Part 1

General Principles of Taxation

1

Case Title
Paseo Realty
and
Development
Corporation
vs CA, GR
No. 119286,
October 13,
2004

Summary
On April 16, 1990, petitioner
filed its Income Tax Return for
the calendar year 1989
declaring a gross income of
P1,855,000.00, deductions of
P1,775,991.00, net income of
P79,009.00, an income tax due
thereon in the amount of
P27,653.00, prior years excess
credit of P146,026.00, and
creditable taxes withheld in
1989 of P54,104.00 or a total
tax credit of P200,130.00 and
credit balance of P172,477.00.
On November 14, 1991,
petitioner filed with respondent
a claim for the refund of excess
creditable withholding and
income taxes for the years 1989
and 1990 in the aggregate
amount of P147,036.15.
On December 27, 1991 alleging
that the prescriptive period for
refunds for 1989 would expire
on December 30, 1991 and that
it was necessary to interrupt the
prescriptive period, petitioner

Issue/s
Whether or not
the petitioner
can claim the
refund of its
creditable
taxes withheld
in 1989 as the
same had
been allegedly
applied
against its
1990 tax due.

Ruling
No.The confusion as to petitioners
entitlement to a refund could altogether
have been avoided had it presented its
tax return for 1990.

Notes/Remarks

The grant of a refund is founded on the

assumption that the tax return is valid,
i.e., that the facts stated therein are true
and correct. Without the tax return, it is
error to grant a refund since it would be
virtually impossible to determine
whether the proper taxes have been
assessed and paid.
It is axiomatic that a claimant has the
burden of proof to establish the factual
basis of his or her claim for tax credit or
refund. Tax refunds, like tax
exemptions, are construed strictly
against the taxpayer.
In case the corporation is entitled to a
refund of the excess estimated quarterly
income taxes paid, the refundable
amount shown on its final adjustment
return may be credited against the
estimated quarterly income tax liabilities
for the taxable quarters of the
succeeding year. The carrying forward of

filed with the respondent Court

of Tax Appeals a petition for
review praying for the refund of
P54,104.00 representing
creditable taxes withheld from
income payments of petitioner
for the calendar year ending
December 31, 1989.

any excess or overpaid income tax for a

given taxable year is limited to the
succeeding taxable year only.
While a taxpayer is given the choice
whether to claim for refund or have its
excess taxes applied as tax credit for the
succeeding taxable year, such election is
not final. Prior verification and approval
by the Commissioner of Internal
Revenue is required. The availment of
the remedy of tax credit is not absolute
and mandatory. It does not confer an
absolute right on the taxpayer to avail of
the tax credit scheme if it so chooses.
Neither does it impose a duty on the
part of the government to sit back and
allow an important facet of tax collection
to be at the sole control and discretion
of the taxpayer.
The amendment of Section 69 by what is
now Section 76 of Republic Act No. 8424
emphasizes that it is imperative to
indicate in the tax return or the final
adjustment return whether a tax credit
or refund is sought by making the
taxpayers choice irrevocable.
Taxation is a destructive power which
interferes with the personal and property
rights of the people and takes from them
a portion of their property for the

Pelizloy
Realty
Corporation
vs Province
of Benguet,
GR No.
183137, April
10, 2013

Pelizloy owns Palm Grove Resort,

which is designed for recreation
and which has facilities like
swimming pools, a spa and
function halls.

1. Whether or
not Section 59,
Article X of
Provincial Tax
Ordinance No.
05-107,
The Prov. Board of the Prov. of
otherwise
Benguet approved Prov. Tax
known as the
Ordinance No. 05-107, otherwise Benguet
known as the Benguet Revenue Revenue Code
Code of 2005 ("Tax Ordinance"). of 2005, levies
Section 59, Article X of the Tax
a percentage
Ordinance levied a ten percent
tax.
(10%) amusement tax on gross
receipts from admissions to
2. Whether or
"resorts, swimming pools, bath
not provinces
houses, hot springs and tourist
are authorized
spots."
to
impose
amusement

support of the government. And since

taxes are what we pay for civilized
society, or are the lifeblood of the
nation, the law frowns against
exemptions from taxation and statutes
granting tax exemptions are thus
construed strictissimi juris against the
taxpayer and liberally in favor of the
taxing authority. A claim of refund or
exemption from tax payments must be
clearly shown and be based on language
in the law too plain to be mistaken.
Elsewise stated, taxation is the rule,
exemption therefrom is the exception.
The power to tax "is an attribute of
sovereignty," and as such, inheres in the
State. Such, however, is not true for
provinces, cities, municipalities and
barangays as they are not the sovereign;
rather, they are mere "territorial and
political subdivisions of the Republic of
the Philippines".
A municipal corporation unlike a
sovereign state is clothed with no
inherent power of taxation. The charter
or statute must plainly show an intent to
confer that power or the municipality,
cannot assume it. And the power when
granted is to be construed in strictissimi
juris. Any doubt or ambiguity arising out
of the term used in granting that power
must be resolved against the

It was Pelizloy's position that the

Tax Ordinance's imposition of a
10% amusement tax on gross
receipts from admission fees for
resorts, swimming pools, bath
houses, hot springs, and tourist
spots is an ultra vires act on the
part of the Province of Benguet.
Thus, it filed an appeal/petition
before the Secretary of Justice
on January 27, 2006.

taxes
on
admission fees
to
resorts,
swimming
pools,
bath
houses,
hot
springs,
and
tourist
spots
for
being
"amusement
places" under
the
Local
Government
Code.

municipality. Inferences, implications,

deductions all these have no place in
the interpretation of the taxing power of
a municipal corporation.
Therefore, the power of a province to tax
is limited to the extent that such power
is delegated to it either by the
Constitution or by statute. Section 5,
Article X of the 1987 Constitution is clear
on this point.
1.Percentage Tax. Supreme Court
defined percentage tax as a "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." Also, Republic
Act No. 8424, , in Section 125, Title
V,lists amusement taxes as among the
(other) percentage taxes which are
levied regardless of whether or not a
taxpayer is already liable to pay valueadded tax (VAT).
Amusement taxes are fixed at a certain
percentage of the gross receipts
incurred by certain specified
establishments.
However, provinces are not barred from

levying amusement taxes even if

amusement taxes are a form of
percentage taxes. Section 133 (i) of the
LGC prohibits the levy of percentage
taxes "except as otherwise provided" by
the LGC.
2. No. Section 131 (c) of the LGC already
provides a clear definition of
amusement places.
Indeed, theaters, cinemas, concert halls,
circuses, and boxing stadia are bound by
a common typifying characteristic in that
they are all venues primarily for the
staging of spectacles or the holding of
public shows, exhibitions, performances,
and other events meant to be viewed by
an audience. Accordingly, other places
of amusement must be interpreted in
light of the typifying characteristic of
being venues "where one seeks
admission to entertain oneself by seeing
or viewing the show or performances" or
being venues primarily used to stage
spectacles or hold public shows,
exhibitions, performances, and other
events meant to be viewed by an
audience.
Considering these, it is clear that
resorts, swimming pools, bath houses,
hot springs and tourist spots cannot be

considered venues primarily "where one

seeks admission to entertain oneself by
seeing or viewing the show or
performances". While it is true that they
may be venues where people are
visually engaged, they are not primarily
venues for their proprietors or operators
to actively display, stage or present
shows and/or performances.
Thus, resorts, swimming pools, bath
houses, hot springs and tourist spots do
not belong to the same category or class
as theaters, cinemas, concert halls,
circuses, and boxing stadia. It follows
that they cannot be considered as
among the other places of amusement
contemplated by Section 140 of the LGC
and which may properly be subject to
amusement taxes.
The second paragraph of Section 59,
Article X of the Tax Ordinance is not
limited to resorts, swimming pools, bath
houses, hot springs, and tourist spots
but also covers admission fees for
boxing. As Section 140 of the LGC allows
for the imposition of amusement taxes
on gross receipts from admission fees to
boxing stadia, Section 59, Article X of
the Tax Ordinance must be sustained
with respect to admission fees from
boxing stadia.

CIR vs Metro
Star
Superama
Inc., GR No.
L-28896,
February 17,
1988

On November 8, 2001, Revenue

District Officer issued a
Preliminary 15-day Letter which
stated that a post audit review
was held and it was ascertained
that there was deficiency valueadded and withholding taxes
due from petitioner in the
amount of P 292,874.16.
Petitioner received a Formal
Letter of Demand dated April 3,
2002.
Revenue District Office No. 67
sent a copy of the Final Notice of
Seizure.
Petitioner received from
Revenue District Office No. 67 a
Warrant of Distraint and/or Levy
dated May 12, 2003 demanding
payment of deficiency valueadded tax and withholding tax
payment in the amount of
P292,874.16.
Denying that it received a
Preliminary Assessment Notice
(PAN) and claiming that it was
not accorded due process, Metro
Star filed a petition for review

Whether or not
Metro Star was
denied due
process.

Denied due process. The Supreme Court

has consistently held that while a mailed
letter is deemed received by the
addressee in the course of mail, this is
merely a disputable presumption subject
to controversion and a direct denial
thereof shifts the burden to the party
favored by the presumption to prove
that the mailed letter was indeed
received by the addressee.
The facts to be proved to raise this
presumption are (a) that the letter was
properly addressed with postage
prepaid, and (b) that it was mailed. Once
these facts are proved, the presumption
is that the letter was received by the
addressee as soon as it could have been
transmitted to him in the ordinary
course of the mail. But if one of the said
facts fails to appear, the presumption
does not lie.
CIR failed to discharge its duty and
present any evidence to show that Metro
Star indeed received the PAN dated
January 16, 2002.
Section 228 of the Tax Code clearly
requires that the taxpayer must first be
informed that he is liable for deficiency
taxes through the sending of a PAN. He

with the CTA. The CIR insisting

that Metro Star received the
PAN, dated January 16, 2002,
and that due process was
served nonetheless because the
latter received the Final
Assessment Notice (FAN).

must be informed of the facts and the

law upon which the assessment is made.
The law imposes a substantive, not
merely a formal, requirement. To
proceed heedlessly with tax collection
without first establishing a valid
assessment is evidently violative of the
cardinal principle in administrative
investigations that taxpayers should be
able to present their case and adduce
supporting evidence.
The sending of a PAN to taxpayer to
inform him of the assessment made is
but part of the "due process requirement
in the issuance of a deficiency tax
assessment," the absence of which
renders nugatory any assessment made
by the tax authorities. The use of the
word "shall" in subsection 3.1.2
describes the mandatory nature of the
service of a PAN.
Thus, for its failure to send the PAN
stating the facts and the law on which
the assessment was made as required
by Section 228 of R.A. No. 8424, the
assessment made by the CIR is void.
Taxes are the lifeblood of the
government and so should be collected
without unnecessary hindrance.

It is said that taxes are what we pay for

civilized society. Without taxes, the
government would be paralyzed for the
lack of the motive power to activate and
operate it.
It is a requirement in all democratic
regimes that it be exercised reasonably
and in accordance with the prescribed
procedure.
4

Reyes vs
Almazor, GR
No. L-4983946, April 26,
1991

Petitioners JBL Reyes et al.

owned a parcel of land in Tondo
which are leased and occupied
as dwelling units by tenants who
were paying monthly rentals of
not exceeding P300. Rental
Freezing Law was passed
prohibiting for one year from its
effectivity, an increase in
monthly rentals of dwelling units
where rentals do not exceed
three hundred pesos (P300.00),
so that the Reyeses were
precluded from raising the rents
and from ejecting the tenants. In
1973, respondent City Assessor
of Manila re-classified and
reassessed the value of the
subject properties based on the
schedule of market values,
which entailed an increase in
the corresponding tax rates

Is the
approach on
tax
assessment
used by the
City Assessor
reasonable?

No. The power to tax "is an attribute of

sovereignty". In fact, it is the strongest
of all the powers of government. But for
all its plenitude the power to tax is not
unconfined as there are restrictions.
Adversely effecting as it does property
rights, both the due process and equal
protection clauses of the Constitution
may properly be invoked to invalidate in
appropriate cases a revenue measure. If
it were otherwise, there would be truth
to the 1903 dictum of Chief Justice
Marshall that "the power to tax involves
the power to destroy." The web or
unreality spun from Marshall's famous
dictum was brushed away by one stroke
of Mr. Justice Holmes pen, thus: "The
power to tax is not the power to destroy
while this Court sits. So it is in the
Philippines "
In the same vein, the due process clause

prompting petitioners to file a

Memorandum of Disagreement
averring that the reassessments
made were "excessive,
unwarranted, inequitable,
confiscatory and
unconstitutional" considering
that the taxes imposed upon
them greatly exceeded the
annual income derived from
their properties. They argued
that the income approach
should have been used in
determining the land values
instead of the comparable sales
approach which the City
Assessor adopted.

Pepsi Cola
Bottling

may be invoked where a taxing statute

is so arbitrary that it finds no support in
the Constitution. An obvious example is
where it can be shown to amount to
confiscation of property. That would be a
clear abuse of power.

Verily, taxes are the lifeblood of the

government and so should be collected
without unnecessary hindrance.
However, such collection should be
made in accordance with law as any
arbitrariness will negate the very reason
for government itself It is therefore
necessary to reconcile the apparently
conflicting interests of the authorities
and the taxpayers so that the real
purpose of taxations, which is the
promotion of the common good, may be
achieved (Commissioner of Internal
Revenue v. Algue Inc., et al., 158 SCRA 9
[1988]). Consequently, it stands to
reason that petitioners who are
burdened by the government by its
Rental Freezing Laws (then R.A. No. 6359
and P.D. 20) under the principle of social
justice should not now be penalized by
the same government by the imposition
of excessive taxes petitioners can ill
afford and eventually result in the
forfeiture of their properties.
Pepsi Cola has a bottling plant in Whether or not No. It is a power that is purely
the Municipality of Tanauan,
there is undue legislative and which the central

10

Philippines
Company vs
Municipality
of Tanuan,
GR No. L31156,
February 27,
1976

Leyte. In September 1962, the

Municipality approved Ordinance
No. 23 which levies and collects
from soft drinks producers and
manufacturers a tai of onesixteenth (1/16) of a centavo for
every bottle of soft drink
corked. In December 1962,
the Municipality also approved
Ordinance No. 27 which levies
and collects on soft drinks
produced or manufactured
within the territorial jurisdiction
of this municipality a tax of one
centavo P0.01) on each gallon of
volume capacity.
Pepsi Cola assailed the validity
of the ordinances as it alleged
that they constitute double
taxation in two instances: a)
double taxation because
Ordinance No. 27 covers the
same subject matter and impose
practically the same tax rate as
with Ordinance No. 23, b) double
taxation because the two
ordinances impose percentage
or specific taxes. Pepsi Cola also
questions the constitutionality of
Republic Act 2264 which allows
for the delegation of taxing
powers to local government
units; that allowing local

delegation of
taxing powers.
Whether or not
there is double
taxation.

legislative body cannot delegate either

to the executive or judicial department
of the government without infringing
upon the theory of separation of powers.
The exception, however, lies in the case
of municipal corporations, to which, said
theory does not apply. Legislative
powers may be delegated to local
governments in respect of matters of
local concern.
Under the New Constitution, local
governments are granted the
autonomous authority to create their
own sources of revenue and to levy
taxes. Section 5, Article XI provides:
"Each local government unit shall have
the power to create its sources of
revenue and to levy taxes, subject to
such limitations as may be provided by
law." Withal, it cannot be said that
Section 2 of Republic Act No. 2264
emanated from beyond the sphere of
the legislative power to enact and vest
in local governments the power of local
taxation.
The plenary nature of the taxing power
thus delegated, contrary to plaintiffappellant's pretense, would not suffice
to invalidate the said law as confiscatory
and oppressive. In delegating the
authority, the State is not limited 6 the

11

governments to tax companies

like Pepsi Cola is confiscatory
and oppressive.
6

Tio vs
Videogram
Regulatory
Board, GR
No. 75697,
June 19,
1987

The petitioner assails the

validity of PD 1987 entitled an
"Act creating the Videogram
Regulatory Board," citing
especially Section 10 thereof,
which imposes a tax of 30% on
the gross receipts payable to the
local government. Petitioner
contends that aside from its
being a rider and not germane
to the subject matter thereof,
and such imposition was being
harsh, confiscatory, oppressive
and/or unlawfully restraints
trade in violation of the due
process clause of the
Constitution.

exact measure of that which is exercised

by itself.
Is PD 1987 a
valid exercise
of taxing
power of the
state?

Yes. a tax does not cease to be valid

merely because it regulates,
discourages, or even definitely deters
the activities taxed. 8 The power to
impose taxes is one so unlimited in force
and so searching in extent, that the
courts scarcely venture to declare that it
is subject to any restrictions whatever,
except such as rest in the discretion of
the authority which exercises it.
The levy of the 30% tax is for a public
purpose. It was imposed primarily to
answer the need for regulating the video
industry, particularly because of the
rampant film piracy, the flagrant
violation of intellectual property rights,
and the proliferation of pornographic
video tapes. And while it was also an
objective of the DECREE to protect the
movie industry, the tax remains a valid
imposition.
The public purpose of a tax may legally
exist even if the motive which impelled
the legislature to impose the tax was to
favor one industry over another.
It is inherent in the power to tax that a
state be free to select the subjects of

12

taxation, and it has been repeatedly

held that "inequities which result from a
singling out of one particular class for
taxation or exemption infringe no
constitutional limitation". Taxation has
been made the implement of the state's
police power.
7

Planters
Products Inc.
vs Fertiphil
Corp., GR No.
166006,
March 14,
2008

Marcos issued Letter of

WON the LOI is
Instruction (LOI) 1465, imposing constitutional.
a capital recovery component of
Php10.00 per bag of fertilizer.
The levy was to continue until
adequate capital was raised to
make PPI financially viable.
Fertiphil remitted to the
Fertilizer and Pesticide Authority
(FPA), which was then remitted
the depository bank of PPI.
Fertiphil paid P6,689,144 to FPA
from 1985 to 1986.
After the 1986 Edsa Revolution,
FPA voluntarily stopped the
imposition of the P10 levy.
Fertiphil demanded from PPI a
refund of the amount it
remitted, however PPI refused.
Fertiphil filed a complaint for
collection and damages,
questioning the constitutionality
of LOI 1465, claiming that it was
unjust, unreasonable,

No.
The LOI is still unconstitutional even if
enacted under the police power; it did
not promote public interest. Taxes are
exacted only for a public purpose. The
P10 levy is unconstitutional because it
was not for a public purpose. The levy
was imposed to give undue benefit to
PPI. An inherent limitation on the power
of taxation is public purpose. Taxes are
exacted only for a public purpose. They
cannot be used for purely
privatepurposes or for the exclusive
benefit of private persons. The reason
for this is simple. The power to tax exists
for the general welfare; hence, implicit
in its power is the limitation that it
should be used only for a public
purpose. It would be a robbery for the
State to tax its citizens and use the
funds generated for a private purpose.
As an old United States case bluntly put
it: "To lay with one hand, the power of
the government on the property of the

13

oppressive, invalid and an

unlawful imposition that
amounted to a denial of due
process. PPI argues that Fertiphil
has no locus standi to question
the constitutionality of LOI No.
1465 because it does not have a
"personal and substantial
interest in the case or will
sustain direct injury as a result
of its enforcement." It asserts
that Fertiphil did not suffer any
damage from the imposition
because "incidence of the levy
fell on the ultimate consumer or
the farmers themselves, not on
the seller fertilizer company.

citizen, and with the other to bestow it

upon favored individuals to aid private
enterprises and build up private
fortunes, is nonetheless a robbery
because it is done under the forms of
law and is called taxation." The term
"public purpose" is not defined. It is an
elastic concept that can be hammered to
fit modern standards. Jurisprudence
states that "public purpose" should be
given a broad interpretation. It does not
only pertain to those purposes which are
traditionally viewed as essentially
government functions, such as building
roads and delivery of basic services, but
also includes those purposes designed
to promote social justice. Thus, public
money may now be used for the
relocation of illegal settlers, low-cost
housing and urban or agrarian reform.
Police power and the power of taxation
are inherent powers of the State. These
powers are distinct and have different
tests for validity. Police power is the
power of the State to enact legislation
that may interfere with personal liberty
or property in order to promote the
general welfare, while the power of
taxation is the power to levy taxes to be
used for public purpose. The main
purpose of police power is the regulation
of a behavior or conduct, while taxation

14

is revenue generation. The "lawful

subjects" and "lawful means" tests are
used to determine the validity of a law
enacted under the police power. The
power of taxation, on the other hand, is
circumscribed by inherent and
constitutional limitations. We agree with
the RTC that the imposition of the levy
was an exercise by the State of its
taxation power. While it is true that the
power of taxation can be used as an
implement of police power,41 the
primary purpose of the levy is revenue
generation. If the purpose is primarily
revenue, or if revenue is, at least, one of
the real and substantial purposes, then
the exaction is properly called a tax.
8

CIR vs
Central
Luzon
Corporation,
GR No.
159647, April
15, 2005

Central Luzon Drug Corporation

is a retailer of medicines and
other pharmaceutical products.
For the period January 1995 to
December 1995, pursuant to the
mandate of Section 4(a) of
Republic Act No. 7432,
otherwise known as the Senior
Citizens Act, it granted a twenty
percent
(20%) discount on the sale of
medicines to qualified senior
citizens amounting to
P219,778.00. It then deducted
the same amount from its gross

Whether or not The Petition is DENIED.

the 20%
discount
Sec. 4(a) of the Senior Citizens Act
granted by
provides:
Central Luzon
Drug to
Sec. 4. Privileges for the Senior
qualified
Citizens. The senior citizens shall
senior citizens
be entitled to the following:
pursuant to
Sec. 4(a) of
(a) the grant of twenty percent
the Senior
(20%) discount from all
Citizens Act
establishments relative to
may be
utilization of transportations
claimed as a
services, hotels and similar
tax credit or as
lodging establishments,

15

income for the taxable year

1995, pursuant to
Revenue Regulations No. 2-94
implementing the Senior
Citizens Act, which states that
the discount given to senior
citizens shall be deducted by the
establishment from its gross
sales for value-added tax and
other percentage tax purposes.
For the said taxable period,
Central Luzon Drug reported a
net loss of P20,963.00 in its
corporate income tax return,
thus, it did not pay income tax
for 1995.
Subsequently, Central Luzon
Drug filed a claim for refund in
the amount of P150,193.00,
claiming that according to Sec.
4(a) of the Senior Citizens Act,
the amount of P219,778.00
should be applied as a tax
credit. The Commissioner of
Internal Revenue (CIR) was not
able to decide the claim on time,
hence, Central Luzon Drug filed
a Petition for Review with the
Court of Tax Appeals. The latter
dismissed the petition, declaring
that even if the law treats the
20% discount granted to senior

a deduction
from gross
sales in
accordance
with Sec. 2(1)
of Revenue
Regulations
No. 2-94

restaurants and recreation centers

and purchase of medicines
anywhere in the country: Provided,
That private establishments may
claim the cost as tax credit.
The above provision explicitly employed
the term tax credit. Nothing in the
provision suggests for it to mean a
deduction from gross sales. Thus, the
20% discount required by the law to be
given to senior citizens is a tax credit,
not a deduction from the gross sales of
the establishment concerned. As a
corollary to this, the definition of tax
credit found in Sect. 2(1) of Revenue
Regulations No. 2-94 is erroneous as it
refers to tax credit as the amount
representing the 20% discount that
shall be deducted by the said
establishment from their gross sales for
value added tax and other percentage
tax purposes. When the law says that
the cost of the discount may be claimed
as a tax credit, it means that the
amount, when claimed, shall be treated
as a reduction from any tax liability. The
law cannot be amended by a mere
regulation.
Finally, for purposes of clarity, Sec. 229
of the Tax Code does not apply to cases
that fall under Sec. 4 of the Senior

16

citizens as a tax credit, the

same cannot apply when there
is no tax liability or the amount
of the tax credit is greater than
the tax due. In the latter case,
the tax credit will only be to the
extent of the tax liability. Also,
no refund can be granted as no
tax was erroneously, illegally
and actually collected.
Furthermore, the law does not
state that a refund can be
claimed by the establishment
concerned as an alternative to
the tax credit.

Central Luzon Drug filed a

Petition for Review with the
Court of Appeals. The appellate
court held that the 20% discount
given to senior citizens which is
treated as a tax credit is
considered just compensation
and, as such, may be carried
over to the next taxable period
if there is no current tax liability.
Carlos
Petitioners are
Whether or
Superdrug
domestic corporations and
not RA 9257 is
Corporation
proprietors operating drugstores constitutional
vs DSWD, GR in the Philippines. Petitioners
No. 166494, assail the constitutionality of
June 29,
Section 4(a) of RA 9257,

Citizens Act because the former

provision governs exclusively all kinds of
refund or credit of internal revenue taxes
that were erroneously or illegally
imposed and collected pursuant to the
Tax Code while the latter extends the tax
credit benefit to the private
establishments concerned even before
tax payments have been made. The tax
credit that is contemplated under the
Senior Citizens Act is a form of just
compensation, not a remedy for taxes
that were erroneously or illegally
assessed and collected. In the same
vein, prior payment of any tax liability is
not a precondition before a taxable
entity can benefit from the tax credit.
The credit may be availed of upon
payment of the tax due, if any. Where
there is no tax liability or where a
private establishment reports a net loss
for the period, the tax credit can be
availed of and carried over to the next
taxable year.

YES.
The law is a legitimate exercise of police
power which, similar to the power
of eminent domain, has general welfare
for its object.

17

2007

otherwise known as the

Expanded Senior Citizens Act of
2003. Section 4(a) of RA 9257
grants twenty percent
(20%) discount as privileges for
the Senior Citizens. Petitioner
contends that said law is
unconstitutional because it
constitutes deprivation of
private property.

Accordingly, it has been described as

the most essential, insistent and the
least limitable of powers, extending as it
does to all the great public needs. It is
the power vested in the legislature
by the constitution to make, ordain, and
establish all manner of wholesome and
reasonable laws, statutes, and
ordinances, either with penalties or
without, not repugnant to the
constitution, as they shall judge to be for
the good and welfare of the
commonwealth, and of the subjects of
the same.
For this reason, when the conditions so
demand as determined by the
legislature, property rights must bow to
the primacy of police power because
property rights, though sheltered by due
process, must yield to general welfare.

10 Manila

Memorial
Park, Inc.
and La
Funeraria
Paz-Sucat,
Inc vs
Secretary of
DSWD and
DOF, GR No.

On April 23, 1992, RA 7432 was

passed into law, granting senior
citizens numerous privileges.
Petitioners emphasize that they
are not questioning the 20%
discount granted to senior
citizens but are only assailing
the constitutionality of the tax
deduction scheme prescribed
under RA 9257 and the

WHETHER
SECTION 4 OF
REPUBLIC ACT
NO. 9257 AND
ITS
IMPLEMENTING
RULES AND
REGULATIONS,
INSOFAR AS
THEY PROVIDE

No.
A fair reading of Carlos Superdrug
Corporation52 would show that we
categorically ruled therein that the 20%
discount is a valid exercise of police
power. Thus, even if the current law,
through its tax deduction scheme (which
abandoned the tax credit scheme under
the previous law), does not provide for a

18

175356,
December 3,
2013

implementing rules and

regulations issued by the DSWD
and the DOF. Petitioners posit
that the tax deduction scheme
contravenes Article III, Section 9
of the Constitution, which
provides that: "[p]rivate
property shall not be taken for
public use without just
compensation." In support of
their position, petitioners cite
Central Luzon Drug
Corporation, where it was ruled
that the 20% discount privilege
constitutes taking of private
property for public use which
requires the payment of just
compensation, and Carlos
Superdrug Corporation v.
Department of Social Welfare
and Development, where it was
acknowledged that the tax
deduction scheme does not
meet the definition of just
compensation. They assert that
"[a]lthough both police power
and the power of eminent
domain have the general
welfare for their object, there
are still traditional distinctions
between the two" and that
"eminent domain cannot be
made less supreme than police

THAT THE
TWENTY
PERCENT
(20%)
DISCOUNT TO
SENIOR
CITIZENS MAY
BE CLAIMED
AS A TAX
DEDUCTION BY
THE PRIVATE
ESTABLISHMEN
TS, ARE
INVALID AND
UNCONSTITUTI
ONAL.

peso for peso reimbursement of the 20%

discount given by private
establishments, no constitutional
infirmity obtains because, being a valid
exercise of police power, payment of just
compensation is not warranted. In the
exercise of police power (as
distinguished from eminent domain),
although the regulation affects the right
of ownership, none of the bundle of
rights which constitute ownership is
appropriated for use by or for the benefit
of the public.
On the other hand, in the exercise of the
power of eminent domain, property
interests are appropriated and applied to
some public purpose which necessitates
the payment of just compensation
therefor. Normally, the title to and
possession of the property are
transferred to the expropriating
authority. Examples include the
acquisition of lands for the construction
of public highways as well as agricultural
lands acquired by the government under
the agrarian reform law for redistribution
to qualified farmer beneficiaries. We now
look at the nature and effects of the 20%
discount to determine if it constitutes an
exercise of police power or eminent
domain. The 20% discount is intended to
improve the welfare of senior citizens

19

power."
Respondents, maintain that the
tax deduction scheme is a
legitimate exercise of the
States police power.

who, at their age, are less likely to be

gainfully employed, more prone to
illnesses and other disabilities, and,
thus, in need of subsidy in purchasing
basic commodities. It may not be amiss
to mention also that the discount serves
to honor senior citizens who presumably
spent the productive years of their lives
on contributing to the development and
progress of the nation. As to its nature
and effects, the 20% discount is a
regulation affecting the ability of private
establishments to price their products
and services relative to a special class of
individuals, senior citizens, for which the
Constitution affords preferential
concern.76In turn, this affects the
amount of profits or income/gross sales
that a private establishment can derive
from senior citizens. In other words, the
subject regulation affects the pricing,
and, hence, the profitability of a private
establishment. However, it does not
purport to appropriate or burden specific
properties, used in the operation or
conduct of the business of private
establishments, for the use or benefit of
the public, or senior citizens for that
matter, but merely regulates the pricing
of goods and services relative to, and
the amount of profits or income/gross
sales that such private establishments
may derive from, senior citizens. The

20

20% discount may be properly viewed as

belonging to the category of price
regulatory measures which affect the
profitability of establishments subjected
thereto. On its face, therefore, the
subject regulation is a police power
measure. We find that there are at least
two conceivable bases to sustain the
subject regulations validity absent clear
and convincing proof that it is
unreasonable, oppressive or
confiscatory. Congress may have
legitimately concluded that business
establishments have the capacity to
absorb a decrease in profits or
income/gross sales due to the 20%
discount without substantially affecting
the reasonable rate of return on their
investments considering (1) not all
customers of a business establishment
are senior citizens and (2) the level of its
profit margins on goods and services
offered to the general public.
Concurrently, Congress may have,
likewise, legitimately concluded that the
establishments, which will be required to
extend the 20% discount, have the
capacity to revise their pricing strategy
so that whatever reduction in profits or
income/gross sales that they may
sustain because of sales to senior
citizens, can be recouped through higher
mark-ups or from other products not

21

subject of discounts. As a result, the

discounts resulting from sales to senior
citizens will not be confiscatory or
unduly oppressive. In sum, we sustain
our ruling in Carlos Superdrug
Corporation88 that the 20% senior
citizen discount and tax deduction
scheme are valid exercises of police
power of the State absent a clear
showing that it is arbitrary, oppressive or
confiscatory.

PART 2
Inherent and Constitutional Limitations
1

Case Title
Pascual vs.
Secretary of
Public Works,
et. al., G.R.
No. L-10405.

Summary
Issue/s
A law was enacted in 1953
Is the
containing a provision for the
appropriation
construction, reconstruction,
valid?
repair, extension and
improvement of Pasig feeder
road terminals within Antonio
Subdivision owned by Senator
Jose C. Zulueta. Zulueta
donated said parcels of land to
the Government 5 months after
the enactment of the law, on the

Ruling
No. The appropriation of amount for the
construction on a land owned by private
individual is invalid imposition since it
results in the promotion of private
enterprise; it benefits the property of a
particular individual. The provision that
the land thereafter be donated to the
government does not cure this defect.
The rule is that if the public advantage
or benefit is merely incidental in the
promotion of a particular enterprise,

Notes/Remarks

22

condition that if the Government

violates such condition the lands
would revert to Zulueta. The
provincial governor of Rizal,
Wenceslao Pascual, questioned
the validity of the donation and
the Constitutionality of the
particular provision, it being an
appropriation not for a public
purpose.
2

Lutz vs.
Araneta, et.
al., G.R. No.
L-7859,
November
22, 1955.

The Sugar Adjustment Act was

passed which provided, among
others, for an increase of the
existing tax on the manufacture
of sugar and levy on owners or
persons in control of lands
devoted to the cultivation of
sugar cane and ceded to others
for a consideration on lease or
otherwise.
All collections made shall accrue
to a special fund named SUGAR
ADJUSTMENT AND
STABILIZATION FUND. This
whole law was enacted with a
declaration of emergency due to
the imminent imposition of
export taxes upon sugar as
provided under the TydingsMcduffie Act.

such defect shall render the law invalid.

On the other hand, if what is incidental
is the promotion of a private enterprise,
the tax law shall be deemed for public
purpose.

Whether or not
the tax
imposed is
constitutional.

The Sugar Adjustment Act was

regulatory and primarily an exercise of
police power. Sugar Industrys
promotion, protection and advancement
greatly redound to the general welfare.
Hence, it was competent for legislature
to find that the general welfare
demanded for the stabilization of the
sugar industry.
It is inherent in the power to tax that a
state be free to select the subjects of
taxation, and it has been repeatedly
held that inequalities which result from
the singling out of one particular class
for taxation or exemption infringe no
constitutional limitation.
The funds raised under the Act should
be exclusively spent in aid of the sugar
industry, since it is that very enterprise
that is being protected. It may be that

23

Lutz, the judicial administrator of

the estate of one Antonio
Ledesma, which was taxed by
the Commissioner on Internal
Revenue, questioned the
constitutionality of said act
contending that it is for the aid
and support of the sugar
industry exclusively, which is not
for a public purpose.
3

Caltex vs.
Commission
on Audit,
G.R. No.
92585, May
8, 1992.

On February 2, 1989, the

Commission on Audit (COA) sent
a letter to Caltex requesting the
latter to remit its tax
contributions amounting to
P335,037,649 to Oil Price
Stabilization Fund (OPSF)
pursuant to Section 8 of P.D. No.
1956. Another letter was sent to
the petitioner, stating that the
total amount of its unremitted
tax was P1,287,668,820.00 from
1986-1988 as verified by the
Office of Energy Affairs (OEA).
Denying such request, Caltex
answered to COAs letters asking
OEA for early release of
reimbursement certificates from
OPSF. COA denied petitioners
request but instead asked Caltex
to remit its collection. As a reply,

other industries are also in need of

similar protection; but the legislature is
not required by the Constitution to
adhere to a policy of all or none.

Whether or not
OPSF
contributions
are for nonrevenue
purposes of
the
government
and it is still in
the form of
taxation.

YES, OPSF are for non-revenue purposes

and is in the nature of taxes.
The Supreme Court found no merit in
petitioner's contention that the OPSF
contributions are not for a public
purpose because they go to a special
fund of the government. Taxation is no
longer envisioned as a measure merely
to raise revenue to support the
existence of the government; taxes may
be levied with a regulatory purpose to
provide means for the rehabilitation and
stabilization of a threatened industry
which is affected with public interest as
to be within the police power of the
state. There can be no doubt that the oil
industry is greatly imbued with public
interest as it vitally affects the general
welfare. Any unregulated increase in oil
prices could hurt the lives of a majority
of the people and cause economic crisis

24

Caltex gave a proposal for its

payment based on PD 1956, as
amended by E.O 137;
Department of Finance Circular
No. 1-87; the New Civil Code as
to compensation; and the
Revised Administrative Code.
COA accepted the proposal
except those matters involving
offsetting the remittances and
reimbursements.
Pursuant to such agreement,
COA informed OEA as to Caltexs
remittances amounting to P1,
505,668,906 to OPSF and
allowing OEA to reimburse
Caltex the amount of P1,
959,182,612. Caltex, however,
disagreed with such
arrangement. Caltex thereby
insisted that its remittances and
reimbursements must be offset.
But COA disregarded such
contention holding as a basis the
case of Francia vs. IAC and
Fernandez, arguing that OPSF is
not in the form of taxation,
therefore not for revenue
purposes.
4

Lozada vs.
Commission

Petitioner Lozada claims that he

is a taxpayer and a bonafide

of untold proportions. It would have a

chain reaction in terms of, among
others, demands for wage increases and
upward spiralling of the cost of basic
commodities. The stabilization then of
oil prices is of prime concern which the
state, via its police power, may properly
address.
Also, P.D. No. 1956, as amended by E.O.
No. 137, explicitly provides that the
source of OPSF is taxation. No amount
of semantical juggleries could dim this
fact.

Whether or not As taxpayers, petitioners may not file

petitioners
the instant petition, for nowhere therein

25

on Elections,
G.R. No. L59068,
January 27,
1983.

elector of Cebu City and a

transient voter of Quezon City,
Metro Manila, who desires to run
for the position in the Batasan
Pambansa; while petitioner
Romeo B. Igot alleges that, as a
taxpayer, he has standing to
petition by mandamus the
calling of a special election as
mandated by the 1973
Constitution. As reason for their
petition, petitioners allege that
they are "... deeply concerned
about their duties as citizens and
desirous to uphold the
constitutional mandate and rule
of law ...; that they have filed the
instant petition on their own and
in behalf of all other Filipinos
since the subject matters are of
profound and general interest. "
The respondent COMELEC,
represented by counsel, opposes
the petition alleging,
substantially, that 1) petitioners
lack standing to file the instant
petition for they are not the
proper parties to institute the
action; 2) this Court has no
jurisdiction to entertain this
petition; and 3) Section 5(2),
Article VIII of the 1973

lack standing
to file the
instant petition
for they are
not the proper
parties to
institute the
action.

is it alleged that tax money is being

illegally spent. The act complained of is
the inaction of the COMELEC to call a
special election, as is allegedly its
ministerial duty under the constitutional
provision above cited, and therefore,
involves no expenditure of public funds.
It is only when an act complained of,
which may include a legislative
enactment or statute, involves the
illegal expenditure of public money that
the so-called taxpayer suit may be
allowed. What the case at bar seeks is
one that entails expenditure of public
funds which may be illegal because it
would be spent for a purpose that of
calling a special election which, as will
be shown, has no authority either in the
Constitution or a statute.
As voters, neither have petitioners the
requisite interest or personality to
qualify them to maintain and prosecute
the present petition. The unchallenged
rule is that the person who impugns the
validity of a statute must have a
personal and substantial interest in the
case such that he has sustained, or will
sustain, direct injury as a result of its
enforcement. In the case before Us, the
alleged inaction of the COMELEC to call
a special election to fill-up the existing
vacancies in the Batasan Pambansa,

26

Constitution does not apply to

the Interim Batasan Pambansa.

National
The President issued
Development Proclamation no. 430 reserving
Company vs. Block no. 4, Reclamation Area

standing alone, would adversely affect

only the generalized interest of all
citizens. Petitioners' standing to sue
may not be predicated upon an interest
of the kind alleged here, which is held in
common by all members of the public
because of the necessarily abstract
nature of the injury supposedly shared
by all citizens. Concrete injury, whether
actual or threatened, is that
indispensable element of a dispute
which serves in part to cast it in a form
traditionally capable of judicial
resolution. When the asserted harm is a
"generalized grievance" shared in
substantially equal measure by all or a
large class of citizens, that harm alone
normally does not warrant exercise of
jurisdiction. As adverted to earlier,
petitioners have not demonstrated any
permissible personal stake, for
petitioner Lozadas interest as an
alleged candidate and as a voter are not
sufficient to confer standing. Petitioner
Lozada does not only fail to inform the
Court of the region he wants to be a
candidate but makes indiscriminate
demand that special election be called
throughout the country.
Whether or not While it might be stated that the
the properties Republic owns NDC, it does not
of NDC,
necessarily follow that the properties

27

Cebu City, et.

al., G.R. No.
51593,
November 5,
1992.

no. 4 for warehousing purposes

under the administration of the
National Warehousing
Corporation (NWC), which was
later on dissolved and was taken
over by the National
Development Company (NDC).
Cebu assessed and collected real
estate taxes on the land and
warehouse where NDC paid
under protest, claiming that the
land and warehouse were owned
by the Republic and therefore,
exempt from taxation.

namely the
land and
warehouse,
are taxexempt.

owned by NDC are also owned by the

Republic.
Tax exemption of property owned by the
Republic refers to properties owned by
the Government and by its agencies
which do not have separate and distinct
personalities (unincorporated entities).
Once government ownership is
determined, the nature of the use of the
property, whether proprietary or for
sovereign purposes, is immaterial. What
appears to be ceded to NWC is merely
the administration of the property while
the Government retains ownership of
what has been declared reserved for
warehousing purposes under
Proclamation no. 430.
When a land is reserved, the land
remains the absolute property of the
government. The latter does not part
with its title by reserving them, but
simply gives notice that it desires them
for a certain purpose. As its title
remains with the Republic, the reserved
land is clearly covered by the tax
exemption.
The reserved land is tax-exempt but the
warehouse constructed on such
reserved land should be assessed real
estate tax as such improvement does

28

not belong to the Republic.

6

Arturo M.
Tolentino, vs.
The
Secretary of
Finance and
The
Commissione
r of Internal
Revenue,
G.R. No.
115455
August 25,
1994.

Herein various petitioners seek

to declare RA 7166 as
unconstitutional as it seeks to
widen the tax base of the
existing VAT system and
enhance its administration by
amending the National Internal
Revenue Code. The value-added
tax (VAT) is levied on the sale,
barter or exchange of goods and
properties as well as on the sale
or exchange of services. It is
equivalent to 10% of the gross
selling price or gross value in
money of goods or properties
sold, bartered or exchanged or of
the gross receipts from the sale
or exchange of services.

Whether or not
RA 7166
violates the
principle of
progressive
system of
taxation.

No, there is no justification for passing

upon the claims that the law also
violates the rule that taxation must be
progressive and that it denies
petitioners' right to due process and
that equal protection of the laws. The
reason for this different treatment has
been cogently stated by an eminent
authority on constitutional law thus:
"When freedom of the mind is imperiled
by law, it is freedom that commands a
momentum of respect; when property is
imperiled it is the lawmakers' judgment
that commands respect. This dual
standard may not precisely reverse the
presumption of constitutionality in civil
liberties cases, but obviously it does set
up a hierarchy of values within the due
process clause."

CREBA asserts that R.A. No.

7716 (1) impairs the obligations
of contracts, (2) classifies
transactions as covered or
exempt without reasonable basis
and (3) violates the rule that
taxes should be uniform and
equitable and that Congress
shall "evolve a progressive
system of taxation."

Petitioners contend that as a result of

the uniform 10% VAT, the tax on
consumption goods of those who are in
the higher-income bracket, which before
were taxed at a rate higher than 10%,
has been reduced, while basic
commodities, which before were taxed
at rates ranging from 3% to 5%, are
now taxed at a higher rate.

With respect to the first

Just as vigorously as it is asserted that

29

contention, it is claimed that the

application of the tax to existing
contracts of the sale of real
property by installment or on
deferred payment basis would
result in substantial increases in
the monthly amortizations to be
paid because of the 10% VAT.
The additional amount, it is
pointed out, is something that
the buyer did not anticipate at
the time he entered into the
contract.
It is next pointed out that while
Section 4 of R.A. No. 7716
exempts such transactions as
the sale of agricultural products,
food items, petroleum, and
medical and veterinary services,
it grants no exemption on the
sale of real property which is
equally essential. The sale of
real property for socialized and
low-cost housing is exempted
from the tax, but CREBA claims
that real estate transactions of
"the less poor," i.e., the middle
class, who are equally homeless,
should likewise be exempted.
Finally, it is contended, for the
reasons already noted, that R.A.

the law is regressive, the opposite claim

is pressed by respondents that in fact it
distributes the tax burden to as many
goods and services as possible
particularly to those which are within
the reach of higher-income groups, even
as the law exempts basic goods and
services. It is thus equitable. The goods
and properties subject to the VAT are
those used or consumed by higherincome groups. These include real
properties held primarily for sale to
customers or held for lease in the
ordinary course of business, the right or
privilege to use industrial, commercial
or scientific equipment, hotels,
restaurants and similar places, tourist
buses, and the like. On the other hand,
small business establishments, with
annual gross sales of less than
P500,000, are exempted. This,
according to respondents, removes from
the coverage of the law some 30,000
business establishments. On the other
hand, an occasional paper of the Center
for Research and Communication cities
a NEDA study that the VAT has minimal
impact on inflation and income
distribution and that while additional
expenditure for the lowest income class
is only P301 or 1.49% a year, that for a
family earning P500,000 a year or more
is P8,340 or 2.2%.

30

No. 7716 also violates Art. VI,

Section 28(1) which provides
that "The rule of taxation shall
be uniform and equitable. The
Congress shall evolve a
progressive system of taxation."

Lacking empirical data on which to base

any conclusion regarding these
arguments, any discussion whether the
VAT is regressive in the sense that it will
hit the "poor" and middle-income group
in society harder than it will the "rich,"
is largely an academic exercise. On the
other hand, the CUP's contention that
Congress' withdrawal of exemption of
producers cooperatives, marketing
cooperatives, and service cooperatives,
while maintaining that granted to
electric cooperatives, not only goes
against the constitutional policy to
promote cooperatives as instruments of
social justice (Art. XII, 15) but also
denies such cooperatives the equal
protection of the law is actually a policy
argument. The legislature is not
required to adhere to a policy of "all or
none" in choosing the subject of
taxation.
Nor is the contention of the Chamber of
Real Estate and Builders Association
(CREBA), petitioner in G.R. 115754, that
the VAT will reduce the mark up of its
members by as much as 85% to 90%
any more concrete. It is a mere
allegation. On the other hand, the claim
of the Philippine Press Institute,
petitioner in G.R. No. 115544, that the

31

VAT will drive some of its members out

of circulation because their profits from
advertisements will not be enough to
pay for their tax liability, while
purporting to be based on the financial
statements of the newspapers in
question, still falls short of the
establishment of facts by evidence so
necessary for adjudicating the question
whether the tax is oppressive and
confiscatory.
Indeed, regressivity is not a negative
standard for courts to enforce. What
Congress is required by the Constitution
to do is to "evolve a progressive system
of taxation." This is a directive to
Congress, just like the directive to it to
give priority to the enactment of laws
for the enhancement of human dignity
and the reduction of social, economic
and political inequalities (Art. XIII, 1),
or for the promotion of the right to
"quality education" (Art. XIV, 1). These
provisions are put in the Constitution as
moral incentives to legislation, not as
judicially enforceable rights.
7

Herrera vs.
Quezon City
Board
Assessment
Appeals, G.R.

In 1952, the Director of the

Bureau of Hospitals authorized
Jose V. Herrera and Ester
Ochangco Herrera to establish
and operate the St. Catherines

Whether St.
Catherines
Hospital is
exempt from
realty tax.

The admission of pay-patients does not

detract from the charitable character of
a hospital, if all its funds are devoted
exclusively to the maintenance of the
institution as a public charity. The

32

No. L-1527
vs. Philippine
Lung Center
vs. Quezon
City, G.R. No.
144104.

Hospital. In 1953, the Herreras

sent a letter to the Quezon City
Assessor requesting exemption
from payment of real estate tax
on the hospital, stating that the
same was established for
charitable and humanitarian
purposes and not for commercial
gain. The exemption
wasgranted effective years 1953
to 1955.

exemption in favor of property used

exclusively for charitable or educational
purpose is not limited to property
actually indispensable therefore, but
extends to facilities which are incidental
to and reasonably necessary for the
accomplishment of said purpose, such
as in the case of hospitals -- a school for
training nurses; a nurses home;
property used to provide housing
facilities for interns, resident doctors,
superintendents and other members of
the hospital staff; and recreational
facilities for student nurses, interns and
residents. Within the purview of the
Constitution, St. Catherines Hospital is
a charitable institution exempt
from taxation.

In 1955, however, theAssessor re

classified the properties fromex
empt to taxable effective
1956, as it was ascertained that
out 32 beds in the hospital, 12 of
which aref or pay-patients. A
school of midwifery is also
operated within the premises
of the hospital.
Lung Center of the Philippines is
a non-stock and non-profit entity
established by virtue of PD No.
1823. It is the registered owner
of the land on which the Lung
Center of the Philippines Hospital
is erected. A big space in the
ground floor of the hospital is
being leased to private parties,
for canteen and small store

Is the Lung
Center of the
Philippines a
charitable
institution
within the
context of the
Constitution,
and therefore,
exempt from

The Lung Center of the Philippines is a

charitable institution. To determine
whether an enterprise is a charitable
institution 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, that character of the

33

spaces, and to medical or

real property
professional practitioners who
tax?
use the same as their private
clinics. Also, a big portion on the
right side of the hospital is being
leased for commercial purposes
to a private enterprise known as
the Elliptical Orchids and Garden
Center. When the City Assessor
of Quezon City assessed both its
land and hospital building for
real property taxes, the Lung
Center of the Philippines filed a
claim for exemption on its
averment that it is a charitable
institution with a minimum of
60% of its hospital beds
exclusively used for charity
patients and that the major
thrust of its hospital operation is
to serve charity patients. The
claim for exemption was denied,
prompting a petition for the
reversal of the resolution of the
City Assessor with the Local
Board of Assessment Appeals of
Quezon City, which denied the
same. On appeal, the Central
Board of Assessment Appeals of
Quezon City affirmed the local
boards decision, finding that
Lung Center of the Philippines is
not a charitable institution and

services rendered, the indefiniteness of

the beneficiaries and the use and
occupation of the properties.
However, under the Constitution, in
order to be entitled to exemption from
real property tax, there must be clear
and unequivocal proof that (1) it is a
charitable institution and (2)its real
properties are ACTUALLY, DIRECTLY and
EXCLUSIVELY used for charitable
purposes. While portions of the hospital
are used for 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 and enterprises.
Exclusive is defined as possessed and
enjoyed to the exclusion of others,
debarred from participation or
enjoyment. 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.

34

that its properties were not

actually, directly and exclusively
used for charitable purposes.
Hence, the present petition for
review with averments that the
Lung Center of the Philippines is
a charitable institution under
Section 28(3), Article VI of the
Constitution, notwithstanding
that it accepts paying patients
and rents out portions of the
hospital building to private
individuals and enterprises.
8

Abra Valley
College, Inc.
vs. Aquino,
G.R. No. L39086, June
15, 1988.

Abra Valley, an educational

corporation and institution of
higher learning duly
incorporated with the SEC was
assessed with payment of real
estate tax for their schools lot
and building. Abra Valley failed
to pay so a notice of seizure of
the property was made. The
school is offering primary, high
school, college courses and has
a population of more than 1000
students. The elementary
students are housed in a twostorey building across the street,
while the highschool and college
students are housed in the main
building. The director with his
family is in the second floor of

The proper
interpretation
of the phrase
used
exclusively for
educational
purposes.

Constitutional provision Section 22,

paragraph 3, Article VI, of the then 1935
Philippine Constitution, expressly grants
exemption from realty taxes for
"Cemeteries, churches and parsonages
or convents appurtenant thereto, and all
lands, buildings, and improvements
used exclusively for religious, charitable
or educational purposes. The phrase
"exclusively used for educational
purposes" was clarified in the cases of
Herrera vs. Quezon City Board of
assessment Appeals, where such means
not limited to property actually
indispensable' therefor but extends to
facilities which are incidental to and
reasonably necessary for the
accomplishment of said purposes, such
as in the case of hospitals, "a school for

35

the main building. Also, the

ground floor of the college
building is used and rented by a
commercial establishment, the
Northern Marketing Corporation.
Abra Valleys contention is that
the primary use of the lot and
building for educational
purposes and not the incidental
use thereof determines
exemption from property taxes
under Sec22 Art6
1935Consitution. Thus the
assessment of tax for the real
property tax by respond is
without basis.

training nurses, a nurses' home,

property use to provide housing
facilities for interns, resident doctors,
superintendents, and other members of
the hospital staff, and recreational
facilities for student nurses, interns, and
residents'. The test of exemption from
taxation is the use of the property for
purposes mentioned in the Constitution.
It must be stressed however, that while
this Court allows a more liberal and nonrestrictive interpretation of the phrase
"exclusively used for educational
purposes", reasonable emphasis has
always been made that exemption
extends to facilities which are incidental
to and reasonably necessary for the
accomplishment of the main purposes.
Otherwise stated, the use of the school
building or lot for commercial purposes
is neither contemplated by law, nor by
jurisprudence. Thus, while the use of
the second floor of the main building in
the case at bar for residential purposes
of the Director and his family, may find
justification under the concept of
incidental use, which is complimentary
to the main or primary purpose
educational, the lease of the first floor
thereof to the Northern Marketing
Corporation cannot by any stretch of the
imagination be considered incidental to
the purpose of education.

36

City Assessor
of Cebu City
vs.
Association
of Benevola
de Cebu, G.R.
No. 152904.
June 8, 2007.

Respondent Association of
Benevola de Cebu, Inc. is a nonstock, non-profit organization
and is the owner of Chong Hua
Hospital (CHH) in Cebu City. In
the late 1990s, respondent
constructed the CHH Medical
Arts Center (CHHMAC).
Petitioner City Assessor of Cebu
City assessed the CHHMAC
building as commercial at the
assessment level of 35% for
commercial buildings, and not at
the 10% special assessment
currently imposed for CHH and
its other separate buildingsthe
CHHs Dietary and Records
Departments. He further
ascertained that it is not a part
of the CHH building but a
separate building which is
actually used as commercial
clinic/room spaces for renting
out to physicians and, thus,
classified as commercial.
On the other hand, respondent
contended that CHHMAC building
is actually, directly, and
exclusively part of CHH and
should have a special
assessment level of 10% as

Whether or not
the medical
arts center
built by Chong
Hua Hospital
to house its
doctors a
separate
commercial
establishment
or an
appurtenant to
the hospital.

Yes. The CHH Medical Arts Center

(CHHMAC) is an integral part of CHH. It
is definitely incidental to and reasonably
necessary for the operations of Chong
Hua Hospital.
It is undisputed that the doctors and
medical specialists holding clinics in
CHHMAC are those duly accredited by
CHH, that is, they are consultants of the
hospital and the ones who can treat
CHHs patients confined in it. This fact
alone takes away CHHMAC from being
categorized as commercial since a
tertiary hospital like CHH is required by
law to have a pool of physicians who
comprises the required medical
departments in various medical fields.
The fact that the physicians are holding
office in a separate building does not
take away the essence and nature of
their services vis--vis the over-all
operation of the hospital and the
benefits to the hospitals patients. Their
transfer to a more spacious and,
perhaps, convenient place and location
for the benefit of the hospitals patients
does not remove them from being an
integral part of the overall operation of
the hospital.

37

provided under City Tax

Ordinance LXX. Respondent
asserted that the CHHMAC
building is similarly situated as
the buildings of CHH, housing its
Dietary and Records
Departments, are completely
separate from the main CHH
building and are imposed the
10% special assessment level. In
fine, respondent argued that the
CHHMAC, though not actually
indispensable, is nonetheless
incidental and reasonably
necessary to CHHs operations.

10 Commissione Private Respondent YMCA is a

r of Internal
Revenue vs.
YMCA, G.R.
No. 124043,
October 14,
1998.

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.

Respondents charge of rentals for the

offices and clinics its accredited
physicians occupy cannot be equated to
a commercial venture, which is mainly
for profit.
First, CHHMAC is only for its consultants
or accredited doctors and medical
specialists. Second, the charging of
rentals is a practical necessity: (1) to
recoup the investment cost of the
building, (2) to cover the rentals for the
lot CHHMAC is built on, and (3) to
maintain the CHHMAC building and its
facilities. Third, as correctly pointed out
by respondent, it pays the proper taxes
for its rental income. And, fourth, if
there is indeed any net income from the
lease income of CHHMAC, such does not
inure to any private or individual person
as it will be used for respondents other
charitable projects.
Whether or not
the income
derived from
rentals of real
property
owned by
YMCA subject
to income tax

Yes. Income of whatever kind and

character of non-stock non-profit
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 the NIRC.
Rental income derived by a tax-exempt

38

YMCA earned income from

leasing out a portion of its
premises to small shop owners,
like restaurants and canteen
operators, and from parking fees
collected from non-members.
Petitioner issued an assessment
to private respondent for
deficiency taxes. Private
respondent formally protested
the assessment. In reply, the CIR
denied the claims of YMCA.

organization from the lease of its

properties, real or personal, is not
exempt from income taxation, even if
such income is exclusively used for the
accomplishment of its objectives.
Because taxes are the lifeblood of the
nation, the Court has always applied the
doctrine of strict in interpretation in
construing tax exemptions
(Commissioner of Internal Revenue v.
Court of Appeals, 271 SCRA 605, 613,
April 18, 1997). 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 (Davao Gulf Lumber
Corporation v. Commissioner of Internal
Revenue and Court of Appeals, G.R. No.
117359, p. 15 July 23, 1998).
Verba legis non est recedendum. 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.
Private respondent also invokes Article
XIV, Section 4, par. 3 of the Constitution,

39

claiming that it is a non-stock, nonprofit 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. This is
without merit since the exemption
provided lies on the payment of
property tax, and not on the income tax
on the rentals of its property. The bare
allegation alone that one is a non-stock,
non-profit educational institution is
insufficient to justify its exemption from
the payment of income tax.
For the YMCA to be granted the
exemption it claims under the above
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.
Unfortunately for respondent, the Court
noted that not a scintilla of evidence
was submitted to prove that it met the
said requisites.
The Court appreciates the nobility of
respondents cause. However, the
Courts power and function are limited
merely to applying the law fairly and

40

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. 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.
11 Chamber of

Real Estate
and Builders
Associations
Inc. vs.
Romulo, et.
al., G.R. No.
160756,
March 9,
2010.

Petitioner Chamber of Real

Estate and Builders
Associations, Inc. (CREBA), an
association of real estate
developers and builders in the
Philippines, questioned the
validity of Section 27(E) of the
Tax Code which imposes the
minimum corporate income tax
(MCIT) on corporations.
Under the Tax Code, a
corporation can become subject
to the MCIT at the rate of 2% of
gross income, beginning on the
4th taxable year immediately
following the year in which it
commenced its business
operations, when such MCIT is
greater than the normal
corporate income tax. If the
regular income tax is higher than

(1) Is the
imposition of
MCIT
constitutional?
(2) Is the
imposition of
CWT on
income from
sales of real
properties
classified as
ordinary
assets
constitutional?

: (1) Yes. The imposition of the MCIT is

constitutional. An income tax is
arbitrary and confiscatory if it taxes
capital, because it is income, and not
capital, which is subject to income tax.
However, MCIT is imposed on gross
income which is computed by deducting
from gross sales the capital spent by a
corporation in the sale of its goods, i.e.,
the cost of goods and other direct
expenses from gross sales. Clearly, the
capital is not being taxed.
Various safeguards were incorporated
into the law imposing MCIT.
Firstly, recognizing the birth pangs of
businesses and the reality of the need
to recoup initial major capital
expenditures, the MCIT is imposed only
on the 4th taxable year immediately
following the year in which the

41

the MCIT, the corporation does

not pay the MCIT.
CREBA argued, among others,
that the use of gross income as
MCIT base amounts to a
confiscation of capital because
gross income, unlike net income,
is not realized gain.
CREBA also sought to invalidate
the provisions of RR No. 2-98, as
amended, otherwise known as
the Consolidated Withholding Tax
Regulations, which prescribe the
rules and procedures for the
collection of CWT on sales of real
properties classified as ordinary
assets, on the grounds that
these regulations:
Use gross selling price
(GSP) or fair market value
(FMV) as basis for
determining
the income tax on the sale of
real estate classified as ordinary
assets, instead of the entitys
net taxable income as provided
for under the Tax Code;
Mandate the collection of
income tax on a per
transaction basis, contrary

corporation commenced its operations.

Secondly, the law allows the carryforward of any excess of the MCIT paid
over the normal income tax which shall
be credited against the normal income
tax for the three immediately
succeeding years.
Thirdly, since certain businesses may be
incurring genuine repeated losses, the
law authorizes the Secretary of Finance
to suspend the imposition of MCIT if a
corporation suffers losses due to
prolonged labor dispute, force majeure
and legitimate business reverses.
(2) Yes. Despite the imposition of CWT
on GSP or FMV, the income tax base for
sales of real property classified as
ordinary assets remains as the entitys
net taxable income as provided in the
Tax Code, i.e., gross income less
allowable costs and deductions. The
seller shall file its income tax return and
credit the taxes withheld by the
withholding agent-buyer against its tax
due. If the tax due is greater than the
tax withheld, then the taxpayer shall
pay the difference. If, on the other hand,
the tax due is less than the tax
withheld, the taxpayer will be entitled to
a refund or tax credit.

42

to the Tax Code provision

which imposes income tax
on net income at the end
of the taxable period;
Go against the due process
clause because the
government collects
income tax even when the
net income has not yet
been determined; gain is
never assured by mere
receipt of the selling price;
and
Contravene the equal
protection clause because
the CWT is being charged
upon real estate
enterprises, but not on
other business enterprises,
more particularly, those in
the manufacturing sector,
which do business similar
to that of a real estate
enterprise.

The use of the GSP or FMV as basis to

determine the CWT is for purposes of
practicality and convenience. The
knowledge of the withholding agentbuyer is limited to the particular
transaction in which he is a party.
Hence, his basis can only be the GSP or
FMV which figures are reasonably
known to him.
Also, the collection of income tax via
the CWT on a per transaction basis, i.e.,
upon consummation of the sale, is not
contrary to the Tax Code which calls for
the payment of the net income at the
end of the taxable period. The taxes
withheld are in the nature of advance
tax payments by a taxpayer in order to
cancel its possible future tax obligation.
They are installments on the annual tax
which may be due at the end of the
taxable year. The withholding agentbuyers act of collecting the tax at the
time of the transaction, by withholding
the tax due from the income payable, is
the very essence of the withholding tax
method of tax collection.
On the alleged violation of the equal
protection clause, the taxing power has
the authority to make reasonable
classifications for purposes of taxation.

43

Inequalities which result from singling

out a particular class for taxation, or
exemption, infringe no constitutional
limitation. The real estate industry is, by
itself, a class and can be validly treated
differently from other business
enterprises.
What distinguishes the real estate
business from other manufacturing
enterprises, for purposes of the
imposition of the CWT, is not their
production processes but the prices of
their goods sold and the number of
transactions involved. The income from
the sale of a real property is bigger and
its frequency of transaction limited,
making it less cumbersome for the
parties to comply with the withholding
tax scheme. On the other hand, each
manufacturing enterprise may have
tens of thousands of transactions with
several thousand customers every
month involving both minimal and
substantial amounts.
12 People vs.

Cayat, G.R.
No. L-45987.

Cayat was a native of Baguio,

Benguet, Mountain Province. He
was accused for violating Act No.
1639 which declared unlawful for
any native of the Philippine
islands who is a member of a
non-Christian Tribe to have in his

Whether or not
the said Act is
violative of the
equal
protection
clause of the
constitution.

No. As early as 1551, the Spanish

Government had assumed a solicitous
attitude toward these inhabitants. It had
been regarded by the Spanish
Government as a sacred "duty to
conscience and humanity" to civilize
these less fortunate people living "in the

44

possession, drink any beer, wine

or intoxicating liquors of any
kind, other than the so-called
native wines and liquors which
the members of the tribes have
been accustomed. It was alleged
that Cayat had received,
acquired and had in his
possession and control, one
bottle of gin which is an
intoxicating liquor other than the
so-called native wines and
liquors which the member of
such tribe have been
accustomed to. Cayat was found
guilty of such. Accused
challenged the constitutionality
of the Act. One of the grounds
was that the said act is
discriminatory and denies the
equal protection laws.

obscurity of ignorance" and to accord

them the "the moral and material
advantages" of community life and the
"protection and vigilance afforded them
by the same laws." Constant and active
effort had been exercised to prevent
barbarous practices and introduce
civilized customs.
Guaranty of the equal protection of the
laws is not equal protection of the laws
is not violated by a legislation based on
reasonable classification. And the
classification, to be reasonable, (1) must
rest on substantial distinctions; (2) must
be germane to the purposes of the law;
(3) must not be limited to existing
conditions only; and (4) must apply
equally to all members of the same
class. Act No. 1639 satisfies these
requirements.
The classification rests on real and
substantial, not merely imaginary or
whimsical, distinctions. It is based upon
the degree of civilization and culture.
"The term 'non-Christian tribes' refers,
not to religious belief, but, in a way, to
the geographical area, and, more
directly, to natives of the Philippine
Islands of a low grade of civilization,
usually living in tribal relationship apart
from settled communities."
This distinction is unquestionably

45

reasonable, for the Act was intended to

meet the peculiar conditions existing in
the non-Christian tribes.
That it is germane to the purposes of
law cannot be doubted. It is designed to
insure peace and order among the nonChristian tribes since past experiences
show that free use of highlight
intoxicating liquors by them had
resulted in lawlessness and crimes.
The law is not limited in its application
to conditions existing at the time of its
enactment. It is intended to apply for all
times as long as those conditions exist.
Legislature understood that the
civilization of a people is a slow process
and that hand in hand with it must go
measures of protection and security.
Finally, that the Act applies equally to all
members of the class.
13
14 Ormoc Sugar

Company vs.
Conejos, et.
al., G.R. No.
L-23794,
February 17,
1968.

In 1964, Ormoc City passed a bill

which read: There shall be paid
to the City Treasurer on any and
all productions of centrifugal
sugar milled at the Ormoc Sugar
Company Incorporated, in Ormoc
City a municipal tax equivalent
to one per centum (1%) per
export sale to the United States
of America and other foreign
countries. Though referred to as

Whether or not
constitutional
limits on the
power of
taxation,
specifically the
equal
protection
clause and rule
of uniformity
of taxation,

The SC held in favor of Ormoc Sugar. It

ruled that the equal protection clause
applies only to persons or things
identically situated and does not bar a
reasonable classification of the subject
of legislation, and a classification is
reasonable where (1) it is based on
substantial distinctions which make real
differences; (2) these are germane to
the purpose of the law; (3) the
classification applies not only to present

46

a production tax, the

were infringed. conditions but also to future conditions
imposition actually amounts to a
which are substantially identical to
tax on the export of centrifugal
those of the present; (4) the
sugar produced at Ormoc Sugar
classification applies only to those who
Company, Inc. For production of
belong to the same class.
sugar alone is not taxable; the
only time the tax applies is when
Though Ormoc Sugar Company Inc. is
the sugar produced is exported.
the only sugar central in the city of
Ormoc Sugar paid the tax
Ormoc at the time, the classification, to
(P7,087.50) in protest averring
be reasonable, should be in terms
that the same is violative of Sec
applicable to future conditions as well.
2287 of the Revised
Said ordinance shoouldnt be singular
Administrative Code which
and exclusive as to exclude any
provides: It shall not be in the
subsequently established sugar central,
power of the municipal council to
of the same class as plaintiff, for
impose a tax in any form
coverage of the tax.
whatever, upon goods and
merchandise carried into the
municipality, or out of the same,
and any attempt to impose an
import or export tax upon such
goods in the guise of an
unreasonable charge for
wharfage, use of bridges or
otherwise, shall be void. And
that the ordinance is violative to
equal protection as it singled out
Ormoc Sugar As being liable for
such tax impost for no other
sugar mill is found in the city.
15 Tiu vs. Court

of Appeals,

Congress, with the approval of

Whether the
the President, passed into law RA provisions of

No. The Court found real and

substantive distinctions between the

47

G.R. No.
127410,
January 20,
1999.

7227 entitled "An Act

Accelerating the Conversion of
Military Reservations Into Other
Productive Uses, Creating the
Bases Conversion and
Development Authority for this
Purpose, Providing Funds
Therefor and for Other
Purposes." Section 12 thereof
created the Subic Special
Economic Zone and granted
there to special privileges.
President Ramos issued
Executive Order No. 97,
clarifying the application of the
tax and duty incentives. The
President issued Executive Order
No. 97-A, specifying the area
within which the tax-and-dutyfree privilege was operative.
Petitioners challenged the
constitutionality of EO 97-A for
allegedly being violative of their
right to equal protection of the
laws. This was due to the
limitation of tax incentives to
Subic and not to the entire area
of Olongapo. The case was
referred to the Court of Appeals.
The appellate court concluded
that such being the case,
petitioners could not claim that

Executive
Order No. 97-A
confining the
application of
R.A. 7227
within the
secured area
and excluding
the residents
of the zone
outside of the
secured area is
discriminatory
or not owing to
a violation of
the equal
protection
clause.

circumstances obtaining inside and

those outside the Subic Naval Base,
thereby justifying a valid and
reasonable classification. The
fundamental right of equal protection of
the laws is not absolute, but is subject
to reasonable classification. If the
groupings are characterized by
substantial distinctions that make real
differences, one class may be treated
and regulated differently from another.
The classification must also be germane
to the purpose of the law and must
apply to all those belonging to the same
class. Classification, to be valid, must
(1) rest on substantial distinctions, (2)
be germane to the purpose of the law,
(3) not be limited to existing conditions
only, and (4) apply equally to all
members of the same class. The
Supreme Court believed it was
reasonable for the President to have
delimited the application of some
incentives to the confines of the former
Subic military base.
RA 7227 aims primarily to accelerate
the conversion of military reservations
into productive uses. This was really
limited to the military bases as the law's
intent provides. Moreover, the law
tasked the BCDA to specifically develop
the areas the bases occupied.

48

EO 97-A is unconstitutional,
while at the same time
maintaining the validity of RA
7227.

Even more important, at this time the

business activities outside the "secured
area" are not likely to have any impact
in achieving the purpose of the law,
which is to turn the former military base
to productive use for the benefit of the
Philippine economy. Hence, there was
no reasonable basis to extend the tax
incentives in RA 7227.

Respondent Court held that

"there is no substantial
difference between the
provisions of EO 97-A and
Section 12 of RA 7227. In both,
the 'Secured Area' is precise and
well-defined as '. . . the lands
occupied by the Subic Naval
Base and its contiguous
extensions as embraced,
covered and defined by the 1947
Military Bases Agreement
between the Philippines and the
United States of America, as
amended . . .'"

It is well-settled that the equalprotection guarantee does not require

territorial uniformity of laws. As long as
there are actual and material
differences between territories, there is
no violation of the constitutional clause.

Part 3
Income Taxation
1

Case Title
VICENTE
MADRIGAL
and his wife,
SUSANA
PATERNO,
plaintiffs-

Summary
M and P were legally married
prior to January 1, 1914. The
marriage was contracted under
the provisions concerning
conjugal partnerships. The
claim is submitted that the

Issue/s
What is the
meaning of
income?

Ruling
The Income Tax Law of the United
States in force in the Philippine
Islands has selected income as the
test of faculty in taxation. The aim
has been to mitigate the evils arising
from the inequalities of wealth by a

Notes/Remarks

49

appellants,
vs. JAMES J.
RAFFERTY
38 Phil 415

income shown on the form

presented for 1914 was in fact
the income of the conjugal
partnership existing between
M and P, and that in computing
and assessing the additional
income tax, the income
declared by M should be
divided into two equal parts,
one-half to be considered the
income of M and the other half
the income of P.

progressive scheme of taxation, which

places the burden on those best able
to pay. To carry out this idea, public
considerations have demanded an
exemption roughly equivalent to the
minimum of subsistence. With these
exceptions, the Income Tax Law is
supposed to reach the earnings of the
entire non-governmental property of
the country.
Income as contrasted with capital or
property is to be the test. The
essential difference between capital
and income is that capital is a fund;
income is a flow. Capital is wealth,
while income is the service of wealth.
"The fact is that property is a tree,
income is the fruit; labor is a tree,
income the fruit; capital is a tree,
income the fruit." (Waring vs. City of
Savannah [1878], 60 Ga., 93.)
Income means profits or gains.

FREDER
ICK C.
FISHER,
plaintiff
appella
nt, vs.
WENCE

Philippine American Drug

Company was a corporation duly
organized and existing under
the laws of the Philippine
Islands, doing business in the
City of Manila; that he appellant
was a stockholder in said
corporation; that said

Are the
"stock
dividends
" in the
present
case
"income"
and

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,
the corporate profits belong to the
corporation and not to the
stockholders, and are liable for the

50

SLAO
TRINIDA
D,
Collecto
r of
Internal
Revenu
e,
defenda
ntappelle
e.
48 Phil
415

corporation, as result of the

business for that year, declared
a "stock dividend"; that the
proportionate share of said stock
divided of the appellant was
P24,800; that the stock dividend
for that amount was issued to
the appellant; that thereafter, in
the month of March, 1920, the
appellant, upon demand of the
appellee, paid under protest,
and voluntarily, unto the
appellee the sum of P889.91 as
income tax on said stock
dividend. For the recovery of
that sum (P889.91) the present
action was instituted.

taxable as
such
under the
provisions
of section
25 of Act
No. 2833?

payment of the debts of the

corporation.
When a cash dividend is declared and
paid to the stock holders, such cash
dividend is declared and paid to the
stockholder, such cash becomes the
absolute property of the stockholder
and cannot be reached by the
creditors of the corporation in the
absence of fraud. A stock dividend,
however, still being the property of
the corporation, and not of the
stockholder, it may be reached by an
execution against the corporation,
and sold as a part of the property of
the corporation. Until the dividend is
declared and paid, the corporate
profits still belong to the corporation,
not to the stockholders, and are liable
for corporate indebtedness. The rule
is well established that cash
dividends, whether large or small, are
regarded as "income" and all stock
dividends, as capital or assets.
The stockholder who receives a
stock dividend has received
nothing but a representation of
this increased interest in the
capital of the corporation. There
has been no separation or
segregation of his interest. All the

51

property or capital of the

corporation still belongs to the
corporation.
3

CONWI VS
CTA
213 SCRA 83

CIR vs BOAC
149 SCRA
395

The dollar earnings of

petitioners are the fruits of their
labors in the foreign subsidiaries
of Procter & Gamble. It was a
definite amount of money which
came to them within a specified
period of time of two years as
payment for their services.
Petitioners argue that since
there were no remittances and
acceptances of their salaries
and wages in US dollars into the
Philippines, they are exempt
from the coverage of RMC 771,41-71.

Are the
petitioners
income earned
outside the
Philippines
exempt from
income tax?
Does the Sec. of
Finance possess
the power to
promulgate the
circulars in
question?

Income may be defined as an amount

of money coming to a person or
corporation within a specified time,
whether as payment for services,
interest or profit from investment.
Unless otherwise specified, it means
cash or its equivalent. Income can also
be thought of as a flow of the fruits of
one's labor.

BOAC, A RESIDENT FOREIGN

CORPORATION, impress on the
Court that income derived from
transportation is income for
services, with the result that the
place where the services are
rendered determines the source;
and since BOAC's service of

Did such "flow

of wealth" come
from "sources
within the
Philippines"?

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

Petitioners forget that they are

citizens of the Philippines, and
their income, within or without,
and in these cases wholly
without, are subject to income
tax. The fact still remains that
"taxes are the lifeblood of the
government" and one of the
duties of a Filipino citizen is to
pay his income tax.

52

transportation is performed
outside the Philippines, the
income derived is from sources
without the Philippines and,
therefore, not taxable under our
income tax laws.

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.
The absence of flight operations to and
from the Philippines is not
determinative of the source of income
or the situs of income taxation.
Admittedly, BOAC was an off-line
international airline at the time
pertinent to this case. The test of
taxability is the "source"; and the
source of an income is that activity . . .
which produced the income.
Unquestionably, the passage
documentations (e.g. transportation
ticket, ordinary ticket) in these cases
were sold in the Philippines and the
revenue therefrom was derived from a
business activity regularly pursued
within the Philippines. And even if the
BOAC tickets sold covered the
"transport of passengers and cargo to

53

and from foreign cities", it cannot alter

the fact that income from the sale of
tickets was derived from the
Philippines. The word "source" conveys
one essential idea, that of origin, and
the origin of the income herein is the
Philippines.
5

Commission
of Internal
Revenue
(CIR) vs
Filinvest
Development
Corporation
(FDC)
G. R. Nos.
163653 and
167689

Respondent Filinvest
Development Corporation (FDC)
is a holding company which is
the owner of 80% of the
outstanding shares of
respondent Filinvest Alabang,
Inc. (FAI), and 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.
463,094,301 shares of stock of
FLI were issued to FDC and FAI
in exchange for said parcels
which were intended to facilitate
development of medium-rise
residential and commercial
buildings.

1. Whether the

1. No. The CIR's powers does not

CIRs powers
include the power to impute
include the
"theoretical interests" to the
power to
controlled taxpayer's transactions.
impute
theoretical
The term gross income means all
interests on
income from whatever source
the advances
derived. While the phrase "from
FDC
whatever source derived" There
extended to
must be proof of the actual or
its affiliates
probable receipt or realization of the
in 1996 and
item of gross income sought to be
1997
distributed, apportioned or allocated
considering
by the CIR.
that, for said
purpose, FDC
There was no evidence of actual or
resorted to
possible realization showing that the
interestadvances FDC extended to its
bearing fund
affiliates had resulted to the
borrowings
interests subsequently assessed by
from
the CIR.
commercial
banks and
More so, pursuant to Article 1956 of
that since
the Civil Code of the Philippines, no
considerable
interest shall be due unless it has

54

FDC also extended advances in

favor of its affiliates, namely,
FAI, FLI, Davao Sugar Central
Corporation (DSCC) and Filinvest
Capital, Inc. (FCI). Duly
evidenced by instructional
letters as well as cash and
Journal vouchers, said cash
advances amounted to
P2,557,213,942.60 in 1996 and
P3,360,889,677.48 in 1997.

interest
been expressly stipulated in writing.
expenses
Taxes, being burdens, are not to be
were
presumed beyond what the
deducted by
applicable statute expressly and
FDC when
clearly declares. Accordingly, the
said funds
general rule of requiring adherence
were
to the letter in construing statutes
borrowed,
applies with peculiar strictness to
the CIR
tax laws and the provisions of a
theorizes
taxing act are not to be extended by
that interest
implication.
income
should
likewise be
2. No. Section 34 (c) (2) of the 1993
declared
NIRC pertinently provides the
when the
exception that no gain or loss shall
same funds
be recognized if property is
were sourced
transferred to a corporation by a
for the
person in exchange for shares of
advances
stock in such corporation of which as
FDC
a result of such exchange said
extended to
person, alone or together with
its affiliates.
others, not exceeding four persons,
gains control of said corporation;
2. Whether the
Provided, That stocks issued for
exchange of
services shall not be considered as
shares of
issued in return of property.
stock for
property
As even admitted in the 14 February
among FDC,
2001 Stipulation of Facts submitted
FAI and FLI
by the parties, the requisites for the
met all the
non-recognition of gain or loss are
requirements
as follows:

55

for the nonrecognition

of taxable
gain under
Section
34(C)(2)(c)
of the NIRC.

BAIERNICKEL
VS CIR
GR
156305
FEBRUA
RY 17,
2003

This is actually a Minute

Resolution dated February 17,
2003, where the SC sustained
the ruling of the Court of
Appeals that Baier-Nickel is
entitled to refund the sum
withheld from her sales
commission income for the year
1994

WON the sales

commission is
taxable in the
Philippines?

(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.
The fact that recipient of
commission income is President
and majority stockholder of the
Philippine company does not alter
the source of income. There are
only two ways by which the
President and other members of
the Board can be granted
compensation apart from
reasonable per diems: (1) when
there is a provision in the by-laws
fixing their compensation; and (2)
when the stockholders agree to
give it to them. If none of these
conditions are present,
commission income cannot be
automatically attributed to

56

petitioners position in the

company .
Commissions paid for marketing
services rendered abroad for a
Philippine company is considered
foreign-source income. The
source of the income is the
property, activity or service that
produced the income. Place
where services are rendered
determine taxation.
7

CIR VS
BAIERNICKEL
G. R.
No.
153793,
August
29,
2006

Baier-Nickel is a non-resident
alien (a German citizen) and is
the president of JUBANITEX, Inc.,
a domestic corporation engaged
in manufacturing, marketing on
wholesale
only,
buying
or
otherwise acquiring, holding,
importing and exporting, selling
and
disposing
embroidered
textile
products.
She
was
appointed as a commission agent
by the domestic corporation with
a sales commission of 10% all
sales actually concluded and
collected through her efforts.
In 1995, respondent received
P1, 707, 772. 64 as sales
commission from w/c Jubanitex
deducted the 10% withholding

Is she entitled
to a refund for
the
wrongly
filed taxes?

The important factor 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.
Pursuant to Sec 25 of NIRC, nonresident aliens, whether or not
engaged in trade or business, are
subject to the Philippine income
taxation on their income received from
all sources in the Philippines.
The rule is 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,

57

tax of P170, 777.26 and

remitted to BIR. Respondent
filed her income tax return but
then claimed a refund from BIR
for the P170K, alleging this was
mistakenly
withheld
by
Jubanitex and that her sales
commission
income
was
compensation
for
services
rendered
in
Germany
not
Philippines and thus not taxable
here.

it is the place where the labor or

service was performed that determines
the source of the income. There is no
merit in the 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.
The decisive factual consideration here
is not the capacity in which Juliane
Baier-Nickel received the income, but
the sufficiency of evidence to prove
that the services she rendered were
performed in Germany to entitle her to
tax exemption since she is a nonresident German citizen. The settled
rule is that tax refunds are in the
nature of tax exemptions and are to be
construed strictissimi juris against the
taxpayer. To those therefore, who claim
a refund rest the burden of proving that
the transaction subjected to tax is
actually exempt from taxation.
Juliane did not prove by substantial
evidence, or that relevant evidence
that a reasonable mind might accept as
adequate to support the conclusion
that it was in Germany where she
performed
the
income
producing
service. She thus failed to discharge
the burden of proving that her income

58

was
from
sources
outside
Philippines and exempt from
application of our income tax law.
8

CIR vs
Marube
ni Corp.
GR
137377
Decemb
er 18,
2001

Marubeni, a Japanese
corporation, engaged in
general import and export
trading, financing and
construction, is duly
registered in the
Philippines with Manila
branch office. CIR
examined the Manila
branchs books of
accounts for fiscal year
ending March 1985, and
found that respondent had
undeclared income from
contracts with NDC and
Philphos for construction
of a wharf/port complex
and ammonia storage
complex respectively.

Whether
Marubeni is
exempted from
income tax by
invoking the
situs of taxation
rule?

the
the

Marubeni, however, was able to

sufficiently prove in trial that not
all its work was performed in the
Philippines because some of
them were completed in Japan
(and in fact subcontracted) in
accordance with the provisions of
the contracts. All services for the
design, fabrication, engineering
and manufacture of the materials
and equipment under Japanese
Yen Portion I were made and
completed in Japan. These
services were rendered outside
Philippines taxing jurisdiction
and are therefore not subject to
contractors tax.

On Aug 2, 1986, EO 41 declared

a tax amnesty for unpaid
income taxes for 1981-85, and
that taxpayers who wished to
avail this should on or before
Oct 31, 1986. Marubeni filed its
tax amnesty return on Oct 30,
1986.

59

On Nov 17, 1986, EO 64

expanded EO 41s scope to
include estate and donors taxes
under Title 3 and business tax
under Chap 2, Title 5 of NIRC,
extended the period of
availment to Dec 15, 1986 and
stated those who already
availed amnesty under EO 41
should file an amended return to
avail of the new benefits.
Marubeni filed a supplemental
tax amnesty return on Dec 15,
1986.
9

TUASON
VS
LINGAD
G.R. No.
L24248.
July 31,
1974

The mother of Antonio Tuason

owned a 7 hectare parcel of land
located in the City of Manila.
She subdivided the land into
twenty-nine (29) lots. Possession
of the land was eventually
inherited by Taxpayer in 1948.

Whether or not
the properties
in question
should be
regarded as
capital assets.

No. It is Ordinary Income

As thus defined by law, capital assets
include all properties of a taxpayer
whether or not connected with his
trade or business, EXCEPT:
1.

Tuason instructed his

attorney-in-fact to sell the
lots. Twenty-eight (28) out
of the twenty-nine parcels
were all sold. In 1953 and
1954 the Taxpayer
reported his income from
the sale of the small lots
(P102,050.79 and
P103,468.56, respectively)

2.
3.

4.

stock in trade or other property

included in the taxpayer's
inventory;
property primarily for sale to
customers in the ordinary
course of his trade or business;
property uised in the trade or
business of the taxpayer and
subject to depreciation
allowance; and
real property used in trade or

60

as long-term capital gains.

The CIR upheld Taxpayer's
treatment of this tax.

business.
If the taxpayer sells or exchanges any
of the properties above, any gain or
loss relative thereto is an ordinary gain
or an ordinary loss; the loss or gain
from the sale or exchange of all other
properties of the taxpayer is a capital
gain or a capital loss.

In his 1957 tax return the

Taxpayer as before treated his
income from the sale of the
small lots (P119,072.18) as
capital gains. This treatment
was initially approved by the
CIR, but by 1963, the CIR
reversed itself and considered
the Taxpayer's profits from the
sales of the lots as ordinary
gain. The CIR assesed a
deficiency of P31,095.36 from
the Taxpayer.

Under Section 34(b)(2) of the old Tax

Code, if a gain is realized by a taxpayer
(other than a corporation) from the sale
or exchange of capital assets held for
more than 12 months, only 50% of the
net capital gain shall be taken into
account in computing the net income.

Tuason contends that he was

engaged in the business of
leasing the lots he inherited
from his mother as well other
real properties, his subsequent
sales of the mentioned lots
cannot be recognized as sales of
capital assets but of real
property used in trade or
business of the taxpayer.
10 REPUBL

IC VS
DELA
RAMA,

Under the doctrine of

constructive receipt, a taxpayer
is deemed to have received
income where an amount owing

WON there was

constructive
receipt
of
income?

The so-called personal accounts of

Esteban de la Rama were not valid
debts. Of the two items, the first was
contested and proof was lacking to

61

G.R. No.
L21108.
Novemb
er 29,
1966

to him is set off against his debt

by the creditor. Such doctrine,
however, is applicable only
where the set off is made
against a debt acknowledged by
the taxpayer or the validity of
which is not otherwise
questioned. Where the validity
of the debt is contested by the
taxpayer, the doctrine of
constructive receipt is
inapplicable.
The Commissioner sought to
apply this doctrine to dividends
due and payable but not
actually rceived. When such
d,ividends were declared in
1950, no payment was actually
made thereof to the stockholder,
Esteban de la Rama. Instead,
the 1950 dividends due him
were credited to or set-off
against his personal accounts
with the corporation. De la
Rama died without having
actually collected such
dividends and the income tax
returns filed in behalf of his
estate for 1950 did not include
them. Subsequently, a
deficiency assessment was
issued against the estate, based

show its existence and validity. The

second was actually the debt of
another person, Hijos de I. de la Rama,
Inc. It was true that Esteban de la
Rama was the principal stockholder of
said corporation, but as its personality
was separate and distinct, its debts
could not be charged to the deceased
in the absence of proof of a substitution
of debtor. With such findings, the Court
concluded that inasmuch as the
dividends in question had not been
received either actually or
constructively in 1950, no tax could be
due thereon for said year.
The application of the dividends to the
alleged personal accounts of the
deceased did not constitute such
constructive payment to the estate or
the heirs that could become the basis
for a tax assessment on the said
dividends because, with respect to the
first debt, there was no proof adduced
to show its existence and validity; and
with respect to the second debt, to
which the dividends were partly
applied, it was composed of accounts
due from an entity separate and
distinct from the deceased and whose
debts could not be charged against the
deceased even if the latter was the
principal owner thereof, in the absence

62

on the undeclared dividends,

which according to the
Commissioner had been
constructively received in 1950
when the set-off against the
personal debts of the deceased
was made by the corporation.

of proof of substitution of debtor. There

being no basis for the assessment of
the income tax, the assessment and
the sending of the corresponding
notices did not have any basis. The
assessment and the notices did not
therefore produce any legal effect that
would warrant the collection of the tax.
Income is deemed constructively
received where the taxpayer has
an unqualified right to receive the
same but by his own choice the
income is not reduced to
possession.

In behalf of the estate, however,

it was contended that the
doctrine of constructive receipt
was inapplicable to the
situation. For the doctrine to
apply, the set-off must be
against valid debts of the
taxpayer. But the so-called
personal accounts of the late
Esteban de la Rama with the
corporation were not valid
debts. At any rate, his liability
for such debts was never
recognized, nor properly
established.
11 COMMIS

SIONER
OF
INTERN
AL
REVENU
E,
petition
er, vs.

Respondent is engaged in the

business of processing, treating
and refining petroleum for the
purpose
of
producing
marketable products and the
subsequent
sale
thereof.
Respondent filed a formal claim
for refund or tax representing
excise taxes it allegedly paid on

WON
respondent as
manufacturer or
producer
of
petroleum
products
is
exempt
from
the payment of
excise tax on

Sec. 229 of the NIRC allows the

recovery of taxes erroneously or
illegally collected. An "erroneous or
illegal tax" is defined as one levied
without statutory authority, or upon
property not subject to taxation or by
some officer having no authority to levy
the tax, or one which is some other
similar respect is illegal.

63

PILIPIN
AS
SHELL
PETROL
EUM
CORPO
RATION,
respond
ent.
G.R. No.
188497.
April
25,
2012

sales and deliveries of gas and such petroleum

fuel oils to various international products it sold
carriers.
to international
carriers.

Respondent's
locally
manufactured
petroleum products are clearly subject
to excise tax under Sec. 148. Hence, its
claim for tax refund may not be
predicated on Sec. 229 of the NIRC
allowing a refund of erroneous or
excess payment of tax. Respondent's
claim
is
premised
on
what
it
determined as a tax exemption
"attaching to the goods themselves,"
which must be based on a statute
granting tax exemption, or "the result
of legislative grace." Such a claim is to
be construed strictissimi juris against
the taxpayer, meaning that the claim
cannot be made to rest on vague
inference. Where the rule of strict
interpretation against the taxpayer is
applicable as the claim for refund
partakes of the nature of an exemption,
the claimant must show that he clearly
falls under the exempting statute.
The exemption from excise tax
payment on petroleum products under
Sec.
135
(a)
is
conferred
on
international carriers who purchased
the same for their use or consumption
outside the Philippines. Sec. 135 (a) in
relation to the other provisions on
excise tax and from the nature of
indirect
taxation,
may
only
be
construed
as
prohibiting
the
manufacturers-sellers
of
petroleum

64

products from passing on the tax to

international carriers by incorporating
previously paid excise taxes into the
selling
price.
In
other
words,
respondent cannot shift the tax burden
to international carriers who are
allowed to purchase its petroleum
products without having to pay the
added cost of the excise tax.
12 THE RENATO

V. DIAZ and
AURORA MA.
F. TIMBOL,
petitioners,
vs. THE
SECRETARY
OF FINANCE
and THE
COMMISSION
ER OF
INTERNAL
REVENUE,
respondents.
G.R. No.
193007. July
19, 2011

Petitioners Renato V. Diaz and

Aurora
Ma.
F.
Timbol
(petitioners) filed this petition
for declaratory relief 1 assailing
the validity of the impending
imposition of value-added tax
(VAT) by the Bureau of Internal
Revenue (BIR) on the collections
of tollway operators.

1.Whether
or
not
the
government is
unlawfully
expanding VAT
coverage
by
including
tollway
operators
and
tollway
operations
in
the
terms
"franchise
grantees" and
"sale
of
services" under
Section 108 of
the Code; and
2.Whether
not
imposition

It is plain that the law imposes VAT on

"all kinds of services" rendered in the
Philippines for a fee, including those
specified in the list. The enumeration of
affected services is not exclusive. By
qualifying "services" with the words "all
kinds,"

Section 108 subjects to VAT "all kinds of

services" rendered for a fee "regardless
of whether or not the performance
thereof calls for the exercise or use of
the physical or mental faculties." This
means that "services" to be subject to
VAT need not fall under the traditional
concept of services, the personal or
professional kinds that require the use
of human knowledge and skills.
And not only do tollway operators come
or under the broad term "all kinds of
the services," they also come under the
of specific class described in Section 108

65

13 PHILIPPINE

PAGCOR was created pursuant

AMUSEMENT to P.D. No. 1067-A on January 1,
AND GAMING 1977.
Simultaneous
to
its
CORPORATIO creation, P.D. No. 1067-B was

VAT on tollway
operators
a)
amounts to a
tax on tax and
not a tax on
services; b) will
impair
the
tollway
operators' right
to a reasonable
return
of
investment
under
their
TOAs; and c) is
not
administratively
feasible
and
cannot
be
implemented.

as "all other franchise grantees" who

are subject to VAT, "except those under
Section 119 of this Code."

WON PAGCOR is
still
exempt
from corporate
income tax and

Petitioner further contends that Section

1 (c) of R.A. No. 9337 is null and void
ab initio for violating the nonimpairment clause of the Constitution.

Fees paid by the public to tollway

operators for use of the tollways, are
not taxes in any sense. A tax is
imposed under the taxing power of the
government principally for the purpose
of raising revenues to fund public
expenditures. Toll fees, on the other
hand, are collected by private tollway
operators as reimbursement for the
costs and expenses incurred in the
construction,
maintenance
and
operation of the tollways, as well as to
assure them a reasonable margin of
income. Although toll fees are charged
for the use of public facilities, therefore,
they are not government exactions that
can be properly treated as a tax. Taxes
may be imposed only by the
government
under
its
sovereign
authority, toll fees may be demanded
by either the government or private
individuals or entities, as an attribute of
ownership.

66

N (PAGCOR),
petitioner,
vs. THE
BUREAU OF
INTERNAL
REVENUE
(BIR),
represented
herein by
HON. JOSE
MARIO
BUAG, in
his official
capacity as
COMMISSION
ER OF
INTERNAL
REVENUE,
public
respondent,
JOHN DOE
and JANE
DOE, who are
persons
acting for, in
behalf, or
under the
authority of
Respondent,
public and
private
respondents.

issued exempting PAGCOR from VAT with the

the payment of any type of tax, enactment
of
except a franchise tax of five R.A. No. 9337.
percent (5%) of the gross
revenue. Thereafter, on June 2,
1978, P.D. No. 1399 was issued
expanding
the
scope
of
PAGCOR's exemption.
PAGCOR's tax exemption was
removed in June 1984 through
P.D. No. 1931, but it was later
restored by Letter of Instruction
No. 1430, which was issued in
September 1984.
R.A. No. 8424, National Internal
Revenue Code of 1997, took
effect. Section 27 (c) of R.A. No.
8424 provides that governmentowned
and
controlled
corporations (GOCCs) shall pay
corporate income tax, except
petitioner PAGCOR, GSIS, SSS,
PHIC and PCSO.
With the enactment of R.A. No.
9337 on May 24, 2005, certain
sections of the National Internal
Revenue Code of 1997 were
amended.
The
particular
amendment that is at issue in
this case is Section 1 of R.A. No.
9337, which amended Section
27 (c) of the National Internal

Petitioners contention lacks merit. The

non-impairment clause is limited in
application to laws that derogate from
prior acts or contracts by enlarging,
abridging or in any manner changing
the intention of the parties.
As regards franchises, Section 11,
Article XII of the Constitution 31
provides that no franchise or right shall
be granted except under the condition
that it shall be subject to amendment,
alteration, or repeal by the Congress
when the common good so requires.
Under Section 11, Article XII of the
Constitution, PAGCOR's franchise is
subjecto amendment, alteration or
repeal by Congress such as the
amendment under Section 1 of R.A. No.
9377. Hence, the provision in Section 1
of R.A. No. 9337, amending Section 27
(c) of R.A. No. 8424 by withdrawing the
exemption of PAGCOR from corporate
income tax, which may affect any
benefits to PAGCOR's transactions with
private parties, is not violative of the
non-impairment
clause
of
the
Constitution.
Petitioner is exempt from the payment
of VAT, because PAGCOR's charter, P.D.
No. 1869, is a special law that grants
petitioner exemption from taxes.

67

G.R. No.
172087.
March 15,
2011

Revenue Code of 1997 by

excluding PAGCOR from the
enumeration of GOCCs that are
exempt
from
payment
of
corporate income tax.

Moreover, the exemption of PAGCOR

from VAT is supported by Section 6 of
R.A. No. 9337, which retained Section
108 (B) (3) of R.A. No. 8424.
It is settled rule 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.

14 United

Airlines vs.
Commissione
r of Internal
Revenue
G.R. No.
178788

International airline, petitioner

United Airlines, filed a claim for
income tax refund. Petitioner
sought to be refunded
the erroneously collected
income tax from in the amount
of P5,028,813.23 on passenger
revenue from tickets sold in the
Philippines, the uplifts of which
did not originate in the
Philippines. The airlines ceased
operation originating form the
Philippines since February 21,
1998.
Court of Tax appeals ruled the
petitioner is not entitled to a
refund because under the NIRC,
income tax on GPB also includes

Whether or not
petitioner is
entitled to a
refund?

Petitioner was correct in averring that

his claim to a refund cannot be subject
to offsetting or, as it claimed the
offsetting to be, a legal compensation
under Sec. 28(A)(3)(a)
The Court have consistently ruled that
there can be no off-setting [or
compensation] of taxes against the
claims that the taxpayer may have
against the government. A person
cannot refuse to pay a tax on the
ground that the government owes him
an amount equal to or greater than the
tax being collected. The collection of a
tax cannot await the results of a lawsuit
against the government. (Francia vs
Intermediate appellate court)

68

gross revenue from carriage of

cargoes from the Philippines.
And upon assessment by the
CTA, it was found out that
petitioner deducted items from
its cargo revenues which should
have entitled the government to
an amount of P 31.43 million,
which is obviously higher than
the amount the petitioner
prayed to be refunded.

The grant of a refund is founded on the

assumption that the tax return is valid,
that is, the facts stated therein are true
and correct. The deficiency
assessment, although not yet final,
created a doubt as to and constitutes a
challenge against the truth and
accuracy of the facts stated in said
return which, by itself and without
unquestionable evidence, cannot be
the basis for the grant of the refund.
(CIR vs CTA)

Petitioner argued that the

petitioners supposed
underpayment cannot offset his
claim to a refund as established
by well-settled jurisprudence.
15 Commissione Smart Communications, Inc.

r of Internal
Revenue vs.
Smart
Communicati
ons, Inc.
G.R. No.
179045-46;
25 August
2010

1. Whether or
not Smart
had the right
to file the
claim for
refund;

(Smart) entered into 3

agreements with Prism
Transactive (Prism), a nonresident Malaysian corporation,
under which Prism would
provide programming and
consultancy services for the
2. Whether
installation of the Service
Smarts
Download Manager (SDM
Agreement) and the Channel
payments to
Manager (CM Agreement), and
Prism
for the installation and
constituted
implementation of Smart Money
business
and Mobile Banking Service SIM

1. Smart, as withholding agent, may file

the claim for refund.
The person entitled to claim a tax
refund is the taxpayer [Sections 204(c)
and 229 of the National Internal
Revenue Code (NIRC)]. However, in
case the taxpayer does not file a claim
for refund, the withholding agent may
file the claim. The CIR was incorrect in
saying that this ruling applies only
when the withholding agent and the
taxpayer are related parties, i.e., where
the withholding agent is a wholly
owned subsidiary of the taxpayer.

69

Applications and Private Text

Platform (SIM Application
Agreement). Prism billed Smart
US$547,822.45. Thinking that
the amount constituted
royalties, Smart withheld from
its payments to Prism the
amount of US$136,955.61 or
P7,008,840.43, representing the
25% royalty tax under the RPMalaysia Tax Treaty.
Within the 2-year period to claim
a refund, Smart filed an
administrative claim with the
Bureau of Internal Revenue (BIR)
for the refund of the withheld
amount (P7,008,840.43). Smart
averred that its payments to
Prism were not royalties but
business profits, as defined in
the RP-Malaysian Tax Treaty,
which were not taxable because
Prism did not have a permanent
establishment in the Philippines.
The CIR countered that Smart,
as a withholding agent was not
a party-in-interest to file the
claim for refund, and even if it
were the proper party, there was
no showing that the payments
to Prism constituted business
profits.

profits or
royalties.

Although such relation between the

taxpayer and the withholding agent is a
factor that increases the latters legal
interest to file a claim for refund, there
is nothing in the decision in said case
to suggest that such relationship is
required or that the lack of such
relation deprives the withholding agent
of the right to file a claim for refund.
Rather, what is clear in the decision is
that a withholding agent has a legal
right to file a claim for refund for two
reasons. First, he is considered a
taxpayer under the NIRC as he is
personally liable for the withholding tax
as well as 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.
Second, as an agent of the taxpayer,
his authority to file the necessary
income tax return and to remit the tax
withheld to the government impliedly
includes the authority to file a claim for
refund and to bring an action for
recovery of such claim.
2. The payments for the CM and SIM
Application Agreements constituted
business profits which were not
taxable under the RP-Malaysia Tax
Treaty. However, the payment for the

70

SDM Agreement constituted taxable

royalty under the same treaty.
Under its agreements with Smart, Prism
had intellectual property right over the
SDM program, but not over the CM and
SIM Application programs as the
proprietary rights of these programs
belonged to Smart. Thus, out of the
payments made to Prism, only the
payment for the SDM program was a
royalty subject to a 25% withholding
tax; the payments for the CM and SIM
Application programs constituted
Prisms non-taxable business profits.
The BIR should, therefore, refund the
erroneously withheld royalty taxes for
the payments pertaining to the CM and
SIM Application Agreements. The BIR
was ordered to issue a Tax Credit
Certificate to Prism in the amount of
P3,989,456.43.
16 Miguel J.

Ossorio
Pension
Foundation,
Inc. vs. CA
and CIR
G.R. No.
162175

Petitioner, a non-stock and nonprofit

corporation,
was
organized for the purpose of
holding
title
to
and
administering the employees
trust
or
retirement
funds
established for the benefit of the
employees of Victorias Milling
Company, Inc. (VMC). Petitioner,

Whether
petitioner or the
Employees
Trust Fund is
exempt from
tax and thus
entitled to
refund

Petitioner is a corporation that

was
formed
to
administer
the
Employees' Trust Fund. Petitioner
invested P5,504,748.25 of the funds of
the Employees' Trust Fund to purchase
the MBP lot. When the MBP lot was
sold, the gross income of the
Employees Trust Fund from the sale of
the MBP lot was P40,500,000. The 7.5%

71

as trustee, claims that the

income
earned
by
the
Employees Trust Fund is tax
exempt under Section 53(b) of
the National Internal Revenue
Code (Tax Code).
Petitioner decided to invest part
of the Employees Trust Fund to
purchase a lot in the Madrigal
Business Park (MBP lot) in
Alabang, Muntinlupa. Petitioner
claims that since it needed
funds to pay the retirement and
pension
benefits
of
VMC
employees and to reimburse
advances
made
by
VMC,
petitioners Board of Trustees
authorized the sale of its share
in the MBP lot. VMC negotiated
the sale of the MBP lot with
Metropolitan Bank and Trust
Company, Inc. (Metrobank).
Metrobank,
as
withholding
agent, paid the Bureau of
Internal
Revenue
(BIR)
P6,125,625 as withholding tax
on the sale of real property.
Petitioner claims that it is
a co-owner of the MBP lot as
trustee of the Employees Trust

withholding tax of P3,037,500 and

brokers commission were deducted
from the proceeds.
It is evident that tax-exemption is
likewise to be enjoyed by the income of
the pension trust. Otherwise, taxation
of those earnings would result in a
diminution of accumulated income and
reduce whatever the trust beneficiaries
would receive out of the trust fund. This
would run afoul of the very intendment
of the law. Indeed, the petitioner is
correct in its adherence to the clear
ruling laid by the Supreme Court way
back in 1992 in the case of
Commissioner of Internal Revenue vs.
The Honorable Court of Appeals, The
Court of Tax Appeals and GCL
Retirement Plan, 207 SCRA 487 at page
496, supra, wherein it was succinctly
held:
There can be no denying either
that the final withholding tax is
collected from income in respect of
which employees trusts are declared
exempt (Sec. 56(b), now 53(b), Tax
Code).
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

72

Fund, based on the notarized

Memorandum
of
Agreement
presented before the appellate
courts.
Petitioner
further
contends that there is no
dispute that the Employees
Trust Fund is exempt from
income tax. Since petitioner, as
trustee, purchased 49.59% of
the MBP lot using funds of the
Employees
Trust
Fund,
petitioner asserts that the
Employees Trust Fund's 49.59%
share in the income tax paid or
P3,037,697.40
should
be
refunded.

source. If an employees trust like the

GCL enjoys a tax-exempt status from
income, we see no logic in withholding
a certain percentage of that income
which it is not supposed to pay in the
first place.
Similarly, the income of the trust
funds involved herein is exempt from
the payment of final withholding taxes.
Since petitioner has proven that the
income from the sale of the MBP lot
came from an investment by the
Employees' Trust Fund, petitioner, as
trustee of the Employees Trust Fund, is
entitled to claim the tax refund of
P3,037,500 which was erroneously paid
in the sale of the MBP lot.

PART 4
Corporate Income Taxation

Case Title

Summary

Issue/s

Officemetro
Philippines,
Inc.
vs
Commissione
r of Internal
Revenue

In 2006, respondent CIR

ordered the examination of
petitioners books for tax year
2005. After such examination,
it issued a deficiency
assessment for expanded
withholding tax (EWT), final

WON petitioner is
liable for the
deficiency
assessments and
if it is, are they
entirely correct.

Ruling

Notes/Remark
s

For the EWT, the Court agrees with

petitioner that condominium dues billed
to the company are not subject to EWT.
The BIR has held a number of times that
association/condominium dues,
membership fees, and other
assessment/charges collected from its

73

CTA Case No. withholding of VAT (FWVAT),

8382, June 3, final withholding tax (FWT)
2014
and a compromise penalty.

members are not included in the

corporations gross income as these are
held in trust and used for administrative
purposes for the common benefit of the
members. Thus they are not subject to
income tax and withholding tax.

The current petition for review

was thus filed by petitioner
questioning the assessments.
Respondent contends that
petitioner failed to prove with
documentary evidence that
the Service Agreement with
Regus Centres Pty. Ltd and
petitioner is for services
performed outside the
Philippines.
2

CIR
vs
Pilipinas
Shell
Petroleum
Corporation
G.R. No.
188497,
February 19,
2104

Shell sold petroleum products

to international carriers who
are excise tax exempt. On
such sale, the taxing authority
imposed excise taxes.

Petitioner failed to prove that the services

in question were performed by its nonresident foreign corporation counterpart.
Thus, it is liable for the deficiency
assessment since it failed to prove
exemption from coverage.
The CTA only partially modified the
assessment of the BIR.
Whether a
manufacturer or
producer of
petroleum
products is
exempt for
payment of
excise tax on
such products if
sold to
international
carriers?

Yes!
~ international air carriers, tax exempt chicago convention; this exemption on
allow international carriers to purchase
petroleum products without excise tax as
component of price fixed be seller.
In denying the domestic
manufacturers/sellers claim for refund of
the excise taxes they already paid on
petroleum products sold to international
carriers in their original ruling, the court
now says, (T)he shifting of the tax
burden by manufacturerssellers is a
business prerogative resulting from the

Excise tax taxes applicable

to certain
specific goods or
articles
manufactured or
produced in the
philippines for
domestic sales
or consumption
or any
disposition and
to things
imported into
philippines;
imposed in

74

collective impact of market forces, and,

it is erroneous to construe the NIRCs
prohibition of domestic manufacturer to
pass on to international carriers the
excise tax it had paid on petroleum
products only as a prohibition against the
shifting by the manufacturerssellers of
petroleum products of the tax burden to
international carriers, for such
construction will deprive the
manufacturerssellers of their business
prerogative to determine the prices at
which they can sell their products.

addition to VaT;
indirect tax
( subject to tax
exemptions
generated by
law to buyers)
Excise tax must
be paid upon
withdrawal from
the place of
production

Thus in their motion for reconsideration.

Shell manufacturer, as the statutory
taxpayer who is directly liable to pay the
excise tax on its petroleum products, is
entitled to a refund or credit of the excise
taxes it paid for petroleum products sold
to international carriers, the latter having
been granted exemption from the
payment of said excise tax
3

Deutsche
Bank-AG
Manila
Branch
vs
CIR
G.R. No.
188550,
August 19,

In accordance with Section 28

(A) (5) of the National Internal
Revenue Code (NIRC) of 1997,
petitioner withheld and
remitted to respondent on 21
October 2003 the amount of
PHP67,688,553.51,
representing fifteen percent
(15%) branch profit

Whether or not
the failure to
strictly comply
with RMO No. 12000 will deprive
persons or
corporations of
the benefit of a
tax treaty.

No. The denial of the availment of tax

relief for the failure of a taxpayer to apply
within the prescribed period under the
administrative issuance would impair the
value of the tax treaty. At most, the
application for a tax treaty relief from the
BIR should merely operate to confirm the
entitlement of the taxpayer to the relief.
"A state that has contracted valid

75

2013

remittance tax (BPRT) on its

regular banking unit (RBU) net
income remitted to Deutsche
Bank Germany (DB Germany)
for 2002 and prior taxable
years. Believing that it made
an overpayment of the BPRT,
petitioner filed with the BIR
Large Taxpayers Assessment
and Investigation Division on
4 October 2005 an
administrative claim for
refund or issuance of its tax
credit certificate in the total
amount of PHP22,562,851.17.
On the same date, petitioner
requested from the
International Tax Affairs
Division (ITAD) a confirmation
of its entitlement to the
preferential tax rate of 10%
under the RP-Germany Tax
Treaty. Alleging the inaction
of the BIR on its
administrative claim,
petitioner filed a Petition for
Review with the CTA on 18
October 2005. Petitioner
reiterated its claim for the
refund or issuance of its tax
credit certificate for the
amount of PHP22,562,851.17
representing the alleged

international obligations is bound to make

in its legislations those modifications that
may be necessary to ensure the
fulfillment of the obligations undertaken."
20 Thus, laws and issuances must ensure
that the reliefs granted under tax treaties
are accorded to the parties entitled
thereto. The obligation to comply with a
tax treaty must take precedence over the
objective of RMO No. 1-2000.|||It is
significant to emphasize that petitioner
applied though belatedly for a tax
treaty relief, in substantial compliance
with RMO No. 1-2000. Clearly, there is no
reason to deprive petitioner of the benefit
of a preferential tax rate of 10% BPRT in
accordance with the RP-Germany Tax
Treaty.

76

excess BPRT paid on branch

profits remittance to DB
Germany.
4

CIR
vs
General
Foods
(Phils.), Inc.
G.R. No.
143672, April
24, 2003

General Foods (Phils), which is

engaged in the manufacture
of Tang, Calumet and
Kool-Aid, filed its income tax
return for the fiscal year
ending February 1985 and
claimed as deduction, among
other business expenses,
P9,461,246 for media
advertising for Tang.
The Commissioner disallowed
50% of the deduction claimed
and assessed deficiency
income taxes of
P2,635,141.42 against
General Foods, prompting the
latter to file an MR which was
denied.
General Foods later on filed a
petition for review at CA,
which reversed and set aside
an earlier decision by CTA
dismissing the companys
appeal.

WON the subject

media
advertising
expense for
Tang was
ordinary and
necessary
expense fully
deductible under
the NIRC

No. Tax exemptions must be construed in

stricissimi juris against the taxpayer and
liberally in favor of the taxing authority,
and he who claims an exemption must be
able to justify his claim by the clearest
grant of organic or statute law.
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.
The Court finds 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

77

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.
The companys media advertising
expense for the promotion of a single
product is doubtlessly unreasonable
considering it comprises almost one-half
of the companys entire claim for
marketing expenses for that year under
review. Petition granted, judgment
reversed and set aside.
5

The Late Lino

Gutierrez by
Andrea C.
vda. De
Gutierrez et.
al.
vs

The late Lino Gutierrez was

primarily engaed in the
business of leasing real
property for which he paid
real estate broker's privilege
tax. Subsequently, the
Commissioner of Internal

1. WON the
taxpayer's
aforementioned
claims for
deduction are
proper and
allowable.

1. Yes, provided such expenses meet the

requirements. The said claims for
deduction are proper and allowable if
such expenses are: a) ordinary and
necessary, b) paid or incurred within the
taxable year and c) paid or incurred in
carrying on a trade or business.

78

Collector of
Internal
Revenue
G.R. No. I19537, May
20, 1965

Revenue assessed Gutierrez a

deficiency income tax
amounting to P11,841.00
which was caused by the
disallowance of the
deductions from gross income
representing depreciation
expenses allegedly incurred
by Gutierrez in carrying on his
business and the addition to
gross income of receipts
which he did not report in his
income tax returns. In sum,
the disallowed business
expenses consisted of:
1. Transportation expenses
incurred to attend the
funeral of his friends
2. Procurement and
installation of an iron door
3. Cost of furniture given by
the taxpayer in furtherance
of a business transaction
4. Membership fees in
organizations established
by those engaged in the
real estate trade
5. Car expenses, salary of his
driver and car depreciation
6. Repairing taxpayers rental
apartments
7. Litigation expenses

2. WON real
properties used
in the trade or
business of the
taxpayer are
considered as
ordinary assets.

Of those enumerated, what were

considered as deductible are the
following:
1) The cost of furniture given by the
taxpayer as commission in furtherance of
a business transaction and the expenses
incurred in attending the National
Convention of Filipino Businessmen,
luncheon meeting and cruise to
Corregidor of the Homeowners'
Association. According to the Supreme
Court, commissions given in consideration
for bringing about a profitable transaction
are part of the cost of the business
transaction and are deductible.
2) Membership and activities in
connection with the real estate trade
were solely to enhance his business.
Hence, the expenses incurred thereunder
are deductible as ordinary and necessary
business expenses.
3) Only of the car expenses, salary of
his driver and car depreciation are
allowed as deduction since according to
the evidence, the taxpayer's car was
utilized both for personal and business
needs.
4) The expenses used to repair the

79

8. Depreciation of Gutierrez
residence
9. Fines and penalties for late
payment of taxes
10. Alms given to in indigent
family and a donation
consisting of officers
jewels and aprons to Biakna-Bato Lodge No. 7

taxpayer's rental apartments are

deductible as necessary expenditures for
the maintenance of the taxpayer's
business as they did not increase the
value of such apartments or prolong their
life. They merely kept the apartments in
an ordinary operating condition.
5). Litigation expenses which were
defrayed by Gutierrez to collect
apartment rentals and to eject delinquent
tenants are considered as ordinary and
necessary expenses in pursuing his
business. It is routinary and necessary for
one in the leasing business to collect
rentals and to eject tenants who refuse to
pay their accounts.Hence, Lino Gutirriez
and/or his heirs are ordered to pay the
total sum of P11,929.00 as deficiency
income tax for years 1951-1954 plus the
statutory penalties in case of deliquency.
2. Yes. Before Section 34 was amended by
RA 82 in 1947, it considered the real
property used in the trade or business of
taxpayer as capital asset. However, with
the passage of RA 82, Congress classified
such real properties as ordinary assets.
This has the effect of withdrawing the
gain or loss from the sale or exchange of
real property used in the trade or
business of the taxpayer from the
operation of the capital gains and losses

80

provisions. As such, it is logical that the

gain or loss from the sale or exchange of
such real propeties be treated as ordinary
income or loss.
6

Commissione
r of Internal
Revenue
vs
Isabela
Cultural
Corporation
G.R. No.
172231,
February 12,
2007

Isabela Cultural Corporation

(ICC), a domestic corporation
received
an assessment notice for
deficiency income tax and
expanded withholding tax
from BIR. It arose from the
disallowance of ICCs claimed
expense for professional and
security services paid by ICC;
as well as the alleged
understatement of interest
income on the
three promissory notes due
from Realty Investment Inc.
The deficiency
expanded withholding tax was
allegedly due to the failure of
ICC to withhold 1% ewithholding tax on its claimed
deduction for security
services.
ICC sought a reconsideration
of the assessments. Having
received a final notice
of assessment, it brought the
case to CTA, which held that it

Whether or not
the expenses for
professional and
security services
are deductible.

No. One of the requisites for the

deductibility of ordinary and necessary
expenses is that it must have been paid
or incurred during the taxable year. This
requisite is dependent on the method of
accounting of the taxpayer. In the case at
bar, ICC is using theaccrual method of
accounting. Hence, under this method, an
expense is recognized when it is incurred.
Under a Revenue Audit Memorandum,
when the method of accounting is
accrual, expenses not being claimed as
deductions by a taxpayer in the current
year when they are incurred cannot be
claimed in the succeeding year.
The accrual of income and expense is
permitted when the all-events test has
been met. This test requires:
1) fixing of a right to income or
liability to pay; and
2) the availability of the
reasonable accurate determination
of such income or liability.
The test does not demand that the
amount of income or liability be known
absolutely, only that a taxpayer has at its

81

is unappealable, since the

final notice is not a decision.
CTAs ruling was reversed by
CA, which was sustained by
SC, and case was remanded
to CTA. CTA rendered a
decision in favor of ICC. It
ruled that the deductions for
professional and security
services were properly
claimed, it said that even if
services were rendered in
1984 or 1985, the amount is
not yet determined at that
time. Hence it is a proper
deduction in 1986.
H.
This case stemmed from a
Tambunting
pre-assessment issued by CIR
Pawnshop,
against Tambunting for among
Inc.
others, a deficiency
vs
documentary stamp tax of P
Commissione 50, 910.Thereafter, the CIR
r of Internal
issued an assessment notice
Revenue
with the corresponding
G.R. No.
demand letters for the
173373, July payment of the DST and the
29, 2013
corresponding compromise
penalty for taxable year 1997.
Tambunting filed its written
protest to the assessment
notice alleging that it was not
subject to documentary

disposal the information necessary to

compute the amount with reasonable
accuracy.
From the nature of the claimed
deductions and the span of time during
which the firm was retained, ICC can be
expected to have reasonably known the
retainer fees charged by the firm. They
cannot give as an excuse the delayed
billing, since it could have inquired into
the amount of their obligation and
reasonably determine the amount.

WHETHER THE
PETITIONER,
APAWNSHOP, IS
SUBJECT TO DST
BASED ON
ITSPAWN
TICKETS

Petitioner contends that it is the

document evidencing a pledge of
personal property which is subject to
the DST. Petitioner further contends that
the DST is imposed on the documents
issued, not the transactions so had or
accomplished.
It insists that the document to be taxed
under the transaction contemplated
should be the pledge agreement, if any is
issued, not the pawn ticket.
On the other hand, commissioner
contented that a documentary stamp tax
shall be collected on every pledge of
personal property as a security for the
fulfillment of the contract of loan. Since

82

stamp tax under Section

195 of the National Internal
Revenue Code (NIRC) because
documentary stamp taxes
were applicable only to
pledge contracts, and the
pawnshop business did not
involve contracts of pledge.
Tambunting filed a petition for
review when the protest it
filed with the CIR was not
acted upon.
The court rendered
a decision stating that
petitioner is not subject to
DST.

the transactions in a pawnshop business

partake of the nature of pledge
transactions, then pawn transactions
evidenced by pawn tickets, are subject to
documentary stamp taxes.
Petitioners contention is devoid of merit.
True, the pawn ticket is neither a security
nor a printed evidence of
indebtedness. But, precisely being a
receipt for a pawn, it documents the
pledge. A pledge is a real contract, hence,
it is necessary in order to constitute the
contract of pledge, that the thing pledged
be placed in the possession of the
creditor, or of a third person by common
agreement.
Consequently, the issuance of the pawn
ticket by the pawnshop means that the
thing pledged has already been placed in
its possession and that the pledge has
been constituted.Section 195 of the National Internal
Revenue Code (NIRC) imposes a DST
One very mortgage or pledge of
lands, estate, or property, real or
personal, heritable or movable,
whatsoever, where the same shall be
made as a security for the payment
of any definite and certain sum of

83

money lent
All pledges are subject to DST, unless
there is a law exempting them in clear
and categorical language.
The law imposes DST on documents
issued in respect of the specified
transactions, such as pledge, and not only
on papers evidencing
indebtedness. Therefore, a pawn ticket,
being issued in respect of a pledge
transaction, is subject to documentary
stamp tax.
8

Plaridel
Surety and
Insurance
Company
vs
Commissione
r of Internal
Revenue
G.R. No. L21520,
December
11, 1967

Petitioner PSIC as surety and

Constancio San Jose, as
principal solidarily executed a
performance bond in the
penal sum of P30,600.00 in
favor of the P. L. Galang
Machinery Co., Inc. Petitioner
likewise required Jose and one
Ramon Cuervo to execute an
indemnity agreement
obligating themselves,
solidarily, to indemnify
petitioner for whatever
liability it may incur by reason
of said performance bond.
San Jose failed to perform its
obligation of delivering logs to
Galang Machinery, the latter

Whether the
entire
P44,490.00 paid
by it was or was
not a deductible
loss.

NO. Loss is deductible only in the taxable

year it actually happens or is sustained.
However, if it is compensable by
insurance or otherwise, deduction for the
loss suffered is postponed to a
subsequent year, which, to be precise, is
that year in which it appears that no
compensation at all can be had, or that
there is a remaining or net loss, i.e., no
full compensation. The rule is that loss
deduction will be denied if there is a
measurable right to compensation for the
loss, with ultimate collection reasonably
clear. So where there is reasonable
ground for reimbursement, the taxpayer
must seek his redress and may not secure
a loss deduction until he establishes that
no recovery may be had. In other words,

84

sued on the performance

bond. On October 1, 1952, the
Court of First Instance
adjudged Jose and petitioner
liable; it also directed Jose and
Cuervo to reimburse
petitioner for whatever
amount it would pay to
Galang Machinery. CA
affirmed. The same was
affirmed by the SC with slight
modification of the award on
damages.
On February 19 and March 20,
1957, petitioner effected
payment in favor of
Machinery in the total sum of
P44,490.00 pursuant to the
final decision. In its income
tax return for the year 1957,
petitioner claimed the said
amount of P44,490.00 as
deductible loss from its gross
income and, accordingly, paid
the amount of P136.00 as its
income tax for 1957.

as the Tax Court put it, the taxpayer

(petitioner) must exhaust his remedies
first to recover or reduce his loss. It is on
record that petitioner had not exhausted
its remedies, especially against Ramon
Cuervo who was solidarily liable with San
Jose for reimbursement to it. Thus, it was
too premature for petitioner to claim a
loss deduction. But assuming that there
was no reasonable expectation of
recovery, still no loss deduction can be
had. Sec. 30 (d) (2) of the Tax Code(old
tax code) requires a charge-of as one of
the conditions for loss deduction:
In the case of a corporation, all
losses actually sustained and
charged-of within the taxable
year and not compensated for by
insurance or otherwise. (Emphasis
supplied)
Petitioner, who had the burden of
proof failed to adduce evidence that there
was a charge-off in connection with the
P44,490.00or P30,600.00 which it
paid to Galang Machinery.

The Commissioner of Revenue

disallowed the claimed
deduction of P44,490.00 and
assessed against petitioner
the sum of P8,898.00, plus

85

interest, as deficiency income

tax for the year 1957.
Petitioner filed its protest
which was denied.
Whereupon, appeal was taken
to the Court, petitioner
insisting that the P44,490.00
which it paid to Machinery
was a deductible loss.

Philippine
Refining
Company vs
CA, CTA, and
CIR
G.R. No.
118794, May
8, 1996

The Tax Court dismissed the

appeal, ruling that petitioner
was duly compensated for
otherwise than by insurance
thru the mortgages in its
favor executed by Jose and
Cuervo and it had not yet
exhausted all its available
remedies, especially as
against Cuervo, to minimize
its loss. When its motion to
reconsider was denied,
petitioner elevated the
present appeal.
Philippine Refining Company
(PRC) was assessed by
respondent Commissioner of
Internal Revenue to pay a
deficiency tax for the year
1985. The assessment was
timely protested by PRC, on
the ground that it was based
on the erroneous

WON the CA was

correct in
affirming the CTA
decision in
disallowing PRCs
claim of
deduction as bad
debts of several
accounts

YES.
In determining the "worthlessness of a
debt" 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

86

disallowances of "bad debts"

on several accounts although
the same are both allowable
and legal deductions.

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.
In this case, the only evidentiary support
given by PRC for its aforesaid claimed
deductions was the explanation or
justification posited by its financial
adviser or accountant. 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.

87

10 China

Banking
Corporation
vs
CA, CIR and
CTA
G.R. No.
125508, July
19, 2000

China Banking Corporation

(CBC) made an equity
investment in First CBC
Capital (Asia) Ltd., a
Hongkong subsidiary engaged
in financing and investment
with deposit-taking
function. In the course of the
regular examination of the
financial books and
investment portfolios of CBC
by Bangko Sentral, it was
shown that First CBC Capital
(Asia), Ltd., has become
insolvent. With the approval
of Bangko Sentral, CBC writeoff as being worthless its
investment in First CBC
Capital (Asia), Ltd. and
treated it as a bad debt or as
an ordinary loss deductible
from its gross income.
However, the Commissioner
of Internal Revenue (CIR)
disallowed the deduction and
assessed petitioner for
income tax deficiency. In
assuming that the securities
had indeed become
worthless, CIR held the view
that they should then be
classified as "capital loss,"
and not as a bad debt

Whether or not
the equity
investment made
in First CBC
Capital, after
becoming
worthless, be
deducted from
gross income.

NO.

At all events, it
may not be
An equity investment is a capital, not
amiss to once
ordinary, asset of the investor the sale or again stress that
exchange of which results in either a
the basic rule is
capital gain or a capital loss.
still that
any capital
A capital gain or a capital loss normally
loss can be
requires the concurrence of two
deducted only
conditions for it to result:
from capital
gains under
(1) There is a sale or exchange; and
Section 33(c) of
(2) the thing sold or exchanged is a
the NIRC.
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. 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.
Section 29(d)(4)(A), of the NIRC
expresses:

88

expense there being no

indebtedness to speak of
between petitioner and its
subsidiary.

"(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 (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.
In sum (a) The equity investment in shares of
stock held by CBC in its Hongkong
subsidiary, the First CBC Capital (Asia),
Ltd., is not an indebtedness, and it is
a capital, not an ordinary, asset.
(b) Assuming that the equity investment
of CBC has indeed become "worthless,"
the loss sustained is a capital, not an
ordinary, loss.[
(c) The capital loss sustained by CBC can
only be deducted from capital gains if any

89

derived by it during the same taxable

year that the securities have become
"worthless."
11 Commissione RA No. 7432, otherwise known May the 20%

r of Internal
Revenue
vs
Bicolandia
Drug
Corporation
G.R. No.
148083, July
21, 2006

Yes. Revenue Regulations No. 2-94 is null

as An Act to Maximize the
sales discount be and void for failing to conform to the law
Contribution of Senior Citizens claimed as a tax it sought to implement. Revenue
to Nation Building, Grant
credit, instead of Regulations No. 2-94 is still subordinate to
Benefits and Special Privileges a deduction from RA No. 7432, and in cases of conflict, the
and For Other Purposes,
gross income or implementing rule will not prevail over
granted senior citizens the
gross sales?
the law it seeks to implement.
privilege of obtaining a 20%
discount from all
But even as this particular case is decided
establishments relative to the
in this manner, it must be noted that the
use of transportation services,
concerns of petitioner have been
hotels and similar lodging
addressed. RA No. 7432 has been
establishments, restaurants,
amended by RA No. 9257, the Expanded
recreation centers and
Senior Citizens Act of 2003. In this, the
purchase of medicines
term tax credit is no longer used.Under its
anywhere in the country. The
IRR, Revenue Regulations No. 4-2006,
law provided that private
only the actual amount of the discount
establishments giving
granted not exceeding 20% of the gross
discount to senior citizens
selling price can be deducted from the
may claim the cost astax
gross income, net of VAT, if applicable, for
credit. In compliance with the
income tax purposes, and from gross
law, BIR issued Revenue
sales or receipts for VAT or other
Regulations No. 2-94 defining
percentage taxes. Under the new law,
tax credit as the amount
there is no tax credit to speak of,
representing the 20%
only deductions.
discountwhich discount
shall be deducted by said
As it was RA No. 7432 in force at the time
establishments from their
this case arose, this law controls the
gross income for tax purposes
result in this particular case, for which

90

and from their gross sales for

VAT or other percentage tax
purposes.

reason respondent is entitled to its claim

of tax credit.

Respondent, a corporation
engaged in the business of
retailing pharmaceutical
products under the business
style of Mercury Drug,
granted the 20% sales
discount to qualified senior
citizens purchasing their
medicines, treating this
discount as deduction from its
gross income. Respondent
filed its 1995 Corporate
Annual Income Tax Return
declaring a net loss position
with nil income tax liability.
Respondent filed a claim for
tax refund or credit with BIR
because its net losses for the
year 1995 prevented it from
benefitting from the
treatment of sales discount as
a deduction from gross sales
during the taxable year. It
alleged that petitioner erred
in treating the 20% sales
discount given to senior
citizens as deductions from
gross income for tax purposes
rather than as a tax

91

credit.Petitioner argues that

the tax credit is in the nature
of a tax refund and should be
treated as a return for tax
payments erroneously or
excessively assessed against
a taxpayer, in line with Sec.
204 (c) of NIRC. Petitioner
claims that there should
first be payment of the tax
before tax credit can be
claimed. To do
otherwisewould result in RA
No. 7432 impliedly repealing
Sec. 204 (c) of NIRC.
12 Kuenzle &

Petitioner filed its income tax

Streiff, Inc.
return for the years 1950,
vs
1951 and 1952 and petitioner
The Collector deducted from its gross
of Internal
income certain items
Revenue
representing salaries,
G.R. Nos. Ldirectors' fees and bonuses of
12010 and L- its non-resident president and
12113,
vice-president; bonuses of its
October 20,
resident officers and
1959
employees; and interests on
earned but unpaid salaries
and bonuses of its officers and
employees. The income tax
computed in accordance with
these returns was duly paid
by petitioner.

1. WoN bonuses
are deductible
2. WoN interests
are deductible

1. It would appear that all ordinary and

necessary expenses paid or incurred in
carrying on a trade or business, including
a reasonable allowance for salaries or
other compensation for personal services
actually rendered, may be allowed as
deductions in computing the taxable
income during the year. It likewise
appears that the amount of interests paid
within the taxable year on any
indebtedness may also be deducted from
the gross income. Here it is admitted that
the bonuses paid to the officers and
employees of petitioner, whether resident
or non-resident, were paid to them as
additional compensation for personal
services actually rendered and as such

92

The CIR, after disallowing the

deductions of the items
representing director's fees,
salaries and bonuses of
petitioner's non-resident
president and vice-president;
the bonus participation of
certain resident officers and
employees; and the interests
on earned but unpaid salaries
and bonuses, respondent
assessed and demanded from
petitioner the payment of
deficiency income taxes in the
sums of P26,370.00,
P53,865.00 and P44,112.00
for the years 1950, 1951 and
1952, respectively. However
the respondent modified the
same by allowing as
deductible all items
comprising directors' fees and
salaries of the non-resident
president and vice-president,
but disallowing the bonuses
insofar as they exceed the
salaries of the recipients, as
well as the interests on
earned but unpaid salaries
and bonuses.

can be considered as ordinary and

necessary expenses incurred in the
business within the meaning of the law,
the only question in dispute being how
much of said bonuses may be considered
reasonable in order that it may be
allowed as deduction.
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. The condition
precedents 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."
There is no dispute that these items
accrued on unclaimed salaries and bonus
participation of shareholders and
employees. Under the law, in order that
interest may be deductible, it must be
paid "on indebtedness" (Section 30, (b)(1)

93

of the National Internal Revenue Code). It

is therefore imperative to show that there
is an existing indebtedness which may be
subjected to the payment of interest.
Here the items involved are unclaimed
salaries and bonus participation which in
our opinion cannot constitute
indebtedness within the meaning of the
law
13 Paper

Industries
Corporation
of the
Philippines
(PICOP)
vs
CA, CIR, and
CTA
G.R. Nos.
106949-50,
December 1,
1995

In 1969, 1972 and 1977, Picop

obtained loans from foreign
creditors in order to finance
the purchase of machinery
and equipment needed for its
operations. In its 1977 Income
Tax Return, Picop claimed
interest payments made in
1977, amounting to
P42,840,131.00, on these
loans as a deduction from its
1977 gross income. The CIR
disallowed this deduction
upon the ground that,
because the loans had been
incurred for the purchase of
machinery and equipment,
the interest payments on
those loans should have been
capitalized instead and
claimed as a depreciation
deduction taking into account
the adjusted basis of the

- Whether or not
PICOP is entitled
to deductions
against income
interest
payments on
loans for the
purchase of
machinery and
equipment.

- SC started by noting that interest

payments on loans incurred by a taxpayer
(whether BOI-registered or not) are
allowed by the NIRC as deductions
against the taxpayer's gross income. In
the instant case, the CIR does not dispute
that the interest payments were made by
Picop on loans incurred in connection with
the carrying on of the registered
operations of Picop neither does the CIR
deny that such interest payments were
- Whether or not legally due and demandable under the
PICOP may claim terms of such loans, and in fact paid by
RPPMs net
Picop during the tax year 1977.
operating loss as
a deduction
The CIR has been unable to point to any
against its 1977 provision of the 1977 Tax Code or any
gross income.
other statute that requires the
disallowance of the interest payments
made by Picop . The CIR invokes Section
79 of Revenue Regulations No. 2 but the
SC ruled that said provision is to be
construed as referring to the so called

94

machinery and equipment

(original acquisition cost plus
interest charges) over the
useful life of such assets. Both
the CTA and the Court of
Appeals sustained the
position of Picop and held that
the interest deduction claimed
by Picop was proper and
allowable. In the instant
Petition, the CIR insists on its
original position.
On the other hand, on 18
January 1977, Picop entered
into a merger agreement with
the Rustan Pulp and Paper
Mills, Inc. ("RPPM") and
Rustan Manufacturing
Corporation ("RMC"). Under
this agreement, the rights,
properties, privileges, powers
and franchises of RPPM and
RMC were to be transferred,
assigned and conveyed to
Picop as the surviving
corporation. Immediately
before merger effective date,
RPPM had over preceding
years accumulated losses in
the total amount of
P81,159,904.00. In its 1977
Income Tax Return, Picop

"theoretical interest," that is to say,

interest "calculated" or computed (and
not incurred or paid) for the purpose of
determining the "opportunity cost" of
investing funds in a given business. We
have already noted that our 1977 NIRC
does not prohibit the deduction of interest
on a loan incurred for acquiring
machinery and equipment. Neither does
our 1977 NIRC compel the capitalization
of interest payments on such a loan. The
1977 Tax Code is simply silent on a
taxpayer's right to elect one or the other
tax treatment of such interest payments.
Accordingly, the general rule that interest
payments on a legally demandable loan
are deductible from gross income must be
applied.
The CIR argues finally that to allow Picop
to deduct its interest payments against its
gross income would be to encourage
fraudulent claims to double deductions
from gross income. The Court is not
persuaded. So far as the records of the
instant cases show, Picop has not claimed
to be entitled to double deduction of its
1977 interest payments. The CIR has
neither alleged nor proved that Picop had
previously adjusted its cost basis for the
machinery and equipment purchased with
the loan proceeds by capitalizing the
interest payments here involved. The

95

claimed P44,196,106.00 of
RPPM's accumulated losses as
a deduction against Picop's
1977 gross income. The CIR
disallowed all the deductions
claimed on the basis that
RPPM's losses were incurred
by "another taxpayer," RPPM,
and not by Picop in
connection with Picop's own
registered operations. The CIR
took the view that Picop,
RPPM and RMC were merged
into one (1) corporate
personality only on 12 January
1978, upon approval of the
merger agreement by the BOI.

Court will not assume that the CIR would

be unable or unwilling to disallow "a
double deduction" should Picop, having
deducted its interest cost from its gross
income, also attempt subsequently to
adjust upward the cost basis of the
machinery and equipment purchased and
claim, e.g., increased deductions for
depreciation.
- The CTA and the Court of Appeals
allowed the offsetting of RPPM's
accumulated operating losses against
Picop's 1977 gross income, basically
because towards the end of the taxable
year 1977, upon the arrival of the
effective date of merger, only one (1)
corporation, Picop, remained. The losses
suffered by RPPM's registered operations
and the gross income generated by
Picop's own registered operations now
came under one and the same corporate
roof. We consider that this circumstance
relates much more to form than to
substance. We do not believe that that
single purely technical factor is enough to
authorize and justify the deduction
claimed by Picop. Picop's claim for
deduction is not only bereft of statutory
basis; it does violence to the legislative
intent which animates the tax incentive
granted by Section 7 (c) of R.A. No. 5186.
In granting the extraordinary privilege

96

and incentive of a net operating loss

carry-over to BOI-registered pioneer
enterprises, the legislature could not have
intended to require the Republic to forego
tax revenues in order to benefit a
corporation which had run no risks and
suffered no losses, but had merely
purchased another's losses. We conclude
that the deduction claimed by Picop in the
amount of P44,196,106.00 in its 1977
Income Tax Return must be disallowed.
14 Hospital de

In a letter dated January 15,

San Juan de
1959, the Commissioner of
Dios, Inc.
Internal Revenue assessed
vs
and demanded from the
Commissione petitioner, Hospital De San
r of Internal
Juan De Dios, Inc., payment of
Revenue
P51,462 as deficiency income
G.R. No. Ltaxes for 1952 to 1955. The
31305, May
petitioner protested against
10, 1990
the assessment and
requested the Commissioner
to cancel and withdraw it.
After reviewing, Commissioner
advised petitioner that the
deficiency income tax
assessment against it was
reduced to only P16,852.41
but the petitioner thru its
auditors insisted to have the
revised assessment cancelled
but the same was denied.

WON the
expenses
incurred by the
petitioner for
handling its
funds or income
consisting solely
of dividends and
interests, were
not expenses
incurred in
"carrying on any
trade or
business," hence,
not deductible as
business or
administrative
expenses.

The Court of Tax Appeals found that the

interests and dividends received by the
petitioner "were merely incidental income
to petitioner's main activity, which is the
operation of its hospital and nursing
schools the conclusion is inevitable that
petitioner's activities never went beyond
that of a passive investor, which under
existing jurisprudence do not come within
the purview of carrying on any 'trade or
business'. The fact that petitioner was
assessed a real estate dealer's fixed tax
of P640 on its rental income does not
alter its status as a charitable, non-stock,
non-profit corporation. Finding no
reversible error in the decision of the CTA,
the same is affirmed in toto.

97

Petitioner sought a review of

the assessment by the Court
of Tax Appeals. The CTA found
out that petitioner failed to
establish by competent proof
that its receipt of interests
and dividends constituted the
carrying on of a "trade or
business" so as to warrant the
deductibility of the expenses
incurred in their realization.
No evidence whatsoever was
presented by petitioner to
show how it handled its
investment, the manner it
bought, sold and reinvested
its securities, how it made
decisions, and whether it
consulted brokers, investment
or statistical services. Neither
is there any showing of the
extent of its activities in
stocks or bonds, and
participation, if any, direct or
indirect, in the management
of the corporations where it
made investments. In effect,
there is total absence of any
indication of a business-like
management or operation of
its interests and dividends.
15 Commissione The case involves Mercury

WON the 20%

The discount is treated as a tax credit

98

r of Internal
Revenue
vs
Central
Luzon Drug
Corporation
G.R. No.
159610, June
12, 2008

Drugs (Central Luzon Drug

Corporation) claim for tax
refund arising from an alleged
erroneous interpretation of
the Senior Citizens Act. While
complying with RR 2-94 in
computing its income tax
liability for taxable year 1997,
respondent filed such return
under protest because of its
allegation that RR 2-94, which
provides that the sales
discount should be treated as
a deduction from the gross
income or sales, is without
force and effect for being
inconsistent with RA 7432
which provides for a tax credit
treatment for the senior
citizens discount.

16 Commissione Involves a Petition for Review

senior citizens
sales discount
should be treated
as a tax credit to
be deducted
from the income
tax due or as a
mere deduction
from gross
income or gross
sales.

WON PAL is
r of Internal
on Certiorari seeking to
required to pay
Revenue
reverse and set aside the
MCIT under the
vs
Decision and Resolution of the income tax
Philippine
Court of Tax Appeals (CTA) En provision of the
Airlines (PAL) Bane which affirmed the
NIRC of 1997(RA
G.R. 179259, cancellation and withdrawal of 8424), as
September
Assessment Notice and
amended,
25, 2013
Formal Letter of Demand for
despite the fact

thus entitling Central Luzon to the tax

refund. This case covers the taxable year
1997 and is governed by the old law, RA
7432 which expressly allowed private
establishment to claim the amount of
discounts they grant to senior citizens as
tax credit and not merely as a reduction
to the gross income or gross sales. In this
case taxation was considered to be an
implement for the exercise of the power
of imminent domain wherein the tax
credit is deemed to be the just
compensation for private property taken
by the State for public purpose (the
reduction of income due to the grant of
the senior citizen discount). However,
with the effectivity of RA 9257 on 21
March 2004, there is now a new tax
treatment for senior citizens discount
granted by all covered establishments.
This discount should be considered as a
deductible expense from gross income
and no longer as tax credit.
Petition is denied for the provisions
in PD 1590, a special law prevails
over RA 8424 (NIRC) as regards
respondents exemption from the
MCIT.
Discussion on the SC RULING
The NIRC of 1997, as amended,

99

the payment by the

respondent Philippine Airlines,
Inc. (respondent), of
deficiency Minimum
Corporate Income Tax (MCIT)
in the amount of
P326,778,723.35, covering
the fiscal year ending 31
March 2000.

that the charter

(PD 1590)
creating it
provided only
two options for
its liability to pay
taxes- (a)
Payment of
basic corporate
income tax
For the fiscal year that ended based on the its
31 March 2000, respondent
annual net
filed its Tentative Corporate
taxable income
Income Tax Return, reflecting or (b) the related
a creditable tax withheld for
2% franchise tax
the fourth quarter amounting based on gross
to P524,957.00, and a zero
revenue,
taxable income for said year. whichever is
Hence, respondent filed on 16 lower; further,
July 2001 a written claim for
under PD 1590,
refund before the petitioner.
MCIT is
As a consequence thereof,
presumed to
respondent received a Letter belong to the
of Authority from the Bureau
category of
of Internal Revenue (BIR)
"other taxes" for
Large Taxpayers Service
which
authorizing the revenue
respondent is not
officers named therein to
liable.
examine respondents books
of accounts and other
accounting records for the
purpose of evaluating
respondents "Claim for

provides as regards MCIT that a

domestic corporation must pay whichever
is the higher of: (1) the income tax under
Section 27(A) of the NIRC of 1997,as
amended, 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 same Code, equivalent
to 2% of the gross income of the
corporation. The Court would like to
underscore that although this may be the
general rule in determining the income
tax due from a domestic corporation
under the provisions of the NIRC of 1997,
as amended, such rule can only be
applied to respondent only as to the
extent allowed by the provisions of its
franchise.
Relevant thereto, PD 1590, during the
lifetime of the franchise of respondent, its
taxation shall be strictly governed by two
fundamental rules, to wit: (1) respondent
shall pay the Government either the basic
corporate income tax or franchise tax,
whichever is lower; and (2) the tax paid
by respondent, 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. Any excess
of the total quarterly payments over the
actual annual franchise of income tax due

100

Refund on Creditable
Withholding Tax Income Tax"
covering the fiscal year
ending 31 March 2000.
On 11 August 2003,
respondent received from the
same revenue officers a
computation of their initial
deficiency MCIT assessment in
the amount of
P537,477,867.64.
Consequently, respondent
received on 20October 2003 a
Preliminary Assessment
Notice and Details of
Assessment issued by the
Large Taxpayers Service
dated 22 September 2003,
assessing respondent
deficiency MCIT including
interest, in the aggregate
amount of P315,566,368.68. A
written protest to said
preliminary assessment was
filed by respondent on 3
November 2003. Thereafter,
on 16 December 2003,
respondent received a Formal
Letter of Demand and Details
of Assessment dated 1
December 2003 from the
Large Taxpayers Service

as shown in the final or adjustment

franchise or income-tax return shall either
be refunded to the grantee or credited
against the grantees quarterly franchise
or income-tax liability for the succeeding
taxable year or years at the option of the
grantee.
Accordingly, the respondent cannot be
subjected to MCIT for the following
reasons:
1. Section 13(a) of [PD] 1590 refers to
"basic corporate income tax, as
stipulated in Section 27(A) of the NIRC
of 1997. There is nothing in Section
13(a) of [PD] 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."
2. 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. 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

101

demanding the payment of

the total amount of
P326,778,723.35, inclusive of
interest, as contained in
Assessment Notice No. INC-FY99-2000-000085.
In response thereto,
respondent filed its formal
written protest on 13 January
2004 reiterating the following
defenses:(1) that it is exempt
from, or is not subject to, the
2% MCIT by virtue of its
charter, Presidential Decree
No. (PD) 1590;3 and (2) that
the three-year period allowed
by law for the BIR to assess
deficiency internal revenue
taxes for the taxable year
ending 31 March 2000 had
already lapsed on 15July
2003.
A Petition for Review before
the Second Division of the
CTA, after no response was
received by the respondent
from its protest.
The Ruling of the CTA Second
Division

general one under Section 34 of the

same Code. 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.
3. 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 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 [PD]
1590,which makes PAL liable only for
basic corporate income tax, then MCIT
is included in "all other taxes" from
which PAL is exempted.
4. The evident intent of Section 13 of
[PD] 1520 (sic) is to extend to PAL tax
concessions not ordinarily available to
other domestic corporations. Section

102

In a Decision, the CTA Second

Division granted respondents
petition and accordingly
ordered for the cancellation
and withdrawal of Assessment
Notice and Formal Letter of
Demand for the payment of
deficiency MCIT in the amount
of P326,778,723.35, covering
the fiscal year ending 31
March 2000, issued against
respondent.
The CTA Second Division
denied petitioners Motion for
Reconsideration for lack of
merit. Aggrieved, petitioner
appealed to the CTA En Banc.
The Ruling of the CTA En Banc
The CTA En Banc affirmed
both the aforesaid Decision
and Resolution rendered by
the CTA Second Division in
CTA Case No. 7029,ruling that
under Section 13 of PD 1590,
respondent, as consideration
for the franchise, is indeed
granted the privilege to
choose between two options
in the payment of its tax
liability to the government.

13 of [PD] 1520 (sic) 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. In this case, in addition to
being a public utility providing airtransport service, PAL is also the
official flag carrier of the country.
5. The CIR posits that PAL may not invoke
in the instant case the "in lieu of all
other taxes" clause in Section 13 of
[PD] No. 1520 (sic),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. It is
not the fact of tax payment that
exempts it, but the exercise of its
option. 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

103

arising from its losses would not. There

is no substantial distinction between a
zero tax and a one-peso tax liability.
Based on the same ratiocination, the
Court finds the Substitution Theory
unacceptable in the present Petition.
6. PD 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, [PD] 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 [PD] 1590 on net loss carry-over will
be rendered nugatory.
Consequently, the insistence of the CIR to
subject PAL to MCIT cannot be done
without contravening [PD] 1520 (sic).
Between [PD] 1520 (sic), 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

104

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. 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, and is not

105

covered by the "in lieu of all other taxes"

clause of [PD] 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.
Based on the foregoing pronouncements,
it is clear that respondent is exempt from
the MCIT imposed under Section 27(E) of
the NIRC of 1997,as amended. Thus,
respondent cannot be held liable for the
assessed deficiency MCIT of
P326,778,723.35 for fiscal year ending 31
March 2000. More importantly, as to
petitioners contention that respondent
needs to actually pay a certain amount as
basic corporate income tax or franchise
tax before it can enjoy the tax exemption
granted to it since it should retain the
responsibility of paying its share of the
tax burden, this Court has categorically
ruled in the above-cited cases that it is
not the fact of tax payment that exempts
it, but the exercise of its option..
Notably, in another case involving the
same parties,26 the Court further
expressed that a strict interpretation of
the word "pay" in Section 13of PD 1590
would effectively render nugatory the
other rights categorically conferred upon

106

the respondent by its franchise. Hence,

there being no qualification to the
exercise of its options under Section 13,
then respondent is free to choose basic
corporate income tax, even if it would
have zero liability for the same in light of
its net loss position for the taxable year.
By way of, reiteration, although it appears
that respondent is not completely exempt
from all forms of taxes under PD 1590
considering that Section 13 thereof
requires it to pay, either the lower
amount of the basic corporate income tax
or franchise tax (which are both direct
taxes), at its option, mere exercise of
such option already relieves respondent
of liability for all other taxes and/or
duties, whether direct or indirect taxes.
This is an expression of the same thought
in Our ruling that, to repeat, it is not the
fact of tax payment that exempts it, but
the exercise of its option.
17 Maria Carla

The heirs of Pirovano received

Pirovano
a donation from De La Rama
vs
Steamship Co., of which
Commissione Pirovano was the former
r of Internal
president whose life the
Revenue
company had insured. The
G.R. No. Lheirs contended that since the
19865
SC in a related case had
July 31, 1965 declared the donation a

WON the heirs

are liable for
donees tax
despite an SC
decision that the
donation was
remuneratory

YES. NCC Art. 726. When a person gives

to another a thing ... on account of the
latter's merits or of the services rendered
by him to the donor, provided they do not
constitute a demandable debt, ..., there is
also a donation. ... .

Remuneratory
donation is still
subject to both
donors and
donees tax.

107

remuneratory donation and

not a simple donation, it was
not subject to donees tax.
18 Carmelino F.

On April 13, 1998, petitioner

Pansacola
Carmelino F. Pansacola filed
vs
his income tax return for the
Commissione taxable year 1997 that
r of Internal
reflected an overpayment
Revenue
of P5,950. In it he claimed
G.R. 159991, the increased amounts of
November
personal and additional
16, 2006
exemptions under Section
35 of the NIRC, although his
certificate of income tax
withheld on compensation
indicated the lesser allowed
amounts on these
exemptions.

Could the
exemptions
under Section 35
of the NIRC,
which took effect
on January 1,
1998, be availed
of for the taxable
year 1997?

No. NIRC provides that the income

subject to income tax is the
taxpayers income as derived and
computed during the calendar year,
his taxable year. 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.
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.
Conformably too, personal and additional
exemptions are considered as deductions
from gross income. Deductions for income
tax purposes partake of the nature of tax

108

exemptions, hence strictly

construed against the taxpayer and
cannot be allowed unless granted in the
most explicit and categorical
language too plain to be mistaken.
19 C.M. Hoskins

Petitioner-appellant, a
& Co., Inc.
domestic corporation engaged
vs
in the development and
Commissione management of subdivisions,
r of Internal
sale of subdivision lots and
Revenue
collection of installments due
G.R. L-24059 for a fee which the real estate
November
owners pay as compensation
28, 1969
for each of the services
rendered, failed to pay the
real estate broker's tax on its
income derived from the
supervision and collection
fees. Consequently, the
Commissioner of Internal
Revenue demanded the
payment of the percentage
tax plus surcharge,
contending that said income
is subject to the real estate
broker's percentage tax. On
the other hand, petitionerappellant claimed that the
supervision and collection
fees do not form part of its
taxable gross compensation.
20 Jose
For the year 1916, Jose

WON the
supervision and
collection fees
received by a
real estate
broker are
deductible from
its gross
compensation

No. With respect to the collection fees,

the services rendered by Hoskins in
collecting the amounts due on the sales
of lots on the installment plan are
incidental to its brokerage service in
selling the lots. If the broker's
commissions on the cash sales of lots are
subject to the brokerage percentage tax,
its commissions on installment sales
should likewise be taxable. As to the
supervision fees for the development and
management of the subdivisions, which
fees were paid out of the proceeds of the
sales of the subdivision lots, they, too, are
subject to the real estate broker's
percentage tax.
The development, management and
supervision services were necessary to
bring about the sales of the lots and were
inseparably linked thereto. Hence, there
is basis for holding that the operation of
subdivisions is really incidental to the
main business of the broker, which is the
sale of the lots on commission.

Whether or not

Plaintiff did not contended that said sum

109

Ledesma
vs
The Collector
of Internal
Revenue and
the
Provincial
Treasurer of
Occidental
Negros
G.R. No. L15014,
October 2,
1920

Ledesma (plaintiff) made his

declaration for the purpose of
paying his income tax. In the
said declaration, he claimed
several exceptions and one of
which is the amount of
P135,229.10 which he claims
should be deducted from his
income for the reason that it
had been paid to his
employees as compensation
for their services. The said
exemption was not allowed by
the Provincial Treasurer and
Collector of Internal Revenue
(defendants). Hence, the
plaintiff paid under protest the
income tax upon the full
amount of his income without
the deductions claimed. He
then filed a complaint alleging
that the persons to whom he
had paid the said sum are his
employees in his business and
as such receive a certain
percentage of his annual gain;
and that percentage is fixed
and determined; and is based
upon the extent of the powers
and responsibilities of each of
them in the management and
administration of his business.
In the answer to the

the said sum,

was gifts or bonuses but were fixed
together with
compensations agreed upon, depending
their fixed
upon the value of the services of said
salaries,
employees and the importance of the
constituted
business in which they were engaged. A
reasonable
corporation or person engaged in a
compensation for commercial enterprise has a right to
their services.
fix the compensation of his
employees, and said compensation
shall be considered as part of the
expenses in the conduct and
management of the business. Such
expenses should be taken into
consideration in ascertaining the
amount to be paid as income tax. By
computing such expenses, the net
income may be correctly ascertained.
In the present case, there is not a
word of proof in the record which
disproves the declaration of the
plaintiff that the said sum was paid
to the persons mentioned in the
complaint as compensation for their
services. Said sum, according to
proof, did not constitute gifts or
bonuses. Hence, the lower court was
fully justified in allowing the deduction of
the said sum from the gross income of
the plaintiff. However, plaintiff cannot
claim interest upon the sum to be
returned by the defendants as Section
1579 of Act No. 2711 expressly provides
that actions like the present interest

110

complaint, the AttorneyGeneral, on behalf of the

defendants, alleged that the
sums paid to said employees
were in the nature of bonuses
or distribution of profit, and
were not expenses of the
business. The Court of First
Instance rendered a decision
directing and ordering to pay
to the plaintiff the amount
that latter paid in excess. The
said court is of the opinion
that such percentage does not
constitute bonus but fixed and
agreed permanent
compensation in addition to
the stipulated salaries and is
reasonable, taking into
consideration the services
rendered by said employees
and the importance of the
business in which such
services were and are being
rendered. The defendants,
through the Attorney-General,
contends that the lower court
erred in holding that said sum
paid by plaintiff to his
employees, together with
their fixed salaries,
constituted reasonable
compensation for their

shall not be collected. The courts are,

therefore, without authority to allow
interest upon the sum recovered in
actions like the present.

111

services. Hence this petition.

21 Esso

petitioner ESSO deducted

Standard
from its gross income for
Eastern, Inc. 1959, as part of its ordinary
vs
and necessary business
Commissione expenses, the amount it had
r of Internal
spent for drilling and
Revenue
exploration of its petroleum
G.R. Nos. Lconcessions. This claim was
28508-9, July disallowed by the respondent
7, 1989
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 by reason of its
abandonment as dry holes of
several of its oil wells. Also it
claimed as ordinary and
necessary expenses in the
same return the amount
representing margin fees it
had paid to the Central Bank
on its profit remittances to its
New York head office.
CR assessed ESSO a
deficiency income tax for the
year 1960. The deficiency

WON the margin

fees paid by
petitioner on its
profit remittance
to its Head Office
in New York are
deductible

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. 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.
the margin fees were incurred for
purposes proper to the conduct of the
corporate affairs of ESSO in New York, but
certainly not in the Philippines.
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.

112

arose from the disallowance

of the margin fees paid by
ESSO to the Central Bank on
its profit remittances to its
New York head office.

22 Visayan Cebu

Termnial Co.,
Inc.
vs
Collector of
Internal
Revenue
G.R. L-12798,
May 30, 1960

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.
The appellant, Visayan Cebu
Terminal Co. Inc., is a
corporation organized for the
purpose of handling arrastre
operations in the port of
Cebu. It was awarded the
contract for the said arrastre
operations by the Bureau of
Customs.
On March 1, 1952, appellant
filed its income tax return for
1951 reporting a gross
income of P420,633.40 and
claimed deductions
amounting to P379,036.95,
leaving a net income of
P41,596.45 on which it paid

SO ORDERED.

The only issue

raised in this
appeal relates to
the deductibility
of the sum of
P75,855.88 as
representation
expenses.

INCOME TAXES; DETERMINATION OF

REPRESENTATION EXPENSE. The Court
of Tax Appeals, in the instant case, had
been patently fair and reasonable, if not
liberal, in allowing appellant to deduct a
certain amount as representation
expenses on the basis of its gross income,
net income and representation expenses
during the prior years, although there was
absolutely no concrete evidence of the
sums actually spent for purposes of
representation. The explanation to the
effect that the supporting papers of some
of the expenses had been destroyed
when the house of appellant's treasurer
was burned, it not satisfactory, for
appellant's records were supposed to be
kept in its offices, not in the residence of

113

income tax in the sum of

P8,319.29.
The sum of P379,036.95
claimed as deductions
consisted of various items,
the said sums of P2,375.00,
P75,855.88 and P6,300.00,
representing said salaries,
representation expenses and
miscellaneous expenses,
respectively, or a total of
P84,530.88, were disallowed
by the Collector of Internal
Revenue, thus giving rise to a
deficiency assessment of
P18,991.00.
Upon request for
reconsideration, the Collector
modified the deficiency
income tax assessment by
allowing the deduction from
appellant's gross income of
the salary of Juan Eugenio Lo
in the sum of P1,875.00 and
miscellaneous expenses
amounting to P532.00, at the
same time maintaining the
disallowance of the full
amount of P75,855.88 as
representation expenses.

one of its officers.

"Representation . . . expenses fall under
the category of business expenses which"
are allowable deductions from gross
income if they meet the conditions
prescribed by law", particularly section
30(a) (1) of the National Internal Revenue
Code; that, to be deductible, said
business expenses must be:
1. "ordinary and necessary expenses
paid or incurred in carrying on any
trade or business";
2. that those expenses "must also,
meet the further test of
reasonableness in amount", this
test being "inherent in the phase
'ordinary and necessary'";
some of the representation expenses
claimed by appellant had been evidenced
by vouchers or chits, but others were
reimbursed "without presentation of
supporting papers; that the
aforementioned vouchers or chits were
allegedly "destroyed when the house of
Buenaventura M. Veloso, treasurer of
appellant, where the records were kept
was burned"; that, accordingly, "it is not
possible to determine the actual amount
covered by supporting papers and the
amount without supporting papers"; that
the court should, therefore, "determine

114

Appellant has agreed to the

disallowance of the sum
P500.00 representing the
salaries of Felix Go Chan and
Teotimo Tiu Tiam at P250.00
each, and the sum of
P5,768.00, representing
miscellaneous expenses.

from all available data the amount

properly deductible as representation
expenses"; that "during the period of four
(4) years from 1949 to 1952, appellant
had gross income, net profits and claimed
representation expenses and that "from
the above figures, we may infer that the
sum of P10,000 may be considered
reasonably necessary for entertainment
expenses of appellant in 1951, it having
claimed a little over the amount in 1950,
when its gross income was more than its
gross income in 1951 and 1952", and
because "it allegedly spent for
entertainment purposes in 1948 the sum
of P500.00 only." Hence, the lower court
modified the assessment of the taxes due
from appellant herein the manner set
forth in the beginning of this
decision.Appellant, maintains that said
court had acted arbitrarily in considering
the representation expenses in 1950, not
those incurred in 1949 and 1952, in fixing
the amount deductible in 1951.
This pretense is clearly untenable. It
appears:
(a) that part of the alleged representation
expenses had never had any supporting
paper;
(b) that the vouchers and chits covering

115

other representation expenses had been

allegedly destroyed;
(c) that there is no documentary evidence
on record of any of the representation
expenses in question;
(d) that no testimonial evidence has been
introduced on any specific item of said
alleged expenses;
(e) that there is no more than oral proof
to the effect that payments had been
made to appellant's officers for
representation expenses allegedly made
by the latter and about the general
nature of such alleged expenses;
(f) that the gross income in 1950
exceeded the gross income in 1951 and
1952, and
(g) that the representation expenses in
1948 amounted to P500 only.
Under these circumstances, the lower
court was fully justified in concluding that
the representation expenses in 1951
should be slightly less than those incurred
in 1950. Upon the other hand, appellant
has not even tried to show why its
representation expenses in 1951 should
be deemed bigger than the amount

116

allowed by the lower court. In fact, the

latter had been patently fair and
reasonable, if not rather liberal, in
allowing appellant to deduct P10,000.00
as representation expenses for 1951,
there being absolutely no concrete
evidence of the sums then actually spent
for purposes of representation. It may not
be amiss to note that the explanation to
the effect that the supporting paper of
some of those expenses had been
destroyed when the house of the
treasurer was burned, can hardly be
regarded as satisfactory, for appellant's
records are supposed to be kept in its
offices, not in the residence of one of its
officers.
23 Commissione Sometime in July, 1950, the

r of Internal
Revenue
vs
Carlos
Palanca, Jr.
G.R. No. L16626,
October 29,
1966

late Don Carlos Palanca, Sr.

donated in favor of his son,
Carlos Palanca, Sr., shares of
stock in La Tondea, Inc.
amounting to 12,500 shares.
For failure to file a return on
the donation within the
statutory period, Carlos
Palanca, Jr was assessed the
sums of P97,691.23,
P24,442.81 and P47,868.70 as
gift tax, 25% surcharge and
interest, respectively, or a
total of P170,002.74, which he

Whether or not
deductibility of
"interest on
indebtedness"
from a person's
income tax under
section 30(b)(1)
extends to
"interest on
taxes."

Yes. In a more recent case, Commissioner

of Internal Revenue vs. Prieto, we
explicitly announced that while the
distinction between "taxes" and "debts"
was recognized in this jurisdiction, the
variance in their legal conception does
not extend to the interests paid on them,
at least insofar as Section 30(b) (1) of the
National Internal Revenue Code is
concerned. Under the law, for interest to
be deductible, it must be shown that
there be an indebtedness, that there
should be interest upon it, and that what
is claimed as an interest deduction should
have been paid or accrued within the

117

paid on June 22, 1955. The

year after, Palanca filed with
the Bureau of Internal
Revenue his income tax
return for the calendar year
1955, claiming, among others,
a deduction for interest
amounting to P9,706.45 and
reporting a taxable income of
P65,982.12. On the basis of
this return, he was assessed
the sum of P21,052.91.
Subsequently, Palanca Jr. filed
an amended return for the
calendar year 1955, claiming
therein an additional
deduction in the amount of
P47,868.70 representing
interest paid on the donee's
gift tax, thereby reporting a
taxable net income of
P18,113.42 and a tax due
thereon in the sum of
P3,167.00. The claim for
deduction was based on the
provisions of Section 30(b)(1)
of the Tax Code, which
authorizes the deduction from
gross income of interest paid
within the taxable year on
indebtedness. BIR denied the
claim for refund. Morever, BIR
considered the transfer of

year. It is here conceded that the interest

paid by respondent was in consequence
of the late payment of his estate and
inheritance, and the same was paid
within the year it is sought to be
deducted. The only question to be
determined, as stated by the parties, is
whether or not such interest was paid
upon an indebtedness within the
contemplation of Section (30) (b) (1) of
the Tax Code, the pertinent part of which
reads:
Sec. 30. Deductions from gross
income. In computing net income
there shall be allowed as
deductions
xxx xxx xxx
'Interest:
'(1) In general. The amount of
interest paid within the taxable year
on indebtedness, except on
indebtedness incurred or continued
to purchase or carry obligations the
interest upon which is exempt from
taxation as income under this Title.
The term "indebtedness" as used in the
Tax Code of the United States containing
similar provisions as in the above-quoted
section has been defined as the
unconditional and legally enforceable
obligation for the payment of money.

118

shares of stocks to be a
transfer in contemplation of
death, so Palanca Jr was
assessed a sum of
P191,591.62 as estate and
inheritance taxes. On August
12, 1958, Palanca, Jr. once
more filed an amended
income tax return for the
calendar year 1955, claiming,
in addition to the interest
deduction of P9,076.45
appearing in his original
return, a deduction in the
amount of P60,581.80,
representing interest on the
estate and inheritance taxes
on the 12,500 shares of stock,
thereby reporting a net
taxable income for 1955 in
the amount of P5,400.32 and
an income tax due thereon in
the sum of P428.00. Attached
to this amended return was a
letter of the petitioner, dated
August 11, 1958, wherein he
requested the refund of
P20,624.01 which is the
difference between the
amounts of P21,052.01 he
paid as income tax under his
original return and of P428.00.
CIR denies his claim for

Within the meaning of that definition it is

apparent that a tax may be considered an
indebtedness. It follows that the interest
paid by herein respondent for the late
payment of his estate and inheritance tax
is deductible from his gross income under
Section 30(b) of the Tax Code.

119

refund. On appeal, the Court

of Tax Appeals, finding that
the amount paid by Palanca
for interest on his
delinquent estate and
inheritance tax is deductible
from the gross income for
that year under section 30(b)
(1) of the Revenue Code,
ordered the CIR to refund to
the Palanca, Jr. the amount of
P20,624.01 representing
alleged overpayment of
income taxes for the calendar
year 1955.
Hence, the CIR appeals. The
CIR argues that a tax is not an
indebtedness. He adopts the
view that debts are due to the
government in its corporate
capacity, while taxes are due
to the government in its
sovereign capacity.
24 Philex Mining Philex Mining entered into an

Corporation
vs
Commissione
r of Internal
Revenue
G.R. No.
148187, April

agreement with Baguio Gold

for the former to manage and
operate the latters mining
claim known as Sto. Nino
mine. Philex Mining made
advancements; however, the
mine still suffered losses

WON there is a
bad debt for
Philex Mining to
treat it as a
deduction

No. There is no bad debt in this case.

What the parties actually entered into
was a partnership wherein each of them
was bound to contribute. It is unlikely for
a corporation to lend millions of pesos to
another corporation without any collateral
or security; there was no stipulation for
Baguio Gold to actually repay Philex

120

16, 2008

which led to Philex Minings

withdrawal as manager of the
mine. The parties entered into
a compromise with dation in
payment where the assets of
Baguio Gold were to be
transferred to Philex Mining.

Mining.
The inevitable conclusion is that the
advances were not loans but capital
contributions to a partnership. They can
also be called investments.
In sum, Philex Mining cannot claim the
advances as bad debt deduction. Philex
Mining failed to substantiate its assertion
that the advances were subsisting debts
that could be deducted from its gross
income.

In its annual income tax

return, Philex Mining deducted
from its gross income the
amount representing a loss on
settlement of receivables
from Baguio Gold.
BIR disallowed the deduction
as bad debt and assessed
Philex Mining a deficiency
income tax.
25 Fernandez

Hermanos,
Inc.
vs
CIR and CTA
G.R. No. L21551,
September
30, 1969

A joint decision involving four

appeals, this case deals with
Fernandez Hermanos Inc., a
domestic corporation
engaging in business as an
investment company that
was assessed by the
Commissioner of Internal
Revenue for deficiency
income taxes for the years
1950 to 1954 and for 1957
due to alleged discrepancies
found upon its income tax

Cases L-21551
and L-21557

Cases L-21551 and L-21557

I.
Losses
I. WON Tax court 1. For Makati Lumber Co.
erred in its ruling
-There was an adequate basis for
with respect to
the writing off of the stock as
items of
worthless securities for Makati
disallowances
Lumber ceased operations and
became insolvent.
II. WON
governments
2. Bad debts of Palawan Manganese
right to collect
Mines, Inc.
the deficiency
Advances made by Fernandez

121

returns.

income taxes in
question has
already
Prescribed.

Hermanos Inc to its 100%

subsidiary ( Palawan Manganese) as
Cases L-21551 and La form of financial help without
21557
expectation of repayment were
investments and not loans. No bad
The items subject to
Cases L-24972
debt could arise where there is no
discussion in these two cases and L-24978
valid and subsisting debt. It could
are:
not be properly considered
a.) Losses,
WON Tax court
worthless and deductible.
b.) Excessive depreciation of
erred in its ruling
Furthermore, neither under the Tax
Houses,
with respect to
Code specifically Sec. 30 (d) (2) &
c.) Taxable increase in net
items of
(e) (1) can there be a partial writing
worth and
disallowances
off of a loss or bad debt for such are
d.) Gain realized from sale of
deductible in full or not at all.
real property.
3. Balamban Coal Mines
- Losses are deductible in 1952 when
The Tax Court sustained
the mines are abandoned since
Commissioners disallowance
some definite event must fix time
of the Losses (i.e. assailed
when loss is sustained i.e. actual
bad debts of Palawan
abandonment, and not in 1950 &
Manganese Mines, Co) and
1951 when they were still in
Excessive depreciation but
operation.
overruled the Commissioners
4. Hacienda Dalupiri & Samal
disallowances for items in
- It is operated as a business and
relation to taxable net worth,
therefore, entitled to deduct
gain realized from real
expenses and losses based on the
property and losses in
inventory method of accounting.
connection to Mati Lumber
Co., Balamban Coal Mines,
II.
Depreciation of building
and Hacienda Dalupiri.
- The taxpayer did not submit any
adequate proof so as to justify its
Cases L-24972 and L10% depreciation per annum claim
24978
and thus, would be considered

122

excessive.
These cases refer to the
taxpayers income tax liability
for the year 1957. The
taxpayer insists in this appeal
that it could use as a method
for depletion under the
pertinent provision of the Tax
Code its "capital investment"
representing the alleged value
of its contractual rights and
titles to mining claims in the
sum of P242,408.10 and thus
deduct outright one-fifth (1/5)
of this "Capital investment"
ever year, regardless of
whether it had actually mined
the product and sold the
products. The Tax court
overruled the Commissioners
disallowance of the taxpayers
losses in the operation of its
Hacienda Dalupiri but
sustained disallowance of 1/5
cost of the contractual right
over mines of its subsidiaryPalawan Mines.

III.
Taxable increase in net worth
- Increase in net worth are not
taxable if they are shown not to be
the result of unreported income but
to be the result of the correction of
errors in the taxpayers entries in
the books relating to indebtedness
to certain creditors, erroneously
listed although already paid.
IV.
Prescription
- The governments right to collect
taxes due has not prescribed as
taxpayers appeal was file with the
Tax Court long before the expiration
of the 5-year period.
Cases L-24972 and L-24978
Losses- The hybrid method used by the
petitioner is with justification for if a tax
payer is engaged in more than one trade
or business, he may use a different
method of accounting for each trade. He
may report income from a business on
accrual basis and personal income on the
cash basis.
The alleged "capital investment" method
invoked by the taxpayer is not a method
of depletion, but the Tax Code provision,

123

prior to its amendment by Section 1

of Republic Act No. 2698, which took
effect on June 18, 1960, expressly
provided that "when the allowances shall
equal capital invested . . . no further
allowances shall be made;" in other
words, the "capital investment" was but
the limitation of the amount of depletion
that could be claimed. The outright
deduction by the taxpayer of 1/5 of the
cost of the mines, as if it were a "straight
line" rate of depreciations was correctly
held by the Tax Court not to be authorized
by the Tax Code.
26 Consolidated The BIR and Consolidated

Mines, Inc.
vs
CTA and CIR
G.R. Nos. L18843 and L18844,
August 29,
1974

Mines got into a long and

complicated court case over
how to properly compute the
companys net income.
The Consolidated Mines, Inc.
(aka. Company), a domestic
corporation engaged in
mining, filed its income tax
returns for 1951, 1952, 1953
and 1956. In 1957, BIR
investigated the income tax
returns filed by the Company
because it claimed the refund
of the sum of P107,472.00
representing alleged
overpayments of income

1. WON the
company was
using a hybrid
method of
accounting
rather than
accrual.
2. The proper
amount of mine
depletion
expense
3. The amount of
depreciation
expense.
4. Disallowance
of payments
made as
expenses.

1. No. The company was consistent in

using accrual method. The issue was a
misunderstanding by the BIR of the
terminology used by the company.
Here we 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

1. Rate of Mine
Depletion
2. Amount of
Depreciation
Expense

124

taxes for the year 1951.

BIR found 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.
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

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. 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.
2. The company failed to properly
substantiate its mine development costs,
so very little depletion expense was
allowed
3. You cannot ascribe depreciation from
incomplete constructions, because
being incomplete; they havent even
begun to be used yet.
4. You are supposed to prove payments
with receipts from the payees, internal

125

for the years 1953, 1954 and

1956, respectively and
nullified the assessments for
1951 and 1952 because of
prescription.

company vouchers and testimony only

prove that such expenses were incurred,
not that they are legally deductible.

Upon motion, Tax Court

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.
Both the Company and CIR
appealed questioning the
method of computing the
income.
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

126

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.
27 Antonio

Roxas,
Eduardo
Roxas, and
Roxas Y CIA.,
in their own
respective
behalf and as
judicial coguardians of
Jose Roxas
vs
CTA and CIR
G.R. NO. L25043, April
26, 1968

Don Pedro Roxas and Dona

Carmen Ayala, Spanish
subjects, transmitted to their
grandchildren by hereditary
succession the following
properties:

(1) Is the gain

derived from the
sale of the
Nasugbu farm
lands an ordinary
gain, hence
100% taxable?

(1) Agricultural lands with a

total area of 19,000 hectares, (2) Are the
situated in the municipality of deductions for
Nasugbu, Batangas province; business
expenses and
(2) A residential house and lot contributions
located at Wright St., Malate, deductible?
Manila; and
(3) Is Roxas y
(3) Shares of stocks in
Cia. liable for the
different corporations.
payment of the
fixed tax on real
To manage the aboveestate dealers?
mentioned properties, said
children, namely, Antonio

(1) NO.
In fine, Roxas y Cia. cannot be considered
a real estate dealer for the sale in
question. Hence, pursuant to Section 34
of the Tax Code the lands sold to the
farmers are capital assets, and the gain
derived from the sale thereof is capital
gain, taxable only to the extent of 50%.
It should be borne in mind that the sale of
the Nasugbu farm lands to the very
farmers who tilled them for generations
was not only in consonance with, but
more in obedience to the request and
pursuant to the policy of our Government
to allocate lands to the landless. It was
the bounden duty of the Government to
pay the agreed compensation after it had
persuaded Roxas y Cia. to sell its
haciendas, and to subsequently subdivide
them among the farmers at very

127

Roxas, Eduardo Roxas and

Jose Roxas, formed a
partnership called Roxas y
Compania.
Agricultural Land
In consonance with the
constitutional mandate to
acquire big landed estates
and apportion them among
landless tenants-farmers, the
government persuaded the
Roxas brothers to part with
their landholdings.
It turned out however that the
Government did not have
funds to cover the purchase
price, and so a special
arrangement was made for
the Rehabilitation Finance
Corporation to advance to
Roxas y Cia. the amount of
P1,500,000.00 as loan.
Collateral for such loan were
the lands proposed to be sold
to the farmers. Under the
arrangement, Roxas y Cia.
allowed the farmers to buy
the lands for the same price
but by installment, and
contracted with the

reasonable terms and prices. However,

the Government could not comply with its
duty for lack of funds. Obligingly, Roxas y
Cia. shouldered the Government's
burden, went out of its way and sold
lands directly to the farmers in the same
way and under the same terms as would
have been the case had the Government
done it itself.
(2) Tickets to a banquet in honor of Sergio
Osmena and San Miguel Beer given to
various persons NOT DEDUCTIBLE
Representation expenses are
deductible from gross income as
expenditures incurred in carrying on a
trade or business under Section 30(a)
of the Tax Code provided the taxpayer
proves that they are reasonable in
amount, ordinary and necessary, and
incurred in connection with his
business. In the case at bar, the
evidence does not show such link
between the expenses and the
business of Roxas y Cia.
The contributions to the Christmas
funds of the Pasay City Police, Pasay
City Firemen and Baguio City Police
NOT DEDUCTIBLE
for the reason that the Christmas

128

Rehabilitation Finance
Corporation to pay its loan
from the proceeds of the
yearly amortizations paid by
the farmers.
In 1953 and 1955 Roxas y Cia.
derived from said installment
payments a net gain of
P42,480.83 and P29,500.71.
Fifty percent of said net gain
was reported for income tax
purposes as gain on the sale
of capital asset held for more
than one year pursuant to
Section 34 of the Tax Code.
Residential House
During their bachelor days the
Roxas brothers lived in the
residential house at Wright
St., Malate, Manila, which
they inherited from their
grandparents. After Antonio
and Eduardo got married,
they resided somewhere else
leaving only Jose in the old
house. In fairness to his
brothers, Jose paid to Roxas y
Cia. rentals for the house in
the sum of P8,000.00 a year.

funds were not spent for public

purposes but as Christmas gifts to the
families of the members of said
entities. Under Section 39(h), a
contribution to a government entity is
deductible when used exclusively for
public purposes.
The contribution to the Manila Police
trust fund-DEDUCTIBLE
is an allowable deduction for said trust
fund belongs to the Manila Police, a
government entity, intended to be
used exclusively for its public
functions.
The contributions to the Philippines
Herald's fund for Manila's neediest
families- DEDUCTIBLE
It should be noted however that the
contributions were not made to the
Philippines Herald but to a group of
civic spirited citizens organized by the
Philippines Herald solely for charitable
purposes. There is no question that the
members of this group of citizens do
not receive profits, for all the funds
they raised were for Manila's neediest
families. Such a group of citizens may
be classified as an association
organized exclusively for charitable

129

Assessments
On June 17, 1958, the
Commissioner of Internal
Revenue demanded from
Roxas y Cia the payment of
real estate dealer's tax for
1952 in the amount of
P150.00 plus P10.00
compromise penalty for late
payment, and P150.00 tax for
dealers of securities for 1952
plus P10.00 compromise
penalty for late payment. The
assessment for real estate
dealer's tax was based on the
fact that Roxas y Cia. received
house rentals from Jose Roxas
in the amount of P8,000.00.
The Commissioner of Internal
Revenue justified his demand
for the fixed tax on dealers of
securities against Roxas y
Cia., on the fact that said
partnership made profits from
the purchase and sale of
securities.
In the same assessment, the
Commissioner assessed
deficiency income taxes
against the Roxas Brothers for

purposes mentioned in Section 30(h)

of the Tax Code.
The contribution to Our Lady of Fatima
chapel at the Far Eastern UniversityNOT DEDUCTIBLE
said university gives dividends to its
stockholders.
(3) YES.
Section 194 of the Tax Code, in
considering as real estate dealers
owners of real estate receiving rentals
of at least P3,000.00 a year, does not
provide any qualification as to the
persons paying the rentals. The law,
which states:
. . . "Real estate dealer" includes any
person engaged in the business of
buying, selling, exchanging, leasing or
renting property on 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 ofered to rent for
an aggregate amount of three
thousand pesos or more a year: . . .
is too clear and explicit to admit
construction. The findings of the Court

130

the years 1953 and 1955.

of Tax Appeals or, this point is

sustained.

The deficiency income taxes

resulted from the inclusion as
income of Roxas y Cia. of the
unreported 50% of the net
profits for 1953 and 1955
derived from the sale of the
Nasugbu farm lands to the
tenants, and the disallowance
of deductions from gross
income of various business
expenses and contributions
claimed by Roxas y Cia. and
the Roxas brothers. For the
reason that Roxas y Cia.
subdivided its Nasugbu farm
lands and sold them to the
farmers on installment, the
Commissioner considered the
partnership as engaged in the
business of real estate, hence,
100% of the profits derived
therefrom was taxed.
28 Eufemia

Evangelista
et. al.
vs
The Collector
of Internal
Revenue and
the CTA

The petitioners sought for the

reversal of the decision of the
Court of Tax Appeals which
held them liable for income
tax, real estate dealers tax
and residence tax for the real
properties (parcels of land)
they bought within February

WHEREFORE, the decision appealed from

is modified. Roxas y Cia. is hereby
ordered to pay the sum of P150.00 as real
estate dealer's fixed tax for 1952.

WON petitioners
have established
a partnership
and are subject
to tax on
corporations
under Section 24
of the NIRC

YES. Petitioners have agreed to contribute

and did contribute money to a common
fund for the purpose of engaging in real
estate transactions for monetary gain and
divide the same among themselves
because of the following observations,
among others: (1) Said common fund was
not something they found already in

131

G.R. No. L9996,

October 15,
1957

1943 to April 1994 from

different persons, whose
management of said
properties was charged to
their brother Simeon, and
which were subsequently
rented out to various tenants
from the year 1945-1949.
Petitioners submit that they
are mere co-owners of the
properties, not co-partners
because some of the
characteristics of partnership
are not present, therefore, no
legal entity with a personality
separate from that of the
members exists, and thus
they are excluded from the
coverage of Section 24 of the
National Internal Revenue
Code of the Philippines.

existence; (2)They invested the same, not

merely in one transaction, but in a series
of transactions; (3) The aforesaid lots
were not devoted to residential purposes,
or to other personal uses, of petitioners
herein.
Petitioners argument that their being
mere co-owners did not create a separate
legal entity was rejected because,
according to the Court, the tax in
question is one imposed upon
"corporations", which, strictly speaking,
are distinct and different from
"partnerships". When the NIRC 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. The
qualifying expression found in Section 24
and 84(b) 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. Accordingly, the
lawmaker could not have regarded that
personality as a condition essential to the
existence of the partnerships therein
referred to.

132

For purposes of the tax on corporations,

NIRC includes these partnerships - with
the exception only of duly registered
general co partnerships - within the
purview of the term "corporation." It is,
therefore, clear that petitioners herein
constitute a partnership, insofar as said
Code is concerned and are subject to the
income tax for corporations.
29 Alexander

The Commonwealth Insurance

Howden and Co., a domestic corporation,
Co., Ltd.,
entered into reinsurance
H.G. Chester contracts with 32 British
and Others,
insurance companies not
et. al.
engaged in trade or business
vs
in the Philippines, whereby
Commissione the former agreed to cede to
r of Internal
them a portion of the
Revenue
premiums on insurances on
G.R. L-19392, fire, marine and other risks it
April 14,
has underwritten in the
1965
Philippines. Alexander
Howden & Co., Ltd., also a
British corporation not
engaged in business in this
country, represented the
aforesaid British insurance
companies. The reinsurance
contracts were prepared and
signed by the foreign
reinsurers in England and sent
to Manila where

1. Whether or not
the portions of
premiums earned
from insurances
locally
underwritten by
a domestic
corporation,
ceded to and
received by nonresident foreign
reinsurance
companies, thru
a non-resident
foreign insurance
broker, pursuant
to reinsurance
contracts signed
by the reinsurers
abroad but
signed by the
domestic
corporation in

1. Yes. Section 24 of the National Internal

Revenue Code subjects to tax a nonresident foreign corporation's income
from sources within the Philippines.
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. In the first place, the
reinsured, the liabilities insured and the
risks originally underwritten by
Commonwealth Insurance Co., upon
which the reinsurance premiums and
indemnity were based, were all situated
in the Philippines. Secondly, contrary to
appellants' view, the reinsurance
contracts were perfected in the
Philippines, for Commonwealth Insurance

133

Commonwealth Insurance Co. the Philippines,

signed them.
subject to
income tax or
Pursuant to the aforesaid
not.
contracts, Commonwealth
Insurance Co., in 1951,
2. If subject
remitted P798,297.47 to
thereto, whether
Alexander Howden & Co., Ltd., or not they are
as reinsurance premiums. In
subject to
behalf of Alexander Howden & withholding tax
Co., Ltd., Commonwealth
under Section 54
Insurance Co. filed in April
in relation to
1952 an income tax return
Section 53 of the
declaring the sum of
Tax Code.
P798,297.47, with accrued
interest thereon in the
amount of P4,985.77, as
Alexander Howden & Co.,
Ltd.'s gross income for
calendar year 1951. It also
paid the Bureau of Internal
Revenue P66,112.00 income
tax thereon.
On May 12, 1954, within the
two-year period provided for
by law, Alexander Howden &
Co., Ltd. filed with the Bureau
of Internal Revenue a claim
for refund of the P66,112.00,
later reduced to P65,115.00,
because Alexander Howden &
Co., Ltd. agreed to the

Co. signed them last in Manila. And,

thirdly, the parties to the reinsurance
contracts in question evidently intended
Philippine law to govern.
Yes. Section 53 subjects to withholding
tax various specified income, among
them, "premiums", the generic
connotation of each and every word or
phrase composing the enumeration in
Subsection (b) thereof is income.
Perforce, the word "premiums", which is
neither qualified nor defined by the law
itself, should mean income and should
include all premiums constituting income,
whether they be insurance or reinsurance
premiums.
Assuming that reinsurance premiums are
not within the word "premiums" in Section
53, still they may be classified as
determinable and periodical income
under the same provision of law.
Reinsurance premiums, therefore, are
determinable and periodical income:
determinable, because they can be
calculated accurately on the basis of the
reinsurance contracts; periodical,
inasmuch as they were earned and
remitted from time to time.

134

30 Marubeni

Corporation
vs
CIR and CTA
G.R. No.
76573,
September
14, 1989

payment of P977.00 as
income tax on the P4,985.77
accrued interest. But the said
claim was denied.
The dividends received by
Marubeni Corporation from
Atlantic Gulf and Pacific Co.
are not income arising from
the business activity in which
Marubeni Corporation (head
office) is engaged.
Accordingly, said dividends if
remitted abroad are not
considered branch profits
subject to Branch Profit
Remittance Tax.

1. Whether or not
the dividends
Marubeni
Corporation
received from
Atlantic Gulf and
Pacific Co. are
effectively
connected with
its conduct or
business in the
Philippines as to
be considered
Take Note: In this case,
branch profits
Marubeni Japan (head office) subject to 15%
was the investor of AG andP
profit remittance
Co. Manila, not the branch
tax imposed
office of Marubeni in Manila.
under Section
24(b)(2) of the
Marubeni Corporation is a
National Internal
Japanese corporation licensed Revenue Code.
to engage in business in the
Philippines. When the profits
2. Whether
on Marubenis investments in Marubeni
Atlantic Gulf and Pacific Co. of Corporation is a
Manila were declared, a 10% resident or nonfinal dividend tax was
resident foreign
withheld from it, and another corporation.
15% profit remittance tax

1. NO. 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. The dividends
received by Marubeni Corporation from
Atlantic Gulf and Pacific Co. are not
income arising from the business activity
in which Marubeni Corporation 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.
2. Marubeni Corporation is a non-resident
foreign corporation, with respect to the
transaction. Marubeni Corporations head
office in Japan is a separate and distinct
income taxpayer from the branch in the
Philippines. The investment on Atlantic
Gulf and Pacific Co. was made for
purposes peculiarly germane to the
conduct of the corporate affairs of
Marubeni Corporation in Japan, but
certainly not of the branch in the
Philippines.

135

based on the remittable

amount after the final 10%
withholding tax were paid to
the Bureau of Internal
Revenue. Marubeni Corp. now
claims for a refund or tax
credit for the amount which it
has allegedly overpaid the
BIR.
31 Chamber of

Chamber of Real Estate and

Real Estate
Builders Associations, Inc. is
and Builders questioning the
Associations, constitutionality of Section 27
Inc.
(E) of Republic Act (RA)
vs
8424 and the revenue
The Hon.
regulations (RRs) issued by
Executive
the Bureau of Internal
Secretary
Revenue (BIR) to implement
Alberto
said provision and those
Romulo, the involving creditable
Hon. Acting
withholding taxes.
Secretary of
Finance
Petitioner also seeks to nullify
Juanita D.
Sections 2.57.2(J) (as
Amatong,
amended by RR 6-2001) and
and the Hon. 2.58.2 of RR 2-98, and Section
CIR
4(a)(ii) and (c)(ii) of RR 7Guillermo
2003, all of which prescribe
Parayno, Jr.
the rules and procedures for
G.R. No.
the collection of creditable
160756,
withholding tax (CWT) on the
March 9,
sale of real properties

Whether or not
the imposition of
CWT on income
from sales of real
properties
classified as
ordinary assets
under RRs 2-98,
6-2001 and 72003, is
unconstitutional.

No, Under RR 2-98, the tax base of the

income tax from the sale of real property
classified as ordinary assets remains to
be the entitys net income imposed under
Section 24 (resident individuals) or
Section 27 (domestic corporations) in
relation to Section 31 of RA
8424, i.e. gross income less allowable
deductions. The CWT is to be deducted
from the net income tax payable by the
taxpayer at the end of the taxable year.
Precisely, Section 4(a)(ii) and (c)(ii) of RR
7-2003 reiterate that the tax base for the
sale of real property classified as ordinary
assets remains to be the net taxable
income.
Final withholding Tax (FWT) is imposed on
the sale of capital assets. On the other
hand, CWT is imposed on the sale of
ordinary assets. The inherent and
substantial differences between FWT and
CWT disprove petitioners contention that

136

2010

categorized as ordinary
assets. Petitioner contends
that these revenue
regulations are contrary to
law for two reasons: first, they
ignore the different treatment
by RA 8424 of ordinary assets
and capital assets
and second, respondent
Secretary of Finance has no
authority to collect CWT,
much less, to base the CWT
on the gross selling price or
fair market value of the real
properties classified as
ordinary assets.

32 Commissione On two occasions, Wander

r of Internal
Revenue
vs
Wander
Philippines,
Inc. and the
Court of Tax
Appeals
G.R. No. L68375, April
15, 1988

filed its withholding tax return

and remitted to its parent
company (Glaro S.A. Ltd, a
Swiss Corporation not
engaged in trade or business
in the Philippines) dividends
on which 35% withholding tax
was withheld and paid to the
BIR. Later, Wander filed a
claim for refund and/or tax
credit contending that it is
liable only to 15% withholding
tax in accordance with
Section 24 (b) (1) of the Tax
Code as amended by PD 369

ordinary assets are being lumped

together with, and treated similarly as,
capital assets in contravention of the
pertinent provisions of RA 8424.
The fact that the tax is withheld at source
does not automatically mean that it is
treated exactly the same way as capital
gains. As aforementioned, the mechanics
of the FWT are distinct from those of the
CWT. The withholding agent/buyers act of
collecting the tax at the time of the
transaction by withholding the tax due
from the income payable is the essence
of the withholding tax method of tax
collection.
Whether or not
Wander is
entitled to the
preferential rate
of 15%
withholding tax
on dividends
declared and
remitted to its
parent
corporation,
Glaro.

YES. Section 24 (b) (1) of the Tax Code as

amended provides that the dividends
received from a domestic corporation
liable to tax shall be 15% of the dividends
received, 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 nonresident foreign corporation taxes
deemed to have been paid in the
Philippines equivalent to 20% which
represents the difference between the
regular tax (35%) in corporations and the
tax (15%) dividends.
In this case, Switzerland did not impose

137

and 778.

33 Cyanamid

Philippines,
Inc.
vs
CA, CTA, and
CIR
G.R. No.
108067,
January 20,
2000

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.
On March 4, 1985, petitioner
protested the assessments
particularly, (1) the 25%

any tax on the dividends received by

Glaro from the Philippines. It follows then
that the condition imposed under the
above-mentioned section is satisfied.
Hence, Wander is entitled to 15%
withholding tax rate and the BIR should
make a refund and/or tax credit.
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. 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
citesGolconda 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

138

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.

apply to a closely held corporation.

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

139

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 twenty-six
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

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
expensesreasonably 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

140

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.

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 wellestablished and routinely applied by the
courts, it is not a precise rule. It is used
only for administrative
convenience.22 Petitioner's application of

141

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.
If the CIR determined that the corporation
avoided the tax on shareholders by

142

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 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

143

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

144

DENIED, and the decision of the Court of

Appeals, sustaining that of the Court of
Tax Appeals, is hereby AFFIRMED. Costs
against petitioner. SO ORDERED.

145