G.R. No.
L-17518 October 30, 1922 in the Philippine Islands, the two statutes are here quoted for the purpose of
FREDERICK C. FISHER, plaintiff-appellant,
vs.
WENCESLAO TRINIDAD, Collector of Internal Revenue, defendant-appellee.
Fisher and De Witt and Antonio M. Opisso for appellants.
Acting Attorney-General Tuason for appellee.
JOHNSON, J.:
The only question presented by this appeal is: Are the "stock dividends" in the
present case "income" and taxable as such under the provisions of section 25 of Act
No. 2833? While the appellant presents other important questions, under the view
which we have taken of the facts and the law applicable to the present case, we deem
it unnecessary to discuss them now.
The defendant demurred to the petition in the lower court. The facts are therefore
admitted. They are simple and may be stated as follows:
That during the year 1919 the 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 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. The defendant demurred to the petition upon the ground that it did not
state facts sufficient to constitute cause of action. The demurrer was sustained and
the plaintiff appealed.
To sustain his appeal the appellant cites and relies on some decisions of the Supreme
Court of the United States as will as the decisions of the supreme court of some of
the states of the Union, in which the questions before us, based upon similar statutes,
was discussed. Among the most important decisions may be mentioned the
following: Towne vs. Eisner, 245 U.S., 418; Doyle vs. Mitchell Bors. Co., 247 U.S.,
179; Eisner vs. Macomber, 252 U.S., 189; Dekoven vs Alsop, 205 Ill., 309; 63
L.R.A., 587; Kaufman vs. Charlottesville Woolen Mills, 93 Va., 673.
In each of said cases an effort was made to collect an "income tax" upon "stock
dividends" and in each case it was held that "stock dividends" were capital and not
an "income" and therefore not subject to the "income tax" law.
The appellee admits the doctrine established in the case of Eisner vs. Macomber (252
U.S., 189) that a "stock dividend" is not "income" but argues that said Act No. 2833,
in imposing the tax on the stock dividend, does not violate the provisions of the
Jones Law. The appellee further argues that the statute of the United States providing
for tax upon stock dividends is different from the statute of the Philippine Islands,
and therefore the decision of the Supreme Court of the United States should not be
followed in interpreting the statute in force here.
For the purpose of ascertaining the difference in the said statutes ( (United States and
Philippine Islands), providing for an income tax in the United States as well as that
determining the difference, if any, in the language of the two statutes.
Chapter 463 of an Act of Congress of September 8, 1916, in its title 1 provides for
the collection of an "income tax." Section 2 of said Act attempts to define what is an
income. The definition follows:
That the term "dividends" as used in this title shall be held to mean any
distribution made or ordered to made by a corporation, . . . which stock
dividend shall be considered income, to the amount of its cash value.
Act No. 2833 of the Philippine Legislature is an Act establishing "an income tax."
Section 25 of said Act attempts to define the application of the income tax. The
definition follows:
The term "dividends" as used in this Law shall be held to mean any
distribution made or ordered to be made by a corporation, . . . out of its
earnings or profits accrued since March first, nineteen hundred and thirteen,
and payable to its shareholders, whether in cash or in stock of the
corporation, . . . . Stock dividend shall be considered income, to the amount
of the earnings or profits distributed.
It will be noted from a reading of the provisions of the two laws above quoted that
the writer of the law of the Philippine Islands must have had before him the statute of
the United States. No important argument can be based upon the slight different in
the wording of the two sections.
It is further argued by the appellee that there are no constitutional limitations upon
the power of the Philippine Legislature such as exist in the United States, and in
support of that contention, he cites a number of decisions. There is no question that
the Philippine Legislature may provide for the payment of an income tax, but it
cannot, under the guise of an income tax, collect a tax on property which is not an
"income." The Philippine Legislature can not impose a tax upon "property" under a
law which provides for a tax upon "income" only. The Philippine Legislature has no
power to provide a tax upon "automobiles" only, and under that law collect a tax
upon a carreton or bull cart. Constitutional limitations, that is to say, a statute
expressly adopted for one purpose cannot, without amendment, be applied to another
purpose which is entirely distinct and different. A statute providing for an income tax
cannot be construed to cover property which is not, in fact income. The Legislature
cannot, by a statutory declaration, change the real nature of a tax which it imposes. A
law which imposes an important tax on rice only cannot be construed to an impose
an importation tax on corn.
It is true that the statute in question provides for an income tax and contains a further
provision that "stock dividends" shall be considered income and are therefore subject
to income tax provided for in said law. If "stock dividends" are not "income" then the
law permits a tax upon something not within the purpose and intent of the law.
It becomes necessary in this connection to ascertain what is an "income in order that
we may be able to determine whether "stock dividends" are "income" in the sense
that the word is used in the statute. Perhaps it would be more logical to determine
first what are "stock dividends" in order that we may more clearly understand their
relation to "income." Generally speaking, stock dividends represent undistributed
increase in the capital of corporations or firms, joint stock companies, etc., etc., for a
particular period. They are used to show the increased interest or proportional shares
in the capital of each stockholder. In other words, the inventory of the property of the
corporation, etc., for particular period shows an increase in its capital, so that the
stock theretofore issued does not show the real value of the stockholder's interest,
and additional stock is issued showing the increase in the actual capital, or property,
or assets of the corporation, etc.
To illustrate: A and B form a corporation with an authorized capital of P10,000 for
the purpose of opening and conducting a drug store, with assets of the value of
P2,000, and each contributes P1,000. Their entire assets are invested in drugs and put
upon the shelves in their place of business. They commence business without a cent
in the treasury. Every dollar contributed is invested. Shares of stock to the amount of
P1,000 are issued to each of the incorporators, which represent the actual investment
and entire assets of the corporation. Business for the first year is good. Merchandise
is sold, and purchased, to meet the demands of the growing trade. At the end of the
first year an inventory of the assets of the corporation is made, and it is then
ascertained that the assets or capital of the corporation on hand amount to P4,000,
with no debts, and still not a cent in the treasury. All of the receipts during the year
have been reinvested in the business. Neither of the stockholders have withdrawn a
penny from the business during the year. Every peso received for the sale of
merchandise was immediately used in the purchase of new stock new supplies. At
the close of the year there is not a centavo in the treasury, with which either A or B
could buy a cup of coffee or a pair of shoes for his family. At the beginning of the
year they were P2,000, and at the end of the year they were P4,000, and neither of
the stockholders have received a centavo from the business during the year. At the
close of the year, when it is discovered that the assets are P4,000 and not P2,000,
instead of selling the extra merchandise on hand and thereby reducing the business to
its original capital, they agree among themselves to increase the capital they agree
among themselves to increase the capital issued and for that purpose issue additional
stock in the form of "stock dividends" or additional stock of P1,000 each, which
represents the actual increase of the shares of interest in the business. At the
beginning of the year each stockholder held one-half interest in the capital. At the
close of the year, and after the issue of the said stock dividends, they each still have
one-half interest in the business. The capital of the corporation increased during the
year, but has either of them received an income? It is not denied, for the purpose of
ordinary taxation, that the taxable property of the corporation at the beginning of
the year was P2,000, that at the close of the year it was P4,000, and that the tax rolls
should be changed in accordance with the changed conditions in the business. In
other words, the ordinary tax should be increased by P2,000.
Another illustration: C and D organized a corporation for agricultural purposes with
an authorized capital stock of P20,000 each contributing P5,000. With that capital
they purchased a farm and, with it, one hundred head of cattle. Every peso
contributed is invested. There is no money in the treasury. Much time and labor was
expanded during the year by the stockholders on the farm in the way of
improvements. Neither received a centavo during the year from the farm or the
cattle. At the beginning of the year the assets of the corporation, including the farm
and the cattle, were P10,000, and at the close of the year and inventory of the
property of the corporation is made and it is then found that they have the same farm
with its improvements and two hundred head of cattle by natural increase. At the end
of the year it is also discovered that, by reason of business changes, the farm and the
cattle both have increased in value, and that the value of the corporate property is
now P20,000 instead of P10,000 as it was at the beginning of the year. The
incorporators instead of reducing the property to its original capital, by selling off a
part of its, issue to themselves "stock dividends" to represent the proportional value
or interest of each of the stockholders in the increased capital at the close of the year.
There is still not a centavo in the treasury and neither has withdrawn a peso from the
business during the year. No part of the farm or cattle has been sold and not a single
peso was received out of the rents or profits of the capital of the corporation by the
stockholders.
Another illustration: A, an individual farmer, buys a farm with one hundred head of
cattle for the sum of P10,000. At the end of the first year, by reason of business
conditions and the increase of the value of both real estate and personal property, it is
discovered that the value of the farm and the cattle is P20,000. A, during the year,
has received nothing from the farm or the cattle. His books at the beginning of the
year show that he had property of the value of P10,000. His books at the close of the
year show that he has property of the value of P20,000. A is not a corporation. The
assets of his business are not shown therefore by certificates of stock. His books,
however, show that the value of his property has increased during the year by
P10,000, under any theory of business or law, be regarded as an "income" upon
which the farmer can be required to pay an income tax? Is there any difference in
law in the condition of A in this illustration and the condition of A and B in the
immediately preceding illustration? Can the increase of the value of the property in
either case be regarded as an "income" and be subjected to the payment of the
income tax under the law?
Each of the foregoing illustrations, it is asserted, is analogous to the case before us
and, in view of that fact, let us ascertain how lexicographers and the courts have
defined an "income." The New Standard Dictionary, edition of 1915, defines an
income as "the amount of money coming to a person or corporation within a
specified time whether as payment or corporation within a specified time whether as
payment for services, interest, or profit from investment." Webster's International
Dictionary defines an income as "the receipt, salary; especially, the annual receipts
of a private person or a corporation from property." Bouvier, in his law dictionary,
says that an "income" in the federal constitution and income tax act, is used in its
common or ordinary meaning and not in its technical, or economic sense. (146
Northwestern Reporter, 812) Mr. Black, in his law dictionary, says "An income is
the return in money from one's business, labor, or capital invested; gains, profit or
private revenue." "An income tax is a tax on the yearly profits arising from property ,
professions, trades, and offices."
The Supreme Court of the United States, in the case o Gray vs. Darlington (82 U.S.,
653), said in speaking of income that mere advance in value in no sense constitutes
the "income" specified in the revenue law as "income" of the owner for the year in
which the sale of the property was made. Such advance constitutes and can be treated
merely as an increase of capital. (In re Graham's Estate, 198 Pa., 216; Appeal of
Braun, 105 Pa., 414.)
Mr. Justice Hughes, later Associate Justice of the Supreme Court of the United States
and now Secretary of State of the United States, in his argument before the Supreme
Court of the United States in the case of Towne vs. Eisner, supra, defined an
"income" in an income tax law, unless it is otherwise specified, to mean cash or its
equivalent. It does not mean choses in action or unrealized increments in the value of
the property, and cites in support of the definition, the definition given by the
Supreme Court in the case of Gray vs. Darlington, supra.
In the case of Towne vs. Eisner, supra, Mr. Justice Holmes, speaking for the court,
said: "Notwithstanding the thoughtful discussion that the case received below, we
cannot doubt that the dividend was capital as well for the purposes of the Income
Tax Law. . . . 'A stock dividend really takes nothing from the property of the
corporation, and adds nothing to the interests of the shareholders. Its property is not
diminished and their interest are not increased. . . . The proportional interest of each
shareholder remains the same. . . .' In short, the corporation is no poorer and the
stockholder is no richer then they were before." (Gibbons vs. Mahon, 136 U.S., 549,
559, 560; Logan County vs. U.S., 169 U.S., 255, 261).
In the case of Doyle vs. Mitchell Bros. Co. (247 U.S., 179, Mr. Justice Pitney,
speaking for the court, said that the act employs the term "income" in its natural and
obvious sense, as importing something distinct from principal or capital and
conveying the idea of gain or increase arising from corporate activity.
Mr. Justice Pitney, in the case of Eisner vs. Macomber (252 U.S., 189), again
speaking for the court said: "An income may be defined as the gain derived from
capital, from labor, or from both combined, provided it be understood to include
profit gained through a sale or conversion of capital assets."
For bookkeeping purposes, when stock dividends are declared, the corporation or
company acknowledges a liability, in form, to the stockholders, equivalent to the
aggregate par value of their stock, evidenced by a "capital stock account." If profits
have been made by the corporation during a particular period and not divided, they
create additional bookkeeping liabilities under the head of "profit and loss,"
"undivided profits," "surplus account," etc., or the like. None of these, however,
gives to the stockholders as a body, much less to any one of them, either a claim
against the going concern or corporation, for any particular sum of money, or a right
to any particular portion of the asset, or any shares sells or until the directors
conclude that dividends shall be made a part of the company's assets segregated from
the common fund for that purpose. The dividend normally is payable in money and
when so paid, then only does the stockholder realize a profit or gain, which becomes
his separate property, and thus derive an income from the capital that he has
invested. Until that, is done the increased assets belong to the corporation and not to
the individual stockholders.
When a corporation or company issues "stock dividends" it shows that the company's
accumulated profits have been capitalized, instead of distributed to the stockholders
or retained as surplus available for distribution, in money or in kind, should
opportunity offer. Far from being a realization of profits of the stockholder, it tends
rather to postpone said realization, in that the fund represented by the new stock has
been transferred from surplus to assets, and no longer is available for actual
distribution. The essential and controlling fact is that the stockholder has received
nothing out of the company's assets for his separate use and benefit; on the contrary,
every dollar of his original investment, together with whatever accretions and
accumulations resulting from employment of his money and that of the other
stockholders in the business of the company, still remains the property of the
company, and subject to business risks which may result in wiping out of the entire
investment. Having regard to the very truth of the matter, to substance and not to
form, the stockholder by virtue of the stock dividend has in fact received nothing that
answers the definition of an "income." (Eisner vs. Macomber, 252 U.S., 189, 209,
211.)
