ground that the Company "failed to prove substantially
that said expenses were actually incurred and are legally deductible expenses."
Regarding the disallowed amount of P13,481.20 the year 1954, the Company submits that it consisted of expenses
supported by "vouchers and cancelled checks evidencing payments of these amounts," and were necessary and
ordinary expenses of business for that year. On the disallowance by the Tax Court of the sum of P17,590.00 out of a
total deduction for miscellaneous expenses for 1956 among to P20,050.00, the Company advances the same
argument, namely, that the amount consisted of normal and regular expenses for that year as evidenced by vouchers
and cancelled checks.
These vouchers and cancelled checks of the Company, however, only show that the amounts claimed had indeed been
spent, and confirm the fact of disbursement, but do not necessarily prove that the expenses for which they we're
disbursed are deductible items. In the case of Collector of Internal Revenue vs. Goodrich International Rubber Co. 48
this Court rejected the taxpayer's similar claim for deduction of alleged representation expenses, based upon receipts
issued not by the entities to which the alleged expenses but by the officers of taxpayer corporation who allegedly paid
them. It was there stated:
If the expenses had really been incurred, receipts or chits would have been issued by the entities to
which the payments have been made, and it would have been easy for Goodrich or its officers to
produce such receipts. These receipts issued by said officers merely attest to their claim that they had
incurred and paid said expenses. They do not establish payment of said alleged expenses to the
entities in which the same are said to have been incurred.
In the case before Us, except for the Company's own vouchers and cancelled checks, together with the Company
treasurer's lone and uncorroborated testimony regarding the purpose of said disbursements, there is no other
supporting evidence to show that the expenses were legally deductible items. We therefore affirm the Tax Court's
disallowance of the same.
In resume, this Court finds:
(1) that the Company was not using a "hybrid" method of accounting in the preparation of its income tax returns, but
was consistent in its use of the accrual method of accounting;
(2) that the rate of depletion per ton of the ore deposit mined and sold by the Company is P0.6196 per ton
P0.59189 as contended by the Commissioner nor P1.0197 as claimed by the Company;
49
not
(3) that the disallowance by the Tax Court of the depreciation charges claimed by the Company is correct in view of the
latter's failure to itemize and/or substantiate with definite proof that the Commissioner's own method of determining
depreciation is unreasonable or inaccurate;
(4) that for lack of supporting evidence to show that the Company's claimed expenses were legally deductible items,
the Tax Court's disallowance of the same is affirmed.
As recomputed then, the deficiency income taxes due from the Company are as follows:
1953
Net income as per audited return _________________ P5,193,716.89
Unallowable deductions & additional income
Depletion overcharged _________________________ P178,477.04 Depreciation adjustment ________________________
93,862.96
Total adjustments _____________________________ 272,340.00
Net income as per investigation ___________________ 5,466,056.89
Income tax due thereon 50 _______________________ 1,522,495.92
Less amount already assessed ____________________ 1,446,241.00 DEFICIENCY TAX DUE ______________________
76,254.92
1954
Net income as per audited return _________________ P3,320,307.68 Unallowable deductions & additional
income
Depletion overcharged _________________________ P147,895.72 Depreciation adjustment ________________________
11,878.12 Miscellaneous expenses ________________________ 13,481.20
Net income as per investigation ___________________ 3,493,562.72
Income tax due thereon _________________________ 970,197.56
Less amount already assessed ____________________ 921,686.00 DEFICIENCY TAX DUE ______________________ 48,511.56
1956
Net income as per audited return _________________ P11,504,483.97 Unallowable deductions & additional
income
Depletion overcharged _________________________ P221,272.98 Miscellaneous expenses ________________________
17,590.00
Net income as per investigation __________________ 11,743,346.95
Income tax due thereon ________________________ 3,280,137.14
Less amount already assessed ___________________ 3,213,256.00 DEFICIENCY TAX DUE ______________________ 66,881.14
TOTAL DEFICIENCY TAXES DUE _____________ 191,647.62
WHEREFORE, the appealed decision is hereby modified by ordering Consolidated Mines, Inc. to pay the Commissioner
of Internal Revenue the amounts of P76,254.92, P48,511.56 and P66,881.14 as deficiency income taxes for the years
1953, 1954 and 1956, respectively, or the total sum of P191,647.62 under the terms specified by the Tax Court,
without pronouncement as to costs.
G.R. No. 144104
June 29, 2004
LUNG CENTER OF THE PHILIPPINES, petitioner,

vs.
QUEZON CITY and CONSTANTINO P. ROSAS, in his capacity as City Assessor of Quezon City, respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court, as amended, of the Decision 1 dated July
17, 2000 of the Court of Appeals in CA-G.R. SP No. 57014 which affirmed the decision of the Central Board of
Assessment Appeals holding that the lot owned by the petitioner and its hospital building constructed thereon are
subject to assessment for purposes of real property tax.
The Antecedents
The petitioner Lung Center of the Philippines is a non-stock and non-profit entity established on January 16, 1981 by
virtue of Presidential Decree No. 1823.2 It is the registered owner of a parcel of land, particularly described as Lot No.
RP-3-B-3A-1-B-1, SWO-04-000495, located at Quezon Avenue corner Elliptical Road, Central District, Quezon City. The
lot has an area of 121,463 square meters and is covered by Transfer Certificate of Title (TCT) No. 261320 of the
Registry of Deeds of Quezon City. Erected in the middle of the aforesaid lot is a hospital known as the Lung Center of
the Philippines. A big space at the ground floor is being leased to private parties, for canteen and small store spaces,
and to medical or professional practitioners who use the same as their private clinics for their patients whom they
charge for their professional services. Almost one-half of the entire area on the left side of the building along Quezon
Avenue is vacant and idle, while a big portion on the right side, at the corner of Quezon Avenue and Elliptical Road, is
being leased for commercial purposes to a private enterprise known as the Elliptical Orchids and Garden Center.
The petitioner accepts paying and non-paying patients. It also renders medical services to out-patients, both paying
and non-paying. Aside from its income from paying patients, the petitioner receives annual subsidies from the
government.
On June 7, 1993, both the land and the hospital building of the petitioner were assessed for real property taxes in the
amount of P4,554,860 by the City Assessor of Quezon City. 3 Accordingly, Tax Declaration Nos. C-021-01226 (16-2518)
and C-021-01231 (15-2518-A) were issued for the land and the hospital building, respectively. 4 On August 25, 1993,
the petitioner filed a Claim for Exemption 5 from real property taxes with the City Assessor, predicated on its claim that
it is a charitable institution. The petitioners request was denied, and a petition was, thereafter, filed before the Local
Board of Assessment Appeals of Quezon City (QC-LBAA, for brevity) for the reversal of the resolution of the City
Assessor. The petitioner alleged that under Section 28, paragraph 3 of the 1987 Constitution, the property is exempt
from real property taxes. It averred that a minimum of 60% of its hospital beds are exclusively used for charity patients
and that the major thrust of its hospital operation is to serve charity patients. The petitioner contends that it is a
charitable institution and, as such, is exempt from real property taxes. The QC-LBAA rendered judgment dismissing the
petition and holding the petitioner liable for real property taxes. 6
The QC-LBAAs decision was, likewise, affirmed on appeal by the Central Board of Assessment Appeals of Quezon City
(CBAA, for brevity)7 which ruled that the petitioner was not a charitable institution and that its real properties were not
actually, directly and exclusively used for charitable purposes; hence, it was not entitled to real property tax
exemption under the constitution and the law. The petitioner sought relief from the Court of Appeals, which rendered
judgment affirming the decision of the CBAA.8
Undaunted, the petitioner filed its petition in this Court contending that:
A. THE COURT A QUO ERRED IN DECLARING PETITIONER AS NOT ENTITLED TO REALTY TAX EXEMPTIONS ON
THE GROUND THAT ITS LAND, BUILDING AND IMPROVEMENTS, SUBJECT OF ASSESSMENT, ARE NOT ACTUALLY,
DIRECTLY AND EXCLUSIVELY DEVOTED FOR CHARITABLE PURPOSES.
B. WHILE PETITIONER IS NOT DECLARED AS REAL PROPERTY TAX EXEMPT UNDER ITS CHARTER, PD 1823, SAID
EXEMPTION MAY NEVERTHELESS BE EXTENDED UPON PROPER APPLICATION.
The petitioner avers that it is a charitable institution within the context of Section 28(3), Article VI of the 1987
Constitution. It asserts that its character as a charitable institution is not altered by the fact that it admits paying
patients and renders medical services to them, leases portions of the land to private parties, and rents out portions of
the hospital to private medical practitioners from which it derives income to be used for operational expenses. The
petitioner points out that for the years 1995 to 1999, 100% of its out-patients were charity patients and of the
hospitals 282-bed capacity, 60% thereof, or 170 beds, is allotted to charity patients. It asserts that the fact that it
receives subsidies from the government attests to its character as a charitable institution. It contends that the
"exclusivity" required in the Constitution does not necessarily mean "solely." Hence, even if a portion of its real estate
is leased out to private individuals from whom it derives income, it does not lose its character as a charitable
institution, and its exemption from the payment of real estate taxes on its real property. The petitioner cited our ruling
in Herrera v. QC-BAA9 to bolster its pose. The petitioner further contends that even if P.D. No. 1823 does not exempt it
from the payment of real estate taxes, it is not precluded from seeking tax exemption under the 1987 Constitution.
In their comment on the petition, the respondents aver that the petitioner is not a charitable entity. The petitioners
real property is not exempt from the payment of real estate taxes under P.D. No. 1823 and even under the 1987
Constitution because it failed to prove that it is a charitable institution and that the said property is actually, directly
and exclusively used for charitable purposes. The respondents noted that in a newspaper report, it appears that graft
charges were filed with the Sandiganbayan against the director of the petitioner, its administrative officer, and
Zenaida Rivera, the proprietress of the Elliptical Orchids and Garden Center, for entering into a lease contract over
7,663.13 square meters of the property in 1990 for only P20,000 a month, when the monthly rental should be
P357,000 a month as determined by the Commission on Audit; and that instead of complying with the directive of the
COA for the cancellation of the contract for being grossly prejudicial to the government, the petitioner renewed the
same on March 13, 1995 for a monthly rental of only P24,000. They assert that the petitioner uses the subsidies
granted by the government for charity patients and uses the rest of its income from the property for the benefit of
paying patients, among other purposes. They aver that the petitioner failed to adduce substantial evidence that 100%
of its out-patients and 170 beds in the hospital are reserved for indigent patients. The respondents further assert, thus:
13. That the claims/allegations of the Petitioner LCP do not speak well of its record of service. That before a
patient is admitted for treatment in the Center, first impression is that it is pay-patient and required to pay a
certain amount as deposit. That even if a patient is living below the poverty line, he is charged with high
hospital bills. And, without these bills being first settled, the poor patient cannot be allowed to leave the
hospital or be discharged without first paying the hospital bills or issue a promissory note guaranteed and
indorsed by an influential agency or person known only to the Center; that even the remains of deceased poor
patients suffered the same fate. Moreover, before a patient is admitted for treatment as free or charity patient,
one must undergo a series of interviews and must submit all the requirements needed by the Center, usually
accompanied by endorsement by an influential agency or person known only to the Center. These facts were
heard and admitted by the Petitioner LCP during the hearings before the Honorable QC-BAA and Honorable
CBAA. These are the reasons of indigent patients, instead of seeking treatment with the Center, they prefer to
be treated at the Quezon Institute. Can such practice by the Center be called charitable? 10
The Issues
The issues for resolution are the following: (a) whether the petitioner is a charitable institution within the context of
Presidential Decree No. 1823 and the 1973 and 1987 Constitutions and Section 234(b) of Republic Act No. 7160; and
(b) whether the real properties of the petitioner are exempt from real property taxes.
The Courts Ruling

The petition is partially granted.
On the first issue, we hold that the petitioner is a charitable institution within the context of the 1973 and 1987
Constitutions. To determine whether an enterprise is a charitable institution/entity or not, the elements which should
be considered include the statute creating the enterprise, its corporate purposes, its constitution and by-laws, the
methods of administration, the nature of the actual work performed, the character of the services rendered, the
indefiniteness of the beneficiaries, and the use and occupation of the properties. 11
In the legal sense, a charity may be fully defined as a gift, to be applied consistently with existing laws, for the benefit
of an indefinite number of persons, either by bringing their minds and hearts under the influence of education or
religion, by assisting them to establish themselves in life or otherwise lessening the burden of government. 12 It may be
applied to almost anything that tend to promote the well-doing and well-being of social man. It embraces the
improvement and promotion of the happiness of man.13 The word "charitable" is not restricted to relief of the poor or
sick.14 The test of a charity and a charitable organization are in law the same. The test whether an enterprise is
charitable or not is whether it exists to carry out a purpose reorganized in law as charitable or whether it is maintained
for gain, profit, or private advantage.
Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation which, subject to the provisions of the
decree, is to be administered by the Office of the President of the Philippines with the Ministry of Health and the
Ministry of Human Settlements. It was organized for the welfare and benefit of the Filipino people principally to help
combat the high incidence of lung and pulmonary diseases in the Philippines. The raison detre for the creation of the
petitioner is stated in the decree, viz:
Whereas, for decades, respiratory diseases have been a priority concern, having been the leading cause of
illness and death in the Philippines, comprising more than 45% of the total annual deaths from all causes, thus,
exacting a tremendous toll on human resources, which ailments are likely to increase and degenerate into
serious lung diseases on account of unabated pollution, industrialization and unchecked cigarette smoking in
the country;lavvph!l.net
Whereas, the more common lung diseases are, to a great extent, preventable, and curable with early and
adequate medical care, immunization and through prompt and intensive prevention and health education
programs;
Whereas, there is an urgent need to consolidate and reinforce existing programs, strategies and efforts at
preventing, treating and rehabilitating people affected by lung diseases, and to undertake research and
training on the cure and prevention of lung diseases, through a Lung Center which will house and nurture the
above and related activities and provide tertiary-level care for more difficult and problematical cases;
Whereas, to achieve this purpose, the Government intends to provide material and financial support towards
the establishment and maintenance of a Lung Center for the welfare and benefit of the Filipino people. 15
The purposes for which the petitioner was created are spelled out in its Articles of Incorporation, thus:
SECOND: That the purposes for which such corporation is formed are as follows:
1. To construct, establish, equip, maintain, administer and conduct an integrated medical institution
which shall specialize in the treatment, care, rehabilitation and/or relief of lung and allied diseases in
line with the concern of the government to assist and provide material and financial support in the
establishment and maintenance of a lung center primarily to benefit the people of the Philippines and
in pursuance of the policy of the State to secure the well-being of the people by providing them
specialized health and medical services and by minimizing the incidence of lung diseases in the
country and elsewhere.
2. To promote the noble undertaking of scientific research related to the prevention of lung or
pulmonary ailments and the care of lung patients, including the holding of a series of relevant
congresses, conventions, seminars and conferences;
3. To stimulate and, whenever possible, underwrite scientific researches on the biological,
demographic, social, economic, eugenic and physiological aspects of lung or pulmonary diseases and
their control; and to collect and publish the findings of such research for public consumption;
4. To facilitate the dissemination of ideas and public acceptance of information on lung consciousness
or awareness, and the development of fact-finding, information and reporting facilities for and in aid of
the general purposes or objects aforesaid, especially in human lung requirements, general health and
physical fitness, and other relevant or related fields;
5. To encourage the training of physicians, nurses, health officers, social workers and medical and
technical personnel in the practical and scientific implementation of services to lung patients;
6. To assist universities and research institutions in their studies about lung diseases, to encourage
advanced training in matters of the lung and related fields and to support educational programs of
value to general health;
7. To encourage the formation of other organizations on the national, provincial and/or city and local
levels; and to coordinate their various efforts and activities for the purpose of achieving a more
effective programmatic approach on the common problems relative to the objectives enumerated
herein;
8. To seek and obtain assistance in any form from both international and local foundations and
organizations; and to administer grants and funds that may be given to the organization;
9. To extend, whenever possible and expedient, medical services to the public and, in general, to
promote and protect the health of the masses of our people, which has long been recognized as an
economic asset and a social blessing;
10. To help prevent, relieve and alleviate the lung or pulmonary afflictions and maladies of the people
in any and all walks of life, including those who are poor and needy, all without regard to or
discrimination, because of race, creed, color or political belief of the persons helped; and to enable
them to obtain treatment when such disorders occur;
11. To participate, as circumstances may warrant, in any activity designed and carried on to promote
the general health of the community;
12. To acquire and/or borrow funds and to own all funds or equipment, educational materials and
supplies by purchase, donation, or otherwise and to dispose of and distribute the same in such
manner, and, on such basis as the Center shall, from time to time, deem proper and best, under the
particular circumstances, to serve its general and non-profit purposes and objectives;lavvphil.net
13. To buy, purchase, acquire, own, lease, hold, sell, exchange, transfer and dispose of properties,
whether real or personal, for purposes herein mentioned; and
14. To do everything necessary, proper, advisable or convenient for the accomplishment of any of the
powers herein set forth and to do every other act and thing incidental thereto or connected
therewith.16
Hence, the medical services of the petitioner are to be rendered to the public in general in any and all walks of life
including those who are poor and the needy without discrimination. After all, any person, the rich as well as the poor,
may fall sick or be injured or wounded and become a subject of charity. 17
As a general principle, a charitable institution does not lose its character as such and its exemption from taxes simply
because it derives income from paying patients, whether out-patient, or confined in the hospital, or receives subsidies
from the government, so long as the money received is devoted or used altogether to the charitable object which it is
intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution. 18
In Congregational Sunday School, etc. v. Board of Review,19 the State Supreme Court of Illinois held, thus:
[A]n institution does not lose its charitable character, and consequent exemption from taxation, by reason of
the fact that those recipients of its benefits who are able to pay are required to do so, where no profit is made
by the institution and the amounts so received are applied in furthering its charitable purposes, and those
benefits are refused to none on account of inability to pay therefor. The fundamental ground upon which all
exemptions in favor of charitable institutions are based is the benefit conferred upon the public by them, and a
consequent relief, to some extent, of the burden upon the state to care for and advance the interests of its
citizens.20
As aptly stated by the State Supreme Court of South Dakota in Lutheran Hospital Association of South Dakota v.
Baker:21
[T]he fact that paying patients are taken, the profits derived from attendance upon these patients being
exclusively devoted to the maintenance of the charity, seems rather to enhance the usefulness of the
institution to the poor; for it is a matter of common observation amongst those who have gone about at all
amongst the suffering classes, that the deserving poor can with difficulty be persuaded to enter an asylum of
any kind confined to the reception of objects of charity; and that their honest pride is much less wounded by
being placed in an institution in which paying patients are also received. The fact of receiving money from
some of the patients does not, we think, at all impair the character of the charity, so long as the money thus
received is devoted altogether to the charitable object which the institution is intended to further. 22
The money received by the petitioner becomes a part of the trust fund and must be devoted to public trust purposes
and cannot be diverted to private profit or benefit.23
Under P.D. No. 1823, the petitioner is entitled to receive donations. The petitioner does not lose its character as a
charitable institution simply because the gift or donation is in the form of subsidies granted by the government. As
held by the State Supreme Court of Utah in Yorgason v. County Board of Equalization of Salt Lake County:24
Second, the government subsidy payments are provided to the project. Thus, those payments are like a gift
or donation of any other kind except they come from the government. In both Intermountain Health Care and
the present case, the crux is the presence or absence of material reciprocity. It is entirely irrelevant to this
analysis that the government, rather than a private benefactor, chose to make up the deficit resulting from the
exchange between St. Marks Tower and the tenants by making a contribution to the landlord, just as it would
have been irrelevant in Intermountain Health Care if the patients income supplements had come from private
individuals rather than the government.
Therefore, the fact that subsidization of part of the cost of furnishing such housing is by the government rather
than private charitable contributions does not dictate the denial of a charitable exemption if the facts
otherwise support such an exemption, as they do here. 25
In this case, the petitioner adduced substantial evidence that it spent its income, including the subsidies from the
government for 1991 and 1992 for its patients and for the operation of the hospital. It even incurred a net loss in 1991
and 1992 from its operations.
Even as we find that the petitioner is a charitable institution, we hold, anent the second issue, that those portions of its
real property that are leased to private entities are not exempt from real property taxes as these are not actually,
directly and exclusively used for charitable purposes.
The settled rule in this jurisdiction is that laws granting exemption from tax are construed strictissimi juris against the
taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is the exception. The effect of an
exemption is equivalent to an appropriation. Hence, a claim for exemption from tax payments must be clearly shown
and based on language in the law too plain to be mistaken. 26 As held in Salvation Army v. Hoehn:27
An intention on the part of the legislature to grant an exemption from the taxing power of the state will never
be implied from language which will admit of any other reasonable construction. Such an intention must be
expressed in clear and unmistakable terms, or must appear by necessary implication from the language used,
for it is a well settled principle that, when a special privilege or exemption is claimed under a statute, charter
or act of incorporation, it is to be construed strictly against the property owner and in favor of the public. This
principle applies with peculiar force to a claim of exemption from taxation . 28
Section 2 of Presidential Decree No. 1823, relied upon by the petitioner, specifically provides that the petitioner shall
enjoy the tax exemptions and privileges:
SEC. 2. TAX EXEMPTIONS AND PRIVILEGES. Being a non-profit, non-stock corporation organized primarily to
help combat the high incidence of lung and pulmonary diseases in the Philippines, all donations, contributions,
endowments and equipment and supplies to be imported by authorized entities or persons and by the Board of
Trustees of the Lung Center of the Philippines, Inc., for the actual use and benefit of the Lung Center, shall be
exempt from income and gift taxes, the same further deductible in full for the purpose of determining the
maximum deductible amount under Section 30, paragraph (h), of the National Internal Revenue Code, as
amended.
The Lung Center of the Philippines shall be exempt from the payment of taxes, charges and fees imposed by
the Government or any political subdivision or instrumentality thereof with respect to equipment purchases
made by, or for the Lung Center.29
It is plain as day that under the decree, the petitioner does not enjoy any property tax exemption privileges for its real
properties as well as the building constructed thereon. If the intentions were otherwise, the same should have been
among the enumeration of tax exempt privileges under Section 2:
It is a settled rule of statutory construction that the express mention of one person, thing, or consequence
implies the exclusion of all others. The rule is expressed in the familiar maxim, expressio unius est exclusio
alterius.
The rule of expressio unius est exclusio alterius is formulated in a number of ways. One variation of the rule is
the principle that what is expressed puts an end to that which is implied. Expressium facit cessare tacitum.
Thus, where a statute, by its terms, is expressly limited to certain matters, it may not, by interpretation or
construction, be extended to other matters.
...
The rule of expressio unius est exclusio alterius and its variations are canons of restrictive interpretation. They
are based on the rules of logic and the natural workings of the human mind. They are predicated upon ones
own voluntary act and not upon that of others. They proceed from the premise that the legislature would not
have made specified enumeration in a statute had the intention been not to restrict its meaning and confine its
terms to those expressly mentioned.30
The exemption must not be so enlarged by construction since the reasonable presumption is that the State has
granted in express terms all it intended to grant at all, and that unless the privilege is limited to the very terms of the
statute the favor would be intended beyond what was meant. 31
Section 28(3), Article VI of the 1987 Philippine Constitution provides, thus:
(3) Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings, and improvements, actually, directly and exclusively used for religious,
charitable or educational purposes shall be exempt from taxation. 32
The tax exemption under this constitutional provision covers property taxes only.33 As Chief Justice Hilario G. Davide,
Jr., then a member of the 1986 Constitutional Commission, explained: ". . . what is exempted is not the institution itself
. . .; those exempted from real estate taxes are lands, buildings and improvements actually, directly and exclusively
used for religious, charitable or educational purposes."34
Consequently, the constitutional provision is implemented by Section 234(b) of Republic Act No. 7160 (otherwise
known as the Local Government Code of 1991) as follows:
SECTION 234. Exemptions from Real Property Tax. The following are exempted from payment of the real
property tax:
...
(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-profit
or religious cemeteries and all lands, buildings, and improvements actually, directly, and exclusively
used for religious, charitable or educational purposes. 35
We note that under the 1935 Constitution, "... all lands, buildings, and improvements used exclusively for
charitable purposes shall be exempt from taxation." 36 However, under the 1973 and the present Constitutions, for
"lands, buildings, and improvements" of the charitable institution to be considered exempt, the same should not only
be "exclusively" used for charitable purposes; it is required that such property be used "actually" and "directly" for
such purposes.37
In light of the foregoing substantial changes in the Constitution, the petitioner cannot rely on our ruling in Herrera v.
Quezon City Board of Assessment Appeals which was promulgated on September 30, 1961 before the 1973 and 1987
Constitutions took effect.38 As this Court held in Province of Abra v. Hernando:39
Under the 1935 Constitution: "Cemeteries, churches, and parsonages or convents appurtenant thereto, and
all lands, buildings, and improvements used exclusively for religious, charitable, or educational purposes shall
be exempt from taxation." The present Constitution added "charitable institutions, mosques, and non-profit
cemeteries" and required that for the exemption of "lands, buildings, and improvements," they should not only
be "exclusively" but also "actually" and "directly" used for religious or charitable purposes. The Constitution is
worded differently. The change should not be ignored. It must be duly taken into consideration. Reliance on
past decisions would have sufficed were the words "actually" as well as "directly" not added. There must be
proof therefore of the actual and direct use of the lands, buildings, and improvements for religious or
charitable purposes to be exempt from taxation.
Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption, the petitioner
is burdened to prove, by clear and unequivocal proof, that (a) it is a charitable institution; and (b) its real properties
are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. "Exclusive" is defined as possessed and
enjoyed to the exclusion of others; debarred from participation or enjoyment; and "exclusively" is defined, "in a
manner to exclude; as enjoying a privilege exclusively."40 If real property is used for one or more commercial purposes,
it is not exclusively used for the exempted purposes but is subject to taxation. 41 The words "dominant use" or
"principal use" cannot be substituted for the words "used exclusively" without doing violence to the Constitutions and
the law.42 Solely is synonymous with exclusively.43
What is meant by actual, direct and exclusive use of the property for charitable purposes is the direct and immediate
and actual application of the property itself to the purposes for which the charitable institution is organized. It is not
the use of the income from the real property that is determinative of whether the property is used for tax-exempt
purposes.44
The petitioner failed to discharge its burden to prove that the entirety of its real property is actually, directly and
exclusively used for charitable purposes. While portions of the hospital are used for the treatment of patients and the
dispensation of medical services to them, whether paying or non-paying, other portions thereof are being leased to
private individuals for their clinics and a canteen. Further, a portion of the land is being leased to a private individual
for her business enterprise under the business name "Elliptical Orchids and Garden Center." Indeed, the petitioners
evidence shows that it collected P1,136,483.45 as rentals in 1991 and P1,679,999.28 for 1992 from the said lessees.
Accordingly, we hold that the portions of the land leased to private entities as well as those parts of the hospital leased
to private individuals are not exempt from such taxes.45 On the other hand, the portions of the land occupied by the
hospital and portions of the hospital used for its patients, whether paying or non-paying, are exempt from real property
taxes.
IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The respondent Quezon City Assessor is
hereby DIRECTED to determine, after due hearing, the precise portions of the land and the area thereof which are
leased to private persons, and to compute the real property taxes due thereon as provided for by law.
SO ORDERED.
G.R. No. L-26284 October 8, 1986

TOMAS CALASANZ, ET AL., petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE and the COURT OF TAX APPEALS, respondents.
San Juan, Africa, Gonzales & San Agustin Law Office for petitioners.
FERNAN, J.:
Appeal taken by Spouses Tomas and Ursula Calasanz from the decision of the Court of Tax Appeals in CTA No. 1275
dated June 7, 1966, holding them liable for the payment of P3,561.24 as deficiency income tax and interest for the
calendar year 1957 and P150.00 as real estate dealer's fixed tax.
Petitioner Ursula Calasanz inherited from her father Mariano de Torres an agricultural land located in Cainta, Rizal,
containing a total area of 1,678,000 square meters. In order to liquidate her inheritance, Ursula Calasanz had the land
surveyed and subdivided into lots. Improvements, such as good roads, concrete gutters, drainage and lighting system,
were introduced to make the lots saleable. Soon after, the lots were sold to the public at a profit.
In their joint income tax return for the year 1957 filed with the Bureau of Internal Revenue on March 31, 1958,
petitioners disclosed a profit of P31,060.06 realized from the sale of the subdivided lots, and reported fifty per centum
thereof or P15,530.03 as taxable capital gains.
Upon an audit and review of the return thus filed, the Revenue Examiner adjudged petitioners engaged in business as
real estate dealers, as defined in Section 194 [s] 1 of the National Internal Revenue Code, required them to pay the real
estate dealer's tax 2 and assessed a deficiency income tax on profits derived from the sale of the lots based on the
rates for ordinary income.
On September 29, 1962, petitioners received from respondent Commissioner of Internal Revenue:
a. Demand No. 90-B-032293-57 in the amount of P160.00 representing real estate dealer's fixed tax of
P150.00 and P10.00 compromise penalty for late payment; and
b. Assessment No. 90-5-35699 in the amount of P3,561.24 as deficiency income tax on ordinary gain of
P3,018.00 plus interest of P 543.24.
On October 17, 1962, petitioners filed with the Court of Tax Appeals a petition for review contesting the
aforementioned assessments.
On June 7, 1966, the Tax Court upheld the respondent Commissioner except for that portion of the assessment
regarding the compromise penalty of P10.00 for the reason that in this jurisdiction, the same cannot be collected in the
absence of a valid and binding compromise agreement.
Hence, the present appeal.
The issues for consideration are:

a. Whether or not petitioners are real estate dealers liable for real estate dealer's fixed tax; and
b. Whether the gains realized from the sale of the lots are taxable in full as ordinary income or capital
gains taxable at capital gain rates.
The issues are closely interrelated and will be taken jointly.
Petitioners assail their liabilities as "real estate dealers" and seek to bring the profits from the sale of the lots under
Section 34 [b] [2] 3 of the Tax Code.
The theory advanced by the petitioners is that inherited land is a capital asset within the meaning of Section 34[a] [1]
of the Tax Code and that an heir who liquidated his inheritance cannot be said to have engaged in the real estate
business and may not be denied the preferential tax treatment given to gains from sale of capital assets, merely
because he disposed of it in the only possible and advantageous way.
Petitioners averred that the tract of land subject of the controversy was sold because of their intention to effect a
liquidation. They claimed that it was parcelled out into smaller lots because its size proved difficult, if not impossible,
of disposition in one single transaction. They pointed out that once subdivided, certainly, the lots cannot be sold in one
isolated transaction. Petitioners, however, admitted that roads and other improvements were introduced to facilitate
its sale. 4
On the other hand, respondent Commissioner maintained that the imposition of the taxes in question is in accordance
with law since petitioners are deemed to be in the real estate business for having been involved in a series of real
estate transactions pursued for profit. Respondent argued that property acquired by inheritance may be converted
from an investment property to a business property if, as in the present case, it was subdivided, improved, and
subsequently sold and the number, continuity and frequency of the sales were such as to constitute "doing business."
Respondent likewise contended that inherited property is by itself neutral and the fact that the ultimate purpose is to
liquidate is of no moment for the important inquiry is what the taxpayer did with the property. Respondent concluded
that since the lots are ordinary assets, the profits realized therefrom are ordinary gains, hence taxable in full.
We agree with the respondent.
The assets of a taxpayer are classified for income tax purposes into ordinary assets and capital assets. Section 34[a]
[1] of the National Internal Revenue Code broadly defines 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.
The statutory definition of capital assets is negative in nature. 5 If the asset is not among the exceptions, it is a capital
asset; conversely, assets falling within the exceptions are ordinary assets. And necessarily, any gain resulting from the
sale or exchange of an asset is a capital gain or an ordinary gain depending on the kind of asset involved in the
transaction.
However, there is no rigid rule or fixed formula by which it can be determined with finality whether property sold by a
taxpayer was held primarily for sale to customers in the ordinary course of his trade or business or whether it was sold
as a capital asset. 6 Although several factors or indices 7 have been recognized as helpful guides in making a
determination, none of these is decisive; neither is the presence nor the absence of these factors conclusive. Each
case must in the last analysis rest upon its own peculiar facts and circumstances. 8
Also a property initially classified as a capital asset may thereafter be treated as an ordinary asset if a combination of
the factors indubitably tend to show that the activity was in furtherance of or in the course of the taxpayer's trade or
business. Thus, a sale of inherited real property usually gives capital gain or loss even though the property has to be
subdivided or improved or both to make it salable. However, if the inherited property is substantially improved or very
actively sold or both it may be treated as held primarily for sale to customers in the ordinary course of the heir's
business. 9
Upon an examination of the facts on record, We are convinced that the activities of petitioners are indistinguishable
from those invariably employed by one engaged in the business of selling real estate.
One strong factor against petitioners' contention is the business element of development which is very much in
evidence. Petitioners did not sell the land in the condition in which they acquired it. While the land was originally
devoted to rice and fruit trees, 10 it was subdivided into small lots and in the process converted into a residential
subdivision and given the name Don Mariano Subdivision. Extensive improvements like the laying out of streets,
construction of concrete gutters and installation of lighting system and drainage facilities, among others, were
undertaken to enhance the value of the lots and make them more attractive to prospective buyers. The audited
financial statements 11 submitted together with the tax return in question disclosed that a considerable amount was
expended to cover the cost of improvements. As a matter of fact, the estimated improvements of the lots sold reached
P170,028.60 whereas the cost of the land is only P 4,742.66. There is authority that a property ceases to be a capital
asset if the amount expended to improve it is double its original cost, for the extensive improvement indicates that the
seller held the property primarily for sale to customers in the ordinary course of his business. 12
Another distinctive feature of the real estate business discernible from the records is the existence of contracts
receivables, which stood at P395,693.35 as of the year ended December 31, 1957. The sizable amount of receivables
in comparison with the sales volume of P446,407.00 during the same period signifies that the lots were sold on
installment basis and suggests the number, continuity and frequency of the sales. Also of significance is the
circumstance that the lots were advertised 13 for sale to the public and that sales and collection commissions were
paid out during the period in question.
Petitioners, likewise, urge that the lots were sold solely for the purpose of liquidation.
In Ehrman vs. Commissioner, 14 the American court in clear and categorical terms rejected the liquidation test in
determining whether or not a taxpayer is carrying on a trade or business The court observed that the fact that
property is sold for purposes of liquidation does not foreclose a determination that a "trade or business" is being
conducted by the seller. The court enunciated further:
We fail to see that the reasons behind a person's entering into a business-whether it is to make money
or whether it is to liquidate-should be determinative of the question of whether or not the gains
resulting from the sales are ordinary gains or capital gains. The sole question is-were the taxpayers in
the business of subdividing real estate? If they were, then it seems indisputable that the property sold
falls within the exception in the definition of capital assets . . . that is, that it constituted 'property held
by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.
Additionally, in Home Co., Inc. vs. Commissioner,
15
the court articulated on the matter in this wise:
One may, of course, liquidate a capital asset. To do so, it is necessary to sell. The sale may be
conducted in the most advantageous manner to the seller and he will not lose the benefits of the
capital gain provision of the statute unless he enters the real estate business and carries on the sale in
the manner in which such a business is ordinarily conducted. In that event, the liquidation constitutes
a business and a sale in the ordinary course of such a business and the preferred tax status is lost.
In view of the foregoing, We hold that in the course of selling the subdivided lots, petitioners engaged in the real estate
business and accordingly, the gains from the sale of the lots are ordinary income taxable in full.
WHEREFORE, the decision of the Court of Tax Appeals is affirmed. No costs.
SO ORDERED.
G.R. No. 144516
February 11, 2004
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner

vs.
COMMISSION ON AUDIT, respondent.
DECISION
CARPIO, J.:
The Case
In this special civil action for certiorari,1 the Development Bank of the Philippines ("DBP") seeks to set aside COA
Decision No. 98-4032 dated 6 October 1998 ("COA Decision") and COA Resolution No. 2000-212 3 dated 1 August 2000
issued by the Commission on Audit ("COA"). The COA affirmed Audit Observation Memorandum ("AOM") No. 93-2, 4
which disallowed in audit the dividends distributed under the Special Loan Program ("SLP") to the members of the DBP
Gratuity Plan.
Antecedent Facts
The DBP is a government financial institution with an original charter, Executive Order No. 81, 5 as amended by
Republic Act No. 85236 ("DBP Charter"). The COA is a constitutional body with the mandate to examine and audit all
government instrumentalities and investment of public funds. 7
The COA Decision sets forth the undisputed facts of this case as follows:
xxx [O]n February 20, 1980, the Development Bank of the Philippines (DBP) Board of Governors adopted Resolution
No. 794 creating the DBP Gratuity Plan and authorizing the setting up of a retirement fund to cover the benefits due to
DBP retiring officials and employees under Commonwealth Act No. 186, as amended. The Gratuity Plan was made
effective on June 17, 1967 and covered all employees of the Bank as of May 31, 1977.
On February 26, 1980, a Trust Indenture was entered into by and between the DBP and the Board of Trustees of the
Gratuity Plan Fund, vesting in the latter the control and administration of the Fund. The trustee, subsequently,
appointed the DBP Trust Services Department (DBP-TSD) as the investment manager thru an Investment Management
Agreement, with the end in view of making the income and principal of the Fund sufficient to meet the liabilities of DBP
under the Gratuity Plan.
In 1983, the Bank established a Special Loan Program availed thru the facilities of the DBP Provident Fund and funded
by placements from the Gratuity Plan Fund. This Special Loan Program was adopted as "part of the benefit program of
the Bank to provide financial assistance to qualified members to enhance and protect the value of their gratuity
benefits" because "Philippine retirement laws and the Gratuity Plan do not allow partial payment of retirement
benefits." The program was suspended in 1986 but was revived in 1991 thru DBP Board Resolution No. 066 dated
January 5, 1991.
Under the Special Loan Program, a prospective retiree is allowed the option to utilize in the form of a loan a portion of
his "outstanding equity" in the gratuity fund and to invest it in a profitable investment or undertaking. The earnings of
the investment shall then be applied to pay for the interest due on the gratuity loan which was initially set at 9% per
annum subject to the minimum investment rate resulting from the updated actuarial study. The excess or balance of
the interest earnings shall then be distributed to the investor-members.
Pursuant to the investment scheme, DBP-TSD paid to the investor-members a total of P11,626,414.25 representing the
net earnings of the investments for the years 1991 and 1992. The payments were disallowed by the Auditor under
Audit Observation Memorandum No. 93-2 dated March 1, 1993, on the ground that the distribution of income of the
Gratuity Plan Fund (GPF) to future retirees of DBP is irregular and constituted the use of public funds for private
purposes which is specifically proscribed under Section 4 of P.D. 1445. 8
AOM No. 93-2 did "not question the authority of the Bank to set-up the [Gratuity Plan] Fund and have it invested in the
Trust Services Department of the Bank."9 Apart from requiring the recipients of the P11,626,414.25 to refund their
dividends, the Auditor recommended that the DBP record in its books as miscellaneous income the income of the
Gratuity Plan Fund ("Fund"). The Auditor reasoned that "the Fund is still owned by the Bank, the Board of Trustees is a
mere administrator of the Fund in the same way that the Trust Services Department where the fund was invested was
a mere investor and neither can the employees, who have still an inchoate interest [i]n the Fund be considered as
rightful owner of the Fund."10
In a letter dated 29 July 1996,11 former DBP Chairman Alfredo C. Antonio requested then COA Chairman Celso D.
Gangan to reconsider AOM No. 93-2. Chairman Antonio alleged that the express trust created for the benefit of
qualified DBP employees under the Trust Agreement12 ("Agreement") dated 26 February 1980 gave the Fund a
separate legal personality. The Agreement transferred legal title over the Fund to the Board of Trustees and all
earnings of the Fund accrue only to the Fund. Thus, Chairman Antonio contended that the income of the Fund is not
the income of DBP.
Chairman Antonio also asked COA to lift the disallowance of the P11,626,414.25 distributed as dividends under the SLP
on the ground that the latter was simply a normal loan transaction. He compared the SLP to loans granted by other
gratuity and retirement funds, like the GSIS, SSS and DBP Provident Fund.
The Ruling of the Commission on Audit
On 6 October 1998, the COA en banc affirmed AOM No. 93-2, as follows:
The Gratuity Plan Fund is supposed to be accorded separate personality under the administration of the Board of
Trustees but that concept has been effectively eliminated when the Special Loan Program was adopted. xxx
The Special Loan Program earns for the GPF an interest of 9% per annum, subject to adjustment after actuarial
valuation. The investment scheme managed by the TSD accumulated more than that as evidenced by the payment of
P4,568,971.84 in 1991 and P7,057,442,41 in 1992, to the member-borrowers. In effect, the program is grossly
disadvantageous to the government because it deprived the GPF of higher investment earnings by the unwarranted
entanglement of its resources under the loan program in the guise of giving financial assistance to the availing
employees. xxx
Retirement benefits may only be availed of upon retirement. It can only be demanded and enjoyed when the employee
shall have met the last requisite, that is, actual retirement under the Gratuity Plan. During employment, the
prospective retiree shall only have an inchoate right over the benefits. There can be no partial payment or enjoyment
of the benefits, in whatever guise, before actual retirement. xxx
PREMISES CONSIDERED, the instant request for reconsideration of the disallowance amounting to P11,626,414.25 has
to be, as it is hereby, denied.13
In its Resolution of 1 August 2000, the COA also denied DBPs second motion for reconsideration. Citing the Courts
ruling in Conte v. COA,14 the COA concluded that the SLP was actually a supplementary retirement benefit in the
guise of "financial assistance," thus:
At any rate, the Special Loan Program is not just an ordinary and regular transaction of the Gratuity Plan Fund, as the
Bank innocently represents. xxx It is a systematic investment mix conveniently implemented in a special loan program
with the least participation of the beneficiaries, by merely filing an application and then wait for the distribution of net
earnings. The real objective, of course, is to give financial assistance to augment the value of the gratuity benefits,
and this has the same effect as the proscribed supplementary pension/retirement plan under Section 28 (b) of
C(ommonwealth) A(ct) 186.
This Commission may now draw authority from the case of Conte, et al. v. Commission on Audit (264 SCRA 19 [1996])
where the Supreme Court declared that "financial assistance" granted to retiring employees constitute supplementary
retirement or pension benefits. It was there stated:
"xxx Said Sec. 28 (b) as amended by R.A. 4968 in no uncertain terms bars the creation of any insurance or retirement
plan other than the GSIS for government officers and employees, in order to prevent the undue and iniquitous
proliferation of such plans. It is beyond cavil that Res. 56 contravenes the said provision of law and is therefore,
invalid, void and of no effect. To ignore this and rule otherwise would be tantamount to permitting every other
government office or agency to put up its own supplementary retirement benefit plan under the guise of such
"financial assistance."15
Hence, the instant petition filed by DBP.
The Issues
The DBP invokes justice and equity on behalf of its employees because of prevailing economic conditions. The DBP
reiterates that the income of the Fund should be treated and recorded as separate from the income of DBP itself, and
charges that COA committed grave abuse of discretion:
1. IN CONCLUDING THAT THE ADOPTION OF THE SPECIAL LOAN PROGRAM CONSTITUTES A CIRCUMVENTION OF
PHILIPPINE RETIREMENT LAWS;
2. IN CONCLUDING THAT THE SPECIAL LOAN PROGRAM IS GROSSLY DISADVANTAGEOUS TO THE GOVERNMENT;
3. IN CONCLUDING THAT THE SPECIAL LOAN PROGRAM CONSTITUTES A SUPPLEMENTARY RETIREMENT
BENEFIT.16
The Office of the Solicitor General ("OSG"), arguing on behalf of the COA, questions the standing of the DBP to file the
instant petition. The OSG claims that the trustees of the Fund or the DBP employees themselves should pursue this
certiorari proceeding since they would be the ones to return the dividends and not DBP.
The central issues for resolution are: (1) whether DBP has the requisite standing to file the instant petition for
certiorari; (2) whether the income of the Fund is income of DBP; and (3) whether the distribution of dividends under
the SLP is valid.
The Ruling of the Court
The petition is partly meritorious.
The standing of DBP to file this petition for certiorari
As DBP correctly argued, the COA en banc implicitly recognized DBPs standing when it ruled on DBPs request for
reconsideration from AOM No. 93-2 and motion for reconsideration from the Decision of 6 October 1998. The supposed
lack of standing of the DBP was not even an issue in the COA Decision or in the Resolution of 1 August 2000.
The OSG nevertheless contends that the DBP cannot question the decisions of the COA en banc since DBP is a
government instrumentality. Citing Section 2, Article IX-D of the Constitution, 17 the OSG argued that:
Petitioner may ask the lifting of the disallowance by COA, since COA had not yet made a definitive and final ruling on
the matter in issue. But after COA denied with finality the motion for reconsideration of petitioner, petitioner, being a
government instrumentality, should accept COAs ruling and leave the matter of questioning COAs decision with the
concerned investor-members.18
These arguments do not persuade us.
Section 2, Article IX-D of the Constitution does not bar government instrumentalities from questioning decisions of the
COA. Government agencies and government-owned and controlled corporations have long resorted to petitions for
certiorari to question rulings of the COA.19 These government entities filed their petitions with this Court pursuant to
Section 7, Article IX of the Constitution, which mandates that aggrieved parties may bring decisions of the COA to the
Court on certiorari.20 Likewise, the Government Auditing Code expressly provides that a government agency aggrieved
by a COA decision, order or ruling may raise the controversy to the Supreme Court on certiorari "in the manner
provided by law and the Rules of Court."21 Rule 64 of the Rules of Court now embodies this procedure, to wit:
SEC 2. Mode of review. A judgment or final order or resolution of the Commission on Elections and the Commission
on Audit may be brought by the aggrieved party to the Supreme Court on certiorari under Rule 65, except as
hereinafter provided.
The novel theory advanced by the OSG would necessarily require persons not parties to the present case the DBP
employees who are members of the Plan or the trustees of the Fund to avail of certiorari under Rule 65. The petition
for certiorari under Rule 65, however, is not available to any person who feels injured by the decision of a tribunal,
board or officer exercising judicial or quasi-judicial functions. The "person aggrieved" under Section 1 of Rule 65 who
can avail of the special civil action of certiorari pertains only to one who was a party in the proceedings before the
court a quo,22 or in this case, before the COA. To hold otherwise would open the courts to numerous and endless
litigations.23 Since DBP was the sole party in the proceedings before the COA, DBP is the proper party to avail of the
remedy of certiorari.
The real party in interest who stands to benefit or suffer from the judgment in the suit must prosecute or defend an
action.24 We have held that "interest" means material interest, an interest in issue that the decision will affect, as
distinguished from mere interest in the question involved, or a mere incidental interest. 25
As a party to the Agreement and a trustor of the Fund, DBP has a material interest in the implementation of the
Agreement, and in the operation of the Gratuity Plan and the Fund as prescribed in the Agreement. The DBP also
possesses a real interest in upholding the legitimacy of the policies and programs approved by its Board of Directors
for the benefit of DBP employees. This includes the SLP and its implementing rules, which the DBP Board of Directors
confirmed.
The income of the Gratuity Plan Fund
The COA alleges that DBP is the actual owner of the Fund and its income, on the following grounds: (1) DBP made the
contributions to the Fund; (2) the trustees of the Fund are merely administrators; and (3) DBP employees only have an
inchoate right to the Fund.
The DBP counters that the Fund is the subject of a trust, and that the Agreement transferred legal title over the Fund
to the trustees. The income of the Fund does not accrue to DBP. Thus, such income should not be recorded in DBPs
books of account.26
A trust is a "fiduciary relationship with respect to property which involves the existence of equitable duties imposed
upon the holder of the title to the property to deal with it for the benefit of another." 27 A trust is either express or
implied. Express trusts are those which the direct and positive acts of the parties create, by some writing or deed, or
will, or by words evincing an intention to create a trust. 28
In the present case, the DBP Board of Governors (now Board of Directors) Resolution No. 794 and the Agreement
executed by former DBP Chairman Rafael Sison and the trustees of the Plan created an express trust, specifically, an
employees trust. An employees trust is a trust maintained by an employer to provide retirement, pension or other
benefits to its employees.29 It is a separate taxable entity30 established for the exclusive benefit of the employees. 31
Resolution No. 794 shows that DBP intended to establish a trust fund to cover the retirement benefits of certain
employees under Republic Act No. 161632 ("RA 1616"). The principal and income of the Fund would be separate and
distinct from the funds of DBP. We quote the salient portions of Resolution No. 794, as follows:
2. Trust Agreement designed for in-house trustees of three (3) to be appointed by the Board of Governors and vested
with control and administration of the funds appropriated annually by the Board to be invested in selective
investments so that the income and principal of said contributions would be sufficient to meet the required
payments of benefits as officials and employees of the Bank retire under the Gratuity Plan; xxx
The proposed funding of the gratuity plan has decided advantages on the part of the Bank over the present procedure,
where the Bank provides payment only when an employee retires or on "pay as you go" basis:
1. It is a definite written program, permanent and continuing whereby the Bank provides contributions to a
separate trust fund, which shall be exclusively used to meet its liabilities to retiring officials and
employees; and
2. Since the gratuity plan will be tax qualified under the National Internal Revenue Code and RA 4917, the
Banks periodic contributions thereto shall be deductible for tax purposes and the earnings therefrom tax
free.33 (Emphasis supplied)
In a trust, one person has an equitable ownership in the property while another person owns the legal title to such
property, the equitable ownership of the former entitling him to the performance of certain duties and the exercise of
certain powers by the latter.34 A person who establishes a trust is the trustor. One in whom confidence is reposed as
regards property for the benefit of another is the trustee. The person for whose benefit the trust is created is the
beneficiary.35
In the present case, DBP, as the trustor, vested in the trustees of the Fund legal title over the Fund as well as control
over the investment of the money and assets of the Fund. The powers and duties granted to the trustees of the Fund
under the Agreement were plainly more than just administrative, to wit:
1. The BANK hereby vests the control and administration of the Fund in the TRUSTEES for the
accomplishment of the purposes for which said Fund is intended in defraying the benefits of the PLAN in
accordance with its provisions, and the TRUSTEES hereby accept the trust xxx
2. The TRUSTEES shall receive and hold legal title to the money and/or property comprising the
Fund, and shall hold the same in trust for its beneficiaries, in accordance with, and for the uses and purposes
stated in the provisions of the PLAN.
3. Without in any sense limiting the general powers of management and administration given to TRUSTEES by
our laws and as supplementary thereto, the TRUSTEES shall manage, administer, and maintain the Fund with
full power and authority:
xxx
b. To invest and reinvest at any time all or any part of the Fund in any real estate (situated within the
Philippines), housing project, stocks, bonds, mortgages, notes, other securities or property which the said
TRUSTEES may deem safe and proper, and to collect and receive all income and profits existing
therefrom;
c. To keep and maintain accurate books of account and/or records of the Fund xxx.
d. To pay all costs, expenses, and charges incurred in connection with the administration, preservation,
maintenance and protection of the Fund xxx to employ or appoint such agents or employees xxx.
e. To promulgate, from time to time, such rules not inconsistent with the conditions of this Agreement xxx.
f. To do all acts which, in their judgment, are needful or desirable for the proper and advantageous
control and management of the Fund xxx.36 (Emphasis supplied)
Clearly, the trustees received and collected any income and profit derived from the Fund, and they maintained
separate books of account for this purpose. The principal and income of the Fund will not revert to DBP even if the
trust is subsequently modified or terminated. The Agreement states that the principal and income must be used to
satisfy all of the liabilities to the beneficiary officials and employees under the Gratuity Plan, as follows:
5. The BANK reserves the right at any time and from time to time (1) to modify or amend in whole or in part by written
directions to the TRUSTEES, any and all of the provisions of this Trust Agreement, or (2) to terminate this Trust
Agreement upon thirty (30) days prior notice in writing to the TRUSTEES; provided, however, that no modification or
amendment which affects the rights, duties, or responsibilities of the TRUSTEES may be made without the TRUSTEES
consent; and provided, that such termination, modification, or amendment prior to the satisfaction of all
liabilities with respect to eligible employees and their beneficiaries, does not permit any part of the
corpus or income of the Fund to be used for, or diverted to, purposes other than for the exclusive benefit
of eligible employees and workers as provided for in the PLAN. In the event of termination of this Trust
Agreement, all cash, securities, and other property then constituting the Fund less any amounts constituting accrued
benefits to the eligible employees, charges and expenses payable from the Fund, shall be paid over or delivered by the
TRUSTEES to the members in proportion to their accrued benefits. 37 (Emphasis supplied)
The resumption of the SLP did not eliminate the trust or terminate the transfer of legal title to the Funds trustees. The
records show that the Funds Board of Trustees approved the SLP upon the request of the DBP Career Officials
Association.38 The DBP Board of Directors only confirmed the approval of the SLP by the Funds trustees.
The beneficiaries or cestui que trust of the Fund are the DBP officials and employees who will retire under
Commonwealth Act No. 18639 ("CA 186"), as amended by RA 1616. RA 1616 requires the employer agency or
government instrumentality to pay for the retirement gratuity of its employees who rendered service for the required
number of years.40 The Government Service Insurance System Act of 1997 41 still allows retirement under RA 1616 for
certain employees.
As COA correctly observed, the right of the employees to claim their gratuities from the Fund is still inchoate. RA 1616
does not allow employees to receive their gratuities until they retire. However, this does not invalidate the trust
created by DBP or the concomitant transfer of legal title to the trustees. As far back as in Government v. Abadilla,42
the Court held that "it is not always necessary that the cestui que trust should be named, or even be in esse at the
time the trust is created in his favor." It is enough that the beneficiaries are sufficiently certain or identifiable. 43
In this case, the GSIS Act of 1997 extended the option to retire under RA 1616 only to employees who had entered
government service before 1 June 1977.44 The DBP employees who were in the service before this date are easily
identifiable. As of the time DBP filed the instant petition, DBP estimated that 530 of its employees could still retire
under RA 1616. At least 60 DBP employees had already received their gratuities under the Fund. 45
The Agreement indisputably transferred legal title over the income and properties of the Fund to the Funds trustees.
Thus, COAs directive to record the income of the Fund in DBPs books of account as the miscellaneous income of DBP
constitutes grave abuse of discretion. The income of the Fund does not form part of the revenues or profits of DBP, and
DBP may not use such income for its own benefit. The principal and income of the Fund together constitute the res or
subject matter of the trust. The Agreement established the Fund precisely so that it would eventually be sufficient to
pay for the retirement benefits of DBP employees under RA 1616 without additional outlay from DBP. COA itself
acknowledged the authority of DBP to set up the Fund. However, COAs subsequent directive would divest the Fund of
income, and defeat the purpose for the Funds creation.
The validity of the Special Loan Program
and the disallowance of P11,626,414.25
In disallowing the P11,626,414.25 distributed as dividends under the SLP, the COA relied primarily on Republic Act No.
4968 ("RA 4968") which took effect on 17 June 1967. RA 4968 added the following paragraph to Section 28 of CA 186,
thus:
(b) Hereafter no insurance or retirement plan for officers or employees shall be created by any employer. All
supplementary retirement or pension plans heretofore in force in any government office, agency, or instrumentality or
corporation owned or controlled by the government, are hereby declared inoperative or abolished: Provided, That the
rights of those who are already eligible to retire thereunder shall not be affected.
Even assuming, however, that the SLP constitutes a supplementary retirement plan, RA 4968 does not apply to the
case at bar. The DBP Charter, which took effect on 14 February 1986, expressly authorizes supplementary retirement
plans "adopted by and effective in" DBP, thus:
SEC. 34. Separation Benefits. All those who shall retire from the service or are separated therefrom on account of
the reorganization of the Bank under the provisions of this Charter shall be entitled to all gratuities and benefits
provided for under existing laws and/or supplementary retirement plans adopted by and effective in the
Bank: Provided, that any separation benefits and incentives which may be granted by the Bank subsequent to June 1,
1986, which may be in addition to those provided under existing laws and previous retirement programs of the Bank
prior to the said date, for those personnel referred to in this section shall be funded by the National Government;
Provided, further, that, any supplementary retirement plan adopted by the Bank after the effectivity of this Chapter
shall require the prior approval of the Minister of Finance.
x x x.
SEC. 37. Repealing Clause. All acts, executive orders, administrative orders, proclamations, rules and regulations or
parts thereof inconsistent with any of the provisions of this charter are hereby repealed or modified accordingly. 46
(Emphasis supplied)
Being a special and later law, the DBP Charter 47 prevails over RA 4968. The DBP originally adopted the SLP in 1983.
The Court cannot strike down the SLP now based on RA 4968 in view of the subsequent DBP Charter authorizing the
SLP.
Nevertheless, the Court upholds the COAs disallowance of the P11,626,414.25 in dividends distributed under the SLP.
According to DBP Board Resolution No. 0036 dated 25 January 1991, the "SLP allows a prospective retiree to utilize in
the form of a loan, a portion of their outstanding equity in the Gratuity Plan Fund and to invest [the] proceeds in a
profitable investment or undertaking."48 The basis of the loanable amount was an employees gratuity fund credit, 49
that is to say, what an employee would receive if he retired at the time he availed of the loan.
In his letter dated 26 October 1983 proposing the confirmation of the SLP, then DBP Chairman Cesar B. Zalamea
stated that:
The primary objective of this proposal therefore is to counteract the unavoidable decrease in the value of the said
retirement benefits through the following scheme:
I. To allow a prospective retiree the option to utilize in the form of a loan, a portion of his standing equity
in the Gratuity Fund and to invest it in a profitable investment or undertaking. The income or appreciation in value
will be for his own account and should provide him the desired hedge against inflation or erosion in the value of the
peso. This is being proposed since Philippine retirement laws and the Gratuity Plan do not allow partial
payment of retirement benefits, even the portion already earned, ahead of actual retirement.50 (Emphasis
supplied)
As Chairman Zalamea himself noted, neither the Gratuity Plan nor our laws on retirement allow the partial payment of
retirement benefits ahead of actual retirement. It appears that DBP sought to circumvent these restrictions through the
SLP, which released a portion of an employees retirement benefits to him in the form of a loan. Certainly, the DBP did
this for laudable reasons, to address the concerns of DBP employees on the devaluation of their retirement benefits.
The remaining question is whether RA 1616 and the Gratuity Plan allow this scheme.
We rule that it is not allowed.
The right to retirement benefits accrues only upon certain prerequisites. First, the conditions imposed by the applicable
law in this case, RA 1616 must be fulfilled. 51 Second, there must be actual retirement.52 Retirement means there is
"a bilateral act of the parties, a voluntary agreement between the employer and the employees whereby the latter
after reaching a certain age agrees and/or consents to severe his employment with the former."53
Severance of employment is a condition sine qua non for the release of retirement benefits. Retirement benefits are
not meant to recompense employees who are still in the employ of the government. That is the function of salaries
and other emoluments.54 Retirement benefits are in the nature of a reward granted by the State to a government
employee who has given the best years of his life to the service of his country. 55
The Gratuity Plan likewise provides that the gratuity benefit of a qualified DBP employee shall only be released "upon
retirement under th(e) Plan."56 As the COA correctly pointed out, this means that retirement benefits "can only be
demanded and enjoyed when the employee shall have met the last requisite, that is, actual retirement under the
Gratuity Plan."57
There was thus no basis for the loans granted to DBP employees under the SLP. The rights of the recipient DBP
employees to their retirement gratuities were still inchoate, if not a mere expectancy, when they availed of the SLP. No
portion of their retirement benefits could be considered as "actually earned" or "outstanding" before retirement. Prior
to retirement, an employee who has served the requisite number of years is only eligible for, but not yet entitled to,
retirement benefits.
The DBP contends that the SLP is merely a normal loan transaction, akin to the loans granted by the GSIS, SSS and the
DBP Provident Fund.
The records show otherwise.
In a loan transaction or mutuum, the borrower or debtor acquires ownership of the amount borrowed. 58 As the owner,
the debtor is then free to dispose of or to utilize the sum he loaned, 59 subject to the condition that he should later
return the amount with the stipulated interest to the creditor. 60
In contrast, the amount borrowed by a qualified employee under the SLP was not even released to him. The
implementing rules of the SLP state that:
The loan shall be available strictly for the purpose of investment in the following investment instruments:
a. 182 or 364-day term Time deposits with DBP
b. 182 or 364-day T-bills /CB Bills
c. 182 or 364-day term DBP Blue Chip Fund
The investment shall be registered in the name of DBP-TSD in trust for availee-investor for his sole risk and
account. Choice of eligible terms shall be at the option of availee-investor. Investments shall be commingled by
TSD and Participation Certificates shall be issued to each availee-investor.
xxx
IV. LOANABLE TERMS
xxx
e. Allowable Investment Instruments Time Deposit DBP T-Bills/CB Bills and DBP Blue Chip Fund. TSD shall
purchase new securities and/or allocate existing securities portfolio of GPF depending on liquidity position of the
Fund xxx.
xxx
g. Security The loan shall be secured by GS, Certificate of Time Deposit and/or BCF Certificate of Participation which
shall be registered in the name of DBP-TSD in trust for name of availee-investor and shall be surrendered to the TSD
for safekeeping.61 (Emphasis supplied)
In the present case, the Fund allowed the debtor-employee to "borrow" a portion of his gratuity fund credit solely for
the purpose of investing it in certain instruments specified by DBP. The debtor-employee could not dispose of or utilize
the loan in any other way. These instruments were, incidentally, some of the same securities where the Fund placed its
investments. At the same time the Fund obligated the debtor-employee to assign immediately his loan to DBP-TSD so
that the amount could be commingled with the loans of other employees. The DBP-TSD the same department which
handled and had custody of the Funds accounts then purchased or re-allocated existing securities in the
portfolio of the Fund to correspond to the employees loans.
Simply put, the amount ostensibly loaned from the Fund stayed in the Fund, and remained under the control and
custody of the DBP-TSD. The debtor-employee never had any control or custody over the amount he supposedly
borrowed. However, DBP-TSD listed new or existing investments of the Fund corresponding to the "loan" in the name of
the debtor-employee, so that the latter could collect the interest earned from the investments.
In sum, the SLP enabled certain DBP employees to utilize and even earn from their retirement gratuities even before
they retired. This constitutes a partial release of their retirement benefits, which is contrary to RA 1616 and the
Gratuity Plan. As we have discussed, the latter authorizes the release of gratuities from the earnings and principal of
the Fund only upon retirement.
The Gratuity Plan will lose its tax-exempt status if the retirement benefits are released prior to the retirement of the
employees. The trust funds of employees other than those of private employers are qualified for certain tax
exemptions pursuant to Section 60(B) formerly Section 53(b) of the National Internal Revenue Code. 62 Section 60(B)
provides:
Section 60. Imposition of Tax.
(A) Application of Tax. The tax imposed by this Title upon individuals shall apply to the income of estates or of any
kind of property held in trust, including:
xxx
(B) Exception. The tax imposed by this Title shall not apply to employees trust which forms part of a pension, stock
bonus or profit-sharing plan of an employer for the benefit of some or all of his employees (1) if contributions are made
to the trust by such employer, or employees, or both for the purpose of distributing to such employees the
earnings and principal of the fund accumulated by the trust in accordance with such plan, and (2) if under
the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees
under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted
to, purposes other than for the exclusive benefit of his employees: xxx (Emphasis supplied)
The Gratuity Plan provides that the gratuity benefits of a qualified DBP employee shall be released only "upon
retirement under th(e) Plan." If the earnings and principal of the Fund are distributed to DBP employees prior to their
retirement, the Gratuity Plan will no longer qualify for exemption under Section 60(B). To recall, DBP Resolution No. 794
creating the Gratuity Plan expressly provides that "since the gratuity plan will be tax qualified under the National
Internal Revenue Code xxx, the Banks periodic contributions thereto shall be deductible for tax purposes and the
earnings therefrom tax free." If DBP insists that its employees may receive the P11,626,414.25 dividends, the
necessary consequence will be the non-qualification of the Gratuity Plan as a tax-exempt plan.
Finally, DBP invokes justice and equity on behalf of its affected employees. Equity cannot supplant or contravene the
law.63 Further, as evidenced by the letter of former DBP Chairman Zalamea, the DBP Board of Directors was well aware
of the proscription against the partial release of retirement benefits when it confirmed the SLP. If DBP wants "to
enhance and protect the value of xxx (the) gratuity benefits" of its employees, DBP must do so by investing the money
of the Fund in the proper and sound investments, and not by circumventing restrictions imposed by law and the
Gratuity Plan itself.
We nevertheless urge the DBP and COA to provide equitable terms and a sufficient period within which the affected
DBP employees may refund the dividends they received under the SLP. Since most of the DBP employees were eligible
to retire within a few years when they availed of the SLP, the refunds may be deducted from their retirement benefits,
at least for those who have not received their retirement benefits.
WHEREFORE, COA Decision No. 98-403 dated 6 October 1998 and COA Resolution No. 2000-212 dated 1 August 2000
are AFFIRMED with MODIFICATION. The income of the Gratuity Plan Fund, held in trust for the benefit of DBP
employees eligible to retire under RA 1616, should not be recorded in the books of account of DBP as the income of
the latter.
SO ORDERED.
G.R. No. 159991
November 16, 2006
CARMELINO F. PANSACOLA, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
QUISUMBING, J.:
For review on certiorari is the Decision1 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 National Internal Revenue Code of 19972 (NIRC), which took effect on January 1, 1998. Also
assailed is the appellate courts Resolution 3 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. In it he claimed the increased amounts of personal and additional exemptions under
Section 354 of the NIRC, although his certificate of income tax withheld on compensation indicated the lesser allowed
amounts5 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
law to allow the deduction from a taxpayers gross income earned on a certain year of exemptions availing on a
different taxable year"6 Petitioner sought reconsideration, but the same was denied. 7
On appeal, the Court of Appeals denied his petition for lack of merit. The appellate court ruled that Umali v.
Estanislao,8 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 computing his income tax liability for the taxable year 1997 and thus be entitled to the
refund.9
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?
Petitioner argues that the personal and additional exemptions are of a fixed character based on Section 35 (A) and (B)
of the NIRC10 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 profession, 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 necessarily mean that these were not time bound; and petitioners
proposition was contrary to Section 35 (C)11 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, resident aliens) 12 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 equivalent to the minimum
of subsistence,13 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.
A careful scrutiny of the provisions14 of the NIRC specifically shows that Section 79 (D) 15 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. (A) In General.-For purposes of determining the tax provided in Section 24(A) of this Title, 16 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 citizens 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:
(a) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), 17
(C),18 and (D)19 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 additional exemptions, if any, authorized for such types of income by the NIRC or other special
laws. As defined in Section 22 (P),20 "taxable year" means the calendar year, upon the basis of which the net income is
computed under Title II of the NIRC. Section 4321 also supports the rule that the taxable income of an individual shall
be computed on the basis of the calendar year. In addition, Section 45 22 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."
Moreover, Section 79 (H)23 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 accordance with Section 24 (A). This is for the purpose of either withholding from
the employees December salary, or refunding to him not 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 taxable 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 before the 15th day of April 1999 as mandated by Section 51 (C) (1). 24 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 or 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.
In Umali, we noted that despite being given authority by Section 29 (1) (4) 25 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 cannot be given
retroactive effect. It is established that tax laws are prospective in application, unless it is expressly provided to apply
retroactively.26 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
exemptions, hence strictly construed27 against the taxpayer28 and cannot be allowed unless granted in the most
explicit and categorical language29 too plain to be mistaken.30 They cannot be extended by mere implication or
inference.31 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 case that falls
within its terms.32
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. No. L-66838 April 15, 1988

vs.
PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION & THE COURT OF TAX APPEALS,
respondents.
PARAS, J.:
This is a petition for review on certiorari filed by the herein petitioner, Commissioner of Internal Revenue, seeking the
reversal of the decision of the Court of Tax Appeals dated January 31, 1984 in CTA Case No. 2883 entitled "Procter and
Gamble Philippine Manufacturing Corporation vs. Bureau of Internal Revenue," which declared petitioner therein,
Procter and Gamble Philippine Manufacturing Corporation to be entitled to the sought refund or tax credit in the
amount of P4,832,989.00 representing the alleged overpaid withholding tax at source and ordering payment thereof.
The antecedent facts that precipitated the instant petition are as follows:
Private respondent, Procter and Gamble Philippine Manufacturing Corporation (hereinafter referred to as PMC-Phil.), a
corporation duly organized and existing under and by virtue of the Philippine laws, is engaged in business in the
Philippines and is a wholly owned subsidiary of Procter and Gamble, U.S.A. herein referred to as PMC-USA), a nonresident foreign corporation in the Philippines, not engaged in trade and business therein. As such PMC-U.S.A. is the
sole shareholder or stockholder of PMC Phil., as PMC-U.S.A. owns wholly or by 100% the voting stock of PMC Phil. and is
entitled to receive income from PMC-Phil. in the form of dividends, if not rents or royalties. In addition, PMC-Phil has a
legal personality separate and distinct from PMC-U.S.A. (Rollo, pp. 122-123).
For the taxable year ending June 30, 1974 PMC-Phil. realized a taxable net income of P56,500,332.00 and accordingly
paid the corresponding income tax thereon equivalent to P25%-35% or P19,765,116.00 as provided for under Section
24(a) of the Philippine Tax Code, the pertinent portion of which reads:
SEC. 24. Rates of tax on corporation. a) Tax on domestic corporations. A tax is hereby imposed
upon the taxable net income received during each taxable year from all sources by every corporation
organized in, or geting under the laws of the Philippines, and partnerships, no matter how created or
organized, but not including general professional partnerships, in accordance with the following:
Twenty-five per cent upon the amount by which the taxable net income does not exceed one hundred
thousand pesos; and
Thirty-five per cent upon the amount by which the taxable net income exceeds one hundred thousand
pesos.
After taxation its net profit was P36,735,216.00. Out of said amount it declared a dividend in favor of its sole corporate
stockholder and parent corporation PMC-U.S.A. in the total sum of P17,707,460.00 which latter amount was subjected
to Philippine taxation of 35% or P6,197,611.23 as provided for in Section 24(b) of the Philippine Tax Code which reads
in full:
SECTION 1. The first paragraph of subsection (b) of Section 24 of the National Bureau Internal Revenue
Code, as amended, is hereby further amended to read as follows:
(b) Tax on foreign corporations. 41) Non-resident corporation. A foreign
corporation not engaged in trade or business in the Philippines, including a foreign life
insurance company not engaged in the life insurance business in the Philippines, shall
pay a tax equal to 35% of the gross income received during its taxable year from all
sources within the Philippines, as interest (except interest on foreign loans which shall
be subject to 15% tax), dividends, rents, royalties, salaries, wages, premiums,
annuities, compensations, remunerations for technical services or otherwise,
emoluments or other fixed or determinable, annual, periodical or casual gains, profits,
and income, and capital gains: Provided, however, That premiums shall not include reinsurance premium Provided, further, That cinematograpy film owners, lessors, or
distributors, shall pay a tax of 15% on their gross income from sources within the
Philippines: Provided, still further That on dividends received from a domestic
corporation hable to tax under this Chapter, the tax shall be 15% of the dividends
received, which shall be collected and paid as provided in Section 53(d) of this Code,
subject to the condition that the country in which the non-resident foreign corporation
is domiciled shall allow a credit against the tax due from the non-resident foreign
corporation, taxes deemed to have been paid in the Philippines equivalent to 20%
which represents the difference between the regular tax (35%) on corporations and the
tax (15%) on dividends as provided in this section: Provided, finally That regional or
area headquarters established in the Philippines by multinational corporations and
which headquarters do not earn or derive income from the Philippines and which act as
supervisory, communications and coordinating centers for their affiliates, subsidiaries
or branches in the Asia-Pacific Region shall not be subject to tax.
For the taxable year ending June 30, 1975 PMC-Phil. realized a taxable net income of P8,735,125.00 which was
subjected to Philippine taxation at the rate of 25%-35% or P2,952,159.00, thereafter leaving a net profit of
P5,782,966.00. As in the 2nd quarter of 1975, PMC-Phil. again declared a dividend in favor of PMC-U.S.A. at the tax
rate of 35% or P6,457,485.00.
In July, 1977 PMC-Phil., invoking the tax-sparing credit provision in Section 24(b) as aforequoted, as the withholding
agent of the Philippine government, with respect to the dividend taxes paid by PMC-U.S.A., filed a claim with the herein
petitioner, Commissioner of Internal Revenue, for the refund of the 20 percentage-point portion of the 35 percentagepoint whole tax paid, arising allegedly from the alleged "overpaid withholding tax at source or overpaid withholding tax
in the amount of P4,832,989.00," computed as follows:
Divi
den
d
Inco
me
Tax
wit
hh
eld
15
%
tax
un
der
Alle
ge
d
of
PMC
U.S.
A.
at
sou
rce
at
tax
spa
rin
g
ove
r
35
pro
pay
vis
o
me
nt
P17,
707,
460
P6,
19
6,6
11
P2,
65
6,1
19
P3,
54
1,4
92
6,45
7,48
5
2,2
60,
11
9
96
8,6
22
1,2
91,
49
7
P24,
164,
946
P8,
45
7,7
31
P3,
62
4,9
41
P4,
83
2,9
89
There being no immediate action by the BIR on PMC-Phils' letter-claim the latter sought the intervention of the CTA
when on July 13, 1977 it filed with herein respondent court a petition for review docketed as CTA No. 2883 entitled
"Procter and Gamble Philippine Manufacturing Corporation vs. The Commissioner of Internal Revenue," praying that it
be declared entitled to the refund or tax credit claimed and ordering respondent therein to refund to it the amount of
P4,832,989.00, or to issue tax credit in its favor in lieu of tax refund. (Rollo, p. 41)
On the other hand therein respondent, Commissioner of qqqInterlaal Revenue, in his answer, prayed for the dismissal
of said Petition and for the denial of the claim for refund. (Rollo, p. 48)
On January 31, 1974 the Court of Tax Appeals in its decision (Rollo, p. 63) ruled in favor of the herein petitioner, the
dispositive portion of the same reading as follows:
Accordingly, petitioner is entitled to the sought refund or tax credit of the amount representing the
overpaid withholding tax at source and the payment therefor by the respondent hereby ordered. No
costs.
SO ORDERED.
Hence this petition.
The Second Division of the Court without giving due course to said petition resolved to require the respondents to
comment (Rollo, p. 74). Said comment was filed on November 8, 1984 (Rollo, pp. 83-90). Thereupon this Court by
resolution dated December 17, 1984 resolved to give due course to the petition and to consider respondents' comulent
on the petition as Answer. (Rollo, p. 93)
Petitioner was required to file brief on January 21, 1985 (Rollo, p. 96). Petitioner filed his brief on May 13, 1985 (Rollo,
p. 107), while private respondent PMC Phil filed its brief on August 22, 1985.
Petitioner raised the following assignments of errors:
I
THE COURT OF TAX APPEALS ERRED IN HOLDING WITHOUT ANY BASIS IN FACT AND IN LAW, THAT THE HEREIN
RESPONDENT PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION (PMC-PHIL. FOR SHORT)IS ENTITLED TO
THE SOUGHT REFUND OR TAX CREDIT OF P4,832,989.00, REPRESENTING ALLEGEDLY THE DIVIDED TAX OVER
WITHHELD BY PMC-PHIL. UPON REMITTANCE OF DIVIDEND INCOME IN THE TOTAL SUM OF P24,164,946.00 TO PROCTER
& GAMBLE, USA (PMC-USA FOR SHORT).
II
THE COURT OF TAX APPEALS ERRED IN HOLDING, WITHOUT ANY BASIS IN FACT AND IN LAW, THAT PMC-USA, A NONRESIDENT FOREIGN CORPORATION UNDER SECTION 24(b) (1) OF THE PHILIPPINE TAX CODE AND A DOMESTIC
CORPORATION DOMICILED IN THE UNITED STATES, IS ENTITLED UNDER THE U.S. TAX CODE AGAINST ITS U.S. FEDERAL
TAXES TO A UNITED STATES FOREIGN TAX CREDIT EQUIVALENT TO AT LEAST THE 20 PERCENTAGE-POINT PORTION (OF
THE 35 PERCENT DIVIDEND TAX) SPARED OR WAIVED OR OTHERWISE CONSIDERED OR DEEMED PAID BY THE
PHILIPPINE GOVERNMENT.
The sole issue in this case is whether or not private respondent is entitled to the preferential 15% tax rate on dividends
declared and remitted to its parent corporation.
From this issue two questions are posed by the petitioner Commissioner of Internal Revenue, and they are (1) Whether
or not PMC-Phil. is the proper party to claim the refund and (2) Whether or not the U. S. allows as tax credit the
"deemed paid" 20% Philippine Tax on such dividends?
The petitioner maintains that it is the PMC-U.S.A., the tax payer and not PMC-Phil. the remitter or payor of the dividend
income, and a mere withholding agent for and in behalf of the Philippine Government, which should be legally entitled
to receive the refund if any. (Rollo, p. 129)
It will be observed at the outset that petitioner raised this issue for the first time in the Supreme Court. He did not
raise it at the administrative level, nor at the Court of Tax Appeals. As clearly ruled by Us "To allow a litigant to assume
a different posture when he comes before the court and challenges the position he had accepted at the administrative
level," would be to sanction a procedure whereby the Court-which is supposed to review administrative determinations
would not review, but determine and decide for the first time, a question not raised at the administrative forum." Thus
it is well settled that under the same underlying principle of prior exhaustion of administrative remedies, on the
judicial level, issues not raised in the lower court cannot generally be raised for the first time on appeal. (Pampanga
Sugar Dev. Co., Inc. v. CIR, 114 SCRA 725 [1982]; Garcia v. C.A., 102 SCRA 597 [1981]; Matialonzo v. Servidad, 107
SCRA 726 [1981]),
Nonetheless it is axiomatic that the State can never be in estoppel, and this is particularly true in matters involving
taxation. The errors of certain administrative officers should never be allowed to jeopardize the government's financial
position.
The submission of the Commissioner of Internal Revenue that PMC-Phil. is but a withholding agent of the government
and therefore cannot claim reimbursement of the alleged over paid taxes, is completely meritorious. The real party in
interest being the mother corporation in the United States, it follows that American entity is the real party in interest,
and should have been the claimant in this case.
Closely intertwined with the first assignment of error is the issue of whether or not PMC-U.S.A. a non-resident foreign
corporation under Section 24(b)(1) of the Tax Code (the subsidiary of an American) a domestic corporation domiciled in
the United States, is entitled under the U.S. Tax Code to a United States Foreign Tax Credit equivalent to at least the 20
percentage paid portion (of the 35% dividend tax) spared or waived as otherwise considered or deemed paid by the
government. The law pertinent to the issue is Section 902 of the U.S. Internal Revenue Code, as amended by Public
Law 87-834, the law governing tax credits granted to U.S. corporations on dividends received from foreign
corporations, which to the extent applicable reads:
SEC. 902 - CREDIT FOR CORPORATE STOCKHOLDERS IN FOREIGN CORPORATION.
(a) Treatment of Taxes Paid by Foreign Corporation - For purposes of this subject, a domestic
corporation which owns at least 10 percent of the voting stock of a foreign corporation from which it
receives dividends in any taxable year shall(1) to the extent such dividends are paid by such foreign corporation out of
accumulated profits [as defined in subsection (c) (1) (a)] of a year for which such
foreign corporation is not a less developed country corporation, be deemed to have
paid the same proportion of any income, war profits, or excess profits taxes paid or
deemed to be paid by such foreign corporation to any foreign country or to any
possession of the United States on or with respect to such accumulated profits, which
the amount of such dividends (determined without regard to Section 78) bears to the
amount of such accumulated profits in excess of such income, war profits, and excess
profits taxes (other than those deemed paid); and
(2) to the extent such dividends are paid by such foreign corporation out of
accumulated profits [as defined in subsection (c) (1) (b)] of a year for which such
foreign corporation is a less-developed country corporation, be deemed to have paid
the same proportion of any income, war profits, or excess profits taxes paid or deemed
to be paid by such foreign corporation to any foreign country or to any possession of
the United States on or with respect to such accumulated profits, which the amount of
such dividends bears to the amount of such accumulated profits.
xxx xxx xxx
(c) Applicable Rules
(1) Accumulated profits defined - For purpose of this section, the term 'accumulated profits' means
with respect to any foreign corporation.
(A) for purposes of subsections (a) (1) and (b) (1), the amount of its gains, profits, or
income computed without reduction by the amount of the income, war profits, and
excess profits taxes imposed on or with respect to such profits or income by any
foreign country.... ; and
(B) for purposes of subsections (a) (2) and (b) (2), the amount of its gains, profits, or
income in excess of the income, was profits, and excess profits taxes imposed on or
with respect to such profits or income.
The Secretary or his delegate shall have full power to determine from the accumulated profits of what
year or years such dividends were paid, treating dividends paid in the first 20 days of any year as
having been paid from the accumulated profits of the preceding year or years (unless to his
satisfaction shows otherwise), and in other respects treating dividends as having been paid from the
most recently accumulated gains, profits, or earnings. .. (Rollo, pp. 55-56)
To Our mind there is nothing in the aforecited provision that would justify tax return of the disputed 15% to the private
respondent. Furthermore, as ably argued by the petitioner, the private respondent failed to meet certain conditions
necessary in order that the dividends received by the non-resident parent company in the United States may be
subject to the preferential 15% tax instead of 35%. Among other things, the private respondent failed: (1) to show the
actual amount credited by the U.S. government against the income tax due from PMC-U.S.A. on the dividends received
from private respondent; (2) to present the income tax return of its mother company for 1975 when the dividends
were received; and (3) to submit any duly authenticated document showing that the U.S. government credited the
20% tax deemed paid in the Philippines.
PREMISES CONSIDERED, the petition is GRANTED and the decision appealed from, is REVERSED and SET ASIDE.
SO ORDERED.
G.R. No. L-66838 December 2, 1991

vs.
PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION and THE COURT OF TAX APPEALS,
respondents.
T.A. Tejada & C.N. Lim for private respondent.
RESOLUTION
FELICIANO, J.:p
For the taxable year 1974 ending on 30 June 1974, and the taxable year 1975 ending 30 June 1975, private
respondent Procter and Gamble Philippine Manufacturing Corporation ("P&G-Phil.") declared dividends payable to its
parent company and sole stockholder, Procter and Gamble Co., Inc. (USA) ("P&G-USA"), amounting to P24,164,946.30,
from which dividends the amount of P8,457,731.21 representing the thirty-five percent (35%) withholding tax at
source was deducted.
On 5 January 1977, private respondent P&G-Phil. filed with petitioner Commissioner of Internal Revenue a claim for
refund or tax credit in the amount of P4,832,989.26 claiming, among other things, that pursuant to Section 24 (b) (1)
of the National Internal Revenue Code ("NITC"), 1 as amended by Presidential Decree No. 369, the applicable rate of
withholding tax on the dividends remitted was only fifteen percent (15%) (and not thirty-five percent [35%]) of the
dividends.
There being no responsive action on the part of the Commissioner, P&G-Phil., on 13 July 1977, filed a petition for
review with public respondent Court of Tax Appeals ("CTA") docketed as CTA Case No. 2883. On 31 January 1984, the
CTA rendered a decision ordering petitioner Commissioner to refund or grant the tax credit in the amount of
P4,832,989.00.
On appeal by the Commissioner, the Court through its Second Division reversed the decision of the CTA and held that:
(a) P&G-USA, and not private respondent P&G-Phil., was the proper party to claim the
refund or tax credit here involved;
(b) there is nothing in Section 902 or other provisions of the US Tax Code that allows a
credit against the US tax due from P&G-USA of taxes deemed to have been paid in the
Philippines equivalent to twenty percent (20%) which represents the difference
between the regular tax of thirty-five percent (35%) on corporations and the tax of
fifteen percent (15%) on dividends; and
(c) private respondent P&G-Phil. failed to meet certain conditions necessary in order
that "the dividends received by its non-resident parent company in the US (P&G-USA)
may be subject to the preferential tax rate of 15% instead of 35%."
These holdings were questioned in P&G-Phil.'s Motion for Re-consideration and we will deal with them seriatim in this
Resolution resolving that Motion.
I
1. There are certain preliminary aspects of the question of the capacity of P&G-Phil. to bring the present claim for
refund or tax credit, which need to be examined. This question was raised for the first time on appeal, i.e., in the
proceedings before this Court on the Petition for Review filed by the Commissioner of Internal Revenue. The question
was not raised by the Commissioner on the administrative level, and neither was it raised by him before the CTA.
We believe that the Bureau of Internal Revenue ("BIR") should not be allowed to defeat an otherwise valid claim for
refund by raising this question of alleged incapacity for the first time on appeal before this Court. This is clearly a
matter of procedure. Petitioner does not pretend that P&G-Phil., should it succeed in the claim for refund, is likely to
run away, as it were, with the refund instead of transmitting such refund or tax credit to its parent and sole
stockholder. It is commonplace that in the absence of explicit statutory provisions to the contrary, the government
must follow the same rules of procedure which bind private parties. It is, for instance, clear that the government is
held to compliance with the provisions of Circular No. 1-88 of this Court in exactly the same way that private litigants
are held to such compliance, save only in respect of the matter of filing fees from which the Republic of the Philippines
is exempt by the Rules of Court.
More importantly, there arises here a question of fairness should the BIR, unlike any other litigant, be allowed to raise
for the first time on appeal questions which had not been litigated either in the lower court or on the administrative
level. For, if petitioner had at the earliest possible opportunity, i.e., at the administrative level, demanded that P&GPhil. produce an express authorization from its parent corporation to bring the claim for refund, then P&G-Phil. would
have been able forthwith to secure and produce such authorization before filing the action in the instant case. The
action here was commenced just before expiration of the two (2)-year prescriptive period.
2. The question of the capacity of P&G-Phil. to bring the claim for refund has substantive dimensions as well which, as
will be seen below, also ultimately relate to fairness.
Under Section 306 of the NIRC, a claim for refund or tax credit filed with the Commissioner of Internal Revenue is
essential for maintenance of a suit for recovery of taxes allegedly erroneously or illegally assessed or collected:
Sec. 306. Recovery of tax erroneously or illegally collected. No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have
been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected
without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected,
until a claim for refund or credit has been duly filed with the Commissioner of Internal Revenue; but
such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid
under protest or duress. In any case, no such suit or proceeding shall be begun after the expiration of
two years from the date of payment of the tax or penalty regardless of any supervening cause that
may arise after payment: . . . (Emphasis supplied)
Section 309 (3) of the NIRC, in turn, provides:
Sec. 309. Authority of Commissioner to Take Compromises and to Refund Taxes.The
Commissioner may:
xxx xxx xxx
(3) credit or refund taxes erroneously or illegally received, . . . No credit or refund of taxes or penalties
shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund
within two (2) years after the payment of the tax or penalty. (As amended by P.D. No. 69) (Emphasis
supplied)
Since the claim for refund was filed by P&G-Phil., the question which arises is: is P&G-Phil. a "taxpayer" under Section
309 (3) of the NIRC? The term "taxpayer" is defined in our NIRC as referring to "any person subject to tax imposed by
the Title [on Tax on Income]." 2 It thus becomes important to note that under Section 53 (c) of the NIRC, the
withholding agent who is "required to deduct and withhold any tax" is made " personally liable for such tax" and
indeed is indemnified against any claims and demands which the stockholder might wish to make in questioning the
amount of payments effected by the withholding agent in accordance with the provisions of the NIRC. The withholding
agent, P&G-Phil., is directly and independently liable 3 for the correct amount of the tax that should be withheld from
the dividend remittances. The withholding agent is, moreover, subject to and liable for deficiency assessments,
surcharges and penalties should the amount of the tax withheld be finally found to be less than the amount that
should have been withheld under law.
A "person liable for tax" has been held to be a "person subject to tax" and properly considered a "taxpayer." 4 The
terms liable for tax" and "subject to tax" both connote legal obligation or duty to pay a tax. It is very difficult, indeed
conceptually impossible, to consider a person who is statutorily made "liable for tax" as not "subject to tax." By any
reasonable standard, such a person should be regarded as a party in interest, or as a person having sufficient legal
interest, to bring a suit for refund of taxes he believes were illegally collected from him.
In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, 5 this Court pointed out that a withholding
agent is in fact the agent both of the government and of the taxpayer, and that the withholding agent is not an
ordinary government agent:
The law sets no condition for the personal liability of the withholding agent to attach. The reason is to
compel the withholding agent to withhold the tax under all circumstances. In effect, the responsibility
for the collection of the tax as well as the payment thereof is concentrated upon the person over whom
the Government has jurisdiction. Thus, the withholding agent is constituted the agent of both the
Government and the taxpayer. With respect to the collection and/or withholding of the tax, he is the
Government's agent. In regard to the filing of the necessary income tax return and the payment of the
tax to the Government, he is the agent of the taxpayer. The withholding agent, therefore, is no
ordinary government agent especially because under Section 53 (c) he is held personally liable for the
tax he is duty bound to withhold; whereas the Commissioner and his deputies are not made liable by
law. 6 (Emphasis supplied)
If, as pointed out in Philippine Guaranty, the withholding agent is also an agent of the beneficial owner of the dividends
with respect to the filing of the necessary income tax return and with respect to actual payment of the tax to the
government, such authority may reasonably be held to include the authority to file a claim for refund and to bring an
action for recovery of such claim. This implied authority is especially warranted where, is in the instant case, the
withholding agent is the wholly owned subsidiary of the parent-stockholder and therefore, at all times, under the
effective control of such parent-stockholder. In the circumstances of this case, it seems particularly unreal to deny the
implied authority of P&G-Phil. to claim a refund and to commence an action for such refund.
We believe that, even now, there is nothing to preclude the BIR from requiring P&G-Phil. to show some written or
telexed confirmation by P&G-USA of the subsidiary's authority to claim the refund or tax credit and to remit the
proceeds of the refund., or to apply the tax credit to some Philippine tax obligation of, P&G-USA, before actual
payment of the refund or issuance of a tax credit certificate. What appears to be vitiated by basic unfairness is
petitioner's position that, although P&G-Phil. is directly and personally liable to the Government for the taxes and any
deficiency assessments to be collected, the Government is not legally liable for a refund simply because it did not
demand a written confirmation of P&G-Phil.'s implied authority from the very beginning. A sovereign government
should act honorably and fairly at all times, even vis-a-vis taxpayers.
We believe and so hold that, under the circumstances of this case, P&G-Phil. is properly regarded as a "taxpayer"
within the meaning of Section 309, NIRC, and as impliedly authorized to file the claim for refund and the suit to recover
such claim.
II
1. We turn to the principal substantive question before us: the applicability to the dividend remittances by P&G-Phil. to
P&G-USA of the fifteen percent (15%) tax rate provided for in the following portion of Section 24 (b) (1) of the NIRC:
(b) Tax on foreign corporations.
(1) Non-resident corporation. A foreign corporation not engaged in trade and
business in the Philippines, . . ., shall pay a tax equal to 35% of the gross income
receipt during its taxable year from all sources within the Philippines, as . . . dividends .
. . Provided, still further, that on dividends received from a domestic corporation liable
to tax under this Chapter, the tax shall be 15% of the dividends, which shall be
collected and paid as provided in Section 53 (d) of this Code, subject to the condition
that the country in which the non-resident foreign corporation, is domiciled shall allow
a credit against the tax due from the non-resident foreign corporation, taxes deemed
to have been paid in the Philippines equivalent to 20% which represents the difference
between the regular tax (35%) on corporations and the tax (15%) on dividends as
provided in this Section . . .
The ordinary thirty-five percent (35%) tax rate applicable to dividend remittances to non-resident corporate
stockholders of a Philippine corporation, goes down to fifteen percent (15%) if the country of domicile of the foreign
stockholder corporation "shall allow" such foreign corporation a tax credit for "taxes deemed paid in the Philippines,"
applicable against the tax payable to the domiciliary country by the foreign stockholder corporation. In other words, in
the instant case, the reduced fifteen percent (15%) dividend tax rate is applicable if the USA "shall allow" to P&G-USA
a tax credit for "taxes deemed paid in the Philippines" applicable against the US taxes of P&G-USA. The NIRC specifies
that such tax credit for "taxes deemed paid in the Philippines" must, as a minimum, reach an amount equivalent to
twenty (20) percentage points which represents the difference between the regular thirty-five percent (35%) dividend
tax rate and the preferred fifteen percent (15%) dividend tax rate.
It is important to note that Section 24 (b) (1), NIRC, does not require that the US must give a "deemed paid" tax credit
for the dividend tax (20 percentage points) waived by the Philippines in making applicable the preferred divided tax
rate of fifteen percent (15%). In other words, our NIRC does not require that the US tax law deem the parentcorporation to have paid the twenty (20) percentage points of dividend tax waived by the Philippines. The NIRC only
requires that the US "shall allow" P&G-USA a "deemed paid" tax credit in an amount equivalent to the twenty (20)
percentage points waived by the Philippines.
2. The question arises: Did the US law comply with the above requirement? The relevant provisions of the US Intemal
Revenue Code ("Tax Code") are the following:
Sec. 901 Taxes of foreign countries and possessions of United States.
(a) Allowance of credit. If the taxpayer chooses to have the benefits of this subpart,
the tax imposed by this chapter shall, subject to the applicable limitation of section
904, be credited with the amounts provided in the applicable paragraph of subsection
(b) plus, in the case of a corporation, the taxes deemed to have been paid under
sections 902 and 960. Such choice for any taxable year may be made or changed at
any time before the expiration of the period prescribed for making a claim for credit or
refund of the tax imposed by this chapter for such taxable year. The credit shall not be
allowed against the tax imposed by section 531 (relating to the tax on accumulated
earnings), against the additional tax imposed for the taxable year under section 1333
(relating to war loss recoveries) or under section 1351 (relating to recoveries of foreign
expropriation losses), or against the personal holding company tax imposed by section
541.
(b) Amount allowed. Subject to the applicable limitation of section 904, the following
amounts shall be allowed as the credit under subsection (a):
(a) Citizens and domestic corporations. In the case of a citizen of the
United States and of a domestic corporation, the amount of any
income, war profits, and excess profits taxes paid or accrued during
the taxable year to any foreign country or to any possession of the
United States; and
xxx xxx xxx
Sec. 902. Credit for corporate stockholders in foreign corporation.
(A) Treatment of Taxes Paid by Foreign Corporation. For purposes of this subject, a
domestic corporation which owns at least 10 percent of the voting stock of a foreign
corporation from which it receives dividends in any taxable year shall
xxx xxx xxx
(2) to the extent such dividends are paid by such foreign corporation
out of accumulated profits [as defined in subsection (c) (1) (b)] of a
year for which such foreign corporation is a less developed country
corporation, be deemed to have paid the same proportion of any
income, war profits, or excess profits taxes paid or deemed to be paid
by such foreign corporation to any foreign country or to any possession
of the United States on or with respect to such accumulated profits,
which the amount of such dividends bears to the amount of such
accumulated profits.
xxx xxx xxx
(c) Applicable Rules
(1) Accumulated profits defined. For purposes of this section, the term "accumulated
profits" means with respect to any foreign corporation,
(A) for purposes of subsections (a) (1) and (b) (1), the amount of its
gains, profits, or income computed without reduction by the amount of
the income, war profits, and excess profits taxes imposed on or with
respect to such profits or income by any foreign country. . . .; and
(B) for purposes of subsections (a) (2) and (b) (2), the amount of its
gains, profits, or income in excess of the income, war profits, and
excess profits taxes imposed on or with respect to such profits or
income.
The Secretary or his delegate shall have full power to determine from the accumulated
profits of what year or years such dividends were paid, treating dividends paid in the
first 20 days of any year as having been paid from the accumulated profits of the
preceding year or years (unless to his satisfaction shows otherwise), and in other
respects treating dividends as having been paid from the most recently accumulated
gains, profits, or earning. . . . (Emphasis supplied)
Close examination of the above quoted provisions of the US Tax Code 7 shows the following:
a. US law (Section 901, Tax Code) grants P&G-USA a tax credit for the amount of the
dividend tax actually paid (i.e., withheld) from the dividend remittances to P&G-USA;
b. US law (Section 902, US Tax Code) grants to P&G-USA a "deemed paid' tax credit 8
for a proportionate part of the corporate income tax actually paid to the Philippines by
P&G-Phil.
The parent-corporation P&G-USA is "deemed to have paid" a portion of the Philippine corporate income tax although
that tax was actually paid by its Philippine subsidiary, P&G-Phil., not by P&G-USA. This "deemed paid" concept merely
reflects economic reality, since the Philippine corporate income tax was in fact paid and deducted from revenues
earned in the Philippines, thus reducing the amount remittable as dividends to P&G-USA. In other words, US tax law
treats the Philippine corporate income tax as if it came out of the pocket, as it were, of P&G-USA as a part of the
economic cost of carrying on business operations in the Philippines through the medium of P&G-Phil. and here earning
profits. What is, under US law, deemed paid by P&G- USA are not "phantom taxes" but instead Philippine corporate
income taxes actually paid here by P&G-Phil., which are very real indeed.
It is also useful to note that both (i) the tax credit for the Philippine dividend tax actually withheld, and (ii) the tax
credit for the Philippine corporate income tax actually paid by P&G Phil. but "deemed paid" by P&G-USA, are tax
credits available or applicable against the US corporate income tax of P&G-USA. These tax credits are allowed because
of the US congressional desire to avoid or reduce double taxation of the same income stream. 9
In order to determine whether US tax law complies with the requirements for applicability of the reduced or
preferential fifteen percent (15%) dividend tax rate under Section 24 (b) (1), NIRC, it is necessary:
a. to determine the amount of the 20 percentage points dividend tax waived by the
Philippine government under Section 24 (b) (1), NIRC, and which hence goes to P&GUSA;
b. to determine the amount of the "deemed paid" tax credit which US tax law must
allow to P&G-USA; and
c. to ascertain that the amount of the "deemed paid" tax credit allowed by US law is at
least equal to the amount of the dividend tax waived by the Philippine Government.
Amount (a), i.e., the amount of the dividend tax waived by the Philippine government is arithmetically determined in
the following manner:
P100.00 Pretax net corporate income earned by P&G-Phil.
x 35% Regular Philippine corporate income tax rate
P35.00 Paid to the BIR by P&G-Phil. as Philippine

corporate income tax.
P100.00
-35.00
P65.00 Available for remittance as dividends to P&G-USA

P65.00 Dividends remittable to P&G-USA
x 35% Regular Philippine dividend tax rate under Section 24
(b) (1), NIRC
P22.75 Regular dividend tax
x 15% Reduced dividend tax rate under Section 24 (b) (1), NIRC
P9.75 Reduced dividend tax

P22.75 Regular dividend tax under Section 24 (b) (1), NIRC
-9.75 Reduced dividend tax under Section 24 (b) (1), NIRC
P13.00 Amount of dividend tax waived by Philippine

===== government under Section 24 (b) (1), NIRC.
Thus, amount (a) above is P13.00 for every P100.00 of pre-tax net income earned by P&G-Phil. Amount (a) is also the
minimum amount of the "deemed paid" tax credit that US tax law shall allow if P&G-USA is to qualify for the reduced or
preferential dividend tax rate under Section 24 (b) (1), NIRC.
Amount (b) above, i.e., the amount of the "deemed paid" tax credit which US tax law allows under Section 902, Tax
Code, may be computed arithmetically as follows:
- 9.75 Dividend tax withheld at the reduced (15%) rate
P55.25 Dividends actually remitted to P&G-USA

P35.00 Philippine corporate income tax paid by P&G-Phil.
to the BIR
Dividends actually
remitted by P&G-Phil.
to P&G-USA P55.25
= x P35.00 = P29.75 10
Amount of accumulated P65.00 ======
profits earned by
P&G-Phil. in excess
of income tax
Thus, for every P55.25 of dividends actually remitted (after withholding at the rate of 15%) by P&G-Phil. to its US
parent P&G-USA, a tax credit of P29.75 is allowed by Section 902 US Tax Code for Philippine corporate income tax
"deemed paid" by the parent but actually paid by the wholly-owned subsidiary.
Since P29.75 is much higher than P13.00 (the amount of dividend tax waived by the Philippine government), Section
902, US Tax Code, specifically and clearly complies with the requirements of Section 24 (b) (1), NIRC.
3. It is important to note also that the foregoing reading of Sections 901 and 902 of the US Tax Code is identical with
the reading of the BIR of Sections 901 and 902 of the US Tax Code is identical with the reading of the BIR of Sections
901 and 902 as shown by administrative rulings issued by the BIR.
The first Ruling was issued in 1976, i.e., BIR Ruling No. 76004, rendered by then Acting Commissioner of Intemal
Revenue Efren I. Plana, later Associate Justice of this Court, the relevant portion of which stated:
However, after a restudy of the decision in the American Chicle Company case and the provisions of
Section 901 and 902 of the U.S. Internal Revenue Code, we find merit in your contention that our
computation of the credit which the U.S. tax law allows in such cases is erroneous as the amount of tax
"deemed paid" to the Philippine government for purposes of credit against the U.S. tax by the recipient
of dividends includes a portion of the amount of income tax paid by the corporation declaring the
dividend in addition to the tax withheld from the dividend remitted. In other words, the U.S.
government will allow a credit to the U.S. corporation or recipient of the dividend, in addition to the
amount of tax actually withheld, a portion of the income tax paid by the corporation declaring the
dividend. Thus, if a Philippine corporation wholly owned by a U.S. corporation has a net income of
P100,000, it will pay P25,000 Philippine income tax thereon in accordance with Section 24(a) of the Tax
Code. The net income, after income tax, which is P75,000, will then be declared as dividend to the U.S.
corporation at 15% tax, or P11,250, will be withheld therefrom. Under the aforementioned sections of
the U.S. Internal Revenue Code, U.S. corporation receiving the dividend can utilize as credit against its
U.S. tax payable on said dividends the amount of P30,000 composed of:
(1) The tax "deemed paid" or indirectly paid on the dividend arrived at
as follows:
P75,000 x P25,000 = P18,750
100,000 **
(2) The amount of 15% of
P75,000 withheld = 11,250
P30,000
The amount of P18,750 deemed paid and to be credited against the U.S. tax on the dividends received
by the U.S. corporation from a Philippine subsidiary is clearly more than 20% requirement of
Presidential Decree No. 369 as 20% of P75,000.00 the dividends to be remitted under the above
example, amounts to P15,000.00 only.
In the light of the foregoing, BIR Ruling No. 75-005 dated September 10, 1975 is hereby amended in
the sense that the dividends to be remitted by your client to its parent company shall be subject to the
withholding tax at the rate of 15% only.
This ruling shall have force and effect only for as long as the present pertinent provisions of the U.S.
Federal Tax Code, which are the bases of the ruling, are not revoked, amended and modified, the effect
of which will reduce the percentage of tax deemed paid and creditable against the U.S. tax on
dividends remitted by a foreign corporation to a U.S. corporation. (Emphasis supplied)
The 1976 Ruling was reiterated in, e.g., BIR Ruling dated 22 July 1981 addressed to Basic Foods Corporation and BIR
Ruling dated 20 October 1987 addressed to Castillo, Laman, Tan and Associates. In other words, the 1976 Ruling of
Hon. Efren I. Plana was reiterated by the BIR even as the case at bar was pending before the CTA and this Court.
4. We should not overlook the fact that the concept of "deemed paid" tax credit, which is embodied in Section 902, US
Tax Code, is exactly the same "deemed paid" tax credit found in our NIRC and which Philippine tax law allows to
Philippine corporations which have operations abroad (say, in the United States) and which, therefore, pay income
taxes to the US government.
Section 30 (c) (3) and (8), NIRC, provides:
(d) Sec. 30. Deductions from Gross Income.In computing net income, there shall be
allowed as deductions . . .
(c) Taxes. . . .
xxx xxx xxx
(3) Credits against tax for taxes of foreign countries. If the taxpayer
signifies in his return his desire to have the benefits of this paragraphs,
the tax imposed by this Title shall be credited with . . .
(a) Citizen and Domestic Corporation. In the case of a citizen of the
Philippines and of domestic corporation, the amount of net income, war
profits or excess profits, taxes paid or accrued during the taxable year
to any foreign country. (Emphasis supplied)
Under Section 30 (c) (3) (a), NIRC, above, the BIR must give a tax credit to a Philippine corporation for taxes actually
paid by it to the US governmente.g., for taxes collected by the US government on dividend remittances to the
Philippine corporation. This Section of the NIRC is the equivalent of Section 901 of the US Tax Code.
Section 30 (c) (8), NIRC, is practically identical with Section 902 of the US Tax Code, and provides as follows:
(8) Taxes of foreign subsidiary. For the purposes of this subsection a domestic corporation which
owns a majority of the voting stock of a foreign corporation from which it receives dividends in any
taxable year shall be deemed to have paid the same proportion of any income, war-profits, or excessprofits taxes paid by such foreign corporation to any foreign country, upon or with respect to the
accumulated profits of such foreign corporation from which such dividends were paid, which the
amount of such dividends bears to the amount of such accumulated profits: Provided, That the amount
of tax deemed to have been paid under this subsection shall in no case exceed the same proportion of
the tax against which credit is taken which the amount of such dividends bears to the amount of the
entire net income of the domestic corporation in which such dividends are included. The term
"accumulated profits" when used in this subsection reference to a foreign corporation, means the
amount of its gains, profits, or income in excess of the income, war-profits, and excess-profits taxes
imposed upon or with respect to such profits or income; and the Commissioner of Internal Revenue
shall have full power to determine from the accumulated profits of what year or years such dividends
were paid; treating dividends paid in the first sixty days of any year as having been paid from the
accumulated profits of the preceding year or years (unless to his satisfaction shown otherwise), and in
other respects treating dividends as having been paid from the most recently accumulated gains,
profits, or earnings. In the case of a foreign corporation, the income, war-profits, and excess-profits
taxes of which are determined on the basis of an accounting period of less than one year, the word
"year" as used in this subsection shall be construed to mean such accounting period. (Emphasis
supplied)
Under the above quoted Section 30 (c) (8), NIRC, the BIR must give a tax credit to a Philippine parent
corporation for taxes "deemed paid" by it, that is, e.g., for taxes paid to the US by the US subsidiary of a
Philippine-parent corporation. The Philippine parent or corporate stockholder is "deemed" under our NIRC to
have paid a proportionate part of the US corporate income tax paid by its US subsidiary, although such US tax
was actually paid by the subsidiary and not by the Philippine parent.
Clearly, the "deemed paid" tax credit which, under Section 24 (b) (1), NIRC, must be allowed by US law to P&G-USA, is
the same "deemed paid" tax credit that Philippine law allows to a Philippine corporation with a wholly- or majorityowned subsidiary in (for instance) the US. The "deemed paid" tax credit allowed in Section 902, US Tax Code, is no
more a credit for "phantom taxes" than is the "deemed paid" tax credit granted in Section 30 (c) (8), NIRC.
III
1. The Second Division of the Court, in holding that the applicable dividend tax rate in the instant case was the regular
thirty-five percent (35%) rate rather than the reduced rate of fifteen percent (15%), held that P&G-Phil. had failed to
prove that its parent, P&G-USA, had in fact been given by the US tax authorities a "deemed paid" tax credit in the
amount required by Section 24 (b) (1), NIRC.
We believe, in the first place, that we must distinguish between the legal question before this Court from questions of
administrative implementation arising after the legal question has been answered. The basic legal issue is of course,
this: which is the applicable dividend tax rate in the instant case: the regular thirty-five percent (35%) rate or the
reduced fifteen percent (15%) rate? The question of whether or not P&G-USA is in fact given by the US tax authorities
a "deemed paid" tax credit in the required amount, relates to the administrative implementation of the applicable
reduced tax rate.
In the second place, Section 24 (b) (1), NIRC, does not in fact require that the "deemed paid" tax credit shall have
actually been granted before the applicable dividend tax rate goes down from thirty-five percent (35%) to fifteen
percent (15%). As noted several times earlier, Section 24 (b) (1), NIRC, merely requires, in the case at bar, that the
USA "shall allow a credit against the
tax due from [P&G-USA for] taxes deemed to have been paid in the Philippines . . ." There is neither statutory provision
nor revenue regulation issued by the Secretary of Finance requiring the actual grant of the "deemed paid" tax credit by
the US Internal Revenue Service to P&G-USA before the preferential fifteen percent (15%) dividend rate becomes
applicable. Section 24 (b) (1), NIRC, does not create a tax exemption nor does it provide a tax credit; it is a provision
which specifies when a particular (reduced) tax rate is legally applicable.
In the third place, the position originally taken by the Second Division results in a severe practical problem of
administrative circularity. The Second Division in effect held that the reduced dividend tax rate is not applicable until
the US tax credit for "deemed paid" taxes is actually given in the required minimum amount by the US Internal
Revenue Service to P&G-USA. But, the US "deemed paid" tax credit cannot be given by the US tax authorities unless
dividends have actually been remitted to the US, which means that the Philippine dividend tax, at the rate here
applicable, was actually imposed and collected. 11 It is this practical or operating circularity that is in fact avoided by
our BIR when it issues rulings that the tax laws of particular foreign jurisdictions (e.g., Republic of Vanuatu 12
Hongkong, 13 Denmark, 14 etc.) comply with the requirements set out in Section 24 (b) (1), NIRC, for applicability of
the fifteen percent (15%) tax rate. Once such a ruling is rendered, the Philippine subsidiary begins to withhold at the
reduced dividend tax rate.
A requirement relating to administrative implementation is not properly imposed as a condition for the applicability, as
a matter of law, of a particular tax rate. Upon the other hand, upon the determination or recognition of the applicability
of the reduced tax rate, there is nothing to prevent the BIR from issuing implementing regulations that would require
P&G Phil., or any Philippine corporation similarly situated, to certify to the BIR the amount of the "deemed paid" tax
credit actually subsequently granted by the US tax authorities to P&G-USA or a US parent corporation for the taxable
year involved. Since the US tax laws can and do change, such implementing regulations could also provide that failure
of P&G-Phil. to submit such certification within a certain period of time, would result in the imposition of a deficiency
assessment for the twenty (20) percentage points differential. The task of this Court is to settle which tax rate is
applicable, considering the state of US law at a given time. We should leave details relating to administrative
implementation where they properly belong with the BIR.
2. An interpretation of a tax statute that produces a revenue flow for the government is not, for that reason alone,
necessarily the correct reading of the statute. There are many tax statutes or provisions which are designed, not to
trigger off an instant surge of revenues, but rather to achieve longer-term and broader-gauge fiscal and economic
objectives. The task of our Court is to give effect to the legislative design and objectives as they are written into the
statute even if, as in the case at bar, some revenues have to be foregone in that process.
The economic objectives sought to be achieved by the Philippine Government by reducing the thirty-five percent (35%)
dividend rate to fifteen percent (15%) are set out in the preambular clauses of P.D. No. 369 which amended Section 24
(b) (1), NIRC, into its present form:
WHEREAS, it is imperative to adopt measures responsive to the requirements of a developing
economy foremost of which is the financing of economic development programs;
WHEREAS, nonresident foreign corporations with investments in the Philippines are taxed on their
earnings from dividends at the rate of 35%;
WHEREAS, in order to encourage more capital investment for large projects an appropriate tax need be
imposed on dividends received by non-resident foreign corporations in the same manner as the tax
imposed on interest on foreign loans;
xxx xxx xxx
(Emphasis supplied)
More simply put, Section 24 (b) (1), NIRC, seeks to promote the in-flow of foreign equity investment in the Philippines
by reducing the tax cost of earning profits here and thereby increasing the net dividends remittable to the investor.
The foreign investor, however, would not benefit from the reduction of the Philippine dividend tax rate unless its home
country gives it some relief from double taxation (i.e., second-tier taxation) (the home country would simply have
more "post-R.P. tax" income to subject to its own taxing power) by allowing the investor additional tax credits which
would be applicable against the tax payable to such home country. Accordingly, Section 24 (b) (1), NIRC, requires the
home or domiciliary country to give the investor corporation a "deemed paid" tax credit at least equal in amount to the
twenty (20) percentage points of dividend tax foregone by the Philippines, in the assumption that a positive incentive
effect would thereby be felt by the investor.
The net effect upon the foreign investor may be shown arithmetically in the following manner:
P65.00 Dividends remittable to P&G-USA (please
see page 392 above
- 9.75 Reduced R.P. dividend tax withheld by P&G-Phil.
P55.25 Dividends actually remitted to P&G-USA

P55.25
x 46% Maximum US corporate income tax rate
P25.415US corporate tax payable by P&G-USA

without tax credits
P25.415
- 9.75 US tax credit for RP dividend tax withheld by P&G-Phil.
at 15% (Section 901, US Tax Code)
P15.66 US corporate income tax payable after Section 901

tax credit.
P55.25
- 15.66
P39.59 Amount received by P&G-USA net of R.P. and U.S.

===== taxes without "deemed paid" tax credit.
P25.415
- 29.75 "Deemed paid" tax credit under Section 902 US
Tax Code (please see page 18 above)
- 0 - US corporate income tax payable on dividends
====== remitted by P&G-Phil. to P&G-USA after
Section 902 tax credit.
P55.25 Amount received by P&G-USA net of RP and US

====== taxes after Section 902 tax credit.
It will be seen that the "deemed paid" tax credit allowed by Section 902, US Tax Code, could offset the US corporate
income tax payable on the dividends remitted by P&G-Phil. The result, in fine, could be that P&G-USA would after US
tax credits, still wind up with P55.25, the full amount of the dividends remitted to P&G-USA net of Philippine taxes. In
the calculation of the Philippine Government, this should encourage additional investment or re-investment in the
Philippines by P&G-USA.
3. It remains only to note that under the Philippines-United States Convention "With Respect to Taxes on Income," 15
the Philippines, by a treaty commitment, reduced the regular rate of dividend tax to a maximum of twenty percent
(20%) of the gross amount of dividends paid to US parent corporations:
Art 11. Dividends
xxx xxx xxx
(2) The rate of tax imposed by one of the Contracting States on dividends derived from
sources within that Contracting State by a resident of the other Contracting State shall
not exceed
(a) 25 percent of the gross amount of the dividend; or
(b) When the recipient is a corporation, 20 percent of the gross amount of the dividend
if during the part of the paying corporation's taxable year which precedes the date of
payment of the dividend and during the whole of its prior taxable year (if any), at least
10 percent of the outstanding shares of the voting stock of the paying corporation was
owned by the recipient corporation.
xxx xxx xxx
(Emphasis supplied)
The Tax Convention, at the same time, established a treaty obligation on the part of the United States that it "shall
allow" to a US parent corporation receiving dividends from its Philippine subsidiary "a [tax] credit for the appropriate
amount of taxes paid or accrued to the Philippines by the Philippine [subsidiary] .16 This is, of course, precisely the
"deemed paid" tax credit provided for in Section 902, US Tax Code, discussed above. Clearly, there is here on the part
of the Philippines a deliberate undertaking to reduce the regular dividend tax rate of twenty percent (20%) is a
maximum rate, there is still a differential or additional reduction of five (5) percentage points which compliance of US
law (Section 902) with the requirements of Section 24 (b) (1), NIRC, makes available in respect of dividends from a
Philippine subsidiary.
We conclude that private respondent P&G-Phil, is entitled to the tax refund or tax credit which it seeks.
WHEREFORE, for all the foregoing, the Court Resolved to GRANT private respondent's Motion for Reconsideration dated
11 May 1988, to SET ASIDE the Decision of the and Division of the Court promulgated on 15 April 1988, and in lieu
thereof, to REINSTATE and AFFIRM the Decision of the Court of Tax Appeals in CTA Case No. 2883 dated 31 January
1984 and to DENY the Petition for Review for lack of merit. No pronouncement as to costs.
Narvasa, Gutierrez, Jr., Grio-Aquino, Medialdea and Romero, JJ., concur.
Fernan, C.J., is on leave.
Separate Opinions
CRUZ, J., concurring:

I join Mr. Justice Feliciano in his excellent analysis of the difficult issues we are now asked to resolve.
As I understand it, the intention of Section 24 (b) of our Tax Code is to attract foreign investors to this country by
reducing their 35% dividend tax rate to 15% if their own state allows them a deemed paid tax credit at least equal in
amount to the 20% waived by the Philippines. This tax credit would offset the tax payable by them on their profits to
their home state. In effect, both the Philippines and the home state of the foreign investors reduce their respective tax
"take" of those profits and the investors wind up with more left in their pockets. Under this arrangement, the total
taxes to be paid by the foreign investors may be confined to the 35% corporate income tax and 15% dividend tax only,
both payable to the Philippines, with the US tax liability being offset wholly or substantially by the US "deemed paid"
tax credits.
Without this arrangement, the foreign investors will have to pay to the local state (in addition to the 35% corporate
income tax) a 35% dividend tax and another 35% or more to their home state or a total of 70% or more on the same
amount of dividends. In this circumstance, it is not likely that many such foreign investors, given the onerous burden of
the two-tier system, i.e., local state plus home state, will be encouraged to do business in the local state.
It is conceded that the law will "not trigger off an instant surge of revenue," as indeed the tax collectible by the
Republic from the foreign investor is considerably reduced. This may appear unacceptable to the superficial viewer.
But this reduction is in fact the price we have to offer to persuade the foreign company to invest in our country and
contribute to our economic development. The benefit to us may not be immediately available in instant revenues but it
will be realized later, and in greater measure, in terms of a more stable and robust economy.
BIDIN, J., concurring:

I agree with the opinion of my esteemed brother, Mr. Justice Florentino P. Feliciano. However, I wish to add some
observations of my own, since I happen to be the ponente in Commissioner of Internal Revenue v. Wander Philippines,
Inc. (160 SCRA 573 [1988]), a case which reached a conclusion that is diametrically opposite to that sought to be
reached in the instant Motion for Reconsideration.
1. In page 5 of his dissenting opinion, Mr. Justice Edgardo L. Paras argues that the failure of petitioner Commissioner of
Internal Revenue to raise before the Court of Tax Appeals the issue of who should be the real party in interest in
claiming a refund cannot prejudice the government, as such failure is merely a procedural defect; and that moreover,
the government can never be in estoppel, especially in matters involving taxes. In a word, the dissenting opinion
insists that errors of its agents should not jeopardize the government's position.
The above rule should not be taken absolutely and literally; if it were, the government would never lose any litigation
which is clearly not true. The issue involved here is not merely one of procedure; it is also one of fairness: whether the
government should be subject to the same stringent conditions applicable to an ordinary litigant. As the Court had
declared in Wander:
. . . To allow a litigant to assume a different posture when he comes before the court and challenge the
position he had accepted at the administrative level, would be to sanction a procedure whereby the
Court which is supposed to review administrative determinations would not review, but determine
and decide for the first time, a question not raised at the administrative forum. . . . (160 SCRA at 566577)
Had petitioner been forthright earlier and required from private respondent proof of authority from its parent
corporation, Procter and Gamble USA, to prosecute the claim for refund, private respondent would doubtless have
been able to show proof of such authority. By any account, it would be rank injustice not at this stage to require
petitioner to submit such proof.
2. In page 8 of his dissenting opinion, Paras, J., stressed that private respondent had failed: (1) to show the actual
amount credited by the US government against the income tax due from P & G USA on the dividends received from
private respondent; (2) to present the 1975 income tax return of P & G USA when the dividends were received; and (3)
to submit any duly authenticated document showing that the US government credited the 20% tax deemed paid in the
Philippines.
I agree with the main opinion of my colleague, Feliciano J., specifically in page 23 et seq. thereof, which, as I
understand it, explains that the US tax authorities are unable to determine the amount of the "deemed paid" credit to
be given P & G USA so long as the numerator of the fraction, i.e., dividends actually remitted by P & G-Phil. to P & G
USA, is still unknown. Stated in other words, until dividends have actually been remitted to the US (which presupposes
an actual imposition and collection of the applicable Philippine dividend tax rate), the US tax authorities cannot
determine the "deemed paid" portion of the tax credit sought by P & G USA. To require private respondent to show
documentary proof of its parent corporation having actually received the "deemed paid" tax credit from the proper tax
authorities, would be like putting the cart before the horse. The only way of cutting through this (what Feliciano, J.,
termed) "circularity" is for our BIR to issue rulings (as they have been doing) to the effect that the tax laws of
particular foreign jurisdictions, e.g., USA, comply with the requirements in our tax code for applicability of the reduced
15% dividend tax rate. Thereafter, the taxpayer can be required to submit, within a reasonable period, proof of the
amount of "deemed paid" tax credit actually granted by the foreign tax authority. Imposing such a resolutory condition
should resolve the knotty problem of circularity.
3. Page 8 of the dissenting opinion of Paras, J., further declares that tax refunds, being in the nature of tax exemptions,
are to be construed strictissimi juris against the person or entity claiming the exemption; and that refunds cannot be
permitted to exist upon "vague implications."
Notwithstanding the foregoing canon of construction, the fundamental rule is still that a judge must ascertain and give
effect to the legislative intent embodied in a particular provision of law. If a statute (including a tax statute reducing a
certain tax rate) is clear, plain and free from ambiguity, it must be given its ordinary meaning and applied without
interpretation. In the instant case, the dissenting opinion of Paras, J., itself concedes that the basic purpose of Pres.
Decree No. 369, when it was promulgated in 1975 to amend Section 24(b), [11 of the National Internal Revenue Code,
was "to decrease the tax liability" of the foreign capital investor and thereby to promote more inward foreign
investment. The same dissenting opinion hastens to add, however, that the granting of a reduced dividend tax rate "is
premised on reciprocity."
4. Nowhere in the provisions of P.D. No. 369 or in the National Internal Revenue Code itself would one find reciprocity
specified as a condition for the granting of the reduced dividend tax rate in Section 24 (b), [1], NIRC. Upon the other
hand, where the law-making authority intended to impose a requirement of reciprocity as a condition for grant of a
privilege, the legislature does so expressly and clearly. For example, the gross estate of non-citizens and non-residents
of the Philippines normally includes intangible personal property situated in the Philippines, for purposes of application
of the estate tax and donor's tax. However, under Section 98 of the NIRC (as amended by P.D. 1457), no taxes will be
collected by the Philippines in respect of such intangible personal property if the law or the foreign country of which
the decedent was a citizen and resident at the time of his death allows a similar exemption from transfer or death
taxes in respect of intangible personal property located in such foreign country and owned by Philippine citizens not
residing in that foreign country.
There is no statutory requirement of reciprocity imposed as a condition for grant of the reduced dividend tax rate of
15% Moreover, for the Court to impose such a requirement of reciprocity would be to contradict the basic policy
underlying P.D. 369 which amended Section 24(b), [1], NIRC, P.D. 369 was promulgated in the effort to promote the
inflow of foreign investment capital into the Philippines. A requirement of reciprocity, i.e., a requirement that the U.S.
grant a similar reduction of U.S. dividend taxes on remittances by the U.S. subsidiaries of Philippine corporations,
would assume a desire on the part of the U.S. and of the Philippines to attract the flow of Philippine capital into the
U.S.. But the Philippines precisely is a capital importing, and not a capital exporting country. If the Philippines had
surplus capital to export, it would not need to import foreign capital into the Philippines. In other words, to require
dividend tax reciprocity from a foreign jurisdiction would be to actively encourage Philippine corporations to invest
outside the Philippines, which would be inconsistent with the notion of attracting foreign capital into the Philippines in
the first place.
5. Finally, in page 15 of his dissenting opinion, Paras, J., brings up the fact that:
Wander cited as authority a BIR ruling dated May 19, 1977, which requires a remittance tax of only
15%. The mere fact that in this Procter and Gamble case, the BIR desires to charge 35% indicates that
the BIR ruling cited in Wander has been obviously discarded today by the BIR. Clearly, there has been
a change of mind on the part of the BIR.
As pointed out by Feliciano, J., in his main opinion, even while the instant case was pending before the Court of Tax
Appeals and this Court, the administrative rulings issued by the BIR from 1976 until as late as 1987, recognized the
"deemed paid" credit referred to in Section 902 of the U.S. Tax Code. To date, no contrary ruling has been issued by the
BIR.
For all the foregoing reasons, private respondent's Motion for Reconsideration should be granted and I vote
accordingly.
PARAS, J., dissenting:

I dissent.
The decision of the Second Division of this Court in the case of "Commissioner of Internal Revenue vs. Procter &
Gamble Philippine Manufacturing Corporation, et al.," G.R. No. 66838, promulgated on April 15, 1988 is sought to be
reviewed in the Motion for Reconsideration filed by private respondent. Procter & Gamble Philippines (PMC-Phils., for
brevity) assails the Court's findings that:
(a) private respondent (PMC-Phils.) is not a proper party to claim the refund/tax credit;
(b) there is nothing in Section 902 or other provision of the US Tax Code that allows a
credit against the U.S. tax due from PMC-U.S.A. of taxes deemed to have been paid in
the Phils. equivalent to 20% which represents the difference between the regular tax of
35% on corporations and the tax of 15% on dividends;
(c) private respondent failed to meet certain conditions necessary in order that the
dividends received by the non-resident parent company in the U.S. may be subject to
the preferential 15% tax instead of 35%. (pp. 200-201, Motion for Reconsideration)
Private respondent's position is based principally on the decision rendered by the Third Division of this Court in the
case of "Commissioner of Internal Revenue vs. Wander Philippines, Inc. and the Court of Tax Appeals," G.R. No. 68375,
promulgated likewise on April 15, 1988 which bears the same issues as in the case at bar, but held an apparent
contrary view. Private respondent advances the theory that since the Wander decision had already become final and
executory it should be a precedent in deciding similar issues as in this case at hand.
Yet, it must be noted that the Wander decision had become final and executory only by reason of the failure of the
petitioner therein to file its motion for reconsideration in due time. Petitioner received the notice of judgment on April
22, 1988 but filed a Motion for Reconsideration only on June 6, 1988, or after the decision had already become final
and executory on May 9, 1988. Considering that entry of final judgment had already been made on May 9, 1988, the
Third Division resolved to note without action the said Motion. Apparently therefore, the merits of the motion for
reconsideration were not passed upon by the Court.
The 1987 Constitution provides that a doctrine or principle of law previously laid down either en banc or in Division
may be modified or reversed by the court en banc. The case is now before this Court en banc and the decision that will
be handed down will put to rest the present controversy.
It is true that private respondent, as withholding agent, is obliged by law to withhold and to pay over to the Philippine
government the tax on the income of the taxpayer, PMC-U.S.A. (parent company). However, such fact does not
necessarily connote that private respondent is the real party in interest to claim reimbursement of the tax alleged to
have been overpaid. Payment of tax is an obligation physically passed off by law on the withholding agent, if any, but
the act of claiming tax refund is a right that, in a strict sense, belongs to the taxpayer which is private respondent's
parent company. The role or function of PMC-Phils., as the remitter or payor of the dividend income, is merely to insure
the collection of the dividend income taxes due to the Philippine government from the taxpayer, "PMC-U.S.A.," the nonresident foreign corporation not engaged in trade or business in the Philippines, as "PMC-U.S.A." is subject to tax
equivalent to thirty five percent (35%) of the gross income received from "PMC-Phils." in the Philippines "as . . .
dividends . . ." (Sec. 24 [b], Phil. Tax Code). Being a mere withholding agent of the government and the real party in
interest being the parent company in the United States, private respondent cannot claim refund of the alleged
overpaid taxes. Such right properly belongs to PMC-U.S.A. It is therefore clear that as held by the Supreme Court in a
series of cases, the action in the Court of Tax Appeals as well as in this Court should have been brought in the name of
the parent company as petitioner and not in the name of the withholding agent. This is because the action should be
brought under the name of the real party in interest. (See Salonga v. Warner Barnes, & Co., Ltd., 88 Phil. 125;
Sutherland, Code Pleading, Practice, & Forms, p. 11; Ngo The Hua v. Chung Kiat Hua, L-17091, Sept. 30, 1963, 9 SCRA
113; Gabutas v. Castellanes, L-17323, June 23, 1965, 14 SCRA 376; Rep. v. PNB, L-16485, January 30, 1945).
Rule 3, Sec. 2 of the Rules of Court provides:
Sec. 2. Parties in interest. Every action must be prosecuted and defended in the name of the real
party in interest. All persons having an interest in the subject of the action and in obtaining the relief
demanded shall be joined as plaintiffs. All persons who claim an interest in the controversy or the
subject thereof adverse to the plaintiff, or who are necessary to a complete determination or
settlement of the questions involved therein shall be joined as defendants.
It is true that under the Internal Revenue Code the withholding agent may be sued by itself if no remittance tax is paid,
or if what was paid is less than what is due. From this, Justice Feliciano claims that in case of an overpayment (or claim
for refund) the agent must be given the right to sue the Commissioner by itself (that is, the agent here is also a real
party in interest). He further claims that to deny this right would be unfair. This is not so. While payment of the tax due
is an OBLIGATION of the agent the obtaining of a refund is a RIGHT. While every obligation has a corresponding right
(and vice-versa), the obligation to pay the complete tax has the corresponding right of the government to demand the
deficiency; and the right of the agent to demand a refund corresponds to the government's duty to refund. Certainly,
the obligation of the withholding agent to pay in full does not correspond to its right to claim for the refund. It is
evident therefore that the real party in interest in this claim for reimbursement is the principal (the mother
corporation) and NOT the agent.
This suit therefore for refund must be DISMSSED.
In like manner, petitioner Commissioner of Internal Revenue's failure to raise before the Court of Tax Appeals the issue
relating to the real party in interest to claim the refund cannot, and should not, prejudice the government. Such is
merely a procedural defect. It is axiomatic that the government can never be in estoppel, particularly in matters
involving taxes. Thus, for example, the payment by the tax-payer of income taxes, pursuant to a BIR assessment does
not preclude the government from making further assessments. The errors or omissions of certain administrative
officers should never be allowed to jeopardize the government's financial position. (See: Phil. Long Distance Tel. Co. v.
Coll. of Internal Revenue, 90 Phil. 674; Lewin v. Galang, L-15253, Oct. 31, 1960; Coll. of Internal Revenue v. Ellen Wood
McGrath, L-12710, L-12721, Feb. 28, 1961; Perez v. Perez, L-14874, Sept, 30, 1960; Republic v. Caballero, 79 SCRA
179; Favis v. Municipality of Sabongan, L-26522, Feb. 27, 1963).
As regards the issue of whether PMC-U.S.A. is entitled under the U.S. Tax Code to a United States Foreign Tax Credit
equivalent to at least 20 percentage paid portion spared or waived as otherwise deemed waived by the government,
We reiterate our ruling that while apparently, a tax-credit is given, there is actually nothing in Section 902 of the U.S.
Internal Revenue Code, as amended by Public Law-87-834 that would justify tax return of the disputed 15% to the
private respondent. This is because the amount of tax credit purportedly being allowed is not fixed or ascertained,
hence we do not know whether or not the tax credit contemplated is within the limits set forth in the law. While the
mathematical computations in Justice Feliciano's separate opinion appear to be correct, the computations suffer from a
basic defect, that is we have no way of knowing or checking the figure used as premises. In view of the ambiguity of
Sec. 902 itself, we can conclude that no real tax credit was really intended. In the interpretation of tax statutes, it is
axiomatic that as between the interest of multinational corporations and the interest of our own government, it would
be far better, in the absence of definitive guidelines, to favor the national interest. As correctly pointed out by the
Solicitor General:
. . . the tax-sparing credit operates on dummy, fictional or phantom taxes, being considered as if paid
by the foreign taxing authority, the host country.
In the context of the case at bar, therefore, the thirty five (35%) percent on the dividend income of
PMC-U.S.A. would be reduced to fifteen (15%) percent if & only if reciprocally PMC-U.S.A's home
country, the United States, not only would allow against PMC-U.SA.'s U.S. income tax liability a foreign
tax credit for the fifteen (15%) percentage-point portion of the thirty five (35%) percent Phil. dividend
tax actually paid or accrued but also would allow a foreign tax "sparing" credit for the twenty (20%)'
percentage-point portion spared, waived, forgiven or otherwise deemed as if paid by the Phil. govt. by
virtue of the "tax credit sparing" proviso of Sec. 24(b), Phil. Tax Code." (Reply Brief, pp. 23-24; Rollo,
pp. 239-240).
Evidently, the U.S. foreign tax credit system operates only on foreign taxes actually paid by U.S. corporate taxpayers,
whether directly or indirectly. Nowhere under a statute or under a tax treaty, does the U.S. government recognize
much less permit any foreign tax credit for spared or ghost taxes, as in reality the U.S. foreign-tax credit mechanism
under Sections 901-905 of the U.S. Intemal Revenue Code does not apply to phantom dividend taxes in the form of
dividend taxes waived, spared or otherwise considered "as if" paid by any foreign taxing authority, including that of
the Philippine government.
Beyond, that, the private respondent failed: (1) to show the actual amount credited by the U.S. government against
the income tax due from PMC-U.S.A. on the dividends received from private respondent; (2) to present the income tax
return of its parent company for 1975 when the dividends were received; and (3) to submit any duly authenticated
document showing that the U.S. government credited the 20% tax deemed paid in the Philippines.
Tax refunds are in the nature of tax exemptions. As such, they are regarded 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 . . . and cannot be permitted to exist upon vague implications. (Asiatic Petroleum Co. v. Llanes, 49 Phil.
466; Northern Phil Tobacco Corp. v. Mun. of Agoo, La Union, 31 SCRA 304; Rogan v. Commissioner, 30 SCRA 968;
Asturias Sugar Central, Inc. v. Commissioner of Customs, 29 SCRA 617; Davao Light and Power Co. Inc. v.
Commissioner of Custom, 44 SCRA 122). Thus, when tax exemption is claimed, it must be shown indubitably to exist,
for every presumption is against it, and a well founded doubt is fatal to the claim (Farrington v. Tennessee & Country
Shelby, 95 U.S. 679, 686; Manila Electric Co. v. Vera, L-29987, Oct. 22, 1975; Manila Electric Co. v. Tabios, L-23847,
Oct. 22, 1975, 67 SCRA 451).
It will be remembered that the tax credit appertaining to remittances abroad of dividend earned here in the Philippines
was amplified in Presidential Decree No. 369 promulgated in 1975, the purpose of which was to "encourage more
capital investment for large projects." And its ultimate purpose is to decrease the tax liability of the corporation
concerned. But this granting of a preferential right is premised on reciprocity, without which there is clearly a
derogation of our country's financial sovereignty. No such reciprocity has been proved, nor does it actually exist. At this
juncture, it would be useful to bear in mind the following observations:
The continuing and ever-increasing transnational movement of goods and services, the emergence of multinational
corporations and the rise in foreign investments has brought about tremendous pressures on the tax system to
strengthen its competence and capability to deal effectively with issues arising from the foregoing phenomena.
International taxation refers to the operationalization of the tax system on an international level. As it is, international
taxation deals with the tax treatment of goods and services transferred on a global basis, multinational corporations
and foreign investments.
Since the guiding philosophy behind international trade is free flow of goods and services, it goes without saying that
the principal objective of international taxation is to see through this ideal by way of feasible taxation arrangements
which recognize each country's sovereignty in the matter of taxation, the need for revenue and the attainment of
certain policy objectives.
The institution of feasible taxation arrangements, however, is hard to come by. To begin with, international tax subjects
are obviously more complicated than their domestic counter-parts. Hence, the devise of taxation arrangements to deal
with such complications requires a welter of information and data build-up which generally are not readily obtainable
and available. Also, caution must be exercised so that whatever taxation arrangements are set up, the same do not
get in the way of free flow of goods and services, exchange of technology, movement of capital and investment
initiatives.
A cardinal principle adhered to in international taxation is the avoidance of double taxation. The phenomenon of
double taxation (i.e., taxing an item more than once) arises because of global movement of goods and services.
Double taxation also occurs because of overlaps in tax jurisdictions resulting in the taxation of taxable items by the
country of source or location (source or situs rule) and the taxation of the same items by the country of residence or
nationality of the taxpayer (domiciliary or nationality principle).
An item may, therefore, be taxed in full in the country of source because it originated there, and in another country
because the recipient is a resident or citizen of that country. If the taxes in both countries are substantial and no tax
relief is offered, the resulting double taxation would serve as a discouragement to the activity that gives rise to the
taxable item.
As a way out of double taxation, countries enter into tax treaties. A tax treaty 1 is a bilateral convention (but may be
made multilateral) entered into between sovereign states for purposes of eliminating double taxation on income and
capital, preventing fiscal evasion, promoting mutual trade and investment, and according fair and equitable tax
treatment to foreign residents or nationals. 2
A more general way of mitigating the impact of double taxation is to recognize the foreign tax either as a tax credit or
an item of deduction.
Whether the recipient resorts to tax credit or deduction is dependent on the tax advantage or savings that would be
derived therefrom.
A principal defect of the tax credit system is when low tax rates or special tax concessions are granted in a country for
the obvious reason of encouraging foreign investments. For instance, if the usual tax rate is 35 percent but a
concession rate accrues to the country of the investor rather than to the investor himself To obviate this, a tax sparing
provision may be stipulated. With tax sparing, taxes exempted or reduced are considered as having been fully paid.
To illustrate:
"X" Foreign Corporation income 100
Tax rate (35%) 35
RP income 100
Tax rate (general, 35%
concession rate, 15%) 15
1. "X" Foreign Corp. Tax Liability without Tax Sparing
RP income 100
Total Income 200
"X" tax payable 70
Less: RP tax 15
Net "X" tax payable 55
2. "X" Foreign Corp. Tax Liability with Tax Sparing
"X" Foreign Corp. income 100
RP income 100
Total income 200
"X" Foreign Corp. tax payable 70
Less: RP tax (35% of 100, the
difference of 20% between 35% and 15%,
deemed paid to RP)
Net "X" Foreign Corp.
tax payable 35
By way of resume, We may say that the Wander decision of the Third Division cannot, and should not result in the
reversal of the Procter & Gamble decision for the following reasons:
1) The Wander decision cannot serve as a precedent under the doctrine of stare decisis. It was promulgated on the
same day the decision of the Second Division was promulgated, and while Wander has attained finality this is simply
because no motion for reconsideration thereof was filed within a reasonable period. Thus, said Motion for
Reconsideration was theoretically never taken into account by said Third Division.
2) Assuming that stare decisis can apply, We reiterate what a former noted jurist Mr. Justice Sabino Padilla aptly said:
"More pregnant than anything else is that the court shall be right." We hereby cite settled doctrines from a treatise on
Civil Law:
We adhere in our country to the doctrine of stare decisis (let it stand, et non quieta movere) for
reasons of stability in the law. The doctrine, which is really "adherence to precedents," states that once
a case has been decided one way, then another case, involving exactly the same point at issue, should
be decided in the same manner.
Of course, when a case has been decided erroneously such an error must not be perpetuated by blind
obedience to the doctrine of stare decisis. No matter how sound a doctrine may be, and no matter how
long it has been followed thru the years, still if found to be contrary to law, it must be abandoned. The
principle of stare decisis does not and should not apply when there is a conflict between the precedent
and the law (Tan Chong v. Sec. of Labor, 79 Phil. 249).
While stability in the law is eminently to be desired, idolatrous reverence for precedent, simply, as
precedent, no longer rules. More pregnant than anything else is that the court shall be right (Phil. Trust
Co. v. Mitchell, 59 Phil. 30).
3) Wander deals with tax relations between the Philippines and Switzerland, a country with which we have a pending
tax treaty; our Procter & Gamble case deals with relations between the Philippines and the United States, a country
with which we had no tax treaty, at the time the taxes herein were collected.
4) Wander cited as authority a BIR Ruling dated May 19, 1977, which requires a remittance tax of only 15%. The mere
fact that in this Procter and Gamble case the B.I.R. desires to charge 35% indicates that the B.I.R. Ruling cited in
Wander has been obviously discarded today by the B.I.R. Clearly, there has been a change of mind on the part of the
B.I.R.
5) Wander imposes a tax of 15% without stating whether or not reciprocity on the part of Switzerland exists. It is
evident that without reciprocity the desired consequences of the tax credit under P.D. No. 369 would be rendered
unattainable.
6) In the instant case, the amount of the tax credit deductible and other pertinent financial data have not been
presented, and therefore even were we inclined to grant the tax credit claimed, we find ourselves unable to compute
the proper amount thereof.
7) And finally, as stated at the very outset, Procter & Gamble Philippines or P.M.C. (Phils.) is not the proper party to
bring up the case.
ACCORDINGLY, the decision of the Court of Tax Appeals should be REVERSED and the motion for reconsideration of our
own decision should be DENIED.
Melencio-Herrera, Padilla, Regalado and Davide, Jr., JJ., concur.
# Separate Opinions
CRUZ, J., concurring:

I join Mr. Justice Feliciano in his excellent analysis of the difficult issues we are now asked to resolve.
As I understand it, the intention of Section 24(b) of our Tax Code is to attract foreign investors to this country by
reducing their 35% dividend tax rate to 15% if their own state allows them a deemed paid tax credit at least equal in
amount to the 20% waived by the Philippines. This tax credit would offset the tax payable by them on their profits to
their home state. In effect, both the Philippines and the home state of the foreign investors reduce their respective tax
"take" of those profits and the investors wind up with more left in their pockets. Under this arrangement, the total
taxes to be paid by the foreign investors may be confined to the 35% corporate income tax and 15% dividend tax only,
both payable to the Philippines, with the US tax hability being offset wholly or substantially by the Us "deemed paid'
tax credits.
Without this arrangement, the foreign investors will have to pay to the local state (in addition to the 35% corporate
income tax) a 35% dividend tax and another 35% or more to their home state or a total of 70% or more on the same
amount of dividends. In this circumstance, it is not likely that many such foreign investors, given the onerous burden of
the two-tier system, i.e., local state plus home state, will be encouraged to do business in the local state.
It is conceded that the law will "not trigger off an instant surge of revenue," as indeed the tax collectible by the
Republic from the foreign investor is considerably reduced. This may appear unacceptable to the superficial viewer.
But this reduction is in fact the price we have to offer to persuade the foreign company to invest in our country and
contribute to our economic development. The benefit to us may not be immediately available in instant revenues but it
will be realized later, and in greater measure, in terms of a more stable and robust economy.
BIDIN, J., concurring:

I agree with the opinion of my esteemed brother, Mr. Justice Florentino P. Feliciano. However, I wish to add some
observations of my own, since I happen to be the ponente in Commissioner of Internal Revenue v. Wander Philippines,
Inc. (160 SCRA 573 [1988]), a case which reached a conclusion that is diametrically opposite to that sought to be
reached in the instant Motion for Reconsideration.
1. In page 5 of his dissenting opinion, Mr. Justice Edgardo L. Paras argues that the failure of petitioner Commissioner of
Internal Revenue to raise before the Court of Tax Appeals the issue of who should be the real party in interest in
claiming a refund cannot prejudice the government, as such failure is merely a procedural defect; and that moreover,
the government can never in estoppel, especially in matters involving taxes. In a word, the dissenting opinion insists
that errors of its agents should not jeopardize the government's position.
The above rule should not be taken absolutely and literally; if it were, the government would never lose any litigation
which is clearly not true. The issue involved here is not merely one of procedure; it is also one of fairness: whether the
government should be subject to the same stringent conditions applicable to an ordinary litigant. As the Court had
declared in Wander:
. . . To allow a litigant to assume a different posture when he comes before the court and challenge the
position he had accepted at the administrative level, would be to sanction a procedure whereby the
Court which is supposed to review administrative determinations would not review, but determine
and decide for the first time, a question not raised at the administrative forum. ... (160 SCRA at 566577)
Had petitioner been forthright earlier and required from private respondent proof of authority from its parent
corporation, Procter and Gamble USA, to prosecute the claim for refund, private respondent would doubtless have
been able to show proof of such authority. By any account, it would be rank injustice not at this stage to require
petitioner to submit such proof.
2. In page 8 of his dissenting opinion, Paras, J., stressed that private respondent had failed: (1) to show the actual
amount credited by the US government against the income tax due from P & G USA on the dividends received from
private respondent; (2) to present the 1975 income tax return of P & G USA when the dividends were received; and (3)
to submit any duly authenticated document showing that the US government credited the 20% tax deemed paid in the
Philippines.
I agree with the main opinion of my colleagues, Feliciano J., specifically in page 23 et seq. thereof, which, as I
understand it, explains that the US tax authorities are unable to determine the amount of the "deemed paid" credit to
be given P & G USA so long as the numerator of the fraction, i.e., dividends actually remitted by P & G-Phil. to P & G
USA, is still unknown. Stated in other words, until dividends have actually been remitted to the US (which presupposes
an actual imposition and collection of the applicable Philippine dividend tax rate), the US tax authorities cannot
determine the "deemed paid" portion of the tax credit sought by P & G USA. To require private respondent to show
documentary proof of its parent corporation having actually received the "deemed paid" tax credit from the proper tax
authorities, would be like putting the cart before the horse. The only way of cutting through this (what Feliciano, J.,
termed) "circularity" is for our BIR to issue rulings (as they have been doing) to the effect that the tax laws of
particular foreign jurisdictions, e.g., USA, comply with the requirements in our tax code for applicability of the reduced
15% dividend tax rate. Thereafter, the taxpayer can be required to submit, within a reasonable period, proof of the
amount of "deemed paid" tax credit actually granted by the foreign tax authority. Imposing such a resolutory condition
should resolve the knotty problem of circularity.
3. Page 8 of the dissenting opinion of Paras, J., further declares that tax refunds, being in the nature of tax exemptions,
are to be construed strictissimi juris against the person or entity claiming the exemption; and that refunds cannot be
permitted to exist upon "vague implications."
Notwithstanding the foregoing canon of construction, the fundamental rule is still that a judge must ascertain and give
effect to the legislative intent embodied in a particular provision of law. If a statute (including a tax statute reducing a
certain tax rate) is clear, plain and free from ambiguity, it must be given its ordinary meaning and applied without
interpretation. In the instant case, the dissenting opinion of Paras, J., itself concedes that the basic purpose of Pres.
Decree No. 369, when it was promulgated in 1975 to amend Section 24(b), [11 of the National Internal Revenue Code,
was "to decrease the tax liability" of the foreign capital investor and thereby to promote more inward foreign
investment. The same dissenting opinion hastens to add, however, that the granting of a reduced dividend tax rate "is
premised on reciprocity."
4. Nowhere in the provisions of P.D. No. 369 or in the National Internal Revenue Code itself would one find reciprocity
specified as a condition for the granting of the reduced dividend tax rate in Section 24 (b), [1], NIRC. Upon the other
hand. where the law-making authority intended to impose a requirement of reciprocity as a condition for grant of a
privilege, the legislature does so expressly and clearly. For example, the gross estate of non-citizens and non-residents
of the Philippines normally includes intangible personal property situated in the Philippines, for purposes of application
of the estate tax and donor's tax. However, under Section 98 of the NIRC (as amended by P.D. 1457), no taxes will be
collected by the Philippines in respect of such intangible personal property if the law or the foreign country of which
the decedent was a citizen and resident at the time of his death allows a similar exemption from transfer or death
taxes in respect of intangible personal property located in such foreign country and owned by Philippine citizens not
residing in that foreign country.
There is no statutory requirement of reciprocity imposed as condition for grant of the reduced dividend tax rate of 15%
Moreover, for the Court to impose such a requirement of reciprocity would be to contradict the basic policy underlying
P.D. 369 which amended Section 24(b), [1], NIRC, P.D. 369 was promulgated in the effort to promote the inflow of
foreign investment capital into the Philippines. A requirement of reciprocity, i.e., a requirement that the U.S. grant a
similar reduction of U.S. dividend taxes on remittances by the U.S. subsidiary of Philippine corporations, would assume
a desire on the part of the U.S. and of the Philippines to attract the flow of Philippine capital into the U.S.. But the
Philippines precisely is a capital importing, and not a capital exporting country. If the Philippines had surplus capital to
export, it would not need to import foreign capital into the Philippines. In other words, to require dividend tax
reciprocity from a foreign jurisdiction would be to actively encourage Philippine corporations to invest outside the
Philippines, which would be inconsistent with the notion of attracting foreign capital into the Philippines in the first
place.
5. Finally, in page 15 of his dissenting opinion, Paras, J., brings up the fact that:
Wander cited as authority a BIR ruling dated May 19, 1977, which requires a remittance tax of only
15%. The mere fact that in this Procter and Gamble case, the BIR desires to charge 35% indicates that
the BIR ruling cited in Wander has been obviously discarded today by the BIR. Clearly, there has been
a change of mind on the part of the BIR.
As pointed out by Feliciano, J., in his main opinion, even while the instant case was pending before the Court of Tax
Appeals and this Court, the administrative rulings issued by the BIR from 1976 until as late as 1987, recognized the
"deemed paid" credit referred to in Section 902 of the U.S. Tax Code. To date, no contrary ruling has been issued by the
BIR.
For all the foregoing reasons, private respondent's Motion for Reconsideration should be granted and I vote
accordingly.
PARAS, J., dissenting:

I dissent.
The decision of the Second Division of this Court in the case of "Commissioner of Internal Revenue vs. Procter &
Gamble Philippine Manufacturing Corporation, et al.," G.R. No. 66838, promulgated on April 15,1988 is sought to be
reviewed in the Motion for Reconsideration filed by private respondent. Procter & Gamble Philippines (PMC-Phils., for
brevity) assails the Court's findings that:
(a) private respondent (PMC-Phils.) is not a proper party to claim the refund/tax aredit;
(b) there is nothing in Section 902 or other provision of the US Tax Code that allows a
credit against the U.S. tax due from PMC-U.S.A. of taxes deemed to have been paid in
the Phils. equivalent to 20% which represents the difference between the regular tax of
35% on corporations and the tax of 15% on dividends;
(c) private respondent failed to meet certain conditions necessary in order that the
dividends received by the non-resident parent company in the U.S. may be subject to
the preferential 15% tax instead of 35%. (pp, 200-201, Motion for Reconsideration)
Private respondent's position is based principally on the decision rendered by the Third Division of this Court in the
case of "Commissioner of Internal Revenue vs. Wander Philippines, Inc. and the Court of Tax Appeals," G.R. No. 68375,
promulgated likewise on April 15, 1988 which bears the same issues as in the case at bar, but held an apparent
contrary view. Private respondent advances the theory that since the Wander decision had already become final and
executory it should be a precedent in deciding similar issues as in this case at hand.
Yet, it must be noted that the Wander decision had become final and executory only by reason of the failure of the
petitioner therein to file its motion for reconsideration in due time. Petitioner received the notice of judgment on April
22, 1988 but filed a Motion for Reconsideration only on June 6, 1988, or after the decision had already become final
and executory on May 9, 1988. Considering that entry of final judgment had already been made on May 9, 1988, the
Third Division resolved to note without action the said Motion. Apparently therefore, the merits of the motion for
reconsideration were not passed upon by the Court.
The 1987 Constitution provides that a doctrine or principle of law previously laid down either en banc or in Division
may be modified or reversed by the court en banc. The case is now before this Court en banc and the decision that will
be handed down will put to rest the present controversy.
It is true that private respondent, as withholding agent, is obliged by law to withhold and to pay over to the Philippine
government the tax on the income of the taxpayer, PMC-U.S.A. (parent company). However, such fact does not
necessarily connote that private respondent is the real party in interest to claim reimbursement of the tax alleged to
have been overpaid. Payment of tax is an obligation physically passed off by law on the withholding agent, if any, but
the act of claiming tax refund is a right that, in a strict sense, belongs to the taxpayer which is private respondent's
parent company. The role or function of PMC-Phils., as the remitter or payor of the dividend income, is merely to insure
the collection of the dividend income taxes due to the Philippine government from the taxpayer, "PMC-U.S.A.," the non-
resident foreign corporation not engaged in trade or business in the Philippines, as "PMC-U.S.A." is subject to tax
equivalent to thirty five percent (35%) of the gross income received from "PMC-Phils." in the Philippines "as ...
dividends ..."(Sec. 24[b],Phil. Tax Code). Being a mere withholding agent of the government and the real party in
interest being the parent company in the United States, private respondent cannot claim refund of the alleged
overpaid taxes. Such right properly belongs to PMC-U.S.A. It is therefore clear that as held by the Supreme Court in a
series of cases, the action in the Court of Tax Appeals as well as in this Court should have been brought in the name of
the parent company as petitioner and not in the name of the withholding agent. This is because the action should be
brought under the name of the real party in interest. (See Salonga v. Warner Barnes, & Co., Ltd., 88 Phil. 125;
Sutherland, Code Pleading, Practice, & Forms, p. 11; Ngo The Hua v. Chung Kiat Hua, L-17091, Sept. 30, 1963, 9 SCRA
113; Gabutas v. Castellanes, L-17323, June 23, 1965, 14 SCRA 376; Rep. v. PNB, I, 16485, January 30, 1945).
Rule 3, Sec. 2 of the Rules of Court provides:
Sec. 2. Parties in interest. Every action must be prosecuted and defended in the name of the real
party in interest. All persons having an interest in the subject of the action and in obtaining the relief
demanded shall be joined as plaintiffs. All persons who claim an interest in the controversy or the
subject thereof adverse to the plaintiff, or who are necessary to a complete determination or
settlement of the questions involved therein shall be joined as defendants.
It is true that under the Internal Revenue Code the withholding agent may be sued by itself if no remittance tax is paid,
or if what was paid is less than what is due. From this, Justice Feliciano claims that in case of an overpayment (or claim
for refund) the agent must be given the right to sue the Commissioner by itself (that is, the agent here is also a real
party in interest). He further claims that to deny this right would be unfair. This is not so. While payment of the tax due
is an OBLIGATION of the agent, the obtaining of a refund la a RIGHT. While every obligation has a corresponding right
(and vice-versa), the obligation to pay the complete tax has the corresponding right of the government to demand the
deficiency; and the right of the agent to demand a refund corresponds to the government's duty to refund. Certainly,
the obligation of the withholding agent to pay in full does not correspond to its right to claim for the refund. It is
evident therefore that the real party in interest in this claim for reimbursement is the principal (the mother
corporation) and NOT the agent.
This suit therefore for refund must be DISMSSED.
In like manner, petitioner Commissioner of Internal Revenue's failure to raise before the Court of Tax Appeals the issue
relating to the real party in interest to claim the refund cannot, and should not, prejudice the government. Such is
merely a procedural defect. It is axiomatic that the government can never be in estoppel, particularly in matters
involving taxes. Thus, for example, the payment by the tax-payer of income taxes, pursuant to a BIR assessment does
not preclude the government from making further assessments. The errors or omissions of certain administrative
officers should never be allowed to jeopardize the government's financial position. (See: Phil. Long Distance Tel. Co. v.
Con. of Internal Revenue, 9(, Phil. 674; Lewin v. Galang, L-15253, Oct. 31, 1960; Coll. of Internal Revenue v. Ellen Wood
McGrath, L-12710, L-12721, Feb. 28,1961; Perez v. Perez, L-14874, Sept. 30,1960; Republic v. Caballero, 79 SCRA 179;
Favis v. Municipality of Sabongan, L-26522, Feb. 27,1963).
As regards the issue of whether PMC-U.S.A. is entitled under the U.S. Tax Code to a United States Foreign Tax Credit
equivalent to at least 20 percentage paid portion spared or waived as otherwise deemed waived by the government,
We reiterate our ruling that while apparently, a tax-credit is given, there is actually nothing in Section 902 of the U.S.
Internal Revenue Code, as amended by Public Law-87-834 that would justify tax return of the disputed 15% to the
private respondent. This is because the amount of tax credit purportedly being allowed is not fixed or ascertained,
hence we do not know whether or not the tax credit contemplated is within the limits set forth in the law. While the
mathematical computations in Justice Feliciano's separate opinion appear to be correct, the computations suffer from a
basic defect, that is we have no way of knowing or checking the figure used as premises. In view of the ambiguity of
Sec. 902 itself, we can conclude that no real tax credit was really intended. In the interpretation of tax statutes, it is
axiomatic that as between the interest of multinational corporations and the interest of our own government, it would
be far better, in the absence of definitive guidelines, to favor the national interest. As correctly pointed out by the
Solicitor General:
. . . the tax-sparing credit operates on dummy, fictional or phantom taxes, being considered as if paid
by the foreign taxing authority, the host country.
In the context of the case at bar, therefore, the thirty five (35%) percent on the dividend income of
PMC-U.S.A. would be reduced to fifteen (15%) percent if & only if reciprocally PMC-U.S.A's home
country, the United States, not only would allow against PMC-U.SA.'s U.S. income tax liability a foreign
tax credit for the fifteen (15%) percentage-point portion of the thirty five (35%) percent Phil. dividend
tax actually paid or accrued but also would allow a foreign tax 'sparing' credit for the twenty (20%)'
percentage-point portion spared, waived, forgiven or otherwise deemed as if paid by the Phil. govt. by
virtue of . he "tax credit sparing" proviso of Sec. 24(b), Phil. Tax Code." (Reply Brief, pp. 23-24; Rollo,
pp. 239-240).
Evidently, the U.S. foreign tax credit system operates only on foreign taxes actually paid by U.S. corporate taxpayers,
whether directly or indirectly. Nowhere under a statute or under a tax treaty, does the U.S. government recognize
much less permit any foreign tax credit for spared or ghost taxes, as in reality the U.S. foreign-tax credit mechanism
under Sections 901-905 of the U.S. Internal Revenue Code does not apply to phantom dividend taxes in the form of
dividend taxes waived, spared or otherwise considered "as if' paid by any foreign taxing authority, including that of the
Philippine government.
Beyond, that, the private respondent failed: (1) to show the actual amount credited by the U.S. government against
the income tax due from PMC-U.S.A. on the dividends received from private respondent; (2) to present the income tax
return of its parent company for 1975 when the dividends were received; and (3) to submit any duly authenticated
document showing that the U.S. government credited the 20% tax deemed paid in the Philippines.
Tax refunds are in the nature of tax exemptions. As such, they are regarded 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... and cannot be permitted to exist upon vague implications (Asiatic Petroleum Co. v. Llanes. 49 Phil. 466;
Northern Phil Tobacco Corp. v. Mun. of Agoo, La Union, 31 SCRA 304; Rogan v. Commissioner, 30 SCRA 968; Asturias
Sugar Central, Inc. v. Commissioner of Customs, 29 SCRA 617; Davao Light and Power Co. Inc. v. Commissioner of
Custom, 44 SCRA 122' Thus, when tax exemption is claimed. it must be shown indubitably to exist, for every
presumption is against it, and a well founded doubt is fatal to the claim (Farrington v. Tennessee & Country Shelby, 95
U.S. 679, 686; Manila Electric Co. v. Vera. L-29987. Oct. 22. 1975: Manila Electric Co. v. Vera, L-29987, Oct. 22, 1975;
Manila Electric Co. v. Tabios, L-23847, Oct. 22, 1975, 67 SCRA 451).
It will be remembered that the tax credit appertaining to remittances abroad of dividend earned here in the Philippines
was amplified in Presidential Decree 4 No. 369 promulgated in 1975, the purpose of which was to "encourage more
capital investment for large projects." And its ultimate purpose it to decrease the tax liability of the corporation
concerned. But this granting of a preferential right is premised on reciprocity, without which there is clearly a
derogation of our country's financial sovereignty. No such reciprocity has been proved, nor does it actually exist. At this
juncture, it would be useful to bear in mind the following observations:
The continuing and ever-increasing transnational movement of goods and services, the emergence of multinational
corporations and the rise in foreign investments has brought about tremendous pressures on the tax system to
strengthen its competence and capability to deal effectively with issues arising from the foregoing phenomena.
International taxation refers to the operationalization of the tax system on an international level. As it is, international
taxation deals with the tax treatment of goods and services transferred on a global basis, multinational corporations
and foreign investments.
Since the guiding philosophy behind international trade is free flow of goods and services, it goes without saying that
the principal objective of international taxation is to see through this ideal by way of feasible taxation arrangements
which recognize each country's sovereignty in the matter of taxation, the need for revenue and the attainment of
certain policy objectives.
The institution of feasible taxation arrangements, however, is hard to come by. To begin with, international tax subjects
are obviously more complicated than their domestic counter-parts. Hence, the devise of taxation arrangements to deal
with such complications requires a welter of information and data buildup which generally are not readily obtainable
and available. Also, caution must be exercised so that whatever taxation arrangements are set up, the same do not
get in the way of free flow of goods and services, exchange of technology, movement of capital and investment
initiatives.
A cardinal principle adhered to in international taxation is the avoidance of double taxation. The phenomenon of
double taxation (i.e., taxing an item more than once) arises because of global movement of goods and services.
Double taxation also occurs because of overlaps in tax jurisdictions resulting in the taxation of taxable items by the
country of source or location (source or situs rule) and the taxation of the same items by the country of residence or
nationality of the taxpayer (domiciliary or nationality principle).
An item may, therefore, be taxed in full in the country of source because it originated there, and in another country
because the recipient is a resident or citizen of that country. If the taxes in both countries are substantial and no tax
relief is offered, the resulting double taxation would serve as a discouragement to the activity that gives rise to the
taxable item.
As a way out of double taxation, countries enter into tax treaties. A tax treaty 1 is a bilateral convention (but may be
made multilateral) entered into between sovereign states for purposes of eliminating double taxation on income and
capital, preventing fiscal evasion, promoting mutual trade and investment, and according fair and equitable tax
treatment to foreign residents or nationals. 2
A more general way of mitigating the impact of double taxation is to recognize the foreign tax either as a tax credit or
an item of deduction.
Whether the recipient resorts to tax credit or deduction is dependent on the tax advantage or savings that would be
derived therefrom.
A principal defect of the tax credit system is when low tax rates or special tax concessions are granted in a country for
the obvious reason of encouraging foreign investments. For instance, if the usual tax rate is 35 percent but a
concession rate accrues to the country of the investor rather than to the investor himself To obviate this, a tax sparing
provision may be stipulated. With tax sparing, taxes exempted or reduced are considered as having been frilly paid.
To illustrate:
Tax rate (35%) 35
RP income 100
Tax rate (general, 35%
concession rate, 15%) 15
1. "X" Foreign Corp. Tax Liability without Tax Sparing
RP income 100
Total Income 200
"X" tax payable 70
Less: RP tax 15
Net "X" tax payable 55
2. "X" Foreign Corp. Tax Liability with Tax Sparing
"X" Foreign Corp. income 100
RP income 100
Total income 200
"X" Foreign Corp. tax payable 70
Less: RP tax (35% of 100, the
difference of 20% between 35% and 15%,
deemed paid to RP)
Net "X" Foreign Corp.
tax payable 35
By way of resume, We may say that the Wander decision of the Third Division cannot, and should not result in the
reversal of the Procter & Gamble decision for the following reasons:
1) The Wander decision cannot serve as a precedent under the doctrine of stare decisis. It was promulgated on the
same day the decision of the Second Division was promulgated, and while Wander has attained finality this is simply
because no motion for reconsideration thereof was filed within a reasonable period. Thus, said Motion for
Reconsideration was theoretically never taken into account by said Third Division.
2) Assuming that stare decisis can apply, We reiterate what a former noted jurist Mr. Justice Sabino Padilla aptly said:
"More pregnant than anything else is that the court shall be right." We hereby cite settled doctrines from a treatise on
Civil Law:
We adhere in our country to the doctrine of stare decisis (let it stand, et non quieta movere) for
reasons of stability in the law. The doctrine, which is really 'adherence to precedents,' states that once
a case has been decided one way, then another case, involving exactly the same point at issue, should
be decided in the same manner.
Of course, when a case has been decided erroneously such an error must not be perpetuated by blind
obedience to the doctrine of stare decisis. No matter how sound a doctrine may be, and no matter how
long it has been followed thru the years, still if found to be contrary to law, it must be abandoned. The
principle of stare decisis does not and should not apply when there is a conflict between the precedent
and the law (Tan Chong v. Sec. of Labor, 79 Phil. 249).
While stability in the law is eminently to be desired, idolatrous reverence for precedent, simply, as
precedent, no longer rules. More pregnant than anything else is that the court shall be right (Phil. Trust
Co. v. Mitchell, 69 Phil. 30).
3) Wander deals with tax relations between the Philippines and Switzerland, a country with which we have a pending
tax treaty; our Procter & Gamble case deals with relations between the Philippines and the United States, a country
with which we had no tax treaty, at the time the taxes herein were collected.
4) Wander cited as authority a BIR Ruling dated May 19, 1977, which requires a remittance tax of only 15%. The mere
fact that in this Procter and Gamble case the B.I.R. desires; to charge 35% indicates that the B.I.R. Ruling cited in
Wander has been obviously discarded today by the B.I.R. Clearly, there has been a change of mind on the part of the
B.I.R.
5) Wander imposes a tax of 15% without stating whether or not reciprocity on the part of Switzerland exists. It is
evident that without reciprocity the desired consequences of the tax credit under P.D. No. 369 would be rendered
unattainable.
6) In the instant case, the amount of the tax credit deductible and other pertinent financial data have not been
presented, and therefore even were we inclined to grant the tax credit claimed, we find ourselves unable to compute
the proper amount thereof.
7) And finally, as stated at the very outset, Procter & Gamble Philippines or P.M.C. (Phils.) is not the proper party to
bring up the case.
ACCORDINGLY, the decision of the Court of Tax Appeals should be REVERSED and the motion for reconsideration of our
own decision should be DENIED.
G.R. No. 163653
July 19, 2011

vs.
FILINVEST DEVELOPMENT CORPORATION, Respondent.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 167689

vs.
FILINVEST DEVELOPMENT CORPORATION, Respondent.
DECISION
PEREZ, J.:
Assailed in these twin petitions for review on certiorari filed pursuant to Rule 45 of the 1997 Rules of Civil Procedure
are the decisions rendered by the Court of Appeals (CA) in the following cases: (a) Decision dated 16 December 2003
of the then Special Fifth Division in CA-G.R. SP No. 72992; 1 and, (b) Decision dated 26 January 2005 of the then
Fourteenth Division in CA-G.R. SP No. 74510. 2
The Facts
The owner of 80% of the outstanding shares of respondent Filinvest Alabang, Inc. (FAI), respondent Filinvest
Development Corporation (FDC) is a holding company which also owned 67.42% of the outstanding shares of Filinvest
Land, Inc. (FLI). On 29 November 1996, FDC and FAI entered into a Deed of Exchange with FLI whereby the former both
transferred in favor of the latter parcels of land appraised at P4,306,777,000.00. In exchange for said parcels which
were intended to facilitate development of medium-rise residential and commercial buildings, 463,094,301 shares of
stock of FLI were issued to FDC and FAI.3 As a result of the exchange, FLIs ownership structure was changed to the
extent reflected in the following tabular prcis, viz.:
Number and Percentage of
Shares Held Prior to the
Exchange
Stockhold
er
Number of
Additional
Shares Issued
Number and Percentage of

Shares Held After the
Exchange
FDC
2,537,358,000
67.42%
42,217,000
2,579,575,000
61.03%
FAI
420,877,000
420,877,000
9.96%
OTHERS
1,226,177,000
32.58%
1,226,177,000
29.01%
3,763,535,000
100%
463,094,301
4,226,629,000
(100%)
On 13 January 1997, FLI requested a ruling from the Bureau of Internal Revenue (BIR) to the effect that no gain or loss
should be recognized in the aforesaid transfer of real properties. Acting on the request, the BIR issued Ruling No. S-34046-97 dated 3 February 1997, finding that the exchange is among those contemplated under Section 34 (c) (2) of the
old National Internal Revenue Code (NIRC)4 which provides that "(n)o gain or loss shall be recognized if property is
transferred to a corporation by a person in exchange for a stock in such corporation of which as a result of such
exchange said person, alone or together with others, not exceeding four (4) persons, gains control of said
corporation."5 With the BIRs reiteration of the foregoing ruling upon the 10 February 1997 request for clarification filed
by FLI,6 the latter, together with FDC and FAI, complied with all the requirements imposed in the ruling. 7
On various dates during the years 1996 and 1997, in the meantime, FDC also extended advances in favor of its
affiliates, namely, FAI, FLI, Davao Sugar Central Corporation (DSCC) and Filinvest Capital, Inc. (FCI). 8 Duly evidenced by
instructional letters as well as cash and journal vouchers, said cash advances amounted to P2,557,213,942.60 in 19969
and P3,360,889,677.48 in 1997.10 On 15 November 1996, FDC also entered into a Shareholders Agreement with Reco
Herrera PTE Ltd. (RHPL) for the formation of a Singapore-based joint venture company called Filinvest Asia Corporation
(FAC), tasked to develop and manage FDCs 50% ownership of its PBCom Office Tower Project (the Project). With their
equity participation in FAC respectively pegged at 60% and 40% in the Shareholders Agreement, FDC subscribed to
P500.7 million worth of shares in said joint venture company to RHPLs subscription worth P433.8 million. Having paid
its subscription by executing a Deed of Assignment transferring to FAC a portion of its rights and interest in the Project
worth P500.7 million, FDC eventually reported a net loss of P190,695,061.00 in its Annual Income Tax Return for the
taxable year 1996.11
On 3 January 2000, FDC received from the BIR a Formal Notice of Demand to pay deficiency income and documentary
stamp taxes, plus interests and compromise penalties, 12 covered by the following Assessment Notices, viz.: (a)
Assessment Notice No. SP-INC-96-00018-2000 for deficiency income taxes in the sum of P150,074,066.27 for 1996; (b)
Assessment Notice No. SP-DST-96-00020-2000 for deficiency documentary stamp taxes in the sum of P10,425,487.06
for 1996; (c) Assessment Notice No. SP-INC-97-00019-2000 for deficiency income taxes in the sum of P5,716,927.03
for 1997; and (d) Assessment Notice No. SP-DST-97-00021-2000 for deficiency documentary stamp taxes in the sum of
P5,796,699.40 for 1997.13 The foregoing deficiency taxes were assessed on the taxable gain supposedly realized by
FDC from the Deed of Exchange it executed with FAI and FLI, on the dilution resulting from the Shareholders
Agreement FDC executed with RHPL as well as the "arms-length" interest rate and documentary stamp taxes
imposable on the advances FDC extended to its affiliates. 14
On 3 January 2000, FAI similarly received from the BIR a Formal Letter of Demand for deficiency income taxes in the
sum of P1,477,494,638.23 for the year 1997.15 Covered by Assessment Notice No. SP-INC-97-0027-2000, 16 said
deficiency tax was also assessed on the taxable gain purportedly realized by FAI from the Deed of Exchange it
executed with FDC and FLI.17 On 26 January 2000 or within the reglementary period of thirty (30) days from notice of
the assessment, both FDC and FAI filed their respective requests for reconsideration/protest, on the ground that the
deficiency income and documentary stamp taxes assessed by the BIR were bereft of factual and legal basis. 18 Having
submitted the relevant supporting documents pursuant to the 31 January 2000 directive from the BIR Appellate
Division, FDC and FAI filed on 11 September 2000 a letter requesting an early resolution of their request for
reconsideration/protest on the ground that the 180 days prescribed for the resolution thereof under Section 228 of the
NIRC was going to expire on 20 September 2000.19
In view of the failure of petitioner Commissioner of Internal Revenue (CIR) to resolve their request for
reconsideration/protest within the aforesaid period, FDC and FAI filed on 17 October 2000 a petition for review with the
Court of Tax Appeals (CTA) pursuant to Section 228 of the 1997 NIRC. Docketed before said court as CTA Case No.
6182, the petition alleged, among other matters, that as previously opined in BIR Ruling No. S-34-046-97, no taxable
gain should have been assessed from the subject Deed of Exchange since FDC and FAI collectively gained further
control of FLI as a consequence of the exchange; that correlative to the CIR's lack of authority to impute theoretical
interests on the cash advances FDC extended in favor of its affiliates, the rule is settled that interests cannot be
demanded in the absence of a stipulation to the effect; that not being promissory notes or certificates of obligations,
the instructional letters as well as the cash and journal vouchers evidencing said cash advances were not subject to
documentary stamp taxes; and, that no income tax may be imposed on the prospective gain from the supposed
appreciation of FDC's shareholdings in FAC. As a consequence, FDC and FAC both prayed that the subject assessments
for deficiency income and documentary stamp taxes for the years 1996 and 1997 be cancelled and annulled. 20
On 4 December 2000, the CIR filed its answer, claiming that the transfer of property in question should not be
considered tax free since, with the resultant diminution of its shares in FLI, FDC did not gain further control of said
corporation. Likewise calling attention to the fact that the cash advances FDC extended to its affiliates were interest
free despite the interest bearing loans it obtained from banking institutions, the CIR invoked Section 43 of the old NIRC
which, as implemented by Revenue Regulations No. 2, Section 179 (b) and (c), gave him "the power to allocate,
distribute or apportion income or deductions between or among such organizations, trades or business in order to
prevent evasion of taxes." The CIR justified the imposition of documentary stamp taxes on the instructional letters as
well as cash and journal vouchers for said cash advances on the strength of Section 180 of the NIRC and Revenue
Regulations No. 9-94 which provide that loan transactions are subject to said tax irrespective of whether or not they
are evidenced by a formal agreement or by mere office memo. The CIR also argued that FDC realized taxable gain
arising from the dilution of its shares in FAC as a result of its Shareholders' Agreement with RHPL. 21
At the pre-trial conference, the parties filed a Stipulation of Facts, Documents and Issues 22 which was admitted in the
16 February 2001 resolution issued by the CTA. With the further admission of the Formal Offer of Documentary
Evidence subsequently filed by FDC and FAI23 and the conclusion of the testimony of Susana Macabelda anent the cash
advances FDC extended in favor of its affiliates,24 the CTA went on to render the Decision dated 10 September 2002
which, with the exception of the deficiency income tax on the interest income FDC supposedly realized from the
advances it extended in favor of its affiliates, cancelled the rest of deficiency income and documentary stamp taxes
assessed against FDC and FAI for the years 1996 and 1997, 25 thus:
WHEREFORE, in view of all the foregoing, the court finds the instant petition partly meritorious. Accordingly,
Assessment Notice No. SP-INC-96-00018-2000 imposing deficiency income tax on FDC for taxable year 1996,
Assessment Notice No. SP-DST-96-00020-2000 and SP-DST-97-00021-2000 imposing deficiency documentary stamp
tax on FDC for taxable years 1996 and 1997, respectively and Assessment Notice No. SP-INC-97-0027-2000 imposing
deficiency income tax on FAI for the taxable year 1997 are hereby CANCELLED and SET ASIDE. However, [FDC] is
hereby ORDERED to PAY the amount of P5,691,972.03 as deficiency income tax for taxable year 1997. In addition,
petitioner is also ORDERED to PAY 20% delinquency interest computed from February 16, 2000 until full payment
thereof pursuant to Section 249 (c) (3) of the Tax Code.26
Finding that the collective increase of the equity participation of FDC and FAI in FLI rendered the gain derived from the
exchange tax-free, the CTA also ruled that the increase in the value of FDC's shares in FAC did not result in economic
advantage in the absence of actual sale or conversion thereof. While likewise finding that the documents evidencing
the cash advances FDC extended to its affiliates cannot be considered as loan agreements that are subject to
documentary stamp tax, the CTA enunciated, however, that the CIR was justified in assessing undeclared interests on
the same cash advances pursuant to his authority under Section 43 of the NIRC in order to forestall tax evasion. For
persuasive effect, the CTA referred to the equivalent provision in the Internal Revenue Code of the United States (IRCUS), i.e., Sec. 482, as implemented by Section 1.482-2 of 1965-1969 Regulations of the Law of Federal Income
Taxation.27
Dissatisfied with the foregoing decision, FDC filed on 5 November 2002 the petition for review docketed before the CA
as CA-G.R. No. 72992, pursuant to Rule 43 of the 1997 Rules of Civil Procedure. Calling attention to the fact that the
cash advances it extended to its affiliates were interest-free in the absence of the express stipulation on interest
required under Article 1956 of the Civil Code, FDC questioned the imposition of an arm's-length interest rate thereon
on the ground, among others, that the CIR's authority under Section 43 of the NIRC: (a) does not include the power to
impute imaginary interest on said transactions; (b) is directed only against controlled taxpayers and not against
mother or holding corporations; and, (c) can only be invoked in cases of understatement of taxable net income or
evident tax evasion.28 Upholding FDC's position, the CA's then Special Fifth Division rendered the herein assailed
decision dated 16 December 2003, 29 the decretal portion of which states:
WHEREFORE, premises considered, the instant petition is hereby GRANTED. The assailed Decision dated September
10, 2002 rendered by the Court of Tax Appeals in CTA Case No. 6182 directing petitioner Filinvest Development
Corporation to pay the amount of P5,691,972.03 representing deficiency income tax on allegedly undeclared interest
income for the taxable year 1997, plus 20% delinquency interest computed from February 16, 2000 until full payment
thereof is REVERSED and SET ASIDE and, a new one entered annulling Assessment Notice No. SP-INC-97-00019-2000
imposing deficiency income tax on petitioner for taxable year 1997. No pronouncement as to costs. 30
With the denial of its partial motion for reconsideration of the same 11 December 2002 resolution issued by the CTA, 31
the CIR also filed the petition for review docketed before the CA as CA-G.R. No. 74510. In essence, the CIR argued that
the CTA reversibly erred in cancelling the assessment notices: (a) for deficiency income taxes on the exchange of
property between FDC, FAI and FLI; (b) for deficiency documentary stamp taxes on the documents evidencing FDC's
cash advances to its affiliates; and (c) for deficiency income tax on the gain FDC purportedly realized from the increase
of the value of its shareholdings in FAC.32 The foregoing petition was, however, denied due course and dismissed for
lack of merit in the herein assailed decision dated 26 January 2005 33 rendered by the CA's then Fourteenth Division,
upon the following findings and conclusions, to wit:
1. As affirmed in the 3 February 1997 BIR Ruling No. S-34-046-97, the 29 November 1996 Deed of Exchange
resulted in the combined control by FDC and FAI of more than 51% of the outstanding shares of FLI, hence, no
taxable gain can be recognized from the transaction under Section 34 (c) (2) of the old NIRC;
2. The instructional letters as well as the cash and journal vouchers evidencing the advances FDC extended to
its affiliates are not subject to documentary stamp taxes pursuant to BIR Ruling No. 116-98, dated 30 July
1998, since they do not partake the nature of loan agreements;
3. Although BIR Ruling No. 116-98 had been subsequently modified by BIR Ruling No. 108-99, dated 15 July
1999, to the effect that documentary stamp taxes are imposable on inter-office memos evidencing cash
advances similar to those extended by FDC, said latter ruling cannot be given retroactive application if to do so
would be prejudicial to the taxpayer;
4. FDC's alleged gain from the increase of its shareholdings in FAC as a consequence of the Shareholders'
Agreement it executed with RHPL cannot be considered taxable income since, until actually converted thru
sale or disposition of said shares, they merely represent unrealized increase in capital. 34
Respectively docketed before this Court as G.R. Nos. 163653 and 167689, the CIR's petitions for review on certiorari
assailing the 16 December 2003 decision in CA-G.R. No. 72992 and the 26 January 2005 decision in CA-G.R. SP No.
74510 were consolidated pursuant to the 1 March 2006 resolution issued by this Courts Third Division.
The Issues
In G.R. No. 163653, the CIR urges the grant of its petition on the following ground:
THE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE COURT OF TAX APPEALS AND IN HOLDING THAT
THE ADVANCES EXTENDED BY RESPONDENT TO ITS AFFILIATES ARE NOT SUBJECT TO INCOME TAX. 35
In G.R. No. 167689, on the other hand, petitioner proffers the following issues for resolution:
I
THE HONORABLE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION IN HOLDING THAT THE
EXCHANGE OF SHARES OF STOCK FOR PROPERTY AMONG FILINVEST DEVELOPMENT CORPORATION (FDC),
FILINVEST ALABANG, INCORPORATED (FAI) AND FILINVEST LAND INCORPORATED (FLI) MET ALL THE
REQUIREMENTS FOR THE NON-RECOGNITION OF TAXABLE GAIN UNDER SECTION 34 (c) (2) OF THE OLD
NATIONAL INTERNAL REVENUE CODE (NIRC) (NOW SECTION 40 (C) (2) (c) OF THE NIRC.
II
THE HONORABLE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN HOLDING THAT THE LETTERS OF
INSTRUCTION OR CASH VOUCHERS EXTENDED BY FDC TO ITS AFFILIATES ARE NOT DEEMED LOAN
AGREEMENTS SUBJECT TO DOCUMENTARY STAMP TAXES UNDER SECTION 180 OF THE NIRC.
III
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT GAIN ON DILUTION AS A RESULT OF
THE INCREASE IN THE VALUE OF FDCS SHAREHOLDINGS IN FAC IS NOT TAXABLE. 36
The Courts Ruling
While the petition in G.R. No. 163653 is bereft of merit, we find the CIRs petition in G.R. No. 167689 impressed with
partial merit.
In G.R. No. 163653, the CIR argues that the CA erred in reversing the CTAs finding that theoretical interests can be
imputed on the advances FDC extended to its affiliates in 1996 and 1997 considering that, for said purpose, FDC
resorted to interest-bearing fund borrowings from commercial banks. Since considerable interest expenses were
deducted by FDC when said funds were borrowed, the CIR theorizes that interest income should likewise be declared
when the same funds were sourced for the advances FDC extended to its affiliates. Invoking Section 43 of the 1993
NIRC in relation to Section 179(b) of Revenue Regulation No. 2, the CIR maintains that it is vested with the power to
allocate, distribute or apportion income or deductions between or among controlled organizations, trades or
businesses even in the absence of fraud, since said power is intended "to prevent evasion of taxes or clearly to reflect
the income of any such organizations, trades or businesses." In addition, the CIR asseverates that the CA should have
accorded weight and respect to the findings of the CTA which, as the specialized court dedicated to the study and
consideration of tax matters, can take judicial notice of US income tax laws and regulations. 37
Admittedly, Section 43 of the 1993 NIRC38 provides that, "(i)n any case of two or more organizations, trades or
businesses (whether or not incorporated and whether or not organized in the Philippines) owned or controlled directly
or indirectly by the same interests, the Commissioner of Internal Revenue is authorized to distribute, apportion or
allocate gross income or deductions between or among such organization, trade or business, if he determines that
such distribution, apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the
income of any such organization, trade or business." In amplification of the equivalent provision 39 under
Commonwealth Act No. 466,40 Sec. 179(b) of Revenue Regulation No. 2 states as follows:
Determination of the taxable net income of controlled taxpayer. (A) DEFINITIONS. When used in this section
(1) The term "organization" includes any kind, whether it be a sole proprietorship, a partnership, a
trust, an estate, or a corporation or association, irrespective of the place where organized, where
operated, or where its trade or business is conducted, and regardless of whether domestic or foreign,
whether exempt or taxable, or whether affiliated or not.
(2) The terms "trade" or "business" include any trade or business activity of any kind, regardless of
whether or where organized, whether owned individually or otherwise, and regardless of the place
where carried on.
(3) The term "controlled" includes any kind of control, direct or indirect, whether legally enforceable,
and however exercisable or exercised. It is the reality of the control which is decisive, not its form or
mode of exercise. A presumption of control arises if income or deductions have been arbitrarily shifted.
(4) The term "controlled taxpayer" means any one of two or more organizations, trades, or businesses
owned or controlled directly or indirectly by the same interests.
(5) The term "group" and "group of controlled taxpayers" means the organizations, trades or
businesses owned or controlled by the same interests.
(6) The term "true net income" means, in the case of a controlled taxpayer, the net income (or as the
case may be, any item or element affecting net income) which would have resulted to the controlled
taxpayer, had it in the conduct of its affairs (or, as the case may be, any item or element affecting net
income) which would have resulted to the controlled taxpayer, had it in the conduct of its affairs (or, as
the case may be, in the particular contract, transaction, arrangement or other act) dealt with the other
members or members of the group at arms length. It does not mean the income, the deductions, or
the item or element of either, resulting to the controlled taxpayer by reason of the particular contract,
transaction, or arrangement, the controlled taxpayer, or the interest controlling it, chose to make
(even though such contract, transaction, or arrangement be legally binding upon the parties thereto).
(B) SCOPE AND PURPOSE. - The purpose of Section 44 of the Tax Code is to place a controlled taxpayer on a
tax parity with an uncontrolled taxpayer, by determining, according to the standard of an uncontrolled
taxpayer, the true net income from the property and business of a controlled taxpayer. The interests
controlling a group of controlled taxpayer are assumed to have complete power to cause each controlled
taxpayer so to conduct its affairs that its transactions and accounting records truly reflect the net income from
the property and business of each of the controlled taxpayers. If, however, this has not been done and the
taxable net income are thereby understated, the statute contemplates that the Commissioner of Internal
Revenue shall intervene, and, by making such distributions, apportionments, or allocations as he may deem
necessary of gross income or deductions, or of any item or element affecting net income, between or among
the controlled taxpayers constituting the group, shall determine the true net income of each controlled
taxpayer. The standard to be applied in every case is that of an uncontrolled taxpayer. Section 44 grants no
right to a controlled taxpayer to apply its provisions at will, nor does it grant any right to compel the
Commissioner of Internal Revenue to apply its provisions.
(C) APPLICATION Transactions between controlled taxpayer and another will be subjected to special scrutiny
to ascertain whether the common control is being used to reduce, avoid or escape taxes. In determining the
true net income of a controlled taxpayer, the Commissioner of Internal Revenue is not restricted to the case of
improper accounting, to the case of a fraudulent, colorable, or sham transaction, or to the case of a device
designed to reduce or avoid tax by shifting or distorting income or deductions. The authority to determine true
net income extends to any case in which either by inadvertence or design the taxable net income in whole or
in part, of a controlled taxpayer, is other than it would have been had the taxpayer in the conduct of his affairs
been an uncontrolled taxpayer dealing at arms length with another uncontrolled taxpayer. 41
As may be gleaned from the definitions of the terms "controlled" and "controlled taxpayer" under paragraphs (a) (3)
and (4) of the foregoing provision, it would appear that FDC and its affiliates come within the purview of Section 43 of
the 1993 NIRC. Aside from owning significant portions of the shares of stock of FLI, FAI, DSCC and FCI, the fact that
FDC extended substantial sums of money as cash advances to its said affiliates for the purpose of providing them
financial assistance for their operational and capital expenditures seemingly indicate that the situation sought to be
addressed by the subject provision exists. From the tenor of paragraph (c) of Section 179 of Revenue Regulation No. 2,
it may also be seen that the CIR's power to distribute, apportion or allocate gross income or deductions between or
among controlled taxpayers may be likewise exercised whether or not fraud inheres in the transaction/s under scrutiny.
For as long as the controlled taxpayer's taxable income is not reflective of that which it would have realized had it
been dealing at arm's length with an uncontrolled taxpayer, the CIR can make the necessary rectifications in order to
prevent evasion of taxes.
Despite the broad parameters provided, however, we find that the CIR's powers of distribution, apportionment or
allocation of gross income and deductions under Section 43 of the 1993 NIRC and Section 179 of Revenue Regulation
No. 2 does not include the power to impute "theoretical interests" to the controlled taxpayer's transactions. Pursuant
to Section 28 of the 1993 NIRC,42 after all, the term "gross income" is understood to mean all income from whatever
source derived, including, but not limited to the following items: compensation for services, including fees,
commissions, and similar items; gross income derived from business; gains derived from dealings in property;"
interest; rents; royalties; dividends; annuities; prizes and winnings; pensions; and partners distributive share of the
gross income of general professional partnership.43 While it has been held that the phrase "from whatever source
derived" indicates a legislative policy to include all income not expressly exempted within the class of taxable income
under our laws, the term "income" has been variously interpreted to mean "cash received or its equivalent", "the
amount of money coming to a person within a specific time" or "something distinct from principal or capital." 44
Otherwise stated, there must be proof of the actual or, at the very least, probable receipt or realization by the
controlled taxpayer of the item of gross income sought to be distributed, apportioned or allocated by the CIR.
Our circumspect perusal of the record yielded no evidence of actual or possible showing that the advances FDC
extended to its affiliates had resulted to the interests subsequently assessed by the CIR. For all its harping upon the
supposed fact that FDC had resorted to borrowings from commercial banks, the CIR had adduced no concrete proof
that said funds were, indeed, the source of the advances the former provided its affiliates. While admitting that FDC
obtained interest-bearing loans from commercial banks,45 Susan Macabelda - FDC's Funds Management Department
Manager who was the sole witness presented before the CTA - clarified that the subject advances were sourced from
the corporation's rights offering in 1995 as well as the sale of its investment in Bonifacio Land in 1997. 46 More
significantly, said witness testified that said advances: (a) were extended to give FLI, FAI, DSCC and FCI financial
assistance for their operational and capital expenditures; and, (b) were all temporarily in nature since they were repaid
within the duration of one week to three months and were evidenced by mere journal entries, cash vouchers and
instructional letters."47
Even if we were, therefore, to accord precipitate credulity to the CIR's bare assertion that FDC had deducted
substantial interest expense from its gross income, there would still be no factual basis for the imputation of
theoretical interests on the subject advances and assess deficiency income taxes thereon. More so, when it is borne in
mind that, pursuant to Article 1956 of the Civil Code of the Philippines, no interest shall be due unless it has been
expressly stipulated in writing. Considering that taxes, being burdens, are not to be presumed beyond what the
applicable statute expressly and clearly declares,48 the rule is likewise settled that tax statutes must be construed
strictly against the government and liberally in favor of the taxpayer. 49 Accordingly, the general rule of requiring
adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing
act are not to be extended by implication.50 While it is true that taxes are the lifeblood of the government, it has been
held that their assessment and collection should be in accordance with law as any arbitrariness will negate the very
reason for government itself.51
In G.R. No. 167689, we also find a dearth of merit in the CIR's insistence on the imposition of deficiency income taxes
on the transfer FDC and FAI effected in exchange for the shares of stock of FLI. With respect to the Deed of Exchange
executed between FDC, FAI and FLI, Section 34 (c) (2) of the 1993 NIRC pertinently provides as follows:
Sec. 34. Determination of amount of and recognition of gain or loss.xxxx
(c) Exception x x x x
No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for shares of
stock in such corporation of which as a result of such exchange said person, alone or together with others, not
exceeding four persons, gains control of said corporation; Provided, That stocks issued for services shall not be
considered as issued in return of property.
As even admitted in the 14 February 2001 Stipulation of Facts submitted by the parties, 52 the requisites for the nonrecognition of gain or loss under the foregoing provision are as follows: (a) the transferee is a corporation; (b) the
transferee exchanges its shares of stock for property/ies of the transferor; (c) the transfer is made by a person, acting
alone or together with others, not exceeding four persons; and, (d) as a result of the exchange the transferor, alone or
together with others, not exceeding four, gains control of the transferee. 53 Acting on the 13 January 1997 request filed
by FLI, the BIR had, in fact, acknowledged the concurrence of the foregoing requisites in the Deed of Exchange the
former executed with FDC and FAI by issuing BIR Ruling No. S-34-046-97. 54 With the BIR's reiteration of said ruling upon
the request for clarification filed by FLI,55 there is also no dispute that said transferee and transferors subsequently
complied with the requirements provided for the non-recognition of gain or loss from the exchange of property for tax,
as provided under Section 34 (c) (2) of the 1993 NIRC. 56
Then as now, the CIR argues that taxable gain should be recognized for the exchange considering that FDC's
controlling interest in FLI was actually decreased as a result thereof. For said purpose, the CIR calls attention to the
fact that, prior to the exchange, FDC owned 2,537,358,000 or 67.42% of FLI's 3,763,535,000 outstanding capital stock.
Upon the issuance of 443,094,000 additional FLI shares as a consequence of the exchange and with only 42,217,000
thereof accruing in favor of FDC for a total of 2,579,575,000 shares, said corporations controlling interest was
supposedly reduced to 61%.03 when reckoned from the transferee's aggregate 4,226,629,000 outstanding shares.
Without owning a share from FLI's initial 3,763,535,000 outstanding shares, on the other hand, FAI's acquisition of
420,877,000 FLI shares as a result of the exchange purportedly resulted in its control of only 9.96% of said transferee
corporation's 4,226,629,000 outstanding shares. On the principle that the transaction did not qualify as a tax-free
exchange under Section 34 (c) (2) of the 1993 NIRC, the CIR asseverates that taxable gain in the sum of
P263,386,921.00 should be recognized on the part of FDC and in the sum of P3,088,711,367.00 on the part of FAI.57
The paucity of merit in the CIR's position is, however, evident from the categorical language of Section 34 (c) (2) of the
1993 NIRC which provides that gain or loss will not be recognized in case the exchange of property for stocks results in
the control of the transferee by the transferor, alone or with other transferors not exceeding four persons. Rather than
isolating the same as proposed by the CIR, FDC's 2,579,575,000 shares or 61.03% control of FLI's 4,226,629,000
outstanding shares should, therefore, be appreciated in combination with the 420,877,000 new shares issued to FAI
which represents 9.96% control of said transferee corporation. Together FDC's 2,579,575,000 shares (61.03%) and
FAI's 420,877,000 shares (9.96%) clearly add up to 3,000,452,000 shares or 70.99% of FLI's 4,226,629,000 shares.
Since the term "control" is clearly defined as "ownership of stocks in a corporation possessing at least fifty-one percent
of the total voting power of classes of stocks entitled to one vote" under Section 34 (c) (6) [c] of the 1993 NIRC, the
exchange of property for stocks between FDC FAI and FLI clearly qualify as a tax-free transaction under paragraph 34
(c) (2) of the same provision.
Against the clear tenor of Section 34(c) (2) of the 1993 NIRC, the CIR cites then Supreme Court Justice Jose Vitug and
CTA Justice Ernesto D. Acosta who, in their book Tax Law and Jurisprudence, opined that said provision could be
inapplicable if control is already vested in the exchangor prior to exchange. 58 Aside from the fact that that the 10
September 2002 Decision in CTA Case No. 6182 upholding the tax-exempt status of the exchange between FDC, FAI
and FLI was penned by no less than Justice Acosta himself, 59 FDC and FAI significantly point out that said authors have
acknowledged that the position taken by the BIR is to the effect that "the law would apply even when the exchangor
already has control of the corporation at the time of the exchange."60 This was confirmed when, apprised in FLI's
request for clarification about the change of percentage of ownership of its outstanding capital stock, the BIR opined
as follows:
Please be informed that regardless of the foregoing, the transferors, Filinvest Development Corp. and Filinvest Alabang,
Inc. still gained control of Filinvest Land, Inc. The term 'control' shall mean ownership of stocks in a corporation by
possessing at least 51% of the total voting power of all classes of stocks entitled to vote. Control is determined by the
amount of stocks received, i.e., total subscribed, whether for property or for services by the transferor or transferors.
In determining the 51% stock ownership, only those persons who transferred property for stocks in the same
transaction may be counted up to the maximum of five (BIR Ruling No. 547-93 dated December 29, 1993. 61
At any rate, it also appears that the supposed reduction of FDC's shares in FLI posited by the CIR is more apparent
than real. As the uncontested owner of 80% of the outstanding shares of FAI, it cannot be gainsaid that FDC ideally
controls the same percentage of the 420,877,000 shares issued to its said co-transferor which, by itself, represents
7.968% of the outstanding shares of FLI. Considered alongside FDC's 61.03% control of FLI as a consequence of the 29
November 1996 Deed of Transfer, said 7.968% add up to an aggregate of 68.998% of said transferee corporation's
outstanding shares of stock which is evidently still greater than the 67.42% FDC initially held prior to the exchange.
This much was admitted by the parties in the 14 February 2001 Stipulation of Facts, Documents and Issues they
submitted to the CTA.62 Inasmuch as the combined ownership of FDC and FAI of FLI's outstanding capital stock adds up
to a total of 70.99%, it stands to reason that neither of said transferors can be held liable for deficiency income taxes
the CIR assessed on the supposed gain which resulted from the subject transfer.
On the other hand, insofar as documentary stamp taxes on loan agreements and promissory notes are concerned,
Section 180 of the NIRC provides follows:
Sec. 180. Stamp tax on all loan agreements, promissory notes, bills of exchange, drafts, instruments and securities
issued by the government or any of its instrumentalities, certificates of deposit bearing interest and others not payable
on sight or demand. On all loan agreements signed abroad wherein the object of the contract is located or used in
the Philippines; bill of exchange (between points within the Philippines), drafts, instruments and securities issued by
the Government or any of its instrumentalities or certificates of deposits drawing interest, or orders for the payment of
any sum of money otherwise than at sight or on demand, or on all promissory notes, whether negotiable or nonnegotiable, except bank notes issued for circulation, and on each renewal of any such note, there shall be collected a
documentary stamp tax of Thirty centavos (P0.30) on each two hundred pesos, or fractional part thereof, of the face
value of any such agreement, bill of exchange, draft, certificate of deposit or note: Provided, That only one
documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan,
whichever will yield a higher tax: Provided however, That loan agreements or promissory notes the aggregate of which
does not exceed Two hundred fifty thousand pesos (P250,000.00) executed by an individual for his purchase on
installment for his personal use or that of his family and not for business, resale, barter or hire of a house, lot, motor
vehicle, appliance or furniture shall be exempt from the payment of documentary stamp tax provided under this
Section.
When read in conjunction with Section 173 of the 1993 NIRC, 63 the foregoing provision concededly applies to "(a)ll loan
agreements, whether made or signed in the Philippines, or abroad when the obligation or right arises from Philippine
sources or the property or object of the contract is located or used in the Philippines." Correlatively, Section 3 (b) and
Section 6 of Revenue Regulations No. 9-94 provide as follows:
Section 3. Definition of Terms. For purposes of these Regulations, the following term shall mean:
(b) 'Loan agreement' refers to a contract in writing where one of the parties delivers to another money or other
consumable thing, upon the condition that the same amount of the same kind and quality shall be paid. The term shall
include credit facilities, which may be evidenced by credit memo, advice or drawings.
The terms 'Loan Agreement" under Section 180 and "Mortgage' under Section 195, both of the Tax Code, as amended,
generally refer to distinct and separate instruments. A loan agreement shall be taxed under Section 180, while a deed
of mortgage shall be taxed under Section 195."
"Section 6. Stamp on all Loan Agreements. All loan agreements whether made or signed in the Philippines, or abroad
when the obligation or right arises from Philippine sources or the property or object of the contract is located in the
Philippines shall be subject to the documentary stamp tax of thirty centavos (P0.30) on each two hundred pesos, or
fractional part thereof, of the face value of any such agreements, pursuant to Section 180 in relation to Section 173 of
the Tax Code.
In cases where no formal agreements or promissory notes have been executed to cover credit facilities, the
documentary stamp tax shall be based on the amount of drawings or availment of the facilities, which may be
evidenced by credit/debit memo, advice or drawings by any form of check or withdrawal slip, under Section 180 of the
Tax Code.
Applying the aforesaid provisions to the case at bench, we find that the instructional letters as well as the journal and
cash vouchers evidencing the advances FDC extended to its affiliates in 1996 and 1997 qualified as loan agreements
upon which documentary stamp taxes may be imposed. In keeping with the caveat attendant to every BIR Ruling to
the effect that it is valid only if the facts claimed by the taxpayer are correct, we find that the CA reversibly erred in
utilizing BIR Ruling No. 116-98, dated 30 July 1998 which, strictly speaking, could be invoked only by ASB Development
Corporation, the taxpayer who sought the same. In said ruling, the CIR opined that documents like those evidencing
the advances FDC extended to its affiliates are not subject to documentary stamp tax, to wit:
On the matter of whether or not the inter-office memo covering the advances granted by an affiliate company is
subject to documentary stamp tax, it is informed that nothing in Regulations No. 26 (Documentary Stamp Tax
Regulations) and Revenue Regulations No. 9-94 states that the same is subject to documentary stamp tax. Such being
the case, said inter-office memo evidencing the lendings or borrowings which is neither a form of promissory note nor
a certificate of indebtedness issued by the corporation-affiliate or a certificate of obligation, which are, more or less,
categorized as 'securities', is not subject to documentary stamp tax imposed under Section 180, 174 and 175 of the
Tax Code of 1997, respectively. Rather, the inter-office memo is being prepared for accounting purposes only in order
to avoid the co-mingling of funds of the corporate affiliates.1avvphi1
In its appeal before the CA, the CIR argued that the foregoing ruling was later modified in BIR Ruling No. 108-99 dated
15 July 1999, which opined that inter-office memos evidencing lendings or borrowings extended by a corporation to its
affiliates are akin to promissory notes, hence, subject to documentary stamp taxes. 64 In brushing aside the foregoing
argument, however, the CA applied Section 246 of the 1993 NIRC 65 from which proceeds the settled principle that
rulings, circulars, rules and regulations promulgated by the BIR have no retroactive application if to so apply them
would be prejudicial to the taxpayers.66 Admittedly, this rule does not apply: (a) where the taxpayer deliberately
misstates or omits material facts from his return or in any document required of him by the Bureau of Internal
Revenue; (b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from
the facts on which the ruling is based; or (c) where the taxpayer acted in bad faith. 67 Not being the taxpayer who, in
the first instance, sought a ruling from the CIR, however, FDC cannot invoke the foregoing principle on nonretroactivity of BIR rulings.
Viewed in the light of the foregoing considerations, we find that both the CTA and the CA erred in invalidating the
assessments issued by the CIR for the deficiency documentary stamp taxes due on the instructional letters as well as
the journal and cash vouchers evidencing the advances FDC extended to its affiliates in 1996 and 1997. In Assessment
Notice No. SP-DST-96-00020-2000, the CIR correctly assessed the sum of P6,400,693.62 for documentary stamp tax,
P3,999,793.44 in interests and P25,000.00 as compromise penalty, for a total of P10,425,487.06. Alongside the sum of
P4,050,599.62 for documentary stamp tax, the CIR similarly assessed P1,721,099.78 in interests and P25,000.00 as
compromise penalty in Assessment Notice No. SP-DST-97-00021-2000 or a total of P5,796,699.40. The imposition of
deficiency interest is justified under Sec. 249 (a) and (b) of the NIRC which authorizes the assessment of the same "at
the rate of twenty percent (20%), or such higher rate as may be prescribed by regulations", from the date prescribed
for the payment of the unpaid amount of tax until full payment. 68 The imposition of the compromise penalty is, in turn,
warranted under Sec. 25069 of the NIRC which prescribes the imposition thereof "in case of each failure to file an
information or return, statement or list, or keep any record or supply any information required" on the date prescribed
therefor.
To our mind, no reversible error can, finally, be imputed against both the CTA and the CA for invalidating the
Assessment Notice issued by the CIR for the deficiency income taxes FDC is supposed to have incurred as a
consequence of the dilution of its shares in FAC. Anent FDCs Shareholders Agreement with RHPL, the record shows
that the parties were in agreement about the following factual antecedents narrated in the 14 February 2001
Stipulation of Facts, Documents and Issues they submitted before the CTA, 70 viz.:
"1.11. On November 15, 1996, FDC entered into a Shareholders Agreement (SA) with Reco Herrera Pte. Ltd.
(RHPL) for the formation of a joint venture company named Filinvest Asia Corporation (FAC) which is based
in Singapore (pars. 1.01 and 6.11, Petition, pars. 1 and 7, Answer).
1.12. FAC, the joint venture company formed by FDC and RHPL, is tasked to develop and manage the 50%
ownership interest of FDC in its PBCom Office Tower Project (Project) with the Philippine Bank of
Communications (par. 6.12, Petition; par. 7, Answer).
1.13. Pursuant to the SA between FDC and RHPL, the equity participation of FDC and RHPL in FAC was 60% and
40% respectively.
1.14. In accordance with the terms of the SA, FDC subscribed to P500.7 million worth of shares of stock
representing a 60% equity participation in FAC. In turn, RHPL subscribed to P433.8 million worth of shares of
stock of FAC representing a 40% equity participation in FAC.
1.15. In payment of its subscription in FAC, FDC executed a Deed of Assignment transferring to FAC a portion of
FDCs right and interests in the Project to the extent of P500.7 million.
1.16. FDC reported a net loss of P190,695,061.00 in its Annual Income Tax Return for the taxable year 1996." 71
Alongside the principle that tax revenues are not intended to be liberally construed, 72 the rule is settled that the
findings and conclusions of the CTA are accorded great respect and are generally upheld by this Court, unless there is
a clear showing of a reversible error or an improvident exercise of authority. 73 Absent showing of such error here, we
find no strong and cogent reasons to depart from said rule with respect to the CTA's finding that no deficiency income
tax can be assessed on the gain on the supposed dilution and/or increase in the value of FDC's shareholdings in FAC
which the CIR, at any rate, failed to establish. Bearing in mind the meaning of "gross income" as above discussed, it
cannot be gainsaid, even then, that a mere increase or appreciation in the value of said shares cannot be considered
income for taxation purposes. Since "a mere advance in the value of the property of a person or corporation in no
sense constitute the income specified in the revenue law," it has been held in the early case of Fisher vs. Trinidad, 74
that it "constitutes and can be treated merely as an increase of capital." Hence, the CIR has no factual and legal basis
in assessing income tax on the increase in the value of FDC's shareholdings in FAC until the same is actually sold at a
profit.
WHEREFORE, premises considered, the CIR's petition for review on certiorari in G.R. No. 163653 is DENIED for lack of
merit and the CAs 16 December 2003 Decision in G.R. No. 72992 is AFFIRMED in toto. The CIRs petition in G.R. No.
167689 is PARTIALLY GRANTED and the CAs 26 January 2005 Decision in CA-G.R. SP No. 74510 is MODIFIED.
Accordingly, Assessment Notices Nos. SP-DST-96-00020-2000 and SP-DST-97-00021-2000 issued for deficiency
documentary stamp taxes due on the instructional letters as well as journal and cash vouchers evidencing the
advances FDC extended to its affiliates are declared valid.
The cancellation of Assessment Notices Nos. SP-INC-96-00018-2000, SP-INC-97-00019-2000 and SP-INC-97-0027-2000
issued for deficiency income assessed on (a) the "arms-length" interest from said advances; (b) the gain from FDCs
Deed of Exchange with FAI and FLI; and (c) income from the dilution resulting from FDCs Shareholders Agreement
with RHPL is, however, upheld.
SO ORDERED.
[G.R. No. 108576. January 20, 1999]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE COURT OF APPEALS, COURT OF TAX APPEALS and A.
SORIANO CORP., respondents.
DECISION
MARTINEZ, J.:
Petitioner Commissioner of Internal Revenue (CIR) seeks the reversal of the decision of the Court of Appeals (CA) i[1]
which affirmed the ruling of the Court of Tax Appeals (CTA)ii[2] that private respondent A. Soriano Corporations
(hereinafter ANSCOR) 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 1939 Internal Revenue Act iii[3]
The undisputed facts are as follows:
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 P1,000,000.00 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.iv[4] In 1937, Don Andres subscribed to 4,963 shares of the 5,000 shares originally issued. v[5]
On September 12, 1945, ANSCORs authorized capital stock was increased to P2,500,000.00 divided into 25,000
common shares with 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.vi[6] This increased his subscription to 14,963 common shares. vii[7] A month later,viii[8] Don
Andres transferred 1,250 shares each to his two sons, Jose and Andres, Jr., as their initial investments in ANSCOR. ix[9]
Both sons are foreigners.x[10]
By 1947, ANSCOR declared stock dividends. Other stock dividend declarations were made between 1949 and
December 20, 1963.xi[11] On December 30, 1964 Don Andres died. As of that date, the records revealed that he has a
total shareholdings of 185,154 shares xii[12] - 50,495 of which are original issues and the balance of 134,659 shares as
stock dividend declarations.xiii[13] Correspondingly, one-half of that shareholdings or 92,577xiv[14] shares were
transferred to his wife, Doa Carmen Soriano, as her conjugal share. The other half formed part of his estate. xv[15]
A day after Don Andres died, ANSCOR increased its capital stock to P20Mxvi[16] and in 1966 further increased it to
P30M.xvii[17] In the same year (December 1966), stock dividends worth 46,290 and 46,287 shares were respectively
received by the Don Andres estatexviii[18] and Doa Carmen from ANSCOR. Hence, increasing their accumulated
shareholdings to 138,867 and 138,864xix[19] common shares each.xx[20]
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 xxi[21] under
Section 367 of the 1954 U.S. Revenue Act.xxii[22] By January 2, 1968, ANSCOR reclassified its existing 300,000 common
shares into 150,000 common and 150,000 preferred shares. xxiii[23]
In a letter-reply dated February 1968, the IRS opined that the exchange is only a recapitalization scheme and not tax
avoidance.xxiv[24] Consequently,xxv[25] on March 31, 1968 Doa Carmen exchanged her whole 138,864 common shares
for 138,860 of the newly reclassified preferred shares. The estate of Don Andres in turn, exchanged 11,140 of its
common shares for the remaining 11,140 preferred shares, thus reducing its (the estate) common shares to
127,727.xxvi[26]
On June 30, 1968, pursuant to a Board Resolution, ANSCOR redeemed 28,000 common shares from the Don Andres
estate. By November 1968, the Board further increased ANSCORs capital stock to P75M divided into 150,000 preferred
shares and 600,000 common shares.xxvii[27] About a year later, ANSCOR again redeemed 80,000 common shares from
the Don Andres estate,xxviii[28] further reducing the latters common shareholdings to 19,727. As stated in the board
Resolutions, ANSCORs business purpose for both redemptions of stocks is to partially retire said stocks as treasury
shares in order to reduce the companys foreign exchange remittances in case cash dividends are declared. xxix[29]
In 1973, after examining ANSCORs books of account and records, Revenue examiners issued a report proposing that
ANSCOR be assessed for deficiency withholding tax-at-source, pursuant to Sections 53 and 54 of the 1939 Revenue
Code,xxx[30] for the year 1968 and the second quarter of 1969 based on the transactions of exchange and redemption
of stocks.xxxi[31] The Bureau of Internal Revenue (BIR) made the corresponding assessments despite the claim of
ANSCOR that it availed of the tax amnesty under Presidential Decree (P.D.) 23 xxxii[32] which were amended by P.D.s 67
and 157.xxxiii[33] However, petitioner ruled that the invoked decrees do not cover Sections 53 and 54 in relation to
Article 83(b) of the 1939 Revenue Act under which ANSCOR was assessed. xxxiv[34] ANSCORs subsequent protest on the
assessments was denied in 1983 by petitioner. xxxv[35]
Subsequently, ANSCOR filed a petition for review with the CTA assailing the tax assessments on the redemptions and
exchange of stocks. In its decision, the Tax Court reversed petitioners ruling, after finding sufficient evidence to
overcome the prima facie correctness of the questioned assessments.xxxvi[36] In a petition for review, the CA, as
mentioned, affirmed the ruling of the CTA.xxxvii[37] Hence, this petition.
The bone of contention is the interpretation and application of Section 83(b) of the 1939 Revenue Act xxxviii[38] which
provides:
Sec. 83. Distribution of dividends or assets by corporations.
(b) Stock dividends A stock dividend representing the transfer of surplus to capital account shall not be subject to tax.
However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make
the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a
taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as taxable
income to the extent it represents a distribution of earnings or profits accumulated after March first, nineteen hundred
and thirteen. (Italics supplied).
Specifically, the issue is whether ANSCORs redemption of stocks from its stockholder as well as the exchange of
common with preferred shares 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.
Petitioner contends that the exchange transaction is tantamount to cancellation under Section 83(b) making the
proceeds thereof taxable. It also argues that the said Section applies to stock dividends which is the bulk of stocks that
ANSCOR redeemed. Further, petitioner claims that under the net effect test, the estate of Don Andres gained from the
redemption. Accordingly, it was the duty of ANSCOR to withhold the tax-at-source arising from the two transactions,
pursuant to Section 53 and 54 of the 1939 Revenue Act. xxxix[39]
ANSCOR, however, 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, xl[40] and to (b)
subsequently filipinized ownership of ANSCOR, as allegedly envisioned by Don Andres. xli[41] It likewise invoked the
amnesty provisions of P.D. 67.
We must emphasize that the application of Sec. 83(b) depends on the special factual circumstances of each case. xlii
[42] The findings of facts of a special court (CTA) exercising particular expertise on the subject of tax, generally binds
this Court,xliii[43] considering that it is substantially similar to the findings of the CA which is the final arbiter of
questions of facts.xliv[44] The issue in this case does not only deal with facts but whether the law applies to a particular
set of facts. Moreover, this Court is not necessarily bound by the lower courts conclusions of law drawn from such
facts.xlv[45]
AMNESTY:
We will deal first with the issue of tax amnesty. Section 1 of P.D. 67 xlvi[46] provides:
I. In all cases of voluntary disclosures of previously untaxed income and/or wealth such as earnings, receipts,
gifts, bequests or any other acquisitions from any source whatsoever which are taxable under the National
Internal Revenue Code, as amended, realized here or abroad by any taxpayer, natural or juridical; the
collection of all internal revenue taxes including the increments or penalties or account of non-payment as well
as all civil, criminal or administrative liabilities arising from or incident to such disclosures under the National
Internal Revenue Code, the Revised Penal Code, the Anti-Graft and Corrupt Practices Act, the Revised
Administrative Code, the Civil Service laws and regulations, laws and regulations on Immigration and
Deportation, or any other applicable law or proclamation, are hereby condoned and, in lieu thereof, a tax of
ten (10%) per centum on such previously untaxed income or wealth is hereby imposed, subject to the
following conditions: (conditions omitted) [Emphasis supplied].
The decree condones the collection of all internal revenue taxes including the increments or penalties or 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.
May the withholding agent, in such capacity, be deemed a taxpayer for it to avail of the amnesty? An income taxpayer
covers all persons who derive taxable income.xlvii[47] ANSCOR was assessed by petitioner for deficiency withholding
tax under Section 53 and 54 of the 1939 Code. As such, it is being held liable in its capacity as a withholding agent and
not in 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 xlviii[48] in order to ensure its payments;xlix[49] the payer is
the taxpayer he is the person subject to tax impose by law;l[50] and the payee is the taxing authority.li[51] 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, lii[52]
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 liii[53] (c) 1939
Tax Code, as amended by R.A. No. 2343 which provides in part that xxx Every such person is made personally liable for
such tax xxx.53 arising from the breach of its legal duty to withhold as distinguish from its duty to pay tax since:
the governments cause of action against the withholding agent is not for the collection of income tax, but for
the enforcement of the withholding provision of Section 53 of the Tax Code, compliance with which is imposed
on the withholding agent and not upon the taxpayer.liv[54]
Not being a taxpayer, a withholding agent, like ANSCOR in this transaction, is not protected by the amnesty under the
decree.
Codal provisions on withholding tax are mandatory and must be complied with by the withholding agent. lv[55] The
taxpayer should not answer for the non-performance by the withholding agent of its legal duty to withhold unless there
is collusion or bad faith. The former could not be deemed to have evaded the tax had the withholding agent performed
its duty. This could be the situation for which the amnesty decree was intended. Thus, to curtail tax evasion and give
tax evaders a chance to reform,lvi[56] it was deemed administratively feasible to grant tax amnesty in certain
instances. In addition, a tax amnesty, much like a tax exemption, is never favored nor presumed in law and if granted
by a statute, the terms of the amnesty like that of a tax exemption must be construed strictly against the taxpayer and
liberally in favor of the taxing authority.lvii[57] The rule on strictissimi juris equally applies.lviii[58] So that, any doubt in
the application of an amnesty law/decree should be resolved in favor of the taxing authority.
Furthermore, ANSCORs claim of amnesty cannot prosper. The implementing rules of P.D. 370 which expanded amnesty
on previously untaxed income under P.D. 23 is very explicit, to wit:
Section 4. Cases not covered by amnesty. The following cases are not covered by the amnesty subject of these
regulations:
xxx
xxx
xxx
(2) Tax liabilities with or without assessments, on withholding tax at source provided under Sections 53 and 54 of the
National Internal Revenue Code, as amended;lix[59]
ANSCOR was assessed under Sections 53 and 54 of the 1939 Tax Code. Thus, by specific provision of law, it is not
covered by the amnesty.
TAX ON STOCK DIVIDENDS
General Rule
Section 83(b) of the 1939 NIRC was taken from Section 115(g)(1) of the U.S. Revenue Code of 1928. lx[60] It laid down
the general rule known as the proportionate testlxi[61] wherein stock dividends once issued form part of the capital
and, thus, subject to income tax.lxii[62] Specifically, the general rule states that:
A stock dividend representing the transfer of surplus to capital account shall not be subject to tax.
Having been derived from a foreign law, resort to the jurisprudence of its origin may shed light. Under the US Revenue
Code, this provision originally referred to stock dividends only, without any exception. Stock dividends, strictly
speaking, represent capital and do not constitute income to its recipient. lxiii[63] So that the mere issuance thereof is
not yet subject to income taxlxiv[64] as they are nothing but an enrichment through increase in value of capital
investment.lxv[65] As capital, the stock dividends postpone the realization of profits because the fund represented by
the new stock has been transferred from surplus to capital and no longer available for actual distribution. lxvi[66] Income
in tax law is an amount of money coming to a person within a specified time, whether as payment for services,
interest, or profit from investment.lxvii[67] It means cash or its equivalent.lxviii[68] It is gain derived and severed from
capital,lxix[69] from labor or from both combinedlxx[70] - so that to tax a stock dividend would be to tax a capital
increase rather than the income.lxxi[71] In a loose sense, stock dividends issued by the corporation, are considered
unrealized gain, and cannot be subjected to income tax until that gain has been realized. Before the realization, stock
dividends are nothing but a representation of an interest in the corporate properties. lxxii[72] As capital, it is not yet
subject to income tax. It should be noted that capital and income are different. Capital is wealth or fund; whereas
income is profit or gain or the flow of wealth.lxxiii[73] The determining factor for the imposition of income tax is whether
any gain or profit was derived from a transaction.lxxiv[74]
The Exception
However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make
the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a
taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as taxable
income to the extent it represents a distribution of earnings or profits accumulated after March first, nineteen hundred
and thirteen. (Emphasis supplied).
In a response to the ruling of the American Supreme Court in the case of Eisner v. Macomberlxxv[75] (that pro rata stock
dividends are not taxable income), the exempting clause above quoted was added because corporations found a
loophole in the original provision. They resorted to devious means to circumvent the law and evade the tax. Corporate
earnings would be distributed under the guise of its initial capitalization by declaring the stock dividends previously
issued and later redeem said dividends by paying cash to the stockholder. This process of issuance-redemption
amounts to a distribution of taxable cash dividends which was just delayed so as to escape the tax. It becomes a
convenient technical strategy to avoid the effects of taxation.
Thus, to plug the loophole the exempting clause was added. It provides that the redemption or cancellation of stock
dividends, depending on the time and manner it was made is essentially equivalent to a distribution of taxable
dividends, making the proceeds thereof taxable income to the extent it represents profits. The exception was designed
to prevent the issuance and cancellation or redemption of stock dividends, which is fundamentally not taxable, from
being made use of as a device for the actual distribution of cash dividends, which is taxable. lxxvi[76] Thus,
the provision had the obvious purpose of preventing a corporation from avoiding dividend tax treatment by
distributing earnings to its shareholders in two transactions a pro rata stock dividend followed by a pro rata
redemption that would have the same economic consequences as a simple dividend. lxxvii[77]
Although redemption and cancellation are generally considered capital transactions, as such, they are not subject to
tax. However, it does not necessarily mean that a shareholder may not realize a taxable gain from such
transactions.lxxviii[78] Simply put, depending on the circumstances, the proceeds of redemption of stock dividends are
essentially distribution of cash dividends, which when paid becomes the absolute property of the stockholder.
Thereafter, the latter becomes the exclusive owner thereof and can exercise the freedom of choice lxxix[79] Having
realized gain from that redemption, the income earner cannot escape income tax. lxxx[80]
As qualified by the phrase such time and in such manner, the exception was not intended to characterize as taxable
dividend every distribution of earnings arising from the redemption of stock dividends. lxxxi[81] So that, whether the
amount distributed in the redemption should be treated as the equivalent of a taxable dividend is a question of fact,lxxxii
[82] which is determinable on the basis of the particular facts of the transaction in question. lxxxiii[83] No decisive test
can be used to determine the application of the exemption under Section 83(b) The use of the words such manner and
essentially equivalent negative any idea that a weighted formula can resolve a crucial issue Should the distribution be
treated as taxable dividend.lxxxiv[84] On this aspect, American courts developed certain recognized criteria, which
includes the following:lxxxv[85]
1)the presence or absence of real business purpose,
2) the amount of earnings and profits available for the declaration of a regular dividend and the corporations
past record with respect to the declaration of dividends,
3) the effect of the distribution as compared with the declaration of regular dividend,
4) the lapse of time between issuance and redemption, lxxxvi[86]
5)the presence of a substantial surpluslxxxvii[87] and a generous supply of cash which invites suspicion as does
a meager policy in relation both to current earnings and accumulated surplus. lxxxviii[88]
REDEMPTION AND CANCELLATION
For the exempting clause of Section 83(b) to apply, it is indispensable that: (a) there is redemption or cancellation; (b)
the transaction involves stock dividends and (c) the time and manner of the transaction makes it essentially equivalent
to a distribution of taxable dividends. Of these, the most important is the third.
Redemption is repurchase, a reacquisition of stock by a corporation which issued the stock lxxxix[89] in exchange for
property, whether or not the acquired stock is cancelled, retired or held in the treasury. xc[90] Essentially, the
corporation gets back some of its stock, distributes cash or property to the shareholder in payment for the stock, and
continues in business as before. The redemption of stock dividends previously issued is used as a veil for the
constructive distribution of cash dividends. In the instant case, there is no dispute that ANSCOR redeemed shares of
stocks from a stockholder (Don Andres) twice (28,000 and 80,000 common shares). But where did the shares
redeemed come from? If its source is the original capital subscriptions upon establishment of the corporation or from
initial capital investment in an existing enterprise, its redemption to the concurrent value of acquisition may not invite
the application of Sec. 83(b) under the 1939 Tax Code, as it is not income but a mere return of capital. On the contrary,
if the redeemed shares are from stock dividend declarations other than as initial capital investment, the proceeds of
the redemption is additional wealth, for it is not merely a return of capital but a gain thereon.
It is not the stock dividends but the proceeds of its redemption that may be deemed as taxable dividends. Here, it is
undisputed that at the time of the last redemption, the original common shares owned by the estate were only
25,247.5.xci[91] This means that from the total of 108,000 shares redeemed from the estate, the balance of 82,752.5
(108,000 less 25,247.5) must have come from stock dividends. Besides, in the absence of evidence to the contrary,
the Tax Code presumes that every distribution of corporate property, in whole or in part, is made out of corporate
profits,xcii[92] such as stock dividends. The capital cannot be distributed in the form of redemption of stock dividends
without violating the trust fund doctrine wherein the capital stock, property and other assets of the corporation are
regarded as equity in trust for the payment of the corporate creditors. xciii[93] Once capital, it is always capital.xciv[94]
That doctrine was intended for the protection of corporate creditors. xcv[95]
With respect to the third requisite, ANSCOR redeemed stock dividends issued just 2 to 3 years earlier. The time alone
that lapsed from the issuance to the redemption is not a sufficient indicator to determine taxability. It is a must to
consider the factual circumstances as to the manner of both the issuance and the redemption. The time element is a
factor to show a device to evade tax and the scheme of cancelling or redeeming the same shares is a method usually
adopted to accomplish the end sought.xcvi[96] Was this transaction used as a continuing plan, device or artifice to
evade payment of tax? It is necessary to determine the net effect of the transaction between the shareholder-income
taxpayer and the acquiring (redeeming) corporation.xcvii[97] The net effect test is not evidence or testimony to be
considered; it is rather an inference to be drawn or a conclusion to be reached. xcviii[98] It is also important to know
whether the issuance of stock dividends was dictated by legitimate business reasons, the presence of which might
negate a tax evasion plan.xcix[99]
The issuance of stock dividends and its subsequent redemption must be separate, distinct, and not related, for the
redemption to be considered a legitimate tax scheme. c[100] Redemption cannot be used as a cloak to distribute
corporate earnings.ci[101] Otherwise, the apparent intention to avoid tax becomes doubtful as the intention to evade
becomes manifest. It has been ruled that:
[A]n operation with no business or corporate purpose is a mere devise which put on the form of a corporate
reorganization as a disguise for concealing its real character, and the sole object and accomplishment of which was
the consummation of a preconceived plan, not to reorganize a business or any part of a business, but to transfer a
parcel of corporate shares to a stockholder.cii[102]
Depending on each case, the exempting provision of Sec. 83(b) of the 1939 Code may not be applicable if the
redeemed shares were issued with bona fide business purpose,ciii[103] which is judged after each and every step of
the transaction have been considered and the whole transaction does not amount to a tax evasion scheme.
ANSCOR invoked two reasons to justify the redemptions (1) the alleged filipinization program and (2) the reduction of
foreign exchange remittances in case cash dividends are declared. The Court is not concerned with the wisdom of
these purposes but on their relevance to the whole transaction which can be inferred from the outcome thereof. Again,
it is the net effect rather than the motives and plans of the taxpayer or his corporation civ[104] that is the fundamental
guide in administering Sec. 83(b). This tax provision is aimed at the result. cv[105] It also applies even if at the time of
the issuance of the stock dividend, there was no intention to redeem it as a means of distributing profit or avoiding tax
on dividends.cvi[106] The existence of legitimate business purposes in support of the redemption of stock dividends is
immaterial in income taxation. It has no relevance in determining dividend equivalence. cvii[107] Such purposes may be
material only upon the issuance of the stock dividends. The test of taxability under the exempting clause, when it
provides such time and manner as would make the redemption essentially equivalent to the distribution of a taxable
dividend, is whether the redemption resulted into a flow of wealth. If no wealth is realized from the redemption, there
may not be a dividend equivalence treatment. In the metaphor of Eisner v. Macomber, income is not deemed realize
until the fruit has fallen or been plucked from the tree.
The three elements in the imposition of income tax are: (1) there must be gain or profit, (2) that the gain or profit is
realized or received, actually or constructively,cviii[108] and (3) it is not exempted by law or treaty from income tax. Any
business purpose as to why or how the income was earned by the taxpayer is not a requirement. Income tax is
assessed on income received from any property, activity or service that produces the income because the Tax Code
stands as an indifferent neutral party on the matter of where income comes from. cix[109]
As stated above, 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 stockholders separate property. cx[110] 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. Otherwise, to rule that the
said proceeds are exempt from income tax when the redemption is supported by legitimate business reasons would
defeat the very purpose of imposing tax on income. Such argument would open the door for income earners not to pay
tax so long as the person from whom the income was derived has legitimate business reasons. In other words, the
payment of tax under the exempting clause of Section 83(b) would be made to depend not on the income of the
taxpayer but on the business purposes of a third party (the corporation herein) from whom the income was earned.
This is absurd, illogical and impractical considering that the Bureau of Internal Revenue (BIR) would be pestered with
instances in determining the legitimacy of business reasons that every income earner may interposed. It is not
administratively feasible and cannot therefore be allowed.
The ruling in the American cases cited and relied upon by ANSCOR that the redeemed shares are the equivalent of
dividend only if the shares were not issued for genuine business purposescxi[111] or the redeemed shares have been
issued by a corporation bona fidecxii[112] bears no relevance in determining the non-taxability of the proceeds of
redemption. ANSCOR, relying heavily and applying said cases, argued that so long as the redemption is supported by
valid corporate purposes the proceeds are not subject to tax. cxiii[113] The adoption by the courts below cxiv[114] of such
argument is misleading if not misplaced. A review of the cited American cases shows that the presence or absence of
genuine business purposes may be material with respect to the issuance or declaration of stock dividends but not on
its subsequent redemption. The issuance and the redemption of stocks are two different transactions. Although the
existence of legitimate corporate purposes may justify a corporations acquisition of its own shares under Section 41 of
the Corporation Code,cxv[115] such purposes cannot excuse the stockholder from the effects of taxation arising from
the redemption. If the issuance of stock dividends is part of a tax evasion plan and thus, without legitimate business
reasons the redemption becomes suspicious which may call for the application of the exempting clause. The substance
of the whole transaction, not its form, usually controls the tax consequences. cxvi[116]
The two purposes invoked by ANSCOR under the facts of this case are no excuse for its tax liability. First, the alleged
filipinization plan cannot be considered legitimate as it was not implemented until the BIR started making assessments
on the proceeds of the redemption. Such corporate plan was not stated in nor supported by any Board Resolution but a
mere afterthought interposed by the counsel of ANSCOR. Being a separate entity, the corporation can act only through
its Board of Directors.cxvii[117] The Board Resolutions authorizing the redemptions state only one purpose reduction of
foreign exchange remittances in case cash dividends are declared. Not even this purpose can be given credence.
Records show that despite the existence of enormous corporate profits no cash dividend was ever declared by ANSCOR
from 1945 until the BIR started making assessments in the early 1970s. Although a corporation under certain
exceptions, has the prerogative when to issue dividends, yet when no cash dividends was issued for about three
decades, this circumstance negates the legitimacy of ANSCORs alleged purposes. Moreover, to issue stock dividends is
to increase the shareholdings of ANSCORs foreign stockholders contrary to its filipinization plan. This would also
increase rather than reduce their need for foreign exchange remittances in case of cash dividend declaration,
considering that ANSCOR is a family corporation where the majority shares at the time of redemptions were held by
Don Andres foreign heirs.
Secondly, assuming arguendo, that those business purposes are legitimate, the same cannot be a valid excuse for the
imposition of tax. Otherwise, the taxpayers liability to pay income tax would be made to depend upon a third person
who did not earn the income being taxed. Furthermore, even if the said purposes support the redemption and justify
the issuance of stock dividends, the same has no bearing whatsoever on the imposition of the tax herein assessed
because the proceeds of the redemption are deemed taxable dividends since it was shown that income was generated
therefrom.
Thirdly, ANSCOR argued that to treat as taxable dividend the proceeds of the redeemed stock dividends would be to
impose on such stock an undisclosed lien and would be extremely unfair to intervening purchasers, i.e. those who buys
the stock dividends after their issuance.cxviii[118] Such argument, however, bears no relevance in this case as no
intervening buyer is involved. And even if there is an intervening buyer, it is necessary to look into the factual milieu of
the case if income was realized from the transaction. Again, we reiterate that the dividend equivalence test depends
on such time and manner of the transaction and its net effect. The undisclosed lien cxix[119] may be unfair to a
subsequent stock buyer who has no capital interest in the company. But the unfairness may not be true to an original
subscriber like Don Andres, who holds stock dividends as gains from his investments. The subsequent buyer who buys
stock dividends is investing capital. It just so happen that what he bought is stock dividends. The effect of its (stock
dividends) redemption from that subsequent buyer is merely to return his capital subscription, which is income if
redeemed from the original subscriber.
After considering the manner and the circumstances by which the issuance and redemption of stock dividends were
made, there is no other conclusion but that the proceeds thereof 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 in relation to Section 21cxx[120] of the 1939 Code. Moreover, under Section 29(a) of said Code, dividends
are included in gross income. As income, it is subject to income tax which is required to be withheld at source. The
1997 Tax Code may have altered the situation but it does not change this disposition.
EXCHANGE OF COMMON WITH PREFERRED SHAREScxxi[121]
Exchange is an act of taking or giving one thing for another cxxii[122] involving reciprocal transfercxxiii[123] and is
generally considered as a taxable transaction. The exchange of common stocks with preferred stocks, or preferred for
common or a combination of either for both, may not produce a recognized gain or loss, so long as the provisions of
Section 83(b) is not applicable. This is true in a trade between two (2) persons as well as a trade between a
stockholder and a corporation. In general, this trade must be parts of merger, transfer to controlled corporation,
corporate acquisitions or corporate reorganizations. No taxable gain or loss may be recognized on exchange of
property, stock or securities related to reorganizations.cxxiv[124]
Both the Tax Court and the Court of Appeals found that ANSCOR reclassified its shares into common and preferred, and
that parts of the common shares of the Don Andres estate and all of Doa Carmens shares were exchanged for the
whole 150, 000 preferred shares. Thereafter, both the Don Andres estate and Doa Carmen remained as corporate
subscribers except that their subscriptions now include preferred shares. There was no change in their proportional
interest after the exchange. There was no cash flow. Both stocks had the same par value. Under the facts herein, any
difference in their market value would be immaterial at the time of exchange because no income is yet realized it was
a mere corporate paper transaction. It would have been different, if the exchange transaction resulted into a flow of
wealth, in which case income tax may be imposed. cxxv[125]
Reclassification of shares does not always bring any substantial alteration in the subscribers proportional interest. But
the exchange is different there would be a shifting of the balance of stock features, like priority in dividend
declarations or absence of voting rights. Yet neither the reclassification nor exchange per se, yields realize income for
tax purposes. A common stock represents the residual ownership interest in the corporation. It is a basic class of stock
ordinarily and usually issued without extraordinary rights or privileges and entitles the shareholder to a pro rata
division of profits.cxxvi[126] Preferred stocks are those which entitle the shareholder to some priority on dividends and
asset distribution.cxxvii[127]
Both shares are part of the corporations capital stock. Both stockholders are no different from ordinary investors who
take on the same investment risks. Preferred and common shareholders participate in the same venture, willing to
share in the profits and losses of the enterprise. cxxviii[128] Moreover, under the doctrine of equality of shares all stocks
issued by the corporation are presumed equal with the same privileges and liabilities, provided that the Articles of
Incorporation is silent on such differences.cxxix[129] In this case, the exchange of shares, without more, produces no
realized income to the subscriber. There is only a modification of the subscribers rights and privileges - which is not a
flow of wealth for tax purposes. The issue of taxable dividend may arise only once a subscriber disposes of his entire
interest and not when there is still maintenance of proprietary interest. cxxx[130]
WHEREFORE, premises considered, the decision of the Court of Appeals is MODIFIED in that ANSCORs redemption of
82,752.5 stock dividends is herein considered as essentially equivalent to a distribution of taxable dividends for which
it is LIABLE for the withholding tax-at-source. The decision is AFFIRMED in all other respects.
SO ORDERED.
G.R. No. 198756, January 13, 2015

BANCO DE ORO, BANK OF COMMERCE, CHINA BANKING CORPORATION, METROPOLITAN BANK & TRUST
COMPANY, PHILIPPINE BANK OF COMMUNICATIONS, PHILIPPINE NATIONAL BANK, PHILIPPINE VETERANS
BANK AND PLANTERS DEVELOPMENT BANK, Petitioners,
RIZAL COMMERCIAL BANKING CORPORATION AND RCBC CAPITAL CORPORATION, Petitioners,
CAUCUS OF DEVELOPMENT NGO NETWORKS, Petitioner-Intervenor, v. REPUBLIC OF THE PHILIPPINES, THE
COMMISSIONER OF INTERNAL REVENUE, BUREAU OF INTERNAL REVENUE, SECRETARY OF FINANCE,
DEPARTMENT OF FINANCE, THE NATIONAL TREASURER AND BUREAU OF TREASURY, Respondents.
DECISION
LEONEN, J.:
The case involves the proper tax treatment of the discount or interest income arising from the P35 billion worth of 10year zero-coupon treasury bonds issued by the Bureau of Treasury on October 18, 2001 (denominated as the Poverty
Eradication and Alleviation Certificates or the PEACe Bonds by the Caucus of Development NGO Networks).
On October 7, 2011, the Commissioner of Internal Revenue issued BIR Ruling No. 370-20111 (2011 BIR Ruling),
declaring that the PEACe Bonds being deposit substitutes are subject to the 20% final withholding tax. Pursuant to this
ruling, the Secretary of Finance directed the Bureau of Treasury to withhold a 20% final tax from the face value of the
PEACe Bonds upon their payment at maturity on October 18, 2011.
This is a petition for certiorari, prohibition and/or mandamus 2 filed by petitioners under Rule 65 of the Rules of Court
seeking to:chanroblesvirtuallawlibrary
a. ANNUL Respondent BIRs Ruling No. 370-2011 dated 7 October 2011 [and] other related rulings issued by BIR of
similar tenor and import, for being unconstitutional and for having been issued without jurisdiction or with grave abuse
of discretion amounting to lack or excess of jurisdiction. . .;
b. PROHIBIT Respondents, particularly the BTr, from withholding or collecting the 20% FWT from the payment of the
face value of the Government Bonds upon their maturity;
c. COMMAND Respondents, particularly the BTr, to pay the full amount of the face value of the Government Bonds
upon maturity. . .; and
d. SECURE a temporary restraining order (TRO), and subsequently a writ of preliminary injunction, enjoining
Respondents, particularly the BIR and the BTr, from withholding or collecting 20% FWT on the Government Bonds and
the respondent BIR from enforcing the assailed 2011 BIR Ruling, as well as other related rulings issued by the BIR of
similar tenor and import, pending the resolution by [the court] of the merits of [the] Petition. 3
Factual background
By letter4 dated March 23, 2001, the Caucus of Development NGO Networks (CODE-NGO) with the assistance of its
financial advisors, Rizal Commercial Banking Corp. (RCBC), RCBC Capital Corp. (RCBC Capital), CAPEX Finance
and Investment Corp. (CAPEX) and SEED Capital Ventures, Inc. (SEED),5 requested an approval from the
Department of Finance for the issuance by the Bureau of Treasury of 10-year zero-coupon Treasury Certificates (Tnotes).6 The T-notes would initially be purchased by a special purpose vehicle on behalf of CODE-NGO, repackaged
and sold at a premium to investors as the PEACe Bonds. 7 The net proceeds from the sale of the Bonds will be used to
endow a permanent fund (Hanapbuhay Fund) to finance meritorious activities and projects of accredited nongovernment organizations (NGOs) throughout the country.8chanRoblesvirtualLawlibrary
Prior to and around the time of the proposal of CODE-NGO, other proposals for the issuance of zero-coupon bonds were
also presented by banks and financial institutions, such as First Metro Investment Corporation (proposal dated March 1,
2001),9 International Exchange Bank (proposal dated July 27, 2000), 10 Security Bank Corporation and SB Capital
Investment Corporation (proposal dated July 25, 2001),11 and ATR-Kim Eng Fixed Income, Inc. (proposal dated August
25, 1999).12 [B]oth the proposals of First Metro Investment Corp. and ATR-Kim Eng Fixed Income indicate that the
interest income or discount earned on the proposed zero-coupon bonds would be subject to the prevailing withholding
tax.13chanRoblesvirtualLawlibrary
A zero-coupon bond is a bond bought at a price substantially lower than its face value (or at a deep discount), with
the face value repaid at the time of maturity.14 It does not make periodic interest payments, or have so-called
coupons, hence the term zero-coupon bond.15 However, the discount to face value constitutes the return to the
bondholder.16chanRoblesvirtualLawlibrary
On May 31, 2001, the Bureau of Internal Revenue, in reply to CODE-NGOs letters dated May 10, 15, and 25, 2001,
issued BIR Ruling No. 020-200117 on the tax treatment of the proposed PEACe Bonds. BIR Ruling No. 020-2001, signed
by then Commissioner of Internal Revenue Ren G. Baez confirmed that the PEACe Bonds would not be classified as
deposit substitutes and would not be subject to the corresponding withholding tax:chanroblesvirtuallawlibrary
Thus, to be classified as deposit substitutes, the borrowing of funds must be obtained from twenty (20) or more
individuals or corporate lenders at any one time. In the light of your representation that the PEACe Bonds will be
issued only to one entity, i.e., Code NGO, the same shall not be considered as deposit substitutes falling within the
purview of the above definition. Hence, the withholding tax on deposit substitutes will not apply. 18 (Emphasis supplied)
The tax treatment of the proposed PEACe Bonds in BIR Ruling No. 020-2001 was subsequently reiterated in BIR Ruling
No. 035-200119 dated August 16, 2001 and BIR Ruling No. DA-175-0120 dated September 29, 2001 (collectively, the
2001 Rulings). In sum, these rulings pronounced that to be able to determine whether the financial assets, i.e., debt
instruments and securities are deposit substitutes, the 20 or more individual or corporate lenders rule must apply.
Moreover, the determination of the phrase at any one time for purposes of determining the 20 or more lenders is
to be determined at the time of the original issuance. Such being the case, the PEACe Bonds were not to be treated as
deposit substitutes.
Meanwhile, in the memorandum21 dated July 4, 2001, Former Treasurer Eduardo Sergio G. Edeza (Former Treasurer
Edeza) questioned the propriety of issuing the bonds directly to a special purpose vehicle considering that the latter
was not a Government Securities Eligible Dealer (GSED). 22 Former Treasurer Edeza recommended that the issuance of
the Bonds be done through the ADAPS23 and that CODE-NGO should get a GSED to bid in [sic] its
behalf.24chanRoblesvirtualLawlibrary
Subsequently, in the notice to all GSEDs entitled Public Offering of Treasury Bonds 25 (Public Offering) dated October 9,
2001, the Bureau of Treasury announced that P30.0B worth of 10-year Zero[-] Coupon Bonds [would] be auctioned on
October 16, 2001[.]26 The notice stated that the Bonds shall be issued to not more than 19 buyers/lenders hence,
the necessity of a manual auction for this maiden issue. 27 It also required the GSEDs to submit their bids not later
than 12 noon on auction date and to disclose in their bid submissions the names of the institutions bidding through
them to ensure strict compliance with the 19 lender limit. 28 Lastly, it stated that the issue being limited to 19 lenders
and while taxable shall not be subject to the 20% final withholding [tax]. 29chanRoblesvirtualLawlibrary
On October 12, 2001, the Bureau of Treasury released a memo30 on the Formula for the Zero-Coupon Bond. The
memo stated in part that the formula (in determining the purchase price and settlement amount) is only applicable to
the zeroes that are not subject to the 20% final withholding due to the 19 buyer/lender
limit.31chanRoblesvirtualLawlibrary
A day before the auction date or on October 15, 2001, the Bureau of Treasury issued the Auction Guidelines for the
10-year Zero-Coupon Treasury Bond to be Issued on October 16, 2001 (Auction Guidelines). 32 The Auction Guidelines
reiterated that the Bonds to be auctioned are [n]ot subject to 20% withholding tax as the issue will be limited to a
maximum of 19 lenders in the primary market (pursuant to BIR Revenue Regulation No. 020 2001). 33 The Auction
Guidelines, for the first time, also stated that the Bonds are [e]ligible as liquidity reserves (pursuant to MB Resolution
No. 1545 dated 27 September 2001)[.]34chanRoblesvirtualLawlibrary
On October 16, 2001, the Bureau of Treasury held an auction for the 10-year zero-coupon bonds. 35 Also on the same
date, the Bureau of Treasury issued another memorandum 36 quoting excerpts of the ruling issued by the Bureau of
Internal Revenue concerning the Bonds exemption from 20% final withholding tax and the opinion of the Monetary
Board on reserve eligibility.37chanRoblesvirtualLawlibrary
During the auction, there were 45 bids from 15 GSEDs.38 The bidding range was very wide, from as low as 12.248% to
as high as 18.000%.39 Nonetheless, the Bureau of Treasury accepted the auction results. 40 The cut-off was at
12.75%.41chanRoblesvirtualLawlibrary
After the auction, RCBC which participated on behalf of CODE-NGO was declared as the winning bidder having
tendered the lowest bids.42 Accordingly, on October 18, 2001, the Bureau of Treasury issued P35 billion worth of Bonds
at yield-to-maturity of 12.75% to RCBC for approximately P10.17 billion, 43 resulting in a discount of approximately
P24.83 billion.
Also on October 16, 2001, RCBC Capital entered into an underwriting agreement 44 with CODE-NGO, whereby RCBC
Capital was appointed as the Issue Manager and Lead Underwriter for the offering of the PEACe Bonds. 45 RCBC Capital
agreed to underwrite46 on a firm basis the offering, distribution and sale of the P35 billion Bonds at the price of
P11,995,513,716.51.47 In Section 7(r) of the underwriting agreement, CODE-NGO represented that [a]ll income
derived from the Bonds, inclusive of premium on redemption and gains on the trading of the same, are exempt from all
forms of taxation as confirmed by Bureau of Internal Revenue (BIR) letter rulings dated 31 May 2001 and 16 August
2001, respectively.48chanRoblesvirtualLawlibrary
RCBC Capital sold the Government Bonds in the secondary market for an issue price of P11,995,513,716.51.
Petitioners purchased the PEACe Bonds on different dates. 49chanRoblesvirtualLawlibrary
BIR rulings
On October 7, 2011, the BIR issued the assailed 2011 BIR Ruling imposing a 20% FWT on the Government Bonds and
directing the BIR to withhold said final tax at the maturity thereof, [allegedly without] consultation with Petitioners as
bondholders, and without conducting any hearing.50chanRoblesvirtualLawlibrary
It appears that the assailed 2011 BIR Ruling was issued in response to a query of the Secretary of Finance on the
proper tax treatment of the discount or interest income derived from the Government Bonds. 51 The Bureau of Internal
Revenue, citing three (3) of its rulings rendered in 2004 and 2005, namely: BIR Ruling No. 007-04 52 dated July 16, 2004;
BIR Ruling No. DA-491-0453 dated September 13, 2004; and BIR Ruling No. 008-0554 dated July 28, 2005, declared the
following:chanroblesvirtuallawlibrary
The Php 24.3 billion discount on the issuance of the PEACe Bonds should be subject to 20% Final Tax on interest
income from deposit substitutes. It is now settled that all treasury bonds (including PEACe Bonds), regardless of the
number of purchasers/lenders at the time of origination/issuance are considered deposit substitutes. In the case of
zero-coupon bonds, the discount (i.e. difference between face value and purchase price/discounted value of the bond)
is treated as interest income of the purchaser/holder. Thus, the Php 24.3 interest income should have been properly
subject to the 20% Final Tax as provided in Section 27(D)(1) of the Tax Code of 1997. . . .
....
However, at the time of the issuance of the PEACe Bonds in 2001, the BTr was not able to collect the final tax on the
discount/interest income realized by RCBC as a result of the 2001 Rulings. Subsequently, the issuance of BIR Ruling
No. 007-04 dated July 16, 2004 effectively modifies and supersedes the 2001 Rulings by stating that the [1997] Tax
Code is clear that the term public means borrowing from twenty (20) or more individual or corporate lenders at any
one time. The word any plainly indicates that the period contemplated is the entire term of the bond, and not
merely the point of origination or issuance. . . . Thus, by taking the PEACe bonds out of the ambit of deposits [sic]
substitutes and exempting it from the 20% Final Tax, an exemption in favour of the PEACe Bonds was created when no
such exemption is found in the law.55
On October 11, 2011, a Memo for Trading Participants No. 58-2011 was issued by the Philippine Dealing System
Holdings Corporation and Subsidiaries (PDS Group). The Memo provides that in view of the pronouncement of the
DOF and the BIR on the applicability of the 20% FWT on the Government Bonds, no transfer of the same shall be
allowed to be recorded in the Registry of Scripless Securities (ROSS) from 12 October 2011 until the redemption
payment date on 18 October 2011. Thus, the bondholders of record appearing on the ROSS as of 18 October 2011,
which include the Petitioners, shall be treated by the BTr as the beneficial owners of such securities for the relevant
[tax] payments to be imposed thereon.56chanRoblesvirtualLawlibrary
On October 17, 2011, replying to an urgent query from the Bureau of Treasury, the Bureau of Internal Revenue issued
BIR Ruling No. DA 378-201157 clarifying that the final withholding tax due on the discount or interest earned on the
PEACe Bonds should be imposed and withheld not only on RCBC/CODE NGO but also [on] all subsequent holders of
the Bonds.58chanRoblesvirtualLawlibrary
On October 17, 2011, petitioners filed a petition for certiorari, prohibition, and/or mandamus (with urgent application
for a temporary restraining order and/or writ of preliminary injunction) 59 before this court.
On October 18, 2011, this court issued a temporary restraining order (TRO) 60 enjoining the implementation of BIR
Ruling No. 370-2011 against the [PEACe Bonds,] . . . subject to the condition that the 20% final withholding tax on
interest income therefrom shall be withheld by the petitioner banks and placed in escrow pending resolution of [the]
petition.61chanRoblesvirtualLawlibrary
On October 28, 2011, RCBC and RCBC Capital filed a motion for leave of court to intervene and to admit petition-inintervention62 dated October 27, 2011, which was granted by this court on November 15,
2011.63chanRoblesvirtualLawlibrary
Meanwhile, on November 9, 2011, petitioners filed their Manifestation with Urgent Ex Parte Motion to Direct
Respondents to Comply with the TRO.64 They alleged that on the same day that the temporary restraining order was
issued, the Bureau of Treasury paid to petitioners and other bondholders the amounts representing the face value of
the Bonds, net however of the amounts corresponding to the 20% final withholding tax on interest income, and that
the Bureau of Treasury refused to release the amounts corresponding to the 20% final withholding
tax.65chanRoblesvirtualLawlibrary
On November 15, 2011, this court directed respondents to: (1) SHOW CAUSE why they failed to comply with the
October 18, 2011 resolution; and (2) COMPLY with the Courts resolution in order that petitioners may place the
corresponding funds in escrow pending resolution of the petition. 66chanRoblesvirtualLawlibrary
On the same day, CODE-NGO filed a motion for leave to intervene (and to admit attached petition-in-intervention with
comment on the petition-in-intervention of RCBC and RCBC Capital). 67 The motion was granted by this court on
November 22, 2011.68chanRoblesvirtualLawlibrary
On December 1, 2011, public respondents filed their compliance. 69 They explained that: 1) the implementation of
[BIR Ruling No. 370-2011], which has already been performed on October 18, 2011 with the withholding of the 20%
final withholding tax on the face value of the PEACe bonds, is already fait accompli . . . when the Resolution and TRO
were served to and received by respondents BTr and National Treasurer [on October 19, 2011]; 70 and 2) the withheld
amount has ipso facto become public funds and cannot be disbursed or released to petitioners without congressional
appropriation.71 Respondents further aver that [i]nasmuch as the . . . TRO has already become moot . . . the condition
attached to it, i.e., that the 20% final withholding tax on interest income therefrom shall be withheld by the banks and
placed in escrow . . . has also been rendered moot[.] 72chanRoblesvirtualLawlibrary
On December 6, 2011, this court noted respondents' compliance. 73chanRoblesvirtualLawlibrary
On February 22, 2012, respondents filed their consolidated comment 74 on the petitions-in-intervention filed by RCBC
and RCBC Capital and CODE-NGO.
On November 27, 2012, petitioners filed their Manifestation with Urgent Reiterative Motion (To Direct Respondents to
Comply with the Temporary Restraining Order).75chanRoblesvirtualLawlibrary
On December 4, 2012, this court: (a) noted petitioners manifestation with urgent reiterative motion (to direct
respondents to comply with the temporary restraining order); and (b) required respondents to comment
thereon.76chanRoblesvirtualLawlibrary
Respondents comment77 was filed on April 15, 2013, and petitioners filed their reply 78 on June 5, 2013.cralawred
Issues
The main issues to be resolved are:ChanRoblesVirtualawlibrary
I.
II.
Whether the PEACe Bonds are deposit substitutes and thus subject to 20% final withholding tax under the
1997 National Internal Revenue Code. Related to this question is the interpretation of the phrase borrowing
from twenty (20) or more individual or corporate lenders at any one time under Section 22(Y) of the 1997
National Internal Revenue Code, particularly on whether the reckoning of the 20 lenders includes trading of the
bonds in the secondary market; and
If the PEACe Bonds are considered deposit substitutes, whether the government or the Bureau of Internal
Revenue is estopped from imposing and/or collecting the 20% final withholding tax from the face value of
these Bonds
a.
Will the imposition of the 20% final withholding tax violate the non-impairment clause of the
Constitution?
b.
Will it constitute a deprivation of property without due process of law?
c.
Will it violate Section 245 of the 1997 National Internal Revenue Code on non-retroactivity of rulings?
Arguments of petitioners, RCBC and RCBC

Capital, and CODE-NGO
Petitioners argue that [a]s the issuer of the Government Bonds acting through the BTr, the Government is obligated . .
. to pay the face value amount of PhP35 Billion upon maturity without any deduction whatsoever. 79 They add that
the Government cannot impair the efficacy of the [Bonds] by arbitrarily, oppressively and unreasonably imposing the
withholding of 20% FWT upon the [Bonds] a mere eleven (11) days before maturity and after several, consistent
categorical declarations that such bonds are exempt from the 20% FWT, without violating due process 80 and the
constitutional principle on non-impairment of contracts. 81 Petitioners aver that at the time they purchased the Bonds,
they had the right to expect that they would receive the full face value of the Bonds upon maturity, in view of the 2001
BIR Rulings.82 [R]egardless of whether or not the 2001 BIR Rulings are correct, the fact remains that [they] relied [on]
good faith thereon.83chanRoblesvirtualLawlibrary
At any rate, petitioners insist that the PEACe Bonds are not deposit substitutes as defined under Section 22(Y) of the
1997 National Internal Revenue Code because there was only one lender (RCBC) to whom the Bureau of Treasury
issued the Bonds.84 They allege that the 2004, 2005, and 2011 BIR Rulings erroneously interpreted that the number
of investors that participate in the secondary market is the determining factor in reckoning the existence or nonexistence of twenty (20) or more individual or corporate lenders. 85 Furthermore, they contend that the Bureau of
Internal Revenue unduly expanded the definition of deposit substitutes under Section 22 of the 1997 National Internal
Revenue Code in concluding that the mere issuance of government debt instruments and securities is deemed as
falling within the coverage of deposit substitutes[.] 86 Thus, [t]he 2011 BIR Ruling clearly amount[ed] to an
unauthorized act of administrative legislation[.]87chanRoblesvirtualLawlibrary
Petitioners further argue that their income from the Bonds is a trading gain, which is exempt from income tax. 88
They insist that [t]hey are not lenders whose income is considered as interest income or yield subject to the 20%
FWT under Section 27 (D)(1) of the [1997 National Internal Revenue Code] 89 because they acquired the Government
Bonds in the secondary or tertiary market.90chanRoblesvirtualLawlibrary
Even assuming without admitting that the Government Bonds are deposit substitutes, petitioners argue that the
collection of the final tax was barred by prescription. 91 They point out that under Section 7 of DOF Department Order
No. 141-95,92 the final withholding tax should have been withheld at the time of their issuance[.] 93 Also, under
Section 203 of the 1997 National Internal Revenue Code, internal revenue taxes, such as the final tax, [should] be
assessed within three (3) years after the last day prescribed by law for the filing of the
return.94chanRoblesvirtualLawlibrary
Moreover, petitioners contend that the retroactive application of the 2011 BIR Ruling without prior notice to them was
in violation of their property rights,95 their constitutional right to due process96 as well as Section 246 of the 1997
National Internal Revenue Code on non-retroactivity of rulings.97 Allegedly, it would also have an adverse effect of
colossal magnitude on the investors, both local and foreign, the Philippine capital market, and most importantly, the
countrys standing in the international commercial community. 98 Petitioners explained that unless enjoined, the
governments threatened refusal to pay the full value of the Government Bonds will negatively impact on the image of
the country in terms of protection for property rights (including financial assets), degree of legal protection for lenders
rights, and strength of investor protection.99 They cited the countrys ranking in the World Economic Forum: 75 th in
the world in its 20112012 Global Competitiveness Index, 111 th out of 142 countries worldwide and 2nd to the last
among ASEAN countries in terms of Strength of Investor Protection, and 105 th worldwide and last among ASEAN
countries in terms of Property Rights Index and Legal Rights Index. 100 It would also allegedly send a reverberating
message to the whole world that there is no certainty, predictability, and stability of financial transactions in the
capital markets[.]101 [T]he integrity of Government-issued bonds and notes will be greatly shattered and the credit of
the Philippine Government will suffer102 if the sudden turnaround of the government will be allowed, 103 and it will
reinforce investors perception that the level of regulatory risk for contracts entered into by the Philippine
Government is high,104 thus resulting in higher interest rate for government-issued debt instruments and lowered
credit rating.105chanRoblesvirtualLawlibrary
Petitioners-intervenors RCBC and RCBC Capital contend that respondent Commissioner of Internal Revenue gravely
and seriously abused her discretion in the exercise of her rule-making power 106 when she issued the assailed 2011 BIR
Ruling which ruled that all treasury bonds are deposit substitutes regardless of the number of lenders, in clear
disregard of the requirement of twenty (20) or more lenders mandated under the NIRC. 107 They argue that [b]y her
blanket and arbitrary classification of treasury bonds as deposit substitutes, respondent CIR not only amended and
expanded the NIRC, but effectively imposed a new tax on privately-placed treasury bonds. 108 Petitioners-intervenors
RCBC and RCBC Capital further argue that the 2011 BIR Ruling will cause substantial impairment of their vested
rights109 under the Bonds since the ruling imposes new conditions by subjecting the PEACe Bonds to the twenty
percent (20%) final withholding tax notwithstanding the fact that the terms and conditions thereof as previously
represented by the Government, through respondents BTr and BIR, expressly state that it is not subject to final
withholding tax upon their maturity.110 They added that [t]he exemption from the twenty percent (20%) final
withholding tax [was] the primary inducement and principal consideration for [their] participat[ion] in the auction and
underwriting of the PEACe Bonds.111chanRoblesvirtualLawlibrary
Like petitioners, petitioners-intervenors RCBC and RCBC Capital also contend that respondent Commissioner of Internal
Revenue violated their rights to due process when she arbitrarily issued the 2011 BIR Ruling without prior notice and
hearing, and the oppressive timing of such ruling deprived them of the opportunity to challenge the
same.112chanRoblesvirtualLawlibrary
Assuming the 20% final withholding tax was due on the PEACe Bonds, petitioners-intervenors RCBC and RCBC Capital
claim that respondents Bureau of Treasury and CODE-NGO should be held liable as [these] parties explicitly
represented . . . that the said bonds are exempt from the final withholding tax. 113chanRoblesvirtualLawlibrary
Finally, petitioners-intervenors RCBC and RCBC Capital argue that the implementation of the [2011 assailed BIR Ruling
and BIR Ruling No. DA 378-2011] will have pernicious effects on the integrity of existing securities, which is contrary to
the State policies of stabilizing the financial system and of developing capital markets. 114chanRoblesvirtualLawlibrary
For its part, CODE-NGO argues that: (a) the 2011 BIR Ruling and BIR Ruling No. DA 378-2011 are invalid because they
contravene Section 22(Y) of the 1997 [NIRC] when the said rulings disregarded the applicability of the 20 or more
lender rule to government debt instruments[;] 115 (b) when [it] sold the PEACe Bonds in the secondary market instead
of holding them until maturity, [it] derived . . . long-term trading gain[s], not interest income, which [are] exempt . . .
under Section 32(B)(7)(g) of the 1997 NIRC[;]116 (c) the tax exemption privilege relating to the issuance of the PEACe
Bonds . . . partakes of a contractual commitment granted by the Government in exchange for a valid and material
consideration [i.e., the issue price paid and savings in borrowing cost derived by the Government,] thus protected by
the non-impairment clause of the 1987 Constitution[;]117 and (d) the 2004, 2005, and 2011 BIR Rulings did not validly
revoke the 2001 BIR Rulings since no notice of revocation was issued to [it], RCBC and [RCBC Capital] and petitioners[bondholders], nor was there any BIR administrative guidance issued and published[.] 118 CODE-NGO additionally
argues that impleading it in a Rule 65 petition was improper because: (a) it involves determination of a factual
question;119 and (b) it is premature and states no cause of action as it amounts to an anticipatory third-party
claim.120chanRoblesvirtualLawlibrary
Arguments of respondents
Respondents argue that petitioners direct resort to this court to challenge the 2011 BIR Ruling violates the doctrines
of exhaustion of administrative remedies and hierarchy of courts, resulting in a lack of cause of action that justifies the
dismissal of the petition.121 According to them, the jurisdiction to review the rulings of the [Commissioner of Internal
Revenue], after the aggrieved party exhausted the administrative remedies, pertains to the Court of Tax Appeals. 122
They point out that a case similar to the present Petition was [in fact] filed with the CTA on October 13, 2011[,]
[docketed as] CTA Case No. 8351 [and] entitled, Rizal Commercial Banking Corporation and RCBC Capital Corporation
vs. Commissioner of Internal Revenue, et al. 123chanRoblesvirtualLawlibrary
Respondents further take issue on the timeliness of the filing of the petition and petitions-in-intervention. 124 They
argue that under the guise of mainly assailing the 2011 BIR Ruling, petitioners are indirectly attacking the 2004 and
2005 BIR Rulings, of which the attack is legally prohibited, and the petition insofar as it seeks to nullify the 2004 and
2005 BIR Rulings was filed way out of time pursuant to Rule 65, Section 4. 125chanRoblesvirtualLawlibrary
Respondents contend that the discount/interest income derived from the PEACe Bonds is not a trading gain but
interest income subject to income tax. 126 They explain that [w]ith the payment of the PhP35 Billion proceeds on
maturity of the PEACe Bonds, Petitioners receive an amount of money equivalent to about PhP24.8 Billion as payment
for interest. Such interest is clearly an income of the Petitioners considering that the same is a flow of wealth and not
merely a return of capital the capital initially invested in the Bonds being approximately PhP10.2
Billion[.]127chanRoblesvirtualLawlibrary
Maintaining that the imposition of the 20% final withholding tax on the PEACe Bonds does not constitute an
impairment of the obligations of contract, respondents aver that: The BTr has no power to contractually grant a tax
exemption in favour of Petitioners thus the 2001 BIR Rulings cannot be considered a material term of the Bonds[;] 128
[t]here has been no change in the laws governing the taxability of interest income from deposit substitutes and said
laws are read into every contract[;]129 [t]he assailed BIR Rulings merely interpret the term deposit substitute in
accordance with the letter and spirit of the Tax Code[;]130 [t]he withholding of the 20% FWT does not result in a
default by the Government as the latter performed its obligations to the bondholders in full[;] 131 and [i]f there was a
breach of contract or a misrepresentation it was between RCBC/CODE-NGO/RCBC Cap and the succeeding purchasers
of the PEACe Bonds.132chanRoblesvirtualLawlibrary
Similarly, respondents counter that the withholding of [t]he 20% final withholding tax on the PEACe Bonds does not
amount to a deprivation of property without due process of law. 133 Their imposition of the 20% final withholding tax is
not arbitrary because they were only performing a duty imposed by law; 134 [t]he 2011 BIR Ruling is an interpretative
rule which merely interprets the meaning of deposit substitutes [and upheld] the earlier construction given to the term
by the 2004 and 2005 BIR Rulings.135 Hence, respondents argue that there was no need to observe the requirements
of notice, hearing, and publication[.]136chanRoblesvirtualLawlibrary
Nonetheless, respondents add that there is every reason to believe that Petitioners all major financial institutions
equipped with both internal and external accounting and compliance departments as well as access to both internal
and external legal counsel; actively involved in industry organizations such as the Bankers Association of the
Philippines and the Capital Market Development Council; all actively taking part in the regular and special debt
issuances of the BTr and indeed regularly proposing products for issue by BTr had actual notice of the 2004 and
2005 BIR Rulings.137 Allegedly, the sudden and drastic drop including virtually zero trading for extended periods of
six months to almost a year in the trading volume of the PEACe Bonds after the release of BIR Ruling No. 007-04 on
July 16, 2004 tend to indicate that market participants, including the Petitioners herein, were aware of the ruling and
its consequences for the PEACe Bonds.138chanRoblesvirtualLawlibrary
Moreover, they contend that the assailed 2011 BIR Ruling is a valid exercise of the Commissioner of Internal Revenues
rule-making power;139 that it and the 2004 and 2005 BIR Rulings did not unduly expand the definition of deposit
substitutes by creating an unwarranted exception to the requirement of having 20 or more lenders/purchasers; 140 and
the word any in Section 22(Y) of the National Internal Revenue Code plainly indicates that the period contemplated is
the entire term of the bond and not merely the point of origination or issuance. 141chanRoblesvirtualLawlibrary
Respondents further argue that a retroactive application of the 2011 BIR Ruling will not unjustifiably prejudice
petitioners.142 [W]ith or without the 2011 BIR Ruling, Petitioners would be liable to pay a 20% final withholding tax
just the same because the PEACe Bonds in their possession are legally in the nature of deposit substitutes subject to a
20% final withholding tax under the NIRC.143 Section 7 of DOF Department Order No. 141-95 also provides that
income derived from Treasury bonds is subject to the 20% final withholding tax. 144 [W]hile revenue regulations as a
general rule have no retroactive effect, if the revocation is due to the fact that the regulation is erroneous or contrary
to law, such revocation shall have retroactive operation as to affect past transactions, because a wrong construction of
the law cannot give rise to a vested right that can be invoked by a taxpayer. 145chanRoblesvirtualLawlibrary
Finally, respondents submit that there are a number of variables and factors affecting a capital market. 146 [C]apital
market itself is inherently unstable.147 Thus, [p]etitioners argument that the 20% final withholding tax . . . will wreak
havoc on the financial stability of the country is a mere supposition that is not a justiciable
issue.148chanRoblesvirtualLawlibrary
On the prayer for the temporary restraining order, respondents argue that this order could no longer be implemented
[because] the acts sought to be enjoined are already fait accompli.149 They add that to disburse the funds withheld
to the Petitioners at this time would violate Section 29[,] Article VI of the Constitution prohibiting money being paid
out of the Treasury except in pursuance of an appropriation made by law[.] 150 The remedy of petitioners is to claim
a tax refund under Section 204(c) of the Tax Code should their position be upheld by the Honorable
Court.151chanRoblesvirtualLawlibrary
Respondents also argue that the implementation of the TRO would violate Section 218 of the Tax Code in relation to
Section 11 of Republic Act No. 1125 (as amended by Section 9 of Republic Act No. 9282) which prohibits courts, except
the Court of Tax Appeals, from issuing injunctions to restrain the collection of any national internal revenue tax
imposed by the Tax Code.152chanRoblesvirtualLawlibrary
Summary of arguments
In sum, petitioners and petitioners-intervenors, namely, RCBC, RCBC Capital, and CODE-NGO argue that:
1.
The 2011 BIR Ruling is ultra vires because it is contrary to the 1997 National Internal Revenue Code when it
declared that all government debt instruments are deposit substitutes regardless of the 20-lender rule; and
2.
The 2011 BIR Ruling cannot be applied retroactively because:

a) It will violate the contract clause;
o
It constitutes a unilateral amendment of a material term (tax exempt status) in the Bonds, represented
by the government as an inducement and important consideration for the purchase of the Bonds;
b) It constitutes deprivation of property without due process because there was no prior notice to bondholders
and hearing and publication;
c) It violates the rule on non-retroactivity under the 1997 National Internal Revenue Code;
d) It violates the constitutional provision on supporting activities of non-government organizations and
development of the capital market; and
e) The assessment had already prescribed.
Respondents counter that:

1) Respondent Commissioner of Internal Revenue did not act with grave abuse of discretion in issuing the challenged
2011 BIR Ruling:
a.
The 2011 BIR Ruling, being an interpretative rule, was issued by virtue of the Commissioner of Internal
Revenues power to interpret the provisions of the 1997 National Internal Revenue Code and other tax laws;
b.
Commissioner of Internal Revenue merely restates and confirms the interpretations contained in previously
issued BIR Ruling Nos. 007-2004, DA-491-04, and 008-05, which have already effectively abandoned or
revoked the 2001 BIR Rulings;
c.
Commissioner of Internal Revenue is not bound by his or her predecessors rulings especially when the latters
rulings are not in harmony with the law; and
d.
The wrong construction of the law that the 2001 BIR Rulings have perpetrated cannot give rise to a vested
right. Therefore, the 2011 BIR Ruling can be given retroactive effect.
2) Rule 65 can be resorted to only if there is no appeal or any plain, speedy, and adequate remedy in the ordinary
course of law:
a.
Petitioners had the basic remedy of filing a claim for refund of the 20% final withholding tax they allege to
have been wrongfully collected; and
b.
Non-observance of the doctrine of exhaustion of administrative remedies and of hierarchy of courts.
Courts ruling
Procedural Issues
Non-exhaustion of administrative
remedies proper
Under Section 4 of the 1997 National Internal Revenue Code, interpretative rulings are reviewable by the Secretary of
Finance.
SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. - The power to interpret
the provisions of this Code and other tax laws shall be under the exclusive and original jurisdiction of the
Commissioner, subject to review by the Secretary of Finance. (Emphasis supplied)
Thus, it was held that [i]f superior administrative officers [can] grant the relief prayed for, [then] special civil actions
are generally not entertained.153 The remedy within the administrative machinery must be resorted to first and
pursued to its appropriate conclusion before the courts judicial power can be sought. 154chanRoblesvirtualLawlibrary
Nonetheless, jurisprudence allows certain exceptions to the rule on exhaustion of administrative
remedies:chanroblesvirtuallawlibrary
[The doctrine of exhaustion of administrative remedies] is a relative one and its flexibility is called upon by the
peculiarity and uniqueness of the factual and circumstantial settings of a case. Hence, it is disregarded (1) when there
is a violation of due process, (2) when the issue involved is purely a legal question, 155 (3) when the administrative
action is patently illegal amounting to lack or excess of jurisdiction,(4) when there is estoppel on the part of the
administrative agency concerned,(5) when there is irreparable injury, (6) when the respondent is a department
secretary whose acts as an alter ego of the President bears the implied and assumed approval of the latter, (7) when
to require exhaustion of administrative remedies would be unreasonable, (8) when it would amount to a nullification of
a claim, (9) when the subject matter is a private land in land case proceedings, (10) when the rule does not provide a
plain, speedy and adequate remedy, (11) when there are circumstances indicating the urgency of judicial
intervention.156 (Emphasis supplied, citations omitted)
The exceptions under (2) and (11) are present in this case. The question involved is purely legal, namely: (a) the
interpretation of the 20-lender rule in the definition of the terms public and deposit substitutes under the 1997
National Internal Revenue Code; and (b) whether the imposition of the 20% final withholding tax on the PEACe Bonds
upon maturity violates the constitutional provisions on non-impairment of contracts and due process. Judicial
intervention is likewise urgent with the impending maturity of the PEACe Bonds on October 18, 2011.
The rule on exhaustion of administrative remedies also finds no application when the exhaustion will result in an
exercise in futility.157chanRoblesvirtualLawlibrary
In this case, an appeal to the Secretary of Finance from the questioned 2011 BIR Ruling would be a futile exercise
because it was upon the request of the Secretary of Finance that the 2011 BIR Ruling was issued by the Bureau of
Internal Revenue. It appears that the Secretary of Finance adopted the Commissioner of Internal Revenues opinions
as his own.158 This position was in fact confirmed in the letter 159 dated October 10, 2011 where he ordered the Bureau
of Treasury to withhold the amount corresponding to the 20% final withholding tax on the interest or discounts
allegedly due from the bondholders on the strength of the 2011 BIR Ruling.
Doctrine on hierarchy of courts
We agree with respondents that the jurisdiction to review the rulings of the Commissioner of Internal Revenue pertains
to the Court of Tax Appeals. The questioned BIR Ruling Nos. 370-2011 and DA 378-2011 were issued in connection
with the implementation of the 1997 National Internal Revenue Code on the taxability of the interest income from zerocoupon bonds issued by the government.
Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals), as amended by Republic Act No. 9282, 160 such
rulings of the Commissioner of Internal Revenue are appealable to that court, thus:chanroblesvirtuallawlibrary
SEC. 7. Jurisdiction. - The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
1.
Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the
National Internal Revenue or other laws administered by the Bureau of Internal Revenue;
....
SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. - Any party adversely affected by a decision, ruling or
inaction of the Commissioner of Internal Revenue, the Commissioner of Customs, the Secretary of Finance, the
Secretary of Trade and Industry or the Secretary of Agriculture or the Central Board of Assessment Appeals or the
Regional Trial Courts may file an appeal with the CTA within thirty (30) days after the receipt of such decision or ruling
or after the expiration of the period fixed by law for action as referred to in Section 7(a)(2) herein.
....
SEC. 18. Appeal to the Court of Tax Appeals En Banc. - No civil proceeding involving matters arising under the National
Internal Revenue Code, the Tariff and Customs Code or the Local Government Code shall be maintained, except as
herein provided, until and unless an appeal has been previously filed with the CTA and disposed of in accordance with
the provisions of this Act.
In Commissioner of Internal Revenue v. Leal,161 citing Rodriguez v. Blaquera,162 this court emphasized the jurisdiction of
the Court of Tax Appeals over rulings of the Bureau of Internal Revenue, thus:chanroblesvirtuallawlibrary
While the Court of Appeals correctly took cognizance of the petition for certiorari, however, let it be stressed that the
jurisdiction to review the rulings of the Commissioner of Internal Revenue pertains to the Court of Tax Appeals, not to
the RTC.
The questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or opinions of the Commissioner implementing
the Tax Code on the taxability of pawnshops. . . .
....
Such revenue orders were issued pursuant to petitioner's powers under Section 245 of the Tax Code, which
states:chanroblesvirtuallawlibrary
SEC. 245. Authority of the Secretary of Finance to promulgate rules and regulations. The Secretary of Finance,
upon recommendation of the Commissioner, shall promulgate all needful rules and regulations for the effective
enforcement of the provisions of this Code.

The authority of the Secretary of Finance to determine articles similar or analogous to those subject to a rate of sales
tax under certain category enumerated in Section 163 and 165 of this Code shall be without prejudice to the power of
the Commissioner of Internal Revenue to make rulings or opinions in connection with the implementation of the
provisions of internal revenue laws, including ruling on the classification of articles of sales and similar purposes.
(Emphasis in the original)
....
The Court, in Rodriguez, etc. vs. Blaquera, etc., ruled:chanroblesvirtuallawlibrary
Plaintiff maintains that this is not an appeal from a ruling of the Collector of Internal Revenue, but merely an attempt
to nullify General Circular No. V-148, which does not adjudicate or settle any controversy, and that, accordingly, this
case is not within the jurisdiction of the Court of Tax Appeals.
We find no merit in this pretense. General Circular No. V-148 directs the officers charged with the collection of taxes
and license fees to adhere strictly to the interpretation given by the defendant to the statutory provisions
abovementioned, as set forth in the Circular. The same incorporates, therefore, a decision of the Collector of Internal
Revenue (now Commissioner of Internal Revenue) on the manner of enforcement of the said statute, the
administration of which is entrusted by law to the Bureau of Internal Revenue. As such, it comes within the purview of
Republic Act No. 1125, Section 7 of which provides that the Court of Tax Appeals shall exercise exclusive appellate
jurisdiction to review by appeal . . . decisions of the Collector of Internal Revenue in . . . matters arising under the
National Internal Revenue Code or other law or part of the law administered by the Bureau of Internal Revenue. 163
In exceptional cases, however, this court entertained direct recourse to it when dictated by public welfare and the
advancement of public policy, or demanded by the broader interest of justice, or the orders complained of were found
to be patent nullities, or the appeal was considered as clearly an inappropriate remedy. 164chanRoblesvirtualLawlibrary
In Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA) v. The Secretary, Department of Interior and
Local Government,165 this court noted that the petition for prohibition was filed directly before it in disregard of the
rule on hierarchy of courts. However, [this court] opt[ed] to take primary jurisdiction over the . . . petition and decide
the same on its merits in view of the significant constitutional issues raised by the parties dealing with the tax
treatment of cooperatives under existing laws and in the interest of speedy justice and prompt disposition of the
matter.166chanRoblesvirtualLawlibrary
Here, the nature and importance of the issues raised167 to the investment and banking industry with regard to a
definitive declaration of whether government debt instruments are deposit substitutes under existing laws, and the
novelty thereof, constitute exceptional and compelling circumstances to justify resort to this court in the first instance.
The tax provision on deposit substitutes affects not only the PEACe Bonds but also any other financial instrument or
product that may be issued and traded in the market. Due to the changing positions of the Bureau of Internal Revenue
on this issue, there is a need for a final ruling from this court to stabilize the expectations in the financial market.
Finally, non-compliance with the rules on exhaustion of administrative remedies and hierarchy of courts had been
rendered moot by this courts issuance of the temporary restraining order enjoining the implementation of the 2011
BIR Ruling. The temporary restraining order effectively recognized the urgency and necessity of direct resort to this
court.
Substantive issues
Tax treatment of deposit substitutes
Under Sections 24(B)(1), 27(D)(1), and 28(A)(7) of the 1997 National Internal Revenue Code, a final withholding tax at
the rate of 20% is imposed on interest on any currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements. These provisions read:chanroblesvirtuallawlibrary
SEC. 24. Income Tax Rates.
....
(B) Rate of Tax on Certain Passive Income.
(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is hereby imposed
upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements; . . . Provided, further, That interest income from long-term
deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment
management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral
ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, That should the holder
of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the
entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit
or investment certificate based on the remaining maturity thereof:chanroblesvirtuallawlibrary
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than four (4) years - 12%; and
Less than three (3) years - 20%. (Emphasis supplied)
SEC. 27. Rates of Income Tax on Domestic Corporations. ....
(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 corporations, and royalties, derived from sources
within the Philippines: Provided, however, That interest income derived by a domestic corporation from a depository
bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven
and one-half percent (7 1/2%) of such interest income. (Emphasis supplied)
SEC. 28. Rates of Income Tax on Foreign Corporations. (A) Tax on Resident Foreign Corporations. ....
(7) Tax on Certain Incomes Received by a Resident Foreign Corporation. (a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds and Similar
Arrangements and Royalties. - Interest from any currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements and royalties derived from sources within the
Philippines shall be subject to a final income tax at the rate of twenty percent (20%) of such interest: Provided,
however, That interest income derived by a resident foreign corporation from a depository bank under the expanded
foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7
1/2%) of such interest income. (Emphasis supplied)
This tax treatment of interest from bank deposits and yield from deposit substitutes was first introduced in the 1977
National Internal Revenue Code through Presidential Decree No. 1739168 issued in 1980. Later, Presidential Decree No.
1959, effective on October 15, 1984, formally added the definition of deposit substitutes,
viz:chanroblesvirtuallawlibrary
(y) Deposit substitutes shall mean an alternative form of obtaining funds from the public, other than deposits,
through the issuance, endorsement, or acceptance of debt instruments for the borrower's own account, for the
purpose of relending or purchasing of receivables and other obligations, or financing their own needs or the needs of
their agent or dealer. These promissory notes, repurchase agreements, certificates of assignment or participation and
similar instrument with recourse as may be authorized by the Central Bank of the Philippines, for banks and non-bank
financial intermediaries or by the Securities and Exchange Commission of the Philippines for commercial, industrial,
finance companies and either non-financial companies: Provided, however, that only debt instruments issued for interbank call loans to cover deficiency in reserves against deposit liabilities including those between or among banks and
quasi-banks shall not be considered as deposit substitute debt instruments. (Emphasis supplied)
Revenue Regulations No. 17-84, issued to implement Presidential Decree No. 1959, adopted verbatim the same
definition and specifically identified the following borrowings as deposit substitutes:chanroblesvirtuallawlibrary
SECTION 2. Definitions of Terms. . . .
(h) Deposit substitutes shall mean
....
(a) All interbank borrowings by or among banks and non-bank financial institutions authorized to engage in quasibanking functions evidenced by deposit substitutes instruments, except interbank call loans to cover deficiency in
reserves against deposit liabilities as evidenced by interbank loan advice or repayment transfer tickets.
(b) All borrowings of the national and local government and its instrumentalities including the Central Bank of the
Philippines, evidenced by debt instruments denoted as treasury bonds, bills, notes, certificates of indebtedness and
similar instruments.
(c) All borrowings of banks, non-bank financial intermediaries, finance companies, investment companies, trust
companies, including the trust department of banks and investment houses, evidenced by deposit substitutes
instruments. (Emphasis supplied)
The definition of deposit substitutes was amended under the 1997 National Internal Revenue Code with the addition of
the qualifying phrase for public borrowing from 20 or more individual or corporate lenders at any one time. Under
Section 22(Y), deposit substitute is defined thus:chanroblesvirtuallawlibrary
SEC. 22. Definitions - When used in this Title:
....
(Y) The term deposit substitutes shall mean an alternative form of obtaining funds from the public (the term
'public' means borrowing from twenty (20) or more individual or corporate lenders at any one time) other
than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrowers own account,
for the purpose of relending or purchasing of receivables and other obligations, or financing their own needs or the
needs of their agent or dealer. These instruments may include, but need not be limited to, bankers acceptances,
promissory notes, repurchase agreements, including reverse repurchase agreements entered into by and between the
Bangko Sentral ng Pilipinas (BSP) and any authorized agent bank, certificates of assignment or participation and
similar instruments with recourse: Provided, however, That debt instruments issued for interbank call loans with
maturity of not more than five (5) days to cover deficiency in reserves against deposit liabilities, including those
between or among banks and quasi-banks, shall not be considered as deposit substitute debt instruments. (Emphasis
supplied)
Under the 1997 National Internal Revenue Code, Congress specifically defined public to mean twenty (20) or more
individual or corporate lenders at any one time. Hence, the number of lenders is determinative of whether a debt
instrument should be considered a deposit substitute and consequently subject to the 20% final withholding tax.
20-lender rule
Petitioners contend that there [is] only one (1) lender (i.e. RCBC) to whom the BTr issued the Government Bonds. 169
On the other hand, respondents theorize that the word any indicates that the period contemplated is the entire
term of the bond and not merely the point of origination or issuance[,] 170 such that if the debt instruments were
subsequently sold in secondary markets and so on, in such a way that twenty (20) or more buyers eventually own the
instruments, then it becomes indubitable that funds would be obtained from the public as defined in Section 22(Y) of
the NIRC.171 Indeed, in the context of the financial market, the words at any one time create an ambiguity.
Financial markets
Financial markets provide the channel through which funds from the surplus units (households and business firms that
have savings or excess funds) flow to the deficit units (mainly business firms and government that need funds to
finance their operations or growth). They bring suppliers and users of funds together and provide the means by which
the lenders transform their funds into financial assets, and the borrowers receive these funds now considered as their
financial liabilities. The transfer of funds is represented by a security, such as stocks and bonds. Fund suppliers earn a
return on their investment; the return is necessary to ensure that funds are supplied to the financial
markets.172chanRoblesvirtualLawlibrary
The financial markets that facilitate the transfer of debt securities are commonly classified by the maturity of the
securities[,]173 namely: (1) the money market, which facilitates the flow of short-term funds (with maturities of one
year or less); and (2) the capital market, which facilitates the flow of long-term funds (with maturities of more than one
year).174chanRoblesvirtualLawlibrary
Whether referring to money market securities or capital market securities, transactions occur either in the primary
market or in the secondary market.175 Primary markets facilitate the issuance of new securities. Secondary
markets facilitate the trading of existing securities, which allows for a change in the ownership of the securities. 176
The transactions in primary markets exist between issuers and investors, while secondary market transactions exist
among investors.177chanRoblesvirtualLawlibrary
Over time, the system of financial markets has evolved from simple to more complex ways of carrying out financial
transactions.178 Still, all systems perform one basic function: the quick mobilization of money from the
lenders/investors to the borrowers.179chanRoblesvirtualLawlibrary
Fund transfers are accomplished in three ways: (1) direct finance; (2) semidirect finance; and (3) indirect
finance.180chanRoblesvirtualLawlibrary
With direct financing, the borrower and lender meet each other and exchange funds in return for financial assets 181
(e.g., purchasing bonds directly from the company issuing them). This method provides certain limitations such as: (a)
both borrower and lender must desire to exchange the same amount of funds at the same time[;] 182 and (b) both
lender and borrower must frequently incur substantial information costs simply to find each
other.183chanRoblesvirtualLawlibrary
In semidirect financing, a securities broker or dealer brings surplus and deficit units together, thereby reducing
information costs.184 A broker185 is an individual or financial institution who provides information concerning possible
purchases and sales of securities. Either a buyer or a seller of securities may contact a broker, whose job is simply to
bring buyers and sellers together.186 A dealer187 also serves as a middleman between buyers and sellers, but the
dealer actually acquires the sellers securities in the hope of selling them at a later time at a more favorable price. 188
Frequently, a dealer will split up a large issue of primary securities into smaller units affordable by . . . buyers . . . and
thereby expand the flow of savings into investment.189 In semidirect financing, [t]he ultimate lender still winds up
holding the borrowers securities, and therefore the lender must be willing to accept the risk, liquidity, and maturity
characteristics of the borrowers [debt security]. There still must be a fundamental coincidence of wants and needs
between [lenders and borrowers] for semidirect financial transactions to take place. 190chanRoblesvirtualLawlibrary
The limitations of both direct and semidirect finance stimulated the development of indirect financial transactions,
carried out with the help of financial intermediaries 191 or financial institutions, like banks, investment banks, finance
companies, insurance companies, and mutual funds. 192 Financial intermediaries accept funds from surplus units and
channel the funds to deficit units.193 Depository institutions [such as banks] accept deposits from surplus units and
provide credit to deficit units through loans and purchase of [debt] securities. 194 Nondepository institutions, like
mutual funds, issue securities of their own (usually in smaller and affordable denominations) to surplus units and at
the same time purchase debt securities of deficit units. 195 By pooling the resources of [small savers, a financial
intermediary] can service the credit needs of large firms simultaneously. 196chanRoblesvirtualLawlibrary
The financial market, therefore, is an agglomeration of financial transactions in securities performed by market
participants that works to transfer the funds from the surplus units (or investors/lenders) to those who need them
(deficit units or borrowers).
Meaning of at any one time
Thus, from the point of view of the financial market, the phrase at any one time for purposes of determining the 20
or more lenders would mean every transaction executed in the primary or secondary market in connection with the
purchase or sale of securities.
For example, where the financial assets involved are government securities like bonds, the reckoning of 20 or more
lenders/investors is made at any transaction in connection with the purchase or sale of the Government Bonds, such
as:
1.
Issuance by the Bureau of Treasury of the bonds to GSEDs in the primary market;
2.
Sale and distribution by GSEDs to various lenders/investors in the secondary market;
3.
Subsequent sale or trading by a bondholder to another lender/investor in the secondary market usually
through a broker or dealer; or
4.
Sale by a financial intermediary-bondholder of its participation interests in the bonds to individual or corporate
lenders in the secondary market.
When, through any of the foregoing transactions, funds are simultaneously obtained from 20 or more
lenders/investors, there is deemed to be a public borrowing and the bonds at that point in time are deemed deposit
substitutes. Consequently, the seller is required to withhold the 20% final withholding tax on the imputed interest
income from the bonds.
For debt instruments that are
not deposit substitutes, regular
income tax applies
It must be emphasized, however, that debt instruments that do not qualify as deposit substitutes under the 1997
National Internal Revenue Code are subject to the regular income tax.
The phrase all income derived from whatever source in Chapter VI, Computation of Gross Income, Section 32(A) of
the 1997 National Internal Revenue Code discloses a legislative policy to include all income not expressly exempted as
within the class of taxable income under our laws.
The definition of gross income is broad enough to include all passive incomes subject to specific tax rates or final
taxes.197 Hence, interest income from deposit substitutes are necessarily part of taxable income. However, since
these passive incomes are already subject to different rates and taxed finally at source, they are no longer included in
the computation of gross income, which determines taxable income. 198 Stated otherwise . . . if there were no
withholding tax system in place in this country, this 20 percent portion of the passive income of [creditors/lenders]
would actually be paid to the [creditors/lenders] and then remitted by them to the government in payment of their
income tax.199chanRoblesvirtualLawlibrary
This court, in Chamber of Real Estate and Builders Associations, Inc. v. Romulo, 200 explained the rationale behind the
withholding tax system:chanroblesvirtuallawlibrary
The withholding [of tax at source] was devised for three primary reasons: first, to provide the taxpayer a convenient
manner to meet his probable income tax liability; second, to ensure the collection of income tax which can otherwise
be lost or substantially reduced through failure to file the corresponding returns[;] and third, to improve the
governments cash flow. This results in administrative savings, prompt and efficient collection of taxes, prevention of
delinquencies and reduction of governmental effort to collect taxes through more complicated means and remedies. 201
(Citations omitted)
The application of the withholdings system to interest on bank deposits or yield from deposit substitutes is essentially
to maximize and expedite the collection of income taxes by requiring its payment at the
source.202chanRoblesvirtualLawlibrary
Hence, when there are 20 or more lenders/investors in a transaction for a specific bond issue, the seller is required to
withhold the 20% final income tax on the imputed interest income from the bonds.
Interest income v. gains from sale or redemption
The interest income earned from bonds is not synonymous with the gains contemplated under Section 32(B)(7)(g) 203
of the 1997 National Internal Revenue Code, which exempts gains derived from trading, redemption, or retirement of
long-term securities from ordinary income tax.
The term gain as used in Section 32(B)(7)(g) does not include interest, which represents forbearance for the use of
money. Gains from sale or exchange or retirement of bonds or other certificate of indebtedness fall within the general
category of gains derived from dealings in property under Section 32(A)(3), while interest from bonds or other
certificate of indebtedness falls within the category of interests under Section 32(A)(4). 204 The use of the term gains
from sale in Section 32(B)(7)(g) shows the intent of Congress not to include interest as referred under Sections 24, 25,
27, and 28 in the exemption.205chanRoblesvirtualLawlibrary
Hence, the gains contemplated in Section 32(B)(7)(g) refers to: (1) gain realized from the trading of the bonds before
their maturity date, which is the difference between the selling price of the bonds in the secondary market and the
price at which the bonds were purchased by the seller; and (2) gain realized by the last holder of the bonds when the
bonds are redeemed at maturity, which is the difference between the proceeds from the retirement of the bonds and
the price at which such last holder acquired the bonds. For discounted instruments, like the zero-coupon bonds, the
trading gain shall be the excess of the selling price over the book value or accreted value (original issue price plus
accumulated discount from the time of purchase up to the time of sale) of the
instruments.206chanRoblesvirtualLawlibrary
The Bureau of Internal
Revenue rulings
The Bureau of Internal Revenues interpretation as expressed in the three 2001 BIR Rulings is not consistent with
law.207 Its interpretation of at any one time to mean at the point of origination alone is unduly restrictive.
BIR Ruling No. 370-2011 is likewise erroneous insofar as it stated (relying on the 2004 and 2005 BIR Rulings) that all
treasury bonds . . . regardless of the number of purchasers/lenders at the time of origination/issuance are considered
deposit substitutes.208 Being the subject of this petition, it is, thus, declared void because it completely disregarded
the 20 or more lender rule added by Congress in the 1997 National Internal Revenue Code. It also created a distinction
for government debt instruments as against those issued by private corporations when there was none in the law.
Tax statutes must be reasonably construed as to give effect to the whole act. Their constituent provisions must be
read together, endeavoring to make every part effective, harmonious, and sensible. 209 That construction which will
leave every word operative will be favored over one that leaves some word, clause, or sentence meaningless and
insignificant.210chanRoblesvirtualLawlibrary
It may be granted that the interpretation of the Commissioner of Internal Revenue in charge of executing the 1997
National Internal Revenue Code is an authoritative construction of great weight, but the principle is not absolute and
may be overcome by strong reasons to the contrary. If through a misapprehension of law an officer has issued an
erroneous interpretation, the error must be corrected when the true construction is ascertained.
In Philippine Bank of Communications v. Commissioner of Internal Revenue,211 this court upheld the nullification of
Revenue Memorandum Circular (RMC) No. 7-85 issued by the Acting Commissioner of Internal Revenue because it was
contrary to the express provision of Section 230 of the 1977 National Internal Revenue Code and, hence, [cannot] be
given weight for to do so would, in effect, amend the statute. 212 Thus:chanroblesvirtuallawlibrary
When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive period of two years to
ten years on claims of excess quarterly income tax payments, such circular created a clear inconsistency with the
provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply interpret the law; rather it legislated guidelines
contrary to the statute passed by Congress.
It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the sense of more
specific and less general interpretations of tax laws) which are issued from time to time by the Commissioner of
Internal Revenue. It is widely accepted that the interpretation placed upon a statute by the executive officers, whose
duty is to enforce it, is entitled to great respect by the courts. Nevertheless, such interpretation is not conclusive and
will be ignored if judicially found to be erroneous. Thus, courts will not countenance administrative issuances that
override, instead of remaining consistent and in harmony with, the law they seek to apply and implement. 213 (Citations
omitted)
This court further held that [a] memorandum-circular of a bureau head could not operate to vest a taxpayer with a
shield against judicial action [because] there are no vested rights to speak of respecting a wrong construction of the
law by the administrative officials and such wrong interpretation could not place the Government in estoppel to correct
or overrule the same.214chanRoblesvirtualLawlibrary
In Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc., 215 this court nullified Revenue Memorandum
Order (RMO) No. 15-91 and RMC No. 43-91, which imposed a 5% lending investor's tax on pawnshops. 216 It was held
that the [Commissioner] cannot, in the exercise of [its interpretative] power, issue administrative rulings or circulars
not consistent with the law sought to be applied. Indeed, administrative issuances must not override, supplant or
modify the law, but must remain consistent with the law they intend to carry out. Only Congress can repeal or amend
the law.217chanRoblesvirtualLawlibrary
In Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance Secretary, 218 this court stated that the
Commissioner of Internal Revenue is not bound by the ruling of his predecessors, 219 but, to the contrary, the overruling
of decisions is inherent in the interpretation of laws:chanroblesvirtuallawlibrary
[I]n considering a legislative rule a court is free to make three inquiries: (i) whether the rule is within the delegated
authority of the administrative agency; (ii) whether it is reasonable; and (iii) whether it was issued pursuant to proper
procedure. But the court is not free to substitute its judgment as to the desirability or wisdom of the rule for the
legislative body, by its delegation of administrative judgment, has committed those questions to administrative
judgments and not to judicial judgments. In the case of an interpretative rule, the inquiry is not into the validity but
into the correctness or propriety of the rule. As a matter of power a court, when confronted with an interpretative rule,
is free to (i) give the force of law to the rule; (ii) go to the opposite extreme and substitute its judgment; or (iii) give
some intermediate degree of authoritative weight to the interpretative rule.
In the case at bar, we find no reason for holding that respondent Commissioner erred in not considering copra as an
agricultural food product within the meaning of 103(b) of the NIRC. As the Solicitor General contends, copra per se
is not food, that is, it is not intended for human consumption. Simply stated, nobody eats copra for food. That
previous Commissioners considered it so, is not reason for holding that the present interpretation is wrong. The
Commissioner of Internal Revenue is not bound by the ruling of his predecessors. To the contrary, the overruling of
decisions is inherent in the interpretation of laws.220 (Emphasis supplied, citations omitted)
Tax treatment of income derived
from the PEACe Bonds
The transactions executed for the sale of the PEACe Bonds are:
1.
The issuance of the P35 billion Bonds by the Bureau of Treasury to RCBC/CODE-NGO at P10.2 billion; and
2.
The sale and distribution by RCBC Capital (underwriter) on behalf of CODE-NGO of the PEACe Bonds to
undisclosed investors at P11.996 billion.
It may seem that there was only one lender RCBC on behalf of CODE-NGO to whom the PEACe Bonds were issued
at the time of origination. However, a reading of the underwriting agreement221 and RCBC term sheet222 reveals that
the settlement dates for the sale and distribution by RCBC Capital (as underwriter for CODE-NGO) of the PEACe Bonds
to various undisclosed investors at a purchase price of approximately P11.996 would fall on the same day, October 18,
2001, when the PEACe Bonds were supposedly issued to CODE-NGO/RCBC. In reality, therefore, the entire P10.2 billion
borrowing received by the Bureau of Treasury in exchange for the P35 billion worth of PEACe Bonds was sourced
directly from the undisclosed number of investors to whom RCBC Capital/CODE-NGO distributed the PEACe Bonds all
at the time of origination or issuance. At this point, however, we do not know as to how many investors the PEACe
Bonds were sold to by RCBC Capital.
Should there have been a simultaneous sale to 20 or more lenders/investors, the PEACe Bonds are deemed deposit
substitutes within the meaning of Section 22(Y) of the 1997 National Internal Revenue Code and RCBC Capital/CODENGO would have been obliged to pay the 20% final withholding tax on the interest or discount from the PEACe Bonds.
Further, the obligation to withhold the 20% final tax on the corresponding interest from the PEACe Bonds would
likewise be required of any lender/investor had the latter turned around and sold said PEACe Bonds, whether in whole
or part, simultaneously to 20 or more lenders or investors.
We note, however, that under Section 24223 of the 1997 National Internal Revenue Code, interest income received by
individuals from long-term deposits or investments with a holding period of not less than five (5) years is exempt from
the final tax.
Thus, should the PEACe Bonds be found to be within the coverage of deposit substitutes, the proper procedure was for
the Bureau of Treasury to pay the face value of the PEACe Bonds to the bondholders and for the Bureau of Internal
Revenue to collect the unpaid final withholding tax directly from RCBC Capital/CODE-NGO, or any lender or investor if
such be the case, as the withholding agents.
The collection of tax is not
barred by prescription
The three (3)-year prescriptive period under Section 203 of the 1997 National Internal Revenue Code to assess and
collect internal revenue taxes is extended to 10 years in cases of (1) fraudulent returns; (2) false returns with intent to
evade tax; and (3) failure to file a return, to be computed from the time of discovery of the falsity, fraud, or omission.
Section 203 states:chanroblesvirtuallawlibrary
SEC. 203. Period of Limitation Upon Assessment and Collection. - Except as provided in Section 222, internal
revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return,
and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of
such period: Provided, That in a case where a return is filed beyond the period prescribed by law, the three (3)-year
period shall be counted from the day the return was filed. For purposes of this Section, a return filed before the last
day prescribed by law for the filing thereof shall be considered as filed on such last day. (Emphasis supplied)
....
SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes.
(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be
assessed, or a proceeding in court for the collection of such tax may be filed without assessment, at any time within
ten (10) years after the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has
become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for
the collection thereof.
Thus, should it be found that RCBC Capital/CODE-NGO sold the PEACe Bonds to 20 or more lenders/investors, the
Bureau of Internal Revenue may still collect the unpaid tax from RCBC Capital/CODE-NGO within 10 years after the
discovery of the omission.
In view of the foregoing, there is no need to pass upon the other issues raised by petitioners and petitionersintervenors.
Reiterative motion on the temporary restraining order
Respondents withholding of the
20% final withholding tax on
October 18, 2011 was justified
Under the Rules of Court, court orders are required to be served upon the parties affected. 224 Moreover, service may
be made personally or by mail.225 And, [p]ersonal service is complete upon actual delivery [of the order.] 226 This
courts temporary restraining order was received only on October 19, 2011, or a day after the PEACe Bonds had
matured and the 20% final withholding tax on the interest income from the same was withheld.
Publication of news reports in the print and broadcast media, as well as on the internet, is not a recognized mode of
service of pleadings, court orders, or processes. Moreover, the news reports227 cited by petitioners were posted
minutes before the close of office hours or late in the evening of October 18, 2011, and they did not give the exact
contents of the temporary restraining order.
[O]ne cannot be punished for violating an injunction or an order for an injunction unless it is shown that such
injunction or order was served on him personally or that he had notice of the issuance or making of such injunction or
order.228chanRoblesvirtualLawlibrary
At any rate, [i]n case of doubt, a withholding agent may always protect himself or herself by withholding the tax
due229 and return the amount of the tax withheld should it be finally determined that the income paid is not subject to
withholding.230 Hence, respondent Bureau of Treasury was justified in withholding the amount corresponding to the
20% final withholding tax from the proceeds of the PEACe Bonds, as it received this courts temporary restraining order
only on October 19, 2011, or the day after this tax had been withheld.
Respondents retention of the
amounts withheld is a defiance of
the temporary restraining order
Nonetheless, respondents continued failure to release to petitioners the amount corresponding to the 20% final
withholding tax in order that it may be placed in escrow as directed by this court constitutes a defiance of this courts
temporary restraining order.231chanRoblesvirtualLawlibrary
The temporary restraining order is not moot. The acts sought to be enjoined are not fait accompli. For an act to be
considered fait accompli, the act must have already been fully accomplished and consummated. 232 It must be
irreversible, e.g., demolition of properties,233 service of the penalty of imprisonment,234 and hearings on cases.235 When
the act sought to be enjoined has not yet been fully satisfied, and/or is still continuing in nature, 236 the defense of fait
accompli cannot prosper.
The temporary restraining order enjoins the entire implementation of the 2011 BIR Ruling that constitutes both the
withholding and remittance of the 20% final withholding tax to the Bureau of Internal Revenue. Even though the
Bureau of Treasury had already withheld the 20% final withholding tax 237 when it received the temporary restraining
order, it had yet to remit the monies it withheld to the Bureau of Internal Revenue, a remittance which was due only on
November 10, 2011.238 The act enjoined by the temporary restraining order had not yet been fully satisfied and was
still continuing.
Under DOF-DBM Joint Circular No. 1-2000A239 dated July 31, 2001 which prescribes to national government agencies
such as the Bureau of Treasury the procedure for the remittance of all taxes it withheld to the Bureau of Internal
Revenue, a national agency shall file before the Bureau of Internal Revenue a Tax Remittance Advice (TRA) supported
by withholding tax returns on or before the 10th day of the following month after the said taxes had been withheld. 240
The Bureau of Internal Revenue shall transmit an original copy of the TRA to the Bureau of Treasury, 241 which shall be
the basis for recording the remittance of the tax collection. 242 The Bureau of Internal Revenue will then record the
amount of taxes reflected in the TRA as tax collection in the Journal of Tax Remittance by government agencies based
on its copies of the TRA.243 Respondents did not submit any withholding tax return or TRA to prove that the 20% final
withholding tax was indeed remitted by the Bureau of Treasury to the Bureau of Internal Revenue on October 18, 2011.
Respondent Bureau of Treasurys Journal Entry Voucher No. 11-10-10395244 dated October 18, 2011 submitted to this
court shows:chanroblesvirtuallawlibrary
Bonds Payable-L/T, Dom-Zero

Coupon T/Bonds
(Peace Bonds) 10 yr
Sinking Fund-Cash (BSF)
Due to BIR
Account Code
442-360
198-001
412-002
Debit Amount
Credit Amount
35,000,000,000.00
30,033,792,203.59
4,966,207,796.41
To record redemption of 10yr Zero coupon

(Peace Bond) net of the 20% final
withholding tax pursuant to BIR Ruling No.
378-2011, value date, October 18, 2011
per BTr letter authority and BSP Bank
Statements.
The foregoing journal entry, however, does not prove that the amount of P4,966,207,796.41, representing the 20%
final withholding tax on the PEACe Bonds, was disbursed by it and remitted to the Bureau of Internal Revenue on
October 18, 2011. The entries merely show that the monies corresponding to 20% final withholding tax was set aside
for remittance to the Bureau of Internal Revenue.
We recall the November 15, 2011 resolution issued by this court directing respondents to show cause why they failed
to comply with the [TRO]; and [to] comply with the [TRO] in order that petitioners may place the corresponding funds
in escrow pending resolution of the petition.245 The 20% final withholding tax was effectively placed in custodia legis
when this court ordered the deposit of the amount in escrow. The Bureau of Treasury could still release the money
withheld to petitioners for the latter to place in escrow pursuant to this courts directive. There was no legal obstacle
to the release of the 20% final withholding tax to petitioners.

Congressional appropriation is not required for the servicing of public debts in view of the automatic appropriations
clause embodied in Presidential Decree Nos. 1177 and 1967.
Section 31 of Presidential Decree No. 1177 provides:chanroblesvirtuallawlibrary
Section 31. Automatic Appropriations. All expenditures for (a) personnel retirement premiums, government service
insurance, and other similar fixed expenditures, (b) principal and interest on public debt, (c) national government
guarantees of obligations which are drawn upon, are automatically appropriated: provided, that no obligations shall be
incurred or payments made from funds thus automatically appropriated except as issued in the form of regular
budgetary allotments.
Section 1 of Presidential Decree No. 1967 states:chanroblesvirtuallawlibrary
Section 1. There is hereby appropriated, out of any funds in the National Treasury not otherwise appropriated, such
amounts as may be necessary to effect payments on foreign or domestic loans, or foreign or domestic loans whereon
creditors make a call on the direct and indirect guarantee of the Republic of the Philippines, obtained by:
a. the Republic of the Philippines the proceeds of which were relent to government-owned or controlled corporations
and/or government financial institutions;
b. government-owned or controlled corporations and/or government financial institutions the proceeds of which were
relent to public or private institutions;
c. government-owned or controlled corporations and/or financial institutions and guaranteed by the Republic of the
Philippines;
d. other public or private institutions and guaranteed by government-owned or controlled corporations and/or
government financial institutions.
The amount of P35 billion that includes the monies corresponding to 20% final withholding tax is a lawful and valid
obligation of the Republic under the Government Bonds. Since said obligation represents a public debt, the release of
the monies requires no legislative appropriation.
Section 2 of Republic Act No. 245 likewise provides that the money to be used for the payment of Government Bonds
may be lawfully taken from the continuing appropriation out of any monies in the National Treasury and is not required
to be the subject of another appropriation legislation:chanroblesvirtuallawlibrary
SEC. 2. The Secretary of Finance shall cause to be paid out of any moneys in the National Treasury not otherwise
appropriated, or from any sinking funds provided for the purpose by law, any interest falling due, or accruing, on any
portion of the public debt authorized by law. He shall also cause to be paid out of any such money, or from any such
sinking funds the principal amount of any obligations which have matured, or which have been called for redemption
or for which redemption has been demanded in accordance with terms prescribed by him prior to date of issue . . . In
the case of interest-bearing obligations, he shall pay not less than their face value; in the case of obligations issued at
a discount he shall pay the face value at maturity; or if redeemed prior to maturity, such portion of the face value as is
prescribed by the terms and conditions under which such obligations were originally issued. There are hereby
appropriated as a continuing appropriation out of any moneys in the National Treasury not otherwise appropriated,
such sums as may be necessary from time to time to carry out the provisions of this section. The Secretary of Finance
shall transmit to Congress during the first month of each regular session a detailed statement of all expenditures made
under this section during the calendar year immediately preceding.
Thus, DOF Department Order No. 141-95, as amended, states that payment for Treasury bills and bonds shall be made
through the National Treasurys account with the Bangko Sentral ng Pilipinas, to wit:chanroblesvirtuallawlibrary
Section 38. Demand Deposit Account. The Treasurer of the Philippines maintains a Demand Deposit Account with
the Bangko Sentral ng Pilipinas to which all proceeds from the sale of Treasury Bills and Bonds under R.A. No. 245, as
amended, shall be credited and all payments for redemption of Treasury Bills and Bonds shall be charged.
Regarding these legislative enactments ordaining an automatic appropriations provision for debt servicing, this court
has held:chanroblesvirtuallawlibrary
Congress . . . deliberates or acts on the budget proposals of the President, and Congress in the exercise of its own
judgment and wisdom formulates an appropriation act precisely following the process established by the Constitution,
which specifies that no money may be paid from the Treasury except in accordance with an appropriation made by law.
Debt service is not included in the General Appropriation Act, since authorization therefor already exists under RA Nos.
4860 and 245, as amended, and PD 1967. Precisely in the light of this subsisting authorization as embodied in said
Republic Acts and PD for debt service, Congress does not concern itself with details for implementation by the
Executive, but largely with annual levels and approval thereof upon due deliberations as part of the whole obligation
program for the year. Upon such approval, Congress has spoken and cannot be said to have delegated its wisdom to
the Executive, on whose part lies the implementation or execution of the legislative wisdom. 246 (Citation omitted)
Respondent Bureau of Treasury had the duty to obey the temporary restraining order issued by this court, which
remained in full force and effect, until set aside, vacated, or modified. Its conduct finds no justification and is
reprehensible.247chanRoblesvirtualLawlibrarychanrobleslaw
WHEREFORE, the petition for review and petitions-in-intervention are GRANTED. BIR Ruling Nos. 370-2011 and DA
378-2011 are NULLIFIED.
Furthermore, respondent Bureau of Treasury is REPRIMANDED for its continued retention of the amount
corresponding to the 20% final withholding tax despite this courts directive in the temporary restraining order and in
the resolution dated November 15, 2011 to deliver the amounts to the banks to be placed in escrow pending resolution
of this case.
Respondent Bureau of Treasury is hereby ORDERED to immediately release and pay to the bondholders the amount
corresponding to the 20% final withholding tax that it withheld on October 18, 2011.
G.R. No. 215427, December 10, 2014

PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR), Petitioner, v. THE BUREAU OF INTERNAL
REVENUE, REPRESENTED BY JOSE MARIO BUAG, IN HIS CAPACITY AS COMMISSIONER OF THE BUREAU OF
INTERNAL REVENUE, AND JOHN DOE AND JANE DOE, WHO ARE PERSONS ACTING FOR, IN BEHALF OR
UNDER THE AUTHORITY OF RESPONDENT, Respondent.
DECISION
PERALTA, J.:
The present petition stems from the Motion for Clarification filed by petitioner Philippine Amusement and Gaming
Corporation (PAGCOR) on September 13, 2013 in the case entitled Philippine Amusement and Gaming Corporation
(PAGCOR) v. The Bureau of Internal Revenue, et al.,1 which was promulgated on March 15, 2011. The Motion for
Clarification essentially prays for the clarification of our Decision in the aforesaid case, as well the issuance of a
Temporary Restraining Order and/or Writ of Preliminary Injunction against the Bureau of Internal Revenue (BIR), their
employees, agents and any other persons or entities acting or claiming any right on BIRs behalf, in the
implementation of BIR Revenue Memorandum Circular (RMC) No. 33-2013 dated April 17, 2013.
At the onset, it bears stressing that while the instant motion was denominated as a Motion for Clarification, in the
session of the Court En Banc held on November 25, 2014, the members thereof ruled to treat the same as a new
petition for certiorari under Rule 65 of the Rules of Court, given that petitioner essentially alleges grave abuse of
discretion on the part of the BIR amounting to lack or excess of jurisdiction in issuing RMC No. 33-2013. Consequently,
a new docket number has been assigned thereto, while petitioner has been ordered to pay the appropriate docket fees
pursuant to the Resolution dated November 25, 2014, the pertinent portion of which reads:chanroblesvirtuallawlibrary
G.R. No. 172087 (Philippine Amusement and Gaming Corporation vs. Bureau of Internal Revenue, et al.). The Court
Resolved to
(a)
TREAT as a new petition the Motion for Clarification with Temporary Restraining Order and/or Preliminary
Injunction Application dated September 6, 2013 filed by PAGCOR;
(b)
DIRECT the Judicial Records Office to RE-DOCKET the aforesaid Motion for Clarification, subject to payment of
the appropriate docket fees; and
(c)
REQUIRE petitioner PAGCOR to PAY the filing fees for the subject Motion for Clarification within five (5) days
from notice hereof. Brion, J., no part and on leave. Perlas-Bernabe, J., on official leave.
Considering that the parties have filed their respective pleadings relative to the instant petition, and the appropriate
docket fees have been duly paid by petitioner, this Court considers the instant petition submitted for resolution.
The facts are briefly summarized as follows:
On April 17, 2006, petitioner filed before this Court a Petition for Review on Certiorari and Prohibition (With Prayer for
the Issuance of a Temporary Restraining Order and/or Preliminary Injunction) seeking the declaration of nullity of
Section 12 of Republic Act (R.A.) No. 93373 insofar as it amends Section 27(C)4 of R.A. No. 8424,5 otherwise known as
the National Internal Revenue Code (NIRC) by excluding petitioner from the enumeration of government-owned or
controlled corporations (GOCCs) exempted from liability for corporate income tax.
On March 15, 2011, this Court rendered a Decision6 granting in part the petition filed by petitioner. Its fallo
reads:chanroblesvirtuallawlibrary
WHEREFORE, the petition is PARTLY GRANTED. Section 1 of Republic Act No. 9337, amending Section 27(c) of the
National Internal Revenue Code of 1997, by excluding petitioner Philippine Amusement and Gaming Corporation from
the enumeration of government-owned and controlled corporations exempted from corporate income tax is valid and
constitutional, while BIR Revenue Regulations No. 16-2005 insofar as it subjects PAGCOR to 10% VAT is null and void
for being contrary to the National Internal Revenue Code of 1997, as amended by Republic Act No. 9337.
No costs.
SO ORDERED.7
Both petitioner and respondent filed their respective motions for partial reconsideration, but the same were denied by
this Court in a Resolution8 dated May 31, 2011.
Resultantly, respondent issued RMC No. 33-2013 on April 17, 2013 pursuant to the Decision dated March 15, 2011 and
the Resolution dated May 31, 2011, which clarifies the Income Tax and Franchise Tax Due from the Philippine
Amusement and Gaming Corporation (PAGCOR), its Contractees and Licensees. Relevant portions thereof
state:chanroblesvirtuallawlibrary
II. INCOME TAX
Pursuant to Section 1 of R.A. 9337, amending Section 27(C) of the NIRC, as amended, PAGCOR is no longer exempt
from corporate income tax as it has been effectively omitted from the list of government-owned or controlled
corporations (GOCCs) that are exempt from income tax. Accordingly, PAGCORs income from its operations and
licensing of gambling casinos, gaming clubs and other similar recreation or amusement places, gaming pools, and
other related operations, are subject to corporate income tax under the NIRC, as amended. This includes, among
others:
a)
b)
c)
d)
Income from its casino operations;

Income from dollar pit operations;
Income from regular bingo operations; and
Income from mobile bingo operations operated by it, with agents on commission basis. Provided, however,
that the agents commission income shall be subject to regular income tax, and consequently, to
withholding tax under existing regulations.
Income from other related operations includes, but is not limited to:
a) Income from licensed private casinos covered by authorities to operate issued to private operators;
b) Income from traditional bingo, electronic bingo and other bingo variations covered by authorities to operate issued
to private operators;
c) Income from private internet casino gaming, internet sports betting and private mobile gaming operations;
d) Income from private poker operations;
e) Income from junket operations;
f) Income from SM demo units; and
g) Income from other necessary and related services, shows and entertainment.
PAGCORs other income that is not connected with the foregoing operations are likewise subject to corporate income
tax under the NIRC, as amended.
PAGCORs contractees and licensees are entities duly authorized and licensed by PAGCOR to perform gambling
casinos, gaming clubs and other similar recreation or amusement places, and gaming pools. These contractees and
licensees are subject to income tax under the NIRC, as amended.
III. FRANCHISE TAX
Pursuant to Section 13(2) (a) of P.D. No. 1869,9 PAGCOR is subject to a franchise tax of five percent (5%) of the gross
revenue or earnings it derives from its operations and licensing of gambling casinos, gaming clubs and other similar
recreation or amusement places, gaming pools, and other related operations as described above.
On May 20, 2011, petitioner wrote the BIR Commissioner requesting for reconsideration of the tax treatment of its
income from gaming operations and other related operations under RMC No. 33-2013. The request was, however,
denied by the BIR Commissioner.
On August 4, 2011, the Decision dated March 15, 2011 became final and executory and was, accordingly, recorded in
the Book of Entries of Judgment.10chanRoblesvirtualLawlibrary
Consequently, petitioner filed a Motion for Clarification alleging that RMC No. 33-2013 is an erroneous interpretation
and application of the aforesaid Decision, and seeking clarification with respect to the
following:chanroblesvirtuallawlibrary
1.
Whether PAGCORs tax privilege of paying 5% franchise tax in lieu of all other taxes with respect to its gaming
income, pursuant to its Charter P.D. 1869, as amended by R.A. 9487, is deemed repealed or amended by
Section 1 (c) of R.A. 9337.
2.
If it is deemed repealed or amended, whether PAGCORs gaming income is subject to both 5% franchise tax
and income tax.
3.
Whether PAGCORs income from operation of related services is subject to both income tax and 5% franchise
tax.
4.
Whether PAGCORs tax privilege of paying 5% franchise tax inures to the benefit of third parties with
contractual relationship with PAGCOR in connection with the operation of casinos. 11
In our Decision dated March 15, 2011, we have already declared petitioners income tax liability in view of the
withdrawal of its tax privilege under R.A. No. 9337. However, we made no distinction as to which income is subject to
corporate income tax, considering that the issue raised therein was only the constitutionality of Section 1 of R.A. No.
9337, which excluded petitioner from the enumeration of GOCCs exempted from corporate income tax.
For clarity, it is worthy to note that under P.D. 1869, as amended, PAGCORs income is classified into two: (1) income
from its operations conducted under its Franchise, pursuant to Section 13(2) (b) thereof (income from gaming
operations); and (2) income from its operation of necessary and related services under Section 14(5) thereof (income
from other related services). In RMC No. 33-2013, respondent further classified the aforesaid income as
follows:chanroblesvirtuallawlibrary
1. PAGCORs income from its operations and licensing of gambling casinos, gaming clubs and other similar
recreation or amusement places, gaming pools, includes, among others:
a)
b)
c)
d)
Income from its casino operations;

Income from dollar pit operations;
Income from regular bingo operations; and
Income from mobile bingo operations operated by it, with agents on commission basis. Provided, however,
that the agents commission income shall be subject to regular income tax, and consequently, to
withholding tax under existing regulations.
2. Income from other related operations includes, but is not limited to:
a) Income from licensed private casinos covered by authorities to operate issued to private operators;
b) Income from traditional bingo, electronic bingo and other bingo variations covered by authorities to operate issued
to private operators;
c) Income from private internet casino gaming, internet sports betting and private mobile gaming operations;
d) Income from private poker operations;
e) Income from junket operations;
f) Income from SM demo units; and
g) Income from other necessary and related services, shows and entertainment. 12
After a thorough study of the arguments and points raised by the parties, and in accordance with our Decision dated
March 15, 2011, we sustain petitioners contention that its income from gaming operations is subject only to five
percent (5%) franchise tax under P.D. 1869, as amended, while its income from other related services is subject to
corporate income tax pursuant to P.D. 1869, as amended, as well as R.A. No. 9337. This is demonstrable.
First. Under P.D. 1869, as amended, petitioner is subject to income tax only with respect to its operation of related
services. Accordingly, the income tax exemption ordained under Section 27(c) of R.A. No. 8424 clearly pertains only to
petitioners income from operation of related services. Such income tax exemption could not have been applicable to
petitioners income from gaming operations as it is already exempt therefrom under P.D. 1869, as amended, to
wit:chanroblesvirtuallawlibrary
SECTION 13. Exemptions.

xxxx
(2) Income and other taxes. (a) Franchise Holder: No tax of any kind or form, income or otherwise, as well as
fees, charges or levies of whatever nature, whether National or Local, shall be assessed and collected
under this Franchise from the Corporation; nor shall any form of tax or charge attach in any way to the
earnings of the Corporation, except a Franchise Tax of five (5%) percent of the gross revenue or earnings
derived by the Corporation from its operation under this Franchise. Such tax shall be due and payable
quarterly to the National Government and shall be in lieu of all kinds of taxes, levies, fees or assessments of any kind,
nature or description, levied, established or collected by any municipal, provincial, or national government authority. 13
Indeed, the grant of tax exemption or the withdrawal thereof assumes that the person or entity involved is subject to
tax. This is the most sound and logical interpretation because petitioner could not have been exempted from paying
taxes which it was not liable to pay in the first place. This is clear from the wordings of P.D. 1869, as amended,
imposing a franchise tax of five percent (5%) on its gross revenue or earnings derived by petitioner from its operation
under the Franchise in lieu of all taxes of any kind or form, as well as fees, charges or levies of whatever nature, which
necessarily include corporate income tax.
In other words, there was no need for Congress to grant tax exemption to petitioner with respect to its income from
gaming operations as the same is already exempted from all taxes of any kind or form, income or otherwise, whether
national or local, under its Charter, save only for the five percent (5%) franchise tax. The exemption attached to the
income from gaming operations exists independently from the enactment of R.A. No. 8424. To adopt an assumption
otherwise would be downright ridiculous, if not deleterious, since petitioner would be in a worse position if the
exemption was granted (then withdrawn) than when it was not granted at all in the first place.
Moreover, as may be gathered from the legislative records of the Bicameral Conference Meeting of the Committee on
Ways and Means dated October 27, 1997, the exemption of petitioner from the payment of corporate income tax was
due to the acquiescence of the Committee on Ways and Means to the request of petitioner that it be exempt from such
tax. Based on the foregoing, it would be absurd for petitioner to seek exemption from income tax on its gaming
operations when under its Charter, it is already exempted from paying the same.
Second. Every effort must be exerted to avoid a conflict between statutes; so that if reasonable construction is
possible, the laws must be reconciled in that manner. 14chanRoblesvirtualLawlibrary
As we see it, there is no conflict between P.D. 1869, as amended, and R.A. No. 9337. The former lays down the taxes
imposable upon petitioner, as follows: (1) a five percent (5%) franchise tax of the gross revenues or earnings derived
from its operations conducted under the Franchise, which shall be due and payable in lieu of all kinds of taxes, levies,
fees or assessments of any kind, nature or description, levied, established or collected by any municipal, provincial or
national government authority;15 (2) income tax for income realized from other necessary and related services, shows
and entertainment of petitioner.16 With the enactment of R.A. No. 9337, which withdrew the income tax exemption
under R.A. No. 8424, petitioners tax liability on income from other related services was merely reinstated.
It cannot be gainsaid, therefore, that the nature of taxes imposable is well defined for each kind of activity or
operation. There is no inconsistency between the statutes; and in fact, they complement each other.
Third. Even assuming that an inconsistency exists, P.D. 1869, as amended, which expressly provides the tax
treatment of petitioners income prevails over R.A. No. 9337, which is a general law. It is a canon of statutory
construction that a special law prevails over a general law regardless of their dates of passage and the special is
to be considered as remaining an exception to the general.17 The rationale is:chanroblesvirtuallawlibrary
Why a special law prevails over a general law has been put by the Court as follows:ChanRoblesVirtualawlibrary
xxxx
x x x The Legislature consider and make provision for all the circumstances of the particular case. The Legislature
having specially considered all of the facts and circumstances in the particular case in granting a special
charter, it will not be considered that the Legislature, by adopting a general law containing provisions
repugnant to the provisions of the charter, and without making any mention of its intention to amend or
modify the charter, intended to amend, repeal, or modify the special act. (Lewis vs. Cook County, 74 I11.
App., 151; Philippine Railway Co. vs. Nolting 34 Phil., 401.) 18
Where a general law is enacted to regulate an industry, it is common for individual franchises subsequently granted to
restate the rights and privileges already mentioned in the general law, or to amend the later law, as may be needed,
to conform to the general law.19 However, if no provision or amendment is stated in the franchise to effect the
provisions of the general law, it cannot be said that the same is the intent of the lawmakers, for repeal of laws by
implication is not favored.20chanRoblesvirtualLawlibrary
In this regard, we agree with petitioner that if the lawmakers had intended to withdraw petitioners tax exemption of
its gaming income, then Section 13(2)(a) of P.D. 1869 should have been amended expressly in R.A. No. 9487, or the
same, at the very least, should have been mentioned in the repealing clause of R.A. No. 9337. 21 However, the
repealing clause never mentioned petitioners Charter as one of the laws being repealed. On the other hand, the
repeal of other special laws, namely, Section 13 of R.A. No. 6395 as well as Section 6, fifth paragraph of R.A. No. 9136,
is categorically provided under Section 24(a) (b) of R.A. No. 9337, to wit:chanroblesvirtuallawlibrary
SEC. 24. Repealing Clause. - The following laws or provisions of laws are hereby repealed and the persons and/or
transactions affected herein are made subject to the value-added tax subject to the provisions of Title IV of the
National Internal Revenue Code of 1997, as amended:ChanRoblesVirtualawlibrary
(A)
Section 13 of R.A. No. 6395 on the exemption from value-added tax of the National Power
Corporation (NPC);
(B)
Section 6, fifth paragraph of R.A. No. 9136 on the zero VAT rate imposed on the sales of generated
power by generation companies; and
(C)
All other laws, acts, decrees, executive orders, issuances and rules and regulations or parts thereof which are
contrary to and inconsistent with any provisions of this Act are hereby repealed, amended or modified
accordingly.22
When petitioners franchise was extended on June 20, 2007 without revoking or withdrawing its tax exemption, it
effectively reinstated and reiterated all of petitioners rights, privileges and authority granted under its Charter.
Otherwise, Congress would have painstakingly enumerated the rights and privileges that it wants to withdraw, given
that a franchise is a legislative grant of a special privilege to a person. Thus, the extension of petitioners franchise
under the same terms and conditions means a continuation of its tax exempt status with respect to its income from
gaming operations. Moreover, all laws, rules and regulations, or parts thereof, which are inconsistent with the
provisions of P.D. 1869, as amended, a special law, are considered repealed, amended and modified, consistent with
Section 2 of R.A. No. 9487, thus:chanroblesvirtuallawlibrary
SECTION 2. Repealing Clause. All laws, decrees, executive orders, proclamations, rules and regulations and other
issuances, or parts thereof, which are inconsistent with the provisions of this Act, are hereby repealed, amended and
modified.
It is settled that where a statute is susceptible of more than one interpretation, the court should adopt such reasonable
and beneficial construction which will render the provision thereof operative and effective, as well as harmonious with
each other.23chanRoblesvirtualLawlibrary
Given that petitioners Charter is not deemed repealed or amended by R.A. No. 9337, petitioners income derived from
gaming operations is subject only to the five percent (5%) franchise tax, in accordance with P.D. 1869, as amended.
With respect to petitioners income from operation of other related services, the same is subject to income tax only.
The five percent (5%) franchise tax finds no application with respect to petitioners income from other related services,
in view of the express provision of Section 14(5) of P.D. 1869, as amended, to wit:chanroblesvirtuallawlibrary
Section 14. Other Conditions.
xxxx
(5) Operation of related services. The Corporation is authorized to operate such necessary and related services,
shows and entertainment. Any income that may be realized from these related services shall not be
included as part of the income of the Corporation for the purpose of applying the franchise tax, but the
same shall be considered as a separate income of the Corporation and shall be subject to income tax. 24
Thus, it would be the height of injustice to impose franchise tax upon petitioner for its income from other related
services without basis therefor.
For proper guidance, the first classification of PAGCORs income under RMC No. 33-2013 (i.e., income from its
operations and licensing of gambling casinos, gaming clubs and other similar recreation or amusement places,
gambling pools) should be interpreted in relation to Section 13(2) of P.D. 1869, which pertains to the income derived
from issuing and/or granting the license to operate casinos to PAGCORs contractees and licensees, as well as earnings
derived by PAGCOR from its own operations under the Franchise. On the other hand, the second classification of
PAGCORs income under RMC No. 33-2013 (i.e., income from other related operations) should be interpreted in relation
to Section 14(5) of P.D. 1869, which pertains to income received by PAGCOR from its contractees and licensees in the
latters operation of casinos, as well as PAGCORs own income from operating necessary and related services, shows
and entertainment.
As to whether petitioners tax privilege of paying five percent (5%) franchise tax inures to the benefit of third parties
with contractual relationship with petitioner in connection with the operation of casinos, we find no reason to rule upon
the same. The resolution of the instant petition is limited to clarifying the tax treatment of petitioners income vis--vis
our Decision dated March 15, 2011. This Decision is not meant to expand our original Decision by delving into new
issues involving petitioners contractees and licensees. For one, the latter are not parties to the instant case, and may
not therefore stand to benefit or bear the consequences of this resolution. For another, to answer the fourth issue
raised by petitioner relative to its contractees and licensees would be downright premature and iniquitous as the same
would effectively countenance sidesteps to judicial process.
In view of the foregoing disquisition, respondent, therefore, committed grave abuse of discretion amounting to lack of
jurisdiction when it issued RMC No. 33-2013 subjecting both income from gaming operations and other related services
to corporate income tax and five percent (5%) franchise tax. This unduly expands our Decision dated March 15, 2011
without due process since the imposition creates additional burden upon petitioner. Such act constitutes an overreach
on the part of the respondent, which should be immediately struck down, lest grave injustice results. More, it is settled
that in case of discrepancy between the basic law and a rule or regulation issued to implement said law, the basic law
prevails, because the said rule or regulation cannot go beyond the terms and provisions of the basic law.
In fine, we uphold our earlier ruling that Section 1 of R.A. No. 9337, amending Section 27(c) of R.A. No. 8424, by
excluding petitioner from the enumeration of GOCCs exempted from corporate income tax, is valid and constitutional.
In addition, we hold that:
1.
Petitioners tax privilege of paying five percent (5%) franchise tax in lieu of all other taxes with respect to its
income from gaming operations, pursuant to P.D. 1869, as amended, is not repealed or amended by Section
1(c) of R.A. No. 9337;
2.
Petitioners income from gaming operations is subject to the five percent (5%) franchise tax only; and
3.
Petitioners income from other related services is subject to corporate income tax only.
In view of the above-discussed findings, this Court ORDERS the respondent to cease and desist the implementation of
RMC No. 33-2013 insofar as it imposes: (1) corporate income tax on petitioners income derived from its gaming
operations; and (2) franchise tax on petitioners income from other related services.chanrobleslaw
WHEREFORE, the Petition is hereby GRANTED. Accordingly, respondent is ORDERED to cease and desist the
implementation of RMC No. 33-2013 insofar as it imposes: (1) corporate income tax on petitioners income derived
from its gaming operations; and (2) franchise tax on petitioners income from other related services.
SO ORDERED.cralawlawlibrary
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Income Tax Cases

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INCOME TAX

G.R. No. L-9996

October 15, 1957

EUFEMIA EVANGELISTA, MANUELA EVANGELISTA, and FRANCISCA EVANGELISTA, petitioners,

Total including surcharge and

REAL ESTATE DEALER'S FIXED TAX

Total including penalty

RESIDENCE TAXES OF CORPORATION

Total including surcharge

TOTAL TAXES DUE

BAUTISTA ANGELO, J., concurring:

G.R. No. 112675 January 25, 1999

TOTAL AMOUNT DUE & P1,843,273.60

35% withholding tax at

non-filing of return 300.00

TOTAL AMOUNT DUE & P1,768,799.39

TOTAL AMOUNT DUE & P89,438.68

The Court's Ruling

xxx xxx xxx

G.R. No. 48231

June 30, 1947

WISE & CO., INC., ET AL., plaintiffs-appellants,

Declared and paid

Wise & Co., Inc.

Mr. J.F. MacGregor

Mr. N.C. MacGregor

Mr. C.J. Lafrentz

Mrs. E.M.G. Strickland

Mrs. M.J.G. Mullins

Wise & Co., Inc.

Mr. J.F. MacGregor

Mr. N.C. MacGregor

Mr. C.J. Lafrentz

Mrs. E.M.G. Strickland

Mrs. M.J.G. Mullins

WISE & COMPANY, INC.

Net income as per return

Add: Deductions disallowed Loss on shares

Income not declared:

Total liquidating dividends received

Profits realized on shares of stock in the

Accrued income tax as per return

Deduct accrued income tax

Net income as per investigation

6 per cent Normal tax

Less amount already paid

Balance still due and collectible

Net income as per return

Deduct: Ordinary dividends

Net income as per investigation subject to

Total liquidating dividends received

Less cost of shares

Profit realized on shares of stock

Normal tax at 3 per cent

Additional tax due

Total normal and additional taxes

Less: Amount already paid

Balance still due and collectible

Net income as per return

Deduct: Ordinary dividends

Net income as per investigation subject to

Total liquidating dividends received.

Profit realized on shares of stock in the

Normal tax at 3 per cent