The stockholder who receives a stock dividend has received nothing but a
representation of his increased interest in the capital of the corporation. There has
been no separation or segregation of his interest. All the property or capital of the
corporation still belongs to the corporation. There has been no separation of the
interest of the stockholder from the general capital of the corporation. The
stockholder, by virtue of the stock dividend, has no separate or individual control
over the interest represented thereby, further than he had before the stock dividend
was issued. He cannot use it for the reason that it is still the property of the
corporation and not the property of the individual holder of stock dividend. A
certificate of stock represented by the stock dividend is simply a statement of his
proportional interest or participation in the capital of the corporation. For
bookkeeping purposes, a corporation, by issuing stock dividend, acknowledges a
liability in form to the stockholders, evidenced by a capital stock account. The
receipt of a stock dividend in no way increases the money received of a stockholder
nor his cash account at the close of the year. It simply shows that there has been an
increase in the amount of the capital of the corporation during the particular period,
which may be due to an increased business or to a natural increase of the value of the
capital due to business, economic, or other reasons. We believe that the Legislature,
when it provided for an "income tax," intended to tax only the "income" of
corporations, firms or individuals, as that term is generally used in its common
acceptation; that is that the income means money received, coming to a person or
corporation for services, interest, or profit from investments. We do not believe that
the Legislature intended that a mere increase in the value of the capital or assets of a
corporation, firm, or individual, should be taxed as "income." Such property can be
reached under the ordinary from of taxation.
Mr. Justice Pitney, in the case of the Einer vs. Macomber, supra, said in discussing
the difference between "capital" and "income": "That the fundamental relation of
'capital' to 'income' has been much discussed by economists, the former being
likened to the tree or the land, the latter to the fruit or the crop; the former depicted
as a reservoir supplied from springs; the latter as the outlet stream, to be measured by
its flow during a period of time." It may be argued that a stockholder might sell the
stock dividend which he had acquired. If he does, then he has received, in fact, an
income and such income, like any other profit which he realizes from the business, is
an income and he may be taxed thereon.
There is a clear distinction between an extraordinary cash dividend, no matter when
earned, and stock dividends declared, as in the present case. The one is a
disbursement to the stockholder of accumulated earnings, and the corporation at once
parts irrevocably with all interest thereon. The other involves no disbursement by the
corporation. It parts with nothing to the stockholder. The latter receives, not an actual
dividend, but certificate of stock which simply evidences his interest in the entire
capital, including such as by investment of accumulated profits has been added to the
original capital. They are not income to him, but represent additions to the source of
his income, namely, his invested capital. (DeKoven vs. Alsop, 205, Ill., 309; 63
L.R.A. 587). Such a person is in the same position, so far as his income is concerned,
as the owner of young domestic animal, one year old at the beginning of the year,
which is worth P50 and, which, at the end of the year, and by reason of its growth, is
worth P100. The value of his property has increased, but has had an income during
the year? It is true that he had taxable property at the beginning of the year of the
value of P50, and the same taxable property at another period, of the value of P100,
but he has had no income in the common acceptation of that word. The increase in
the value of the property should be taken account of on the tax duplicate for the
purposes of ordinary taxation, but not as income for he has had none.
The question whether stock dividends are income, or capital, or assets has frequently
come before the courts in another form in cases of inheritance. A is a stockholder
in a large corporation. He dies leaving a will by the terms of which he give to B
during his lifetime the "income" from said stock, with a further provision that C
shall, at B's death, become the owner of his share in the corporation. During B's life
the corporation issues a stock dividend. Does the stock dividend belong to B as an
income, or does it finally belong to C as a part of his share in the capital or assets of
the corporation, which had been left to him as a remainder by A? While there has
been some difference of opinion on that question, we believe that a great weight of
authorities hold that the stock dividend is capital or assets belonging to C and not an
income belonging to B. In the case of D'Ooge vs. Leeds (176 Mass., 558, 560) it was
held that stock dividends in such cases were regarded as capital and not as income
(Gibbons vs. Mahon, 136 U.S., 549.)
In the case of Gibbson vs. Mahon, supra, Mr. Justice Gray said: "The distinction
between the title of a corporation, and the interest of its members or stockholders in
the property of the corporation, is familiar and well settled. The ownership of that
property is in the corporation, and not in the holders of shares of its stock. The
interest of each stockholder consists in the right to a proportionate part of the profits
whenever dividends are declared by the corporation, during its existence, under its
charter, and to a like proportion of the property remaining, upon the termination or
dissolution of the corporation, after payment of its debts." (Minot vs. Paine, 99
Mass., 101; Greeff vs. Equitable Life Assurance Society, 160 N. Y., 19.) In the case
of Dekoven vs. Alsop (205 Ill ,309, 63 L. R. A. 587) Mr. Justice Wilkin said: "A
dividend is defined as a corporate profit set aside, declared, and ordered by the
directors to be paid to the stockholders on demand or at a fixed time. Until the
dividend is declared, these corporate profits belong to the corporation, not to the
stockholders, and are liable for corporate indebtedness.
There is a clear distinction between an extraordinary cash dividend, no matter when
earned, and stock dividends declared. The one is a disbursement to the stockholders
of accumulated earning, and the corporation at once parts irrevocably with all
interest thereon. The other involves no disbursement by the corporation. It parts with
nothing to the stockholders. The latter receives, not an actual dividend, but
certificates of stock which evidence in a new proportion his interest in the entire
capital. When a cash becomes the absolute property of the stockholders 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 the stockholder,
it may be reached by an execution against the corporation, and sold as a part of the
property of the corporation. In such a case, if all the property of the corporation is
sold, then the stockholder certainly could not be charged with having received an
income by virtue of the issuance of the stock dividend. 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
dividend, whether large or small, are regarded as "income" and all stock dividends,
as capital or assets (Cook on Corporation, Chapter 32, secs. 534, 536; Davis vs.
Jackson, 152 Mass., 58; Mills vs. Britton, 64 Conn., 4; 5 Am., and Eng. Encycl. of
Law, 2d ed., p. 738.)
If the ownership of the property represented by a stock dividend is still in the
corporation and to in the holder of such stock, then it is difficult to understand how it
can be regarded as income to the stockholder and not as a part of the capital or assets
of the corporation. (Gibbsons vs. Mahon, supra.) the stockholder has received
nothing but a representation of an interest in the property of the corporation and, as a
matter of fact, he may never receive anything, depending upon the final outcome of
the business of the corporation. The entire assets of the corporation may be
consumed by mismanagement, or eaten up by debts and obligations, in which case
the holder of the stock dividend will never have received an income from his
investment in the corporation. A corporation may be solvent and prosperous today
and issue stock dividends in representation of its increased assets, and tomorrow be
absolutely insolvent by reason of changes in business conditions, and in such a case
the stockholder would have received nothing from his investment. In such a case, if
the holder of the stock dividend is required to pay an income tax on the same, the
result would be that he has paid a tax upon an income which he never received. Such
a conclusion is absolutely contradictory to the idea of an income. An income subject
to taxation under the law must be an actual income and not a promised or prospective
income.
The appelle argues that there is nothing in section 25 of Act No 2833 which
contravenes the provisions of the Jones Law. That may be admitted. He further
argues that the Act of Congress (U.S. Revenue Act of 1918) expressly authorized the
Philippine Legislatures to provide for an income tax. That fact may also be admitted.
But a careful reading of that Act will show that, while it permitted a tax upon
income, the same provided that income shall include gains, profits, and income
derived from salaries, wages, or compensation for personal services, as well as from
interest, rent, dividends, securities, etc. The appellee emphasizes the "income from
dividends." Of course, income received as dividends is taxable as an income but an
income from "dividends" is a very different thing from receipt of a "stock dividend."
One is an actual receipt of profits; the other is a receipt of a representation of the
increased value of the assets of corporation.
In all of the foregoing argument we have not overlooked the decisions of a few of the
courts in different parts of the world, which have reached a different conclusion from
the one which we have arrived at in the present case. Inasmuch, however, as appeals
may be taken from this court to the Supreme Court of the United States, we feel
bound to follow the same doctrine announced by that court.
Having reached the conclusion, supported by the great weight of the authority, that
"stock dividends" are not "income," the same cannot be taxes under that provision of
Act No. 2833 which provides for a tax upon income. Under the guise of an income
tax, property which is not an income cannot be taxed. When the assets of a
corporation have increased so as to justify the issuance of a stock dividend, the
increase of the assets should be taken account of the Government in the ordinary tax
duplicates for the purposes of assessment and collection of an additional tax. For all
of the foregoing reasons, we are of the opinion, and so decide, that the judgment of
the lower court should be revoked, and without any finding as to costs, it is so
ordered.
Araullo, C.J. Avancea, Villamor and Romualdez, JJ., concur.
Separate Opinions
STREET, J., concurring:
I agree that the trial court erred in sustaining the demurrer, and the judgment must be
reversed. Instead of demurring the defendant should have answered and alleged, if
such be the case, that the stock dividend which was the subject of taxation represents
the amount of earnings or profits distributed by means of the issuance of said stock
dividend; and the case should have been tried on that question of fact.
In this connection it will be noted that section 25 (a) of Act No. 2833, of the
Philippine Legislature, under which this tax was imposed, does not levy a tax
generally on stock dividends to the extend of the part of the stock nor even to the
extend of its value, but declares that stock dividends shall be considered as income to
the amount of the earnings or profits distributed. Under provision, before the tax can
be lawfully assessed and collected, it must appear that he stock dividend represents
earning or profits distributed; and the burden of proof is on the Collector of Internal
Revenue to show this.
The case of Eisner vs. Macomber (252 U.S., 189; 64 L. ed., 521), has been cited as
authority for the proposition that it is incompetent for the Legislature to tax as
income any property which by nature is really capital as a stock dividend is there
said to be. In that case the Supreme Court of the United States held that a
Congressional Act taxing stock dividends as income was repugnant to that provision
of the Constitution of the United States which required that direct taxes upon
property shall be apportioned for collection among the several states according to
population and that the Sixteenth Amendment, in authorizing the imposition by
Congress of taxes upon income, had not vested Congress with the power to levy
direct taxes, on property under the guise of income taxes. But the resolution
embodied in that decision was evidently reached because of the necessity of
harmonizing two different provisions of the Constitution of the United States, as
amended. In this jurisdiction our Legislature has full authority to levy both taxes on
property and income taxes; and there is no organic provision here in force similar to
that which, under the Constitution of the United States, requires direct taxes on
property to be levied in a particular way.
It results, under the statute here in force, there being no constitutional restriction
upon the action of the law making body, that the case before us presents merely a
question of statutory construction. That the problem should be viewed in this light, in
a case where there is no restriction upon the legislative body, is pointed our in Eisner
vs. Macomber, supra, where in the course of his opinion Mr. Justice Pitney refers to
the cases of the Swan Brewery Co. vs. Rex ([1914] A. C. 231), and Tax
Commissioner vs. Putnam (227 Mass., 522), as being distinguished from Eisner vs.
Macomber by the very circumstance that in those cases the law making body, or
bodies were under no restriction as to the method of levying taxes. Such is the
situation here.
RR 02-40
SECTION 38. Bases of computation. Approved standard methods of accounting
will be ordinarily regarded as clearly reflecting income. A method of accounting will
not, however, be regarded as clearly reflecting income unless all items of gross
income and all deductions are treated with reasonable consistency. All items of gross
income shall be included in the gross income for the taxable year in which they are
received by the taxpayer and deductions taken accordingly, unless in order clearly to
reflect income such amounts are to be properly accounted for as of a different period.
For instance, in any case in which it is necessary to use an inventory, no accounting
in regard to purchases and sales will correctly reflect income except an accrual
method. A taxpayer is deemed to have received items of gross income which have
been credited to or set apart for him without restriction. On the other hand,
appreciation in value of property is not even an accrual of income to a taxpayer prior
to the realization of such appreciation through sale or conversion of the property.
(For methods of accounting and determination of accounting period, see Sections
166 to 169 of these regulations.)(Section 29(a) of the Code)
FINAL WITHHOLDING TAX; Interest income from personal deposits of
United Nations Personnel - The tax exemption privileges extended to United
Nations personnel under Section (b), Article V and Sections 18 and 19 (b) of Article
VI of the Convention on the Privileges and Immunities of the United Nations do not
include exemption from the final withholding tax the interest income from personal
deposits of the personnel of the United Nations residing in the Philippines, whether
Filipino or resident alien, considering that the interest income is derived from passive
investments in the Philippines and not from their salaries or emolument as personnel
of the united Nations. (BIR Ruling No. 049-98 dated April 27, 1998)
Under the realization principle revenue is realized when both of the ff conditions are
met:
a. Earning process is complete or is virtually complete.
b. Exchange has taken place
This principle requires that revenue must be earned before in be recorded. Thus, the
amounts received in advance are not treated as revenue of the period in which they
are received but as revenue of the future period or periods in which they are earned.
These amounts are carried as unearned revenue, that Is, I iabi I it ies to transfer
goods or future unt I I the earning render services in the process is complete. (Campi
lation of Statements of Financial Accounting Standards No. 1-22, pp. 41-42).
Claim of right doctrine. In the tax law of the United States the claim of right
doctrine causes a taxpayer to recognize income if they receive the income even
though they do not have a fixed right to the income.
G.R. No. 172231 February 12, 2007
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
ISABELA CULTURAL CORPORATION, Respondent.
DECISION
YNARES-SANTIAGO, J.:
Petitioner Commissioner of Internal Revenue (CIR) assails the September 30, 2005
Decision1 of the Court of Appeals in CA-G.R. SP No. 78426 affirming the February
26, 2003 Decision2 of the Court of Tax Appeals (CTA) in CTA Case No. 5211,
which cancelled and set aside the Assessment Notices for deficiency income tax and
expanded withholding tax issued by the Bureau of Internal Revenue (BIR) against
respondent Isabela Cultural Corporation (ICC).
The facts show that on February 23, 1990, ICC, a domestic corporation, received
from the BIR Assessment Notice No. FAS-1-86-90-000680 for deficiency income
tax in the amount of P333,196.86, and Assessment Notice No. FAS-1-86-90-000681
for deficiency expanded withholding tax in the amount of P4,897.79, inclusive of
surcharges and interest, both for the taxable year 1986.
The deficiency income tax of P333,196.86, arose from:
(1) The BIRs disallowance of ICCs claimed expense deductions for
professional and security services billed to and paid by ICC in 1986, to wit:
(a) Expenses for the auditing services of SGV & Co., 3 for the year
ending December 31, 1985;4
(b) Expenses for the legal services [inclusive of retainer fees] of
the law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna &
Bengson for the years 1984 and 1985.5
(c) Expense for security services of El Tigre Security &
Investigation Agency for the months of April and May 1986.6
(2) The alleged understatement of ICCs interest income on the three
promissory notes due from Realty Investment, Inc.
The deficiency expanded withholding tax of P4,897.79 (inclusive of interest and
surcharge) was allegedly due to the failure of ICC to withhold 1% expanded
withholding tax on its claimed P244,890.00 deduction for security services. 7
On March 23, 1990, ICC sought a reconsideration of the subject assessments. On
February 9, 1995, however, it received a final notice before seizure demanding
payment of the amounts stated in the said notices. Hence, it brought the case to the
CTA which held that the petition is premature because the final notice of assessment
cannot be considered as a final decision appealable to the tax court. This was
reversed by the Court of Appeals holding that a demand letter of the BIR reiterating
the payment of deficiency tax, amounts to a final decision on the protested
assessment and may therefore be questioned before the CTA. This conclusion was
sustained by this Court on July 1, 2001, in G.R. No. 135210.8 The case was thus
remanded to the CTA for further proceedings.
On February 26, 2003, the CTA rendered a decision canceling and setting aside the
assessment notices issued against ICC. It held that the claimed deductions for
professional and security services were properly claimed by ICC in 1986 because it
was only in the said year when the bills demanding payment were sent to ICC.
Hence, even if some of these professional services were rendered to ICC in 1984 or
1985, it could not declare the same as deduction for the said years as the amount
thereof could not be determined at that time.
The CTA also held that ICC did not understate its interest income on the subject
promissory notes. It found that it was the BIR which made an overstatement of said
income when it compounded the interest income receivable by ICC from the
promissory notes of Realty Investment, Inc., despite the absence of a stipulation in
the contract providing for a compounded interest; nor of a circumstance, like delay in
payment or breach of contract, that would justify the application of compounded
interest.
Likewise, the CTA found that ICC in fact withheld 1% expanded withholding tax on
its claimed deduction for security services as shown by the various payment orders
and confirmation receipts it presented as evidence. The dispositive portion of the
CTAs Decision, reads:
WHEREFORE, in view of all the foregoing, Assessment Notice No. FAS-1-86-90-
000680 for deficiency income tax in the amount of P333,196.86, and Assessment
Notice No. FAS-1-86-90-000681 for deficiency expanded withholding tax in the
amount of P4,897.79, inclusive of surcharges and interest, both for the taxable year
1986, are hereby CANCELLED and SET ASIDE.
SO ORDERED.9
Petitioner filed a petition for review with the Court of Appeals, which affirmed the
CTA decision,10 holding that although the professional services (legal and auditing
services) were rendered to ICC in 1984 and 1985, the cost of the services was not yet
determinable at that time, hence, it could be considered as deductible expenses only
in 1986 when ICC received the billing statements for said services. It further ruled
that ICC did not understate its interest income from the promissory notes of Realty
Investment, Inc., and that ICC properly withheld and remitted taxes on the payments
for security services for the taxable year 1986.
Hence, petitioner, through the Office of the Solicitor General, filed the instant
petition contending that since ICC is using the accrual method of accounting, the
expenses for the professional services that accrued in 1984 and 1985, should have
been declared as deductions from income during the said years and the failure of ICC
to do so bars it from claiming said expenses as deduction for the taxable year 1986.
As to the alleged deficiency interest income and failure to withhold expanded
withholding tax assessment, petitioner invoked the presumption that the assessment
notices issued by the BIR are valid.
The issue for resolution is whether the Court of Appeals correctly: (1) sustained the
deduction of the expenses for professional and security services from ICCs gross
income; and (2) held that ICC did not understate its interest income from the
promissory notes of Realty Investment, Inc; and that ICC withheld the required 1%
withholding tax from the deductions for security services.
The requisites for the deductibility of ordinary and necessary trade, business, or
professional expenses, like expenses paid for legal and auditing services, are: (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.11
The requisite that it must have been paid or incurred during the taxable year is
further qualified by Section 45 of the National Internal Revenue Code (NIRC) which
states that: "[t]he deduction provided for in this Title shall be taken for the taxable
year in which paid or accrued or paid or incurred, dependent upon the method of strictly construed.18
accounting upon the basis of which the net income is computed x x x".
Accounting methods for tax purposes comprise a set of rules for determining when
and how to report income and deductions.12 In the instant case, the accounting
method used by ICC is the accrual method.
Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual
method of accounting, expenses not being claimed as deductions by a taxpayer in the
current year when they are incurred cannot be claimed as deduction from income for
the succeeding year. Thus, a taxpayer who is authorized to deduct certain expenses
and other allowable deductions for the current year but failed to do so cannot deduct
the same for the next year.13
The accrual method relies upon the taxpayers right to receive amounts or its
obligation to pay them, in opposition to actual receipt or payment, which
characterizes the cash method of accounting. Amounts of income accrue where the
right to receive them become fixed, where there is created an enforceable liability.
Similarly, liabilities are accrued when fixed and determinable in amount, without
regard to indeterminacy merely of time of payment.14
For a taxpayer using the accrual method, the determinative question is, when do the
facts present themselves in such a manner that the taxpayer must recognize income
or expense? 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 all-events test requires the right to income or liability be fixed, and the amount
of such income or liability be determined with reasonable accuracy. However, the
test does not demand that the amount of income or liability be known absolutely,
only that a taxpayer has at his disposal the information necessary to compute the
amount with reasonable accuracy. The all-events test is satisfied where computation
remains uncertain, if its basis is unchangeable; the test is satisfied where a
computation may be unknown, but is not as much as unknowable, within the taxable
year. The amount of liability does not have to be determined exactly; it must be
determined with "reasonable accuracy." Accordingly, the term "reasonable
accuracy" implies something less than an exact or completely accurate
amount.[15]
The propriety of an accrual must be judged by the facts that a taxpayer knew,
or could reasonably be expected to have known, at the closing of its books for
the taxable year.[16] Accrual method of accounting presents largely a question of
fact; such that the taxpayer bears the burden of proof of establishing the accrual of an
item of income or deduction.17
Corollarily, it is a governing principle in taxation that tax exemptions must be
construed in strictissimi juris against the taxpayer and liberally in favor of the taxing
authority; and one who claims an exemption must be able to justify the same by the
clearest grant of organic or statute law. An exemption from the common burden
cannot be permitted to exist upon vague implications. And since a deduction for
income tax purposes partakes of the nature of a tax exemption, then it must also be
In the instant case, the expenses for professional fees consist of expenses for legal
and auditing services. The expenses for legal services pertain to the 1984 and 1985
legal and retainer fees of the law firm Bengzon Zarraga Narciso Cudala Pecson
Azcuna & Bengson, and for reimbursement of the expenses of said firm in
connection with ICCs tax problems for the year 1984. As testified by the Treasurer
of ICC, the firm has been its counsel since the 1960s.19 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 as well
as the compensation for its legal services. The failure to determine the exact amount
of the expense during the taxable year when they could have been claimed as
deductions cannot thus be attributed solely to the delayed billing of these liabilities
by the firm. For one, ICC, in the exercise of due diligence could have inquired into
the amount of their obligation to the firm, especially so that it is using the accrual
method of accounting. For another, it could have reasonably determined the amount
of legal and retainer fees owing to its familiarity with the rates charged by their long
time legal consultant.
As previously stated, the accrual method presents largely a question of fact and that
the taxpayer bears the burden of establishing the accrual of an expense or income.
However, ICC failed to discharge this burden. As to when the firms performance of
its services in connection with the 1984 tax problems were completed, or whether
ICC exercised reasonable diligence to inquire about the amount of its liability, or
whether it does or does not possess the information necessary to compute the amount
of said liability with reasonable accuracy, are questions of fact which ICC never
established. It simply relied on the defense of delayed billing by the firm and the
company, which under the circumstances, is not sufficient to exempt it from being
charged with knowledge of the reasonable amount of the expenses for legal and
auditing services.
In the same vein, the professional fees of SGV & Co. for auditing the financial
statements of ICC for the year 1985 cannot be validly claimed as expense deductions
in 1986. This is so because ICC failed to present evidence showing that even with
only "reasonable accuracy," as the standard to ascertain its liability to SGV & Co. in
the year 1985, it cannot determine the professional fees which said company would
charge for its services.
ICC thus failed to discharge the burden of proving that the claimed expense
deductions for the professional services were allowable deductions for the taxable
year 1986. Hence, per Revenue Audit Memorandum Order No. 1-2000, they cannot
be validly deducted from its gross income for the said year and were therefore
properly disallowed by the BIR.
As to the expenses for security services, the records show that these expenses were
incurred by ICC in 198620 and could therefore be properly claimed as deductions for
the said year.
Anent the purported understatement of interest income from the promissory notes of
Realty Investment, Inc., we sustain the findings of the CTA and the Court of Appeals
that no such understatement exists and that only simple interest computation and not
a compounded one should have been applied by the BIR. There is indeed no
stipulation between the latter and ICC on the application of compounded interest. 21
Under Article 1959 of the Civil Code, unless there is a stipulation to the contrary,
interest due should not further earn interest.
Likewise, the findings of the CTA and the Court of Appeals that ICC truly withheld
the required withholding tax from its claimed deductions for security services and
remitted the same to the BIR is supported by payment order and confirmation
receipts.22 Hence, the Assessment Notice for deficiency expanded withholding tax
was properly cancelled and set aside.
In sum, Assessment Notice No. FAS-1-86-90-000680 in the amount of P333,196.86
for deficiency income tax should be cancelled and set aside but only insofar as the
claimed deductions of ICC for security services. Said Assessment is valid as to the
BIRs disallowance of ICCs expenses for professional services. The Court of
Appeals cancellation of Assessment Notice No. FAS-1-86-90-000681 in the amount
of P4,897.79 for deficiency expanded withholding tax, is sustained.
WHEREFORE, the petition is PARTIALLY GRANTED. The September 30, 2005
Decision of the Court of Appeals in CA-G.R. SP No. 78426, is AFFIRMED with the
MODIFICATION that Assessment Notice No. FAS-1-86-90-000680, which
disallowed the expense deduction of Isabela Cultural Corporation for professional
and security services, is declared valid only insofar as the expenses for the
professional fees of SGV & Co. and of the law firm, Bengzon Zarraga Narciso
Cudala Pecson Azcuna & Bengson, are concerned. The decision is affirmed in all
other respects.
The case is remanded to the BIR for the computation of Isabela Cultural
Corporations liability under Assessment Notice No. FAS-1-86-90-000680.
SO ORDERED.
CHAPTER VIII
ACCOUNTING PERIODS AND METHODS OF ACCOUNTING
SEC. 43. General Rule. - The taxable income shall be computed upon the basis of the
taxpayer's annual accounting period (fiscal year or calendar year, as the case may be)
in accordance with the method of accounting regularly employed in keeping the books
of such taxpayer, but if no such method of accounting has been so employed, or if the
method employed does not clearly reflect the income, the computation shall be made
in accordance with such method as in the opinion of the Commissioner clearly reflects
the income. If the taxpayer's annual accounting period is other than a fiscal year, as
defined in Section 22(Q), or if the taxpayer has no annual accounting period, or does
not keep books, or if the taxpayer is an individual, the taxable income shall be
computed on the basis of the calendar year.
SEC. 44. Period in which Items of Gross Income Included.- The amount of all items
of gross income shall be included in the gross income for the taxable year in which
received by the taxpayer, unless, under methods of accounting permitted under Section
43, any such amounts are to be properly accounted for as of a different period. In the
case of the death of a taxpayer, there shall be included in computing taxable income
for the taxable period in which falls the date of his death, amounts accrued up to the
date of his death if not otherwise properly includible in respect of such period or a
prior period.
SEC. 45. Period for which Deductions and Credits Taken. - The deductions
provided for in this Title shall be taken for the taxable year in which 'paid or accrued'
or 'paid or incurred', dependent upon the method of accounting upon the basis of
which the net income is computed, unless in order to clearly reflect the income, the
deductions should be taken as of a different period. In the case of the death of a
taxpayer, there shall be allowed as deductions for the taxable period in which falls the
date of his death, amounts accrued up to the date of his death if not otherwise properly
allowable in respect of such period or a prior period.
SEC. 46. Change of Accounting Period. - If a taxpayer, other than an individual,
changes his accounting period from fiscal year to calendar year, from calendar year to
fiscal year, or from one fiscal year to another, the net income shall, with the approval
of the Commissioner, be computed on the basis of such new accounting period, subject
to the provisions of Section 47.
SEC. 47. Final or Adjustment Returns for a Period of Less than Twelve (12)
Months. -
(A) Returns for Short Period Resulting from Change of Accounting Period. - If a
taxpayer, other than an individual, with the approval of the Commissioner, changes
the basis of computing net income from fiscal year to calendar year, a separate final
or adjustment return shall be made for the period between the close of the last fiscal
year for which return was made and the following December 31. If the change is from
calendar year to fiscal year, a separate final or adjustment return shall be made for the
period between the close of the last calendar year for which return was made and the
date designated as the close of the fiscal year. If the change is from one fiscal year to
another fiscal year, a separate final or adjustment return shall be made for the period
between the close of the former fiscal year and the date designated as the close of the
new fiscal year.
(B) Income Computed on Basis of Short Period. - Where a separate final or
adjustment return is made under Subsection (A) on account of a change in the
accounting period, and in all other cases where a separate final or adjustment return is
required or permitted by rules and regulations prescribed by the Secretary of Finance,
upon recommendation of the Commissioner, to be made for a fractional part of a year,
then the income shall be computed on the basis of the period for which separate final
or adjustment return is made.
SEC. 48. Accounting for Long-term Contracts. - Income from long-term contracts
shall be reported for tax purposes in the manner as provided in this Section. As used
herein, the term 'long-term contracts' means building, installation or construction
contracts covering a period in excess of one (1) year. Persons whose gross income is
derived in whole or in part from such contracts shall report such income upon the basis
of percentage of completion. The return should be accompanied by a return certificate
of architects or engineers showing the percentage of completion during the taxable
year of the entire work performed under contract. There should be deducted from such
gross income all expenditures made during the taxable year on account of the contract,
account being taken of the material and supplies on hand at the beginning and end of
the taxable period for use in connection with the work under the contract but not yet
so applied. If upon completion of a contract, it is found that the taxable [net] income
arising thereunder has not been clearly reflected for any year or years, the
Commissioner may permit or require an amended return.
SEC. 49. Installment Basis. -
(A) Sales of Dealers in Personal Property. - Under rules and regulations prescribed
by the Secretary of Finance, upon recommendation of the Commissioner, a person
who regularly sells or otherwise disposes of personal property on the installment plan
may return as income therefrom in any taxable year that proportion of the installment
payments actually received in that year, which the gross profit realized or to be realized
when payment is completed, bears to the total contract price.
(B) Sales of Realty and Casual Sales of Personality. - In the case (1) of a casual sale
or other casual disposition of personal property (other than property of a kind which
would properly be included in the inventory of the taxpayer if on hand at the close of
the taxable year), for a price exceeding One thousand pesos (P1,000), or (2) of a sale
or other disposition of real property, if in either case the initial payments do not exceed
twenty-five percent (25%) of the selling price, the income may, under the rules and
regulations prescribed by the Secretary of Finance, upon recommendation of the
Commissioner, be returned on the basis and in the manner above prescribed in this
Section. As used in this Section, the term 'initial payments' means the payments
received in cash or property other than evidences of indebtedness of the purchaser
during the taxable period in which the sale or other disposition is made.
(C) Sales of Real Property Considered as Capital Asset by Individuals. - An
individual who sells or disposes of real property, considered as capital asset, and is
otherwise qualified to report the gain therefrom under Subsection (B) may pay the
capital gains tax in installments under rules and regulations to be promulgated by the
Secretary of Finance, upon recommendation of the Commissioner.
(D) Change from Accrual to Installment Basis. - If a taxpayer entitled to the benefits
of Subsection (A) elects for any taxable year to report his taxable income on the
installment basis, then in computing his income for the year of change or any
subsequent year, amounts actually received during any such year on account of sales
or other dispositions of property made in any prior year shall not be excluded.
SEC. 50. Allocation of Income and Deductions. - In the case of two or more
organizations, trades or businesses (whether or not incorporated and whether or not
organized in the Philippines) owned or controlled directly or indirectly by the same
interests, the Commissioner is authorized to distribute, apportion or allocate gross
income or deductions between or among such organization, trade or business, if he
determined that such distribution, apportionment or allocation is necessary in order to
prevent evasion of taxes or clearly to reflect the income of any such organization, trade
or business.
(F) The term 'resident alien' means an individual whose residence is within the
Philippines and who is not a citizen thereof.
SECTION 5. Definition. A "non-resident alien individual" means an individual
(a) Whose residence is not within the Philippines; and
(b) Who is not a citizen of the Philippines.
An alien actually present in the Philippines who is not a mere transient or sojourner
is a resident of the Philippines for purposes of the income tax. Whether he is a
transient or not is determined by his intentions with regard to the length and nature of
his stay. A mere floating intention indefinite as to time, to return to another country
is not sufficient to constitute him a transient. If he lives in the Philippines and has no
definite intention as to his stay, he is a resident. One who comes to the Philippines
for a definite purpose which in its nature may be promptly accomplished is a
transient. But if his purpose is of such a nature that an extended stay may be
necessary for its accomplishment, and to that end the alien makes his home
temporarily in the Philippines, he becomes a resident, though it may be his intention
at all times to return to his domicile abroad when the purpose for which he came has
been consummated or abandoned.
SEC. 23. General Principles of Income Taxation in the Philippines. - Except when
otherwise provided in this Code:
(A) A citizen of the Philippines residing therein is taxable on all income derived from
sources within and without the Philippines;
(B) A nonresident citizen is taxable only on income derived from sources within the
Philippines;
(C) An individual citizen of the Philippines who is working and deriving income from
abroad as an overseas contract worker is taxable only on income derived from sources
within the Philippines: Provided, That a seaman who is a citizen of the Philippines and
who receives compensation for services rendered abroad as a member of the
complement of a vessel engaged exclusively in international trade shall be treated as
an overseas contract worker;
(D) An alien individual, whether a resident or not of the Philippines, is taxable only
on income derived from sources within the Philippines;
(E) A domestic corporation is taxable on all income derived from sources within and
without the Philippines; and
(F) A foreign corporation, whether engaged or not in trade or business in the
Philippines, is taxable only on income derived from sources within the Philippines.
EC. 25. Tax on Nonresident Alien Individual. -
(A) Nonresident Alien Engaged in trade or Business Within the Philippines. -
(1) In General. - A nonresident alien individual engaged in trade or business in
the Philippines shall be subject to an income tax in the same manner as an
individual citizen and a resident alien individual, on taxable income received
from all sources within the Philippines. A nonresident alien individual who shall
come to the Philippines and stay therein for an aggregate period of more than
one hundred eighty (180) days during any calendar year shall be deemed a
 'nonresident alien doing business in the Philippines'. Section 22 (G) of this Code
notwithstanding.
SECTION 8. Taxation of non-resident aliens; classification. Non-resident alien
individuals are divided into two classes: (1) Those engaged in trade or business
within the Philippines, and (2) those not engaged in trade or business within the
Philippines. Non-resident aliens falling within the first class are subject to the
graduated rates established in Section 21 with respect to their net income from
sources within the Philippines. Non-resident aliens falling within the second class are
subject to a flat rate of 20 per cent on their total income from sources within the
Philippines, if such total income does not exceed P23,800, otherwise, the graduated
rates established in Section 21 will apply to the total income if it exceeds P23,800.
(Conforms with amendments by R.A. 2343, effective June 20, 1959.)
The phrase "engaged in trade or business within the Philippines" includes the
performance of personal services within the Philippines. Whether a non-resident
alien has an "office or place of business," however, implies a place for the regular
transaction of business and does not include a place where casual or incidental
transactions might be, or are, effected. Neither the beneficiary nor the grantor of a
trust, whether revocable or irrevocable, is deemed to be engaged in trade or business
in the Philippines or to have an office or place of business therein, merely because
the trustee is engaged in trade or business in the Philippines or has an office or place
of business therein. (Test of "office or place of business" was deleted by R.A. 2343.)
(Section 23 of the Code)
Expatriates working in the Philippines must keep track of the number of days
of their stay in the country to ensure that they maximize the tax benefits
available to them.
Spending extra or fewer days in the country could change their tax treatment to their
benefit or detriment.
Physical presence, or the number of days that an expatriate is physically present in
the Philippines, is used in ascertaining the tax status and the eligibility of an
expatriate for tax relief under tax treaties.
The tax status of an expatriate is vital in determining their income tax rate, tax
exemptions or deductions and filing responsibilities.
For tax purposes, expatriates on work assignment in the Philippines, being non-
citizens of the country, are considered aliens. As such, regardless of their tax status,
expatriates are subject to Philippine tax only on income -- consisting mainly of
salary, wages and other remuneration from employment in the Philippines -- that
they derive from sources within the country.
Resident or nonresident?
Expatriates are classified as resident or nonresident aliens.
An expatriate may be considered a resident alien if: (1) he or she is not a mere
transient or sojourner, (2) he or she has no definite intention to leave, or (3) his or her
purpose is of such a nature that an extended stay may be necessary for its
accomplishment, and to that end the alien makes his or her home temporarily in the
Philippines.
Thus, both duration and intention of stay are considered in determining the status of
expatriates as resident aliens.
Resident aliens are taxed in the same way as resident citizens, i.e., at the graduated
rates of 5%-32% of their net taxable income.
Engaged or not engaged in business?
Nonresident aliens are further categorized into nonresident aliens engaged in trade or
business in the Philippines, and those not engaged in trade or business in the
Philippines.
Like resident aliens, nonresident aliens engaged in trade or businesses are subject to
the 5%-32% progressive rates; but unlike the former, the latter do not qualify for
substituted filing.
Nonresident aliens engaged in trade or businesses are liable to file annual income tax
returns even if their Philippine tax has been fully withheld by their employers.
On the other hand, nonresident aliens not engaged in trade or business are taxed at
25% of their gross income, which shall be withheld and remitted by the withholding
agent/payor in the Philippines as a final tax.
At certain income levels, nonresident aliens engaged in trade or business status may
be preferred due to availability of deductions and lower tax rate (5%-32% graduated
rates compared to 25% tax on gross).
However, at higher income levels, where most expat employees are, having the
status of not engaged in trade or business is preferred, despite allowable deductions
under the graduated rates, since this results in lower tax due.
On the other hand, determination of whether an expatriate as an alien is regarded as
engaged or not engaged in trade or business is based primarily on the duration of an
expatriates stay in the country.
This is where the counting of an expatriates days of stay is important.
180-day rule: Let me count the days
Under Section 25(A)(1) of the Tax Code, if an alien stays in the Philippines for an
aggregate period of more than 180 days during any calendar year, he will be
considered as a nonresident alien engaged in trade or business.
Otherwise, he shall be classified as not engaged in trade or business in the
Philippines.
The Tax Code uses the term aggregate.
Hence, for purposes of determining the 180-day period, the presence of an expatriate
in the Philippines need not be continuous or uninterrupted in a calendar year. Thus,
an expatriate who travels back and forth between his home country and the
Philippines will still be considered engaged in trade or business in the Philippines
provided that the aggregate period of his stay in the Philippines exceeds 180 days in
any calendar year.
The definition also adopts the term during any calendar year which significantly
impacts on the classification.
There are instances when the expatriate meets the 180-day test in his first year of
assignment but fails to satisfy the 180-day threshold on his second year. Would the
expatriate still be considered engaged in business for the second year?
In Bureau of Internal Revenue (BIR) Ruling No. DA-056-05, BIR addressed this
issue when it clarified that the phrase any calendar year means all the months in a
calendar year covered by the period of assignment of the alien individual.
Hence, an alien who stays in the Philippines for more than 180 days in any calendar
year would be taxed at the graduated rates of 5%-32% not only during the year that
he exceeds the 180-day period, but also during the other years of assignment, even if
such stay did not exceed 180 days.
(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the
Philippines. - There shall be levied, collected and paid for each taxable year upon the
entire income received from all sources within the Philippines by every nonresident
alien individual not engaged in trade or business within the Philippines as interest,
cash and/or property dividends, rents, salaries, wages, premiums, annuities,
compensation, remuneration, emoluments, or other fixed or determinable annual or
periodic or casual gains, profits, and income, and capital gains, a tax equal to twenty-
five percent (25%) of such income. Capital gains realized by a nonresident alien
individual not engaged in trade or business in the Philippines from the sale of shares
of stock in any domestic corporation and real property shall be subject to the income
tax prescribed under Subsections (C) and (D) of Section 24.
(HH) The term 'minimum wage earner' shall refer to a worker in the private sector
paid the statutory minimum wage or to an employee in the public sector with
compensation income of not more than the statutory minimum wage in the non-
agricultural sector where he/she is assigned. [10]
G.R. No. 184450, January 24, 2017 - JAIME N. SORIANO, MICHAEL
VERNON M. GUERRERO, MARY ANN L. REYES, MARAH SHARYN M. DE
CASTRO AND CRIS P. TENORIO, Petitioners, v. SECRETARY OF FINANCE
AND THE COMMISSIONER OF INTERNAL REVENUE, Respondents.; G.R. No.
184508 - SENATOR MANUEL A. ROXAS, Petitioner, v. MARGARITO B.
TEVES, IN HIS CAPACITY AS SECRETARY OF THE DEPARTMENT OF
FINANCE AND LILIAN B. HEFTI, IN HER CAPACITY AS COMMISSIONER
OF THE BUREAU OF INTERNAL REVENUE, Respondents.; G.R. No. 184538 -
TRADE UNION CONGRESS OF THE PHILIPPINES (TUCP), REPRESENTED
BY ITS PRESIDENT, DEMOCRITO T. MENDOZA, Petitioner, v. MARGARITO
B. TEVES, IN HIS CAPACITY AS SECRETARY OF THE DEPARTMENT OF
FINANCE AND LILIAN B. HEFTI, IN HER CAPACITY AS COMMISSIONER
OF THE BUREAU OF INTERNAL REVENUE Respondents.; G.R. No. 185234 -
SENATOR FRANCIS JOSEPH G. ESCUDERO, TAX MANAGEMENT
ASSOCIATION OF THE PHILIPPINES, INC. AND ERNESTO G. EBRO,
Petitioners, v. MARGARITO B. TEVES, IN HIS CAPACITY AS SECRETARY OF
THE DEPARTMENT OF FINANCE AND SIXTO S. ESQUIVIAS IV, IN HIS
CAPACITY AS COMMISSIONER OF THE BUREAU OF INTERNAL
REVENUE, Respondents.
PHILIPPINE SUPREME COURT DECISIONS
EN BANC
G.R. No. 184450, January 24, 2017
JAIME N. SORIANO, MICHAEL VERNON M. GUERRERO, MARY ANN L.
REYES, MARAH SHARYN M. DE CASTRO AND CRIS P. TENORIO,
Petitioners, v. SECRETARY OF FINANCE AND THE COMMISSIONER OF
INTERNAL REVENUE, Respondents.
G.R. No. 184508
SENATOR MANUEL A. ROXAS, Petitioner, v. MARGARITO B. TEVES, IN HIS
CAPACITY AS SECRETARY OF THE DEPARTMENT OF FINANCE AND
LILIAN B. HEFTI, IN HER CAPACITY AS COMMISSIONER OF THE BUREAU
OF INTERNAL REVENUE, Respondents.
G.R. No. 184538
TRADE UNION CONGRESS OF THE PHILIPPINES (TUCP), REPRESENTED
BY ITS PRESIDENT, DEMOCRITO T. MENDOZA, Petitioner, v. MARGARITO
B. TEVES, IN HIS CAPACITY AS SECRETARY OF THE DEPARTMENT OF
FINANCE AND LILIAN B. HEFTI, IN HER CAPACITY AS COMMISSIONER
OF THE BUREAU OF INTERNAL REVENUE Respondents.
G.R. No. 185234
.SENATOR FRANCIS JOSEPH G. ESCUDERO, TAX MANAGEMENT
ASSOCIATION OF THE PHILIPPINES, INC. AND ERNESTO G. EBRO,
Petitioners, v. MARGARITO B. TEVES, IN HIS CAPACITY AS SECRETARY OF
THE DEPARTMENT OF FINANCE AND SIXTO S. ESQUIVIAS IV, IN HIS
CAPACITY AS COMMISSIONER OF THE BUREAU OF INTERNAL
REVENUE, Respondents.
DECISION
SERENO, C.J.:
Before us are consolidated Petitions for Certiorari, Prohibition and Mandamus, under
Rule 65 of the 1997 Revised Rules of Court. These Petitions seek to nullify certain
provisions of Revenue Regulation No. (RR) 10-2008. The RR was issued by the
Bureau of Internal Revenue (BIR) on 24 September 2008 to implement the
provisions of Republic Act No. (R.A.) 9504. The law granted, among others, income
tax exemption for minimum wage earners (MWEs), as well as an increase in
personal and additional exemptions for individual taxpayers.
Petitioners assail the subject RR as an unauthorized departure from the legislative
intent of R.A. 9504. The regulation allegedly restricts the implementation of the
MWEs' income tax exemption only to the period starting from 6 July 2008, instead
of applying the exemption to the entire year 2008. They further challenge the BIR's
adoption of the prorated application of the new set of personal and additional
exemptions for taxable year 2008. They also contest the validity of the RR's alleged
imposition of a condition for the availment by MWEs of the exemption provided by
R.A. 9504. Supposedly, in the event they receive other benefits in excess of P30,000,
they can no longer avail themselves of that exemption. Petitioners contend that the
law provides for the unconditional exemption of MWEs from income tax and, thus,
pray that the RR be nullified.chanroblesvirtuallawlibrary
ANTECEDENT FACTS
R.A. 9504
On 19 May 2008, the Senate filed its Senate Committee Report No. 53 on Senate Bill
No. (S.B.) 2293. On 21 May 2008, former President Gloria M. Arroyo certified the
passage of the bill as urgent through a letter addressed to then Senate President
Manuel Villar. On the same day, the bill was passed on second reading IN the Senate
and, on 27 May 2008, on third reading. The following day, 28 May 2008, the Senate
sent S.B. 2293 to the House of Representatives for the latter's concurrence.
On 04 June 2008, S.B. 2293 was adopted by the House of Representatives as an
amendment to House Bill No. (H.B.) 3971.
On 17 June 2008, R.A. 9504 entitled "An Act Amending Sections 22, 24, 34, 35, 51,
and 79 of Republic Act No. 8424, as Amended, Otherwise Known as the National
Internal Revenue Code of 1997," was approved and signed into law by President
Arroyo. The following are the salient features of the new law:
chanRoblesvirtualLawlibrary
It increased the basic personal exemption from P20,000 for a single individual,
P25,000 for the head of the family, and P32,000 for a married individual to P50,000
for each individual.
It increased the additional exemption for each dependent not exceeding four
from P8,000 to P25,000.
It raised the Optional Standard Deduction (OSD) for individual taxpayers from
10% of gross income to 40% of the gross receipts or gross sales.
It introduced the OSD to corporate taxpayers at no more than 40% of their gross
income.
It granted MWEs exemption from payment of income tax on their minimum
wage, holiday pay, overtime pay, night shift differential pay and hazard pay.1
Section 9 of the law provides that it shall take effect 15 days following its
publication in the Official Gazette or in at least two newspapers of general
circulation. Accordingly, R.A. 9504 was published in the Manila Bulletin and
Malaya on 21 June 2008. On 6 July 2008, the end of the 15-day period, the law took
effect.
RR 10-2008
On 24 September 2008, the BIR issued RR 10-2008, dated 08 July 2008,
implementing the provisions of R.A. 9504. The relevant portions of the said RR read
as follows:
chanRoblesvirtualLawlibrary
SECTION 1. Section 2.78.1 of RR 2-98, as amended, is hereby further amended to
read as follows:
Sec. 2.78.1. Withholding of Income Tax on Compensation Income.
xxxx
The amount of 'de minimis' benefits conforming to the ceiling herein prescribed
shall not be considered in determining the P30,000.00 ceiling of 'other benefits'
excluded from gross income under Section 32 (b) (7) (e) of the Code. Provided that,
the excess of the 'de minimis' benefits over their respective ceilings prescribed by
these regulations shall be considered as part of 'other benefits' and the employee
receiving it will be subject to tax only on the excess over the P30,000.00 ceiling.
Provided, further, that MWEs receiving 'other benefits' exceeding the P30,000.00
limit shall be taxable on the excess benefits, as well as on his salaries, wages and
allowances, just like an employee receiving compensation income beyond the SMW.
xxxx
(B) Exemptions from Withholding Tax on Compensation. - The following income
payments are exempted from the requirements of withholding tax on compensation:
xxxx
(13) Compensation income of MWEs who work in the private sector and being
paid the Statutory Minimum Wage (SMW), as fixed by Regional Tripartite Wage
and Productivity Board (RTWPB)/National Wages and Productivity Commission
(NWPC), applicable to the place where he/she is assigned.
The aforesaid income shall likewise be exempted from income tax.
'Statutory Minimum Wage' (SMW) shall refer to the rate fixed by the Regional
Tripartite Wage and Productivity Board (RTWPB), as defined by the Bureau of
Labor and Employment Statistics (BLES) of the Department of Labor and
Employment (DOLE). The RTWPB of each region shall determine the wage rates in
the different regions based on established criteria and shall be the basis of exemption
from income tax for this purpose.
Holiday pay, overtime pay, night shift differential pay and hazard pay earned by
the aforementioned MWE shall likewise be covered by the above exemption.
Provided, however, that an employee who receives/earns additional compensation
such as commissions, honoraria, fringe benefits, benefits in excess of the allowable
statutory amount of P30,000.00, taxable allowances and other taxable income other
than the SMW, holiday pay, overtime pay, hazard pay and night shift differential pay
shall not enjoy the privilege of being a MWE and, therefore, his/her entire earnings
are not exempt from income tax, and consequently, from withholding tax.
MWEs receiving other income, such as income from the conduct of trade,
business, or practice of profession, except income subject to final tax, in addition to
compensation income are not exempted from income tax on their entire income
earned during the taxable year. This rule, notwithstanding, the SMW, holiday pay,
overtime pay, night shift differential pay and hazard pay shall still be exempt from
withholding tax.
For purposes of these regulations, hazard pay shall mean the amount paid by the
employer to MWEs who were actually assigned to danger or strife-torn areas,
disease-infested places, or in distressed or isolated stations and camps, which expose
them to great danger of contagion or peril to life. Any hazard pay paid to MWEs
which does not satisfy the above criteria is deemed subject to income tax and
consequently, to withholding tax.
xxxx
SECTION 3. Section 2.79 of RR 2-98, as amended, is hereby further amended to
read as follows:
Sec. 2.79. Income Tax Collected at Source on Compensation Income.-
(A) Requirement of Withholding. - Every employer must withhold from
compensation paid an amount computed in accordance with these Regulations.
Provided, that no withholding of tax shall be required on the SMW, including
holiday pay, overtime pay, night shift differential and hazard pay of MWEs in the
private/public sectors as defined in these Regulations. Provided, further, that an
employee who receives additional compensation such as commissions, honoraria,
fringe benefits, benefits in excess of the allowable statutory amount of P30,000.00,
taxable allowances and other taxable income other than the SMW, holiday pay,
overtime pay, hazard pay and night shift differential pay shall not enjoy the privilege
of being a MWE and, therefore, his/her entire earnings are not exempt from income
tax and, consequently, shall be subject to withholding tax.
xxxx
For the year 2008, however, being the initial year of implementation of R.A. 9504,
there shall be a transitory withholding tax table for the period from July 6 to
December 31, 2008 (Annex "D") determined by prorating the annual personal and
additional exemptions under R.A. 9504 over a period of six months. Thus, for
individuals, regardless of personal status, the prorated personal exemption is
P25,000. and for each qualified dependent child (QDC), P12,500.
xxxx
SECTION 9. Effectivity. -
These Regulations shall take effect beginning July 6, 2008. (Emphases
supplied)ChanRoblesVirtualawlibrary
The issuance and effectivity of RR 10-2008 implementing R.A. 9504 spawned the
present Petitions.
G.R. No. 184450
Petitioners Jaime N. Soriano et al. primarily assail Section 3 of RR 10-2008
providing for the prorated application of the personal and additional exemptions for
taxable year 2008 to begin only effective 6 July 2008 for being contrary to Section 4
of Republic Act No. 9504.2
Petitioners argue that the prorated application of the personal and additional
exemptions under RR 10-2008 is not "the legislative intendment in this
jurisdiction."3 They stress that Congress has always maintained a policy of "full
taxable year treatment"4 as regards the application of tax exemption laws. They
allege further that R.A. 9504 did not provide for a prorated application of the new set
of personal and additional exemptions.5
ISSUES
Assailing the validity of RR 10-2008, all four Petitions raise common issues, which
may be distilled into three major ones:
First, whether the increased personal and additional exemptions provided by R.A.
9504 should be applied to the entire taxable year 2008 or prorated, considering that
R.A. 9504 took effect only on 6 July 2008.
Second, whether an MWE is exempt for the entire taxable year 2008 or from 6 July
2008 only.
Third, whether Sections 1 and 3 of RR 10-2008 are consistent with the law in
providing that an MWE who receives other benefits in excess of the statutory limit of
P30,00019 is no longer entitled to the exemption provided by R.A.
9504.chanroblesvirtuallawlibrary
THE COURT'S RULING
I.
Whether the increased personal and additional exemptions provided by R.A. 9504
should be applied to the entire taxable year 2008 or prorated, considering that the law
took effect only on 6 July 2008
The personal and additional exemptions established by R.A. 9504 should be applied
to the entire taxable year 2008.
Umali is applicable.
Umali v. Estanislao20 supports this Court's stance that R.A. 9504 should be applied
on a full-year basis for the entire taxable year 2008.21 In Umali, Congress enacted
R.A. 7167 amending the 1977 National Internal Revenue Code (NIRC). The
amounts of basic personal and additional exemptions given to individual income
taxpayers were adjusted to the poverty threshold level. R.A. 7167 came into law on
30 January 1992. Controversy arose when the Commission of Internal Revenue
(CIR) promulgated RR 1-92 stating that the regulation shall take effect on
compensation income earned beginning 1 January 1992. The issue posed was
whether the increased personal and additional exemptions could be applied to
compensation income earned or received during calendar year 1991, given that R.A.
7167 came into law only on 30 January 1992, when taxable year 1991 had already
closed.
This Court ruled in the affirmative, considering that the increased exemptions were
already available on or before 15 April 1992, the date for the filing of individual
income tax returns. Further, the law itself provided that the new set of personal and
additional exemptions would be immediately available upon its effectivity. While
R.A. 7167 had not yet become effective during calendar year 1991, the Court found
that it was a piece of social legislation that was in part intended to alleviate the
economic plight of the lower-income taxpayers. For that purpose, the new law
provided for adjustments "to the poverty threshold level" prevailing at the time of the
enactment of the law. The relevant discussion is quoted below:
chanRoblesvirtualLawlibrary
[T]he Court is of the considered view that Rep. Act 7167 should cover or extend
to compensation income earned or received during calendar year 1991.
Sec. 29, par.(L), Item No. 4 of the National Internal Revenue Code, as amended,
provides:
chanRoblesvirtualLawlibrary
Upon the recommendation of the Secretary of Finance, the President shall
automatically adjust not more often than once every three years, the personal and
additional exemptions taking into account, among others, the movement in consumer
price indices, levels of minimum wages, and bare subsistence
levels.ChanRoblesVirtualawlibrary
As the personal and additional exemptions of individual taxpayers were last
adjusted in 1986, the President, upon the recommendation of the Secretary of
Finance, could have adjusted the personal and additional exemptions in 1989 by
increasing the same even without any legislation providing for such adjustment. But
the President did not.
However, House Bill 28970, which was subsequently enacted by Congress as Rep.
Act 7167, was introduced in the House of Representatives in 1989 although its
passage was delayed and it did not become effective law until 30 January 1992. A
perusal, however, of the sponsorship remarks of Congressman Hernando B. Perez,
Chairman of the House Committee on Ways and Means, on House Bill 28970,
provides an indication of the intent of Congress in enacting Rep. Act 7167. The
pertinent legislative journal contains the following:
chanRoblesvirtualLawlibrary
At the outset, Mr. Perez explained that the Bill Provides for increased personal
additional exemptions to individuals in view of the higher standard of living.
The Bill, he stated, limits the amount of income of individuals subject to income
tax to enable them to spend for basic necessities and have more disposable income.
xxxx
Mr. Perez added that inflation has raised the basic necessities and that it had
been three years since the last exemption adjustment in 1986.
xxxx
Subsequently, Mr. Perez stressed the necessity of passing the measure to
mitigate the effects of the current inflation and of the implementation of the salary
standardization law. Stating that it is imperative for the government to take measures
to ease the burden of the individual income tax tilers, Mr. Perez then cited specific
examples of how the measure can help assuage the burden to the taxpayers.
He then reiterated that the increase in the prices of commodities has eroded the
purchasing power of the peso despite the recent salary increases and emphasized that
the Bill will serve to compensate the adverse effects of inflation on the taxpayers.
xxx (Journal of the House of Representatives, May 23, 1990, pp. 32-
33).ChanRoblesVirtualawlibrary
It will also be observed that Rep. Act 7167 speaks of the adjustments that it
provides for, as adjustments "to the poverty threshold level." Certainly, "the poverty
threshold level" is the poverty threshold level at the time Rep. Act 7167 was enacted
by Congress, not poverty threshold levels in futuro, at which time there may be need
of further adjustments in personal exemptions. Moreover, the Court can not lose
sight of the fact that these personal and additional exemptions are fixed amounts to
which an individual taxpayer is entitled, as a means to cushion the devastating
effects of high prices and a depreciated purchasing power of the currency. In the end,
it is the lower-income and the middle-income groups of taxpayers (not the high-
income taxpayers) who stand to benefit most from the increase of personal and
additional exemptions provided for by Rep. Act 7167. To that extent, the act is a
social legislation intended to alleviate in part the present economic plight of the
lower income taxpayers. It is intended to remedy the inadequacy of the heretofore
existing personal and additional exemptions for individual taxpayers.
And then, Rep. Act 7167 says that the increased personal exemptions that it
provides for shall be available thenceforth, that is, after Rep. Act 7167 shall have
become effective. In other words, these exemptions are available upon the filing of
personal income tax returns which is, under the National Internal Revenue Code,
done not later than the 15th day of April after the end of a calendar year. Thus, under
Rep. Act 7167, which became effective, as aforestated, on 30 January 1992, the
increased exemptions are literally available on or before 15 April 1992 (though not
before 30 January 1992). But these increased exemptions can be available on 15
April 1992 only in respect of compensation income earned or received during the
calendar year 1991.
The personal exemptions as increased by Rep. Act 7167 cannot be regarded as
available in respect of compensation income received during the 1990 calendar year;
the tax due in respect of said income had already accrued, and been presumably paid,
by 15 April 1991 and by 15 July 1991, at which time Rep. Act 7167 had not been
enacted. To make Rep. Act 7167 refer back to income received during 1990 would
require language explicitly retroactive in purport and effect, language that would
have to authorize the payment of refunds of taxes paid on 15 April 1991 and 15 July
1991: such language is simply not found in Rep. Act 7167.
The personal exemptions as increased by Rep. Act 7167 cannot be regarded as
available only in respect of compensation income received during 1992, as the
implementing Revenue Regulations No. 1-92 purport to provide. Revenue
Regulations No. 1-92 would in effect postpone the availability of the increased
exemptions to 1 January-15 April 1993, and thus literally defer the effectivity of
Rep. Act 7167 to 1 January 1993. Thus, the implementing regulations collide
frontally with Section 3 of Rep. Act 7167 which states that the statute "shall take
effect upon its approval." The objective of the Secretary of Finance and the
Commissioner of Internal Revenue in postponing through Revenue Regulations No.
1-92 the legal effectivity of Rep. Act 7167 is, of course, entirely understandable-to
defer to 1993 the reduction of governmental tax revenues which irresistibly follows
from the application of Rep. Act 7167. But the law-making authority has spoken and
the Court can not refuse to apply the law-maker's words. Whether or not the
government can afford the drop in tax revenues resulting from such increased
exemptions was for Congress (not this Court) to decide.22 (Emphases
supplied)ChanRoblesVirtualawlibrary
In this case, Senator Francis Escudero's sponsorship speech for Senate Bill No. 2293
reveals two important points about R.A. 9504: (1) it is a piece of social legislation;
and (2) its intent is to make the proposed law immediately applicable, that is, to
taxable year 2008:
chanRoblesvirtualLawlibrary
Mr. President, distinguished colleagues, Senate Bill No. 2293 seeks, among
others, to exempt minimum wage earners from the payment of income and/or
withholding tax. It is an attempt to help our people cope with the rising costs of
commodities that seem to be going up unhampered these past few months.
Mr. President, a few days ago, the Regional Tripartite and Wages Productivity
Board granted an increase of P20 per day as far as minimum wage earners arc
concerned. By way of impact, Senate Bill No. 2293 would grant our workers an
additional salary or take-home pay of approximately P34 per day, given the
exemption that will be granted to all minimum wage earners. It might be also worthy
of note that on the part of the public sector, the Senate Committee on Ways and
Means included, as amongst those who will be exempted from the payment of
income tax and/or withholding tax. government workers receiving Salary Grade V.
We did not make any distinction so as to include Steps 1 to 8 of Salary Grade V as
long as one is employed in the public sector or in government.
In contradistinction with House Bill No. 3971 approved by the House of
Representatives pertaining to a similar subject matter, the House of Representatives,
very much like the Senate, adopted the same levels of exemptions which are:
chanRoblesvirtualLawlibrary
From an allowable personal exemption for a single individual of P20,000, to a
head of family of P25,000, to a married individual of P32,000, both the House and
the Senate versions contain a higher personal exemption of
P50,000.ChanRoblesVirtualawlibrary
Also, by way of personal additional exemption as far as dependents are concerned,
up to four, the House, very much like the Senate, recommended a higher ceiling of
P25,000 for each dependent not exceeding four, thereby increasing the maximum
additional exemptions and personal additional exemptions to as high as P200,000,
depending on one's status in life.
The House also, very much like the Senate, recommended by way of trying to
address the revenue loss on the part of the government, an optional standard
deduction (OSD) on gross sales, and/or gross receipts as far as individual taxpayers
are concerned. However, the House, unlike the Senate, recommended a Simplified
Net Income Tax Scheme (SNITS) in order to address the remaining balance of the
revenue loss.
By way of contrast, the Senate Committee on Ways and Means recommended, in
lieu of SNITS, an optional standard deduction of 40% for corporations as far as their
gross income is concerned.
Mr. President, if we total the revenue loss as well as the gain brought about by the
40% OSD on individuals on gross sales and receipts and 40% on gross income as far
as corporations are concerned, with a conservative availment rate as computed by the
Department of Finance, the government would still enjoy a gain of P.78 billion or
P780 million if we use the high side of the computation however improbable it may
be.
For the record, we would like to state that if the availment rate is computed at 15%
for individuals and 10% for corporations, the potential high side of a revenue gain
would amount to approximately P18.08 billion.
Mr. President, we have received many suggestions increasing the rate of personal
exemptions and personal additional exemptions. We have likewise received various
suggestions pertaining to the expansion of the coverage of the tax exemption granted
to minimum wage earners to encompass as well other income brackets.
However, the only suggestion other than or outside the provisions contained in
House Bill No. 3971 that the Senate Committee on Ways and Means adopted, was an
expansion of the exemption to cover overtime, holiday, nightshirt differential, and
hazard pay also being enjoyed by minimum wage earners. It entailed an additional
revenue loss of P1 billion approximately on the part of the government. However,
Mr. President, that was taken into account when I stated earlier that there will still be
a revenue gain on the conservative side on the part of government of P780 million.
Mr. President, [my distinguished colleagues in the Senate, we wish to provide a
higher exemption for our countrymen because of the incessant and constant increase
in the price of goods. Nonetheless, not only Our Committee, but also the Senate and
Congress, must act responsibly in recognizing that much as we would like to give all
forms of help that we can and must provide to our people, we also need to recognize
the need of the government to defray its expenses in providing services to the public.
This is the most that we can give at this time because the government operates on a
tight budget and is short on funds when it comes to the discharge of its main
expenses.]23
Mr. President, time will perhaps come and we can improve on this version, but at
present, this is the best, I believe, that we can give our people. But by way of
comparison, it is still P10 higher than what the wage boards were able to give
minimum wage earners. Given that, we were able to increase their take-home pay by
the amount equivalent to the tax exemption we have granted.
We urge our colleagues, Mr. President, to pass this bill in earnest so that we can
immediately grant relief to our people.
Thank you, Mr. President. (Emphases Supplied)24ChanRoblesVirtualawlibrary
Clearly, Senator Escudero expressed a sense of urgency for passing what would
subsequently become R.A. 9504. He was candid enough to admit that the bill needed
improvement, but because time was of the essence, he urged the Senate to pass the
bill immediately. The idea was immediate tax relief to the individual taxpayers,
particularly low - compensation earners, and an increase in their take-home
pay.25cralawred
Senator Miriam Defensor-Santiago also remarked during the deliberations that "the
increase in personal exemption from P20,000 to P50,000 is timely and appropriate
given the increased cost of living. Also, the increase in the additional exemption for
dependent children is necessary and timely."26
Finally, we consider the President's certification of the necessity of e immediate
enactment of Senate Bill No. 2293. That certification became e basis for the Senate
to dispense with the three-day rule27 for passing a bill. It evinced the intent of the
President to afford wage earners immediate tax relief from the impact of a worldwide
increase in the prices of commodities. Specifically, the certification stated that the
purpose was to "address the urgent need to cushion the adverse impact of the global
escalation of commodity prices upon the most vulnerable within the low income
group by providing expanded income tax relief."28
In sum, R.A. 9504, like R.A. 7167 in Umali, was a piece of social legislation clearly
intended to afford immediate tax relief to individual taxpayers, particularly low-
income compensation earners. Indeed, if R.A. 9504 was to take effect beginning
taxable year 2009 or half of the year 2008 only, then the intent of Congress to
address the increase in the cost of living in 2008 would have been negated.
Therefore, following Umali, the test is whether the new set of personal and
additional exemptions was available at the time of the filing of the income tax return.
In other words, while the status of the individual taxpayers is determined at the close
of the taxable year,29 their personal and additional exemptions - and consequently
the computation of their taxable income - are reckoned when the tax becomes due,
and not while the income is being earned or received.
The NIRC is clear on these matters. The taxable income of an individual taxpayer
shall be computed on the basis of the calendar year.30 The taxpayer is required to
fi1e an income tax return on the 15th of April of each year covering income of the
preceding taxable year.31 The tax due thereon shall be paid at the time the return is
filed.32
It stands to reason that the new set of personal and additional exemptions, adjusted as
a form of social legislation to address the prevailing poverty threshold, should be
given effect at the most opportune time as the Court ruled in Umali.
The test provided by Umali is consistent with Ingalls v. Trinidad,33 in which the
Court dealt with the matter of a married person's reduced exemption. As early as
1923, the Court already provided the reference point for determining the taxable
income:
chanRoblesvirtualLawlibrary
[T]hese statutes dealing with the manner of collecting the income tax and with the
deductions to be made in favor of the taxpayer have reference to the time when the
return is filed and the tax assessed. If Act No. 2926 took, as it did take, effect on
January 1, 1921, its provisions must be applied to income tax returns filed, and
assessments made from that date. This is the reason why Act No. 2833, and Act No.
2926, in their respective first sections, refer to income received during the preceding
civil year. (Italics in the original)ChanRoblesVirtualawlibrary
There, the exemption was reduced, not increased, and the Court effectively ruled that
income tax due from the individual taxpayer is properly determined upon the filing
of the return. This is done after the end of the taxable year, when all the incomes for
the immediately preceding taxable year and the corresponding personal exemptions
and/or deductions therefor have been considered. Therefore, the taxpayer was made
to pay a higher tax for his income earned during 1920, even if the reduced exemption
took effect on 1 January 1921.
In the present case, the increased exemptions were already available much earlier
than the required time of filing of the return on 15 April 2009. R.A. 9504 came into
law on 6 July 2008, more than nine months before the deadline for the filing of the
income tax return for taxable year 2008. Hence, individual taxpayers were entitled to
claim the increased amounts for the entire year 2008. This was true despite the fact
that incomes were already earned or received prior to the law's effectivity on 6 July
2008.
Even more compelling is the fact that R.A. 9504 became effective during the taxable
year in question. In Umali, the Court ruled that the application of the law was
prospective, even if the amending law took effect after the close of the taxable year
in question, but before the deadline for the filing of the return and payment of the
taxes due for that year. Here, not only did R.A. 9504 take effect before the deadline
for the filing of the return and payment for the taxes due for taxable year 2008, it
took effect way before the close of that taxable year. Therefore, the operation of the
new set of personal and additional exemption in the present case was all the more
prospective.
Additionally, as will be discussed later, the rule of full taxable year treatment for the
availment of personal and additional exemptions was established, not by the
amendments introduced by R.A. 9504, but by the provisions of the 1997 Tax Code
itself. The new law merely introduced a change in the amounts of the basic and
additional personal exemptions. Hence, the fact that R.A. 9504 took effect only on 6
July 2008 is irrelevant.
The present case is substantially identical with Umali and not with Pansacola.
Respondents argue that Umali is not applicable to the present case. They contend
that the increase in personal and additional exemptions were necessary in that case to
conform to the 1991 poverty threshold level; but that in the present case, the amounts
under R.A. 9504 far exceed the poverty threshold level. To support their case,
respondents cite figures allegedly coming from the National Statistical Coordination
Board. According to those figures, in 2007, or one year before the effectivity of R.A.
9504, the poverty threshold per capita was P14,866 or P89,196 for a family of six.34
We are not persuaded.
The variance raised by respondents borders on the superficial. The message of Umali
is that there must be an event recognized by Congress that occasions the immediate
application of the increased amounts of personal and additional exemptions. In
Umali, that event was the failure to adjust the personal and additional exemptions to
the prevailing poverty threshold level. In this case, the legislators specified the
increase in the price of commodities as the basis for the immediate availability of the
new amounts of personal and additional exemptions.
We find the facts of this case to be substantially identical to those of Umali.
First, both cases involve an amendment to the prevailing tax code. The present
petitions call for the interpretation of the effective date of the increase in personal
and additional exemptions. Otherwise stated, the present case deals with an
amendment (R.A. 9504) to the prevailing tax code (R.A. 8424 or the 1997 Tax
Code). Like the present case, Umali involved an amendment to the then prevailing
tax code - it interpreted the effective date of R.A. 7167, an amendment to the 1977
NIRC, which also increased personal and additional exemptions.
Second, the amending law in both cases reflects an intent to make the new set of
personal and additional exemptions immediately available after the effectivity of the
law. As already pointed out, in Umali, R.A. 7167 involved social legislation intended
to adjust personal and additional exemptions. The adjustment was made in keeping
with the poverty threshold level prevailing at the time.
Third, both cases involve social legislation intended to cure a social evil - R.A. 7167
was meant to adjust personal and additional exemptions in relation to the poverty
threshold level, while R.A. 9504 was geared towards addressing the impact of the
global increase in the price of goods.
Fourth, in both cases, it was clear that the intent of the legislature was to hasten the
enactment of the law to make its beneficial relief immediately available.
Pansacola is not applicable.
In lieu of Umali, the OSG relies on our ruling in Pansacola v. Commissioner of
Internal Revenue.35 In that case, the 1997 Tax Code (R.A. 8424) took effect on 1
January 1998, and the petitioner therein pleaded for the application of the new set of
personal and additional exemptions provided thereunder to taxable year 1997. R.A.
8424 explicitly provided for its effectivity on 1 January 1998, but it did not provide
for any retroactive application.
We ruled against the application of the new set of personal and additional
exemptions to the previous taxable year 1997, in which the filing and payment of the
income tax was due on 15 April 1998, even if the NIRC had already taken effect on
1 January 1998. This court explained that the NIRC could not be given retroactive
application, given the specific mandate of the law that it shall take effect on 1
January 1998; and given the absence of any reference to the application of personal
and additional exemptions to income earned prior to 1 January 1998. We further
stated that what the law considers for the purpose of determining the income tax due
is the status at the close of the taxable year, as opposed to the time of filing of the
return and payment of the corresponding tax.
The facts of this case are not identical with those of Pansacola.
First, Pansacola interpreted the effectivity of an entirely new tax code - R.A. 8424,
the Tax Reform Act of 1997. The present case, like Umali, involves a mere
amendment of some specific provisions of the prevailing tax code: R.A. 7167
amending then P.D. 1158 (the 1977 NIRC) in Umali and R.A. 9504 amending R.A.
8424 herein.
Second, in Pansacola, the new tax code specifically provided for an effective date -
the beginning of the following year - that was to apply to all its provisions, including
new tax rates, new taxes, new requirements, as well as new exemptions. The tax
code did not make any exception to the effectivity of the subject exemptions, even if
transitory provisions36 specifically provided for different effectivity dates for certain
provisions.
Hence, the Court did not find any legislative intent to make the new rates of personal
and additional exemptions available to the income earned in the year previous to
R.A. 8424's effectivity. In the present case, as previously discussed, there was a clear
intent on the part of Congress to make the new amounts of personal and additional
exemptions immediately available for the entire taxable year 2008. R.A. 9504 does
not even need a provision providing for retroactive application because, as
mentioned above, it is actually prospective - the new law took effect during the
taxable year in question.
Third, in Pansacola, the retroactive application of the new rates of personal and
additional exemptions would result in an absurdity - new tax rates under the new law
would not apply, but a new set of personal and additional exemptions could be
availed of. This situation does not obtain in this case, however, precisely because the
new law does not involve an entirely new tax code. The new law is merely an
amendment to the rates of personal and additional exemptions.
Nonetheless, R.A. 9504 can still be made applicable to taxable year 2008, even if we
apply the Pansacola test. We stress that Pansacola considers the close of the taxable
year as the reckoning date for the effectivity of the new exemptions. In that case, the
Court refused the application of the new set of personal exemptions, since they were
not yet available at the close of the taxable year. In this case, however, at the close of
the taxable year, the new set of exemptions was already available. In fact, it was
already available during the taxable year - as early as 6 July 2008 - when the new
law took effect.
There may appear to be some dissonance between the Court's declarations in Umali
and those in Pansacola, which held:
chanRoblesvirtualLawlibrary
Clearly from the above-quoted provisions, what the law should consider for the
purpose of determining the tax due from an individual taxpayer is his status and
qualified dependents at the close of the taxable year and not at the time the return is
filed and the tax due thereon is paid. Now comes Section 35(C) of the NIRC which
provides,
xxxx
Emphasis must be made that Section 35(C) of the NIRC allows a taxpayer to still
claim the corresponding full amount of exemption for a taxable year, e.g. if he
marries; have additional dependents; he, his spouse, or any of his dependents die;
and if any of his dependents marry, turn 21 years old; or become gainfully employed.
It is as if the changes in his or his dependents status took place at the close of the
taxable year.
 Consequently, his correct taxable income and his corresponding allowable
deductions e.g. personal and additional deductions, if any, had already been
determined as of the end of the calendar year.
xxx. Since the NIRC took effect on January 1, 1998, the increased amounts of
personal and additional exemptions under Section 35, can only be allowed as
deductions from the individual taxpayers gross or net income, as the case maybe, for
the taxable year 1998 to be filed in 1999. The NIRC made no reference that the
personal and additional exemptions shall apply on income earned before January 1,
1998.37ChanRoblesVirtualawlibrary
It must be remembered, however, that the Court therein emphasized that Umali was
interpreting a social legislation:
chanRoblesvirtualLawlibrary
In Umali, we noted that despite being given authority by Section 29(1)(4) of the
National Internal Revenue Code of 1977 to adjust these exemptions, no adjustments
were made to cover 1989. Note that Rep. Act No. 7167 is entitled "An Act Adjusting
the Basic Personal and Additional Exemptions Allowable to Individuals for Income
Tax Purposes to the Poverty Threshold Level, Amending for the Purpose Section 29,
Paragraph (L), Items (1) and (2) (A), of the National Internal Revenue Code, As
Amended, and For Other Purposes." Thus, we said in Umali, that the adjustment
provided by Rep. Act No. 7167 effective 1992, should consider the poverty threshold
level in 1991, the time it was enacted. And we observed therein that since the
exemptions would especially benefit lower and middle-income taxpayers, the
exemption should be made to cover the past year 1991. To such an extent, Rep. Act
No. 7167 was a social legislation intended to remedy the non-adjustment in 1989.
And as cited in Umali, this legislative intent is also clear in the records of the House
of Representatives Journal.
This is not so in the case at bar. There is nothing in the NIRC that expresses any
such intent. The policy declarations in its enactment do not indicate it was a social
legislation that adjusted personal and additional exemptions according to the poverty
threshold level nor is there any indication that its application should retroact. xxx38
(Emphasis Supplied)ChanRoblesVirtualawlibrary
Therefore, the seemingly inconsistent pronouncements in Umali and Pansacola are
more apparent than real. The circumstances of the cases and the laws interpreted, as
well as the legislative intents thereof, were different.
The policy in this jurisdiction is full taxable year treatment.
We have perused R.A. 9504, and we see nothing that expressly provides or even
suggests a prorated application of the exemptions for taxable year 2008. On the other
hand, the policy of full taxable year treatment, especially of the personal and
additional exemptions, is clear under Section 35, particularly paragraph C of R.A.
8424 or the 1997 Tax Code:
chanRoblesvirtualLawlibrary
SEC. 35. Allowance of Personal Exemption for Individual Taxpayer. -
(A) In General. - For purposes of determining the tax provided in Section 24(A) of
this Title, there shall be allowed a basic personal exemption as follows:
xxxx
(B) Additional Exemption for Dependents. - There shall be allowed an additional
exemption of... for each dependent not exceeding four (4).
xxxx
(C) Change of Status. - If the taxpayer marries or should have additional
dependent(s) as defined above during the taxable year, the taxpayer may claim the
corresponding additional exemption, as the case may be, in full for such year.
If the taxpayer dies during the taxable year, his estate may still claim the personal
and additional exemptions for himself and his dependent(s) as if he died at the close
of such year.
If the spouse or any of the dependents dies or if any of such dependents marries,
becomes twenty-one (21) years old or becomes gainfully employed during the
taxable year, the taxpayer may still claim the same exemptions as if the spouse or
any of the dependents died, or as if such dependents married, became twenty-one
(21) years old or became gainfully employed at the close of such year. (Emphases
supplied)ChanRoblesVirtualawlibrary
Note that paragraph C does not allow the prorating of the personal and additional
exemptions provided in paragraphs A and B, even in case a status - changing event
occurs during the taxable year. Rather, it allows the fullest benefit to the individual
taxpayer. This manner of reckoning the taxpayer's status for purposes of the personal
and additional exemptions clearly demonstrates the legislative intention; that is, for
the state to give the taxpayer the maximum exemptions that can be availed,
notwithstanding the fact that the latter's actual status would qualify only for a lower
exemption if prorating were employed.
We therefore see no reason why we should make any distinction between the income
earned prior to the effectivity of the amendment (from 1 January 2008 to 5 July
2008) and that earned thereafter (from 6 July 2008 to 31 December 2008) as none is
indicated in the law. The principle that the courts should not distinguish when the
law itself does not distinguish squarely applies to this case.39
We note that the prorating of personal and additional exemptions was employed in
the 1939 Tax Code. Section 23(d) of that law states:
chanRoblesvirtualLawlibrary
Change of status. - If the status of the taxpayer insofar as it affects the personal
and additional exemptions for himself or his dependents, changes during the taxable
year, the amount of the personal and additional exemptions shall be apportioned,
under rules and regulations prescribed by the Secretary of Finance, in accordance
with the number of months before and after such change. For the purpose of such
apportionment a fractional part of a month shall be disregarded unless it amounts to
more than half a month, in which case it shall be considered as a month.40
(Emphasis supplied)ChanRoblesVirtualawlibrary
On 22 September 1950, R.A. 590 amended Section 23(d) of the 1939 Tax Code by
restricting the operation of the prorating of personal exemptions. As amended,
Section 23(d) reads:
chanRoblesvirtualLawlibrary
(d) Change of status. - If the status of the taxpayer insofar as it affects the personal
and additional exemption for himself or his dependents, changes during the taxable
year by reason of his death, the amount of the personal and additional exemptions
shall be apportioned, under rules and regulations prescribed by the Secretary of
Finance, in accordance with the number of months before and after such change. For
the purpose of such apportionment a fractional part of a month shall be disregarded
unless it amounts to more than half a month, in which case it shall be considered as a
month.41 (Emphasis supplied)ChanRoblesVirtualawlibrary
Nevertheless, in 1969, R. A. 6110 ended the operation of the prorating scheme in our
jurisdiction when it amended Section 23(d) of the 1939 Tax Code and adopted a full
taxable year treatment of the personal and additional exemptions. Section 23(d), as
amended, reads:
chanRoblesvirtualLawlibrary
(d) Change of status.
If the taxpayer married or should have additional dependents as defined in
subsection (c) above during the taxable year the taxpayer may claim the
corresponding personal exemptions in full for such year.
If the taxpayer should die during the taxable year, his estate may still claim the
personal and additional deductions for himself and his dependents as if he died at the
close of such year.
If the spouse or any of the dependents should die during the year, the taxpayer
may still claim the same deductions as if they died at the close of such
year.ChanRoblesVirtualawlibrary
P.D. 69 followed in 1972, and it retained the full taxable year scheme. Section 23(d)
thereof reads as follows:
chanRoblesvirtualLawlibrary
(d) Change of status. - If the taxpayer marries or should have additional
dependents as defined in subsection (c) above during the taxable year the taxpayer
may claim the corresponding personal exemptions in full for such year.
If the taxpayer should die during the taxable year, his estate may still claim the
personal and additional deductions for himself and his dependents as if he died at the
close of such year.
If the spouse or any of the dependents should die or become twenty-one years old
during the taxable year, the taxpayer may still claim the same exemptions as if they
died, or as if such dependents became twenty-one years old at the close of such
year.ChanRoblesVirtualawlibrary
The 1977 Tax Code continued the policy of full taxable year treatment. Section 23(d)
thereof states:
chanRoblesvirtualLawlibrary
(d) Change of status. - If the taxpayer married or should have additional
dependents as defined in subsection (c) above during the taxable year, the taxpayer
may claim the corresponding personal exemption in full for such year.
If the taxpayer should die during the taxable year, his estate may still claim the
personal and additional exemptions for himself and his dependents as if he died at
the close of such year.
If the spouse or any of the dependents should die or become twenty-one years old
during the taxable year, the taxpayer may still claim the same exemptions as if they
died, or as if such dependents became twenty-one years old at the close of such
year.ChanRoblesVirtualawlibrary
While Section 23 of the 1977 Tax Code underwent changes, the provision on full
taxable year treatment in case of the taxpayer's change of status was left
untouched.42 Executive Order No. 37, issued on 31 July 1986, retained the change
of status provision verbatim. The provision appeared under Section 30(1)(3) of the
NIRC, as amended:
chanRoblesvirtualLawlibrary
(3) Change of status. - If the taxpayer married or should have additional
dependents as defined above during the taxable year, the taxpayer may claim the
corresponding personal and additional exemptions, as the case may be, in full for
such year.

If the taxpayer should die during the taxable year, his estate may still claim the
personal and additional exemptions for himself and his dependents as if he died at
the close of such year.
If the spouse or any of the dependents should die or if any of such dependents
becomes twenty-one years old during the taxable year, the taxpayer may still claim
the same exemptions as if they died, or if such dependents become twenty-one years
old at the close of such year.ChanRoblesVirtualawlibrary
Therefore, the legislative policy of full taxable year treatment of the personal and
additional exemptions has been in our jurisdiction continuously since 1969. The
prorating approach has long since been abandoned. Had Congress intended to revert
to that scheme, then it should have so stated in clear and unmistakeable terms. There
is nothing, however, in R.A. 9504 that provides for the reinstatement of the prorating
scheme. On the contrary, the change-of-status provision utilizing the full-year
scheme in the 1997 Tax Code was left untouched by R.A. 9504.
We now arrive at this important point: the policy of full taxable year treatment is
established, not by the amendments introduced by R.A. 9504, but by the provisions
of the 1997 Tax Code, which adopted the policy from as early as 1969.
There is, of course, nothing to prevent Congress from again adopting a policy that
prorates the effectivity of basic personal and additional exemptions. This policy,
however, must be explicitly provided for by law - to amend the prevailing law,
which provides for full-year treatment. As already pointed out, R.A. 9504 is totally
silent on the matter. This silence cannot be presumed by the BIR as providing for a
half-year application of the new exemption levels. Such presumption is unjust, as
incomes do not remain the same from month to month, especially for the MWEs.
Therefore, there is no legal basis for the BIR to reintroduce the prorating of the new
personal and additional exemptions. In so doing, respondents overstepped the bounds
of their rule-making power. It is an established rule that administrative regulations
are valid only when these are consistent with the law.43 Respondents cannot amend,
by mere regulation, the laws they administer.44 To do so would violate the principle
of non--delegability of legislative powers.45
The prorated application of the new set of personal and additional exemptions for the
year 2008, which was introduced by respondents, cannot even be justified under the
exception to the canon of non-delegability; that is, when Congress makes a
delegation to the executive branch.46 The delegation would fail the two accepted
tests for a valid delegation of legislative power; the completeness test and the
sufficient standard test.47 The first test requires the law to be complete in all its
terms and conditions, such that the only thing the delegate will have to do is to
enforce it.48 The sufficient standard test requires adequate guidelines or limitations
in the law that map out the boundaries of the delegate's authority and canalize the
delegation.49
In this case, respondents went beyond enforcement of the law, given the absence of a
provision in R.A. 9504 mandating the prorated application of the new amounts of
personal and additional exemptions for 2008. Further, even assuming that the law
intended a prorated application, there are no parameters set forth in R.A. 9504 that
would delimit the legislative power surrendered by Congress to the delegate. In
contrast, Section 23(d) of the 1939 Tax Code authorized not only the prorating of the
exemptions in case of change of status of the taxpayer, but also authorized the
Secretary of Finance to prescribe the corresponding rules and
regulations.chanroblesvirtuallawlibrary
II.
Whether an MWE is exempt for the entire taxable year 2008 or from 6 July 2008
only
The MWE is exempt for the entire taxable year 2008.
As in the case of the adjusted personal and additional exemptions, the MWE
exemption should apply to the entire taxable year 2008, and not only from 6 July
2008 onwards.
We see no reason why Umali cannot be made applicable to the MWE exemption,
which is undoubtedly a piece of social legislation. It was intended to alleviate the
plight of the working class, especially the low -income earners. In concrete terms,
the exemption translates to a P34 per day benefit, as pointed out by Senator Escudero
in his sponsorship speech.50
As it stands, the calendar year 2008 remained as one taxable year for an individual
taxpayer. Therefore, RR 10-2008 cannot declare the income earned by a minimum
wage earner from 1 January 2008 to 5 July 2008 to be taxable and those earned by
him for the rest of that year to be tax-exempt. To do so would be to contradict the
NIRC and jurisprudence, as taxable income would then cease to be determined on a
yearly basis.
Respondents point to the letter of former Commissioner of Internal Revenue Lilia B.
Hefti dated 5 July 2008 and petitioner Sen. Escudero's signature on the Conforme
portion thereof. This letter and the conforme supposedly establish the legislative
intent not to make the benefits of R.A. 9504 effective as of 1 January 2008.
We are not convinced. The conforme is irrelevant in the determination of legislative
intent.
We quote below the relevant portion of former Commissioner Hefti's letter:
chanRoblesvirtualLawlibrary
Attached herewith are salient features of the proposed regulations to implement
RA 9504 xxx. We have tabulated critical issues raised during the public hearing and
comments received from the public which we need immediate written resolution
based on the inten[t]ion of the law more particularly the effectivity clause. Due to the
expediency and clamor of the public for its immediate implementation, may we
request your confirmation on the proposed recommendation within five (5) days
from receipt hereof. Otherwise, we shall construe your
affirmation.51ChanRoblesVirtualawlibrary
We observe that a Matrix of Salient Features of Proposed Revenue Regulations per
R.A. 9504 was attached to the letter.52 The Matrix had a column entitled "Remarks"
opposite the Recommended Resolution. In that column, noted was a suggestion
coming from petitioner TMAP:
chanRoblesvirtualLawlibrary
TMAP suggested that it should be retroactive considering that it was [for] the
benefit of the majority and to alleviate the plight of workers. Exemption should be
applied for the whole taxable year as provided in the NIRC. xxx Umali v. Estanislao
[ruled] that the increase[d] exemption in 1992 [was applicable] [to] 1991.
Majority issues raised during the public hearing last July 1, 2008 and emails
received suggested [a] retroactive implementation.53 Italics in the
original)ChanRoblesVirtualawlibrary
The above remarks belie the claim that the conforme is evidence of the legislative
intent to make the benefits available only from 6 July 2008 onwards. There would
have been no need to make the remarks if the BIR had merely wanted to confirm was
the availability of the law's benefits to income earned starting 6 July 2008. Rather,
the implication is that the BIR was requesting the conformity of petitioner Senator
Escudero to the proposed implementing rules, subject to the remarks contained in the
Matrix. Certainly, it cannot be said that Senator Escudero's conforme is evidence of
legislative intent to the effect that the benefits of the law would not apply to income
earned from 1 January 2008 to 5 July 2008.
Senator Escudero himself states in G.R. No. 185234:
chanRoblesvirtualLawlibrary
In his bid to ensure that the BIR would observe the effectivity dates of the grant of
tax exemptions and increased basic personal and additional exemptions under
Republic Act No. 9504, Petitioner Escudero, as Co-Chairperson of the Congressional
Oversight Committee on Comprehensive Tax Reform Program, and his counterpart
in the House of Representatives, Hon. Exequiel B. Javier, conveyed through a letter,
dated 16 September 2008, to Respondent Teves the legislative intent that "Republic
Act (RA) No. 9504 must be made applicable to the entire taxable year 2008"
considering that it was "a social legislation intended to somehow alleviate the plight
of minimum wage earners or low income taxpayers". They also jointly expressed
their "fervent hope that the corresponding Revenue Regulations that will be issued
reflect the true legislative intent and rightful statutory interpretation of R.A. No.
9504."54ChanRoblesVirtualawlibrary
Senator Escudero repeats in his Memorandum:
chanRoblesvirtualLawlibrary
On 16 September 2008, the Chairpersons (one of them being herein Petitioner
Sen. Escudero) of the Congressional Oversight Committee on Comprehensive Tax
Reform Program of both House of Congress wrote Respondent DOF Sec. Margarito
Teves, and requested that the revenue regulations (then yet still to be issued)55 to
implement Republic Act No. 9504 reflect the true intent and rightful statutory
interpretation thereof, specifically that the grant of tax exemption and increased basic
personal and additional exemptions be made available for the entire taxable year
2008. Yet, the DOF promulgated Rev. Reg. No. 10-2008 in contravention of such
legislative intent. xxx.56ChanRoblesVirtualawlibrary
We have gone through the records and we do not see anything that would to suggest
that respondents deny the senator's assertion.
Clearly, Senator Escudero's assertion is that the legislative intent is to make the
MWE's tax exemption and the increased basic personal and additional exemptions
available for the entire year 2008. In the face of his assertions, respondents' claim
that his conforme to Commissioner Hefti's letter was evidence of legislative intent
becomes baseless and specious. The remarks described above and the subsequent
letter sent to DOF Secretary Teves, by no less than the Chairpersons of the Bi-
cameral Congressional Oversight Committee on Comprehensive Tax Reform
Program, should have settled for respondents the matter of what the legislature
intended for R.A. 9504's exemptions.
Accordingly, we agree with petitioners that RR 10-2008, insofar as it allows the
availment of the MWE's tax exemption and the increased personal and additional
exemptions beginning only on 6 July 2008 is in contravention of the law it purports
to implement.
A clarification is proper at this point. Our ruling that the MWE exemption is
available for the entire taxable year 2008 is premised on the fact of one's status as an
MWE; that is, whether the employee during the entire year of 2008 was an MWE as
defined by R.A. 9504. When the wages received exceed the minimum wage anytime
during the taxable year, the employee necessarily loses the MWE qualification.
Therefore, wages become taxable as the employee ceased to be an MWE. But the
exemption of the employee from tax on the income previously earned as an MWE
remams.
This rule reflects the understanding of the Senate as gleaned from the exchange
between Senator Miriam Defensor-Santiago and Senator Escudero:
chanRoblesvirtualLawlibrary
Asked by Senator Defensor-Santiago on how a person would be taxed if, during
the year, he is promoted from Salary Grade 5 to Salary Grade 6 in July and ceases to
be a minimum wage employee, Senator Escudero said that the tax computation
would be based starting on the new salary in July.57ChanRoblesVirtualawlibrary
As the exemption is based on the employee's status as an MWE, the operative phrase
is when the employee ceases to be an MWE. Even beyond 2008, it is therefore
possible for one employee to be exempt early in the year for being an MWE for that
period, and subsequently become taxable in the middle of the same year with respect
to the compensation income, as when the pay is increased higher than the minimum
wage. The improvement of one's lot, however, cannot justly operate to make the
employee liable for tax on the income earned as an MWE.
Additionally, on the question of whether one who ceases to be an MWE may still be
entitled to the personal and additional exemptions, the answer must necessarily be
yes. The MWE exemption is separate and distinct from the personal and additional
exemptions. One's status as an MWE does not preclude enjoyment of the personal
and additional exemptions. Thus, when one is an MWE during a part of the year and
later earns higher than the minimum wage and becomes a non-MWE, only earnings
for that period when one is a non-MWE is subject to tax. It also necessarily follows
that such an employee is entitled to the personal and additional exemptions that any
individual taxpayer with taxable gross income is entitled.
A different interpretation will actually render the MWE exemption a totally
oppressive legislation. It would be a total absurdity to disqualifY an MWE from
enjoying as much as P150,00058 in personal and additional exemptions just because
sometime in the year, he or she ceases to be an MWE by earning a little more in
wages. Laws cannot be interpreted with such absurd and unjust outcome. It is
axiomatic that the legislature is assumed to intend right and equity in the laws it
passes.59
Critical, therefore, is how an employee ceases to become an MWE and thus ceases to
be entitled to an MWE's exemption.
III.
Whether Sections 1 and 3 of RR 10-2008 are consistent with the law in declaring that
an MWE who receives other benefits in excess of the statutory limit of P30,000 is no
longer entitled to the exemption provided by R.A. 9504, is consistent with the law.
Sections 1 and 3 of RR 10-2008 add a requirement not found in the law by
effectively declaring that an MWE who receives other benefits in excess of the
statutory limit of P30,000 is no longer entitled to the exemption provided by R.A.
9504.
The BIR added a requirement not found in the law.
The assailed Sections 1 and 3 of RR 10-2008 are reproduced hereunder for easier
reference.
SECTION 1. Section 2.78.1 of RR 2-98, as amended, is hereby further amended to
read as follows:
chanRoblesvirtualLawlibrary
Sec. 2.78.1. Withholding of Income Tax on Compensation Income. -
(A) Compensation Income Defined. - xxx
xxxx
(3) Facilities and privileges of relatively small value. - Ordinarily, facilities,
and privileges (such as entertainment. medical services, or so--called "courtesy"
discounts on purchases), otherwise known as "de minimis benefits," furnished or
offered by an employer to his employees, are not considered as compensation subject
to income tax and consequently to withholding tax, if such facilities or privileges are
of relatively small value and are offered or furnished by the employer merely as
means of promoting the health, goodwill, contentment, or efficiency of his
employees.
The following shall be considered as "de minimis" benefits not subject to
income tax, hence, not subject to withholding tax on compensation income of both
managerial and rank and file employees:
chanRoblesvirtualLawlibrary
(a) Monetized unused vacation leave credits of employees not exceeding
ten (10) days during the year and the monetized value of leave credits paid to
government officials and employees;chanrobleslaw
(b) Medical cash allowance to dependents of employees not
exceedingP750.00 per employee per semester or P125 per month;chanrobleslaw
(c) Rice subsidy of P1,500.00 or one (1) sack of 50-kg. rice per month
amounting to not more than P1,500.00;chanrobleslaw
(d) Uniforms and clothing allowance not exceeding P4,000.00 per
annum;chanrobleslaw
 (e) Actual yearly medical benefits not exceeding P10,000.00 per
annum;chanrobleslaw
(f) Laundry allowance not exceeding P300.00 per month;chanrobleslaw
(g) Employees achievement awards, e.g., for length of service or safety
achievement, which must be in the form of a tangible personal property other than
cash or gift certificate, with an annual monetary value not exceeding P10,000.00
received by the employee under an established written plan which does not
discriminate in favor of highly paid employees;chanrobleslaw
(h) Gifts given during Christmas and major anniversary celebrations not
exceeding P5,000.00 per employee per annum;chanrobleslaw
(i) Flowers, fruits, books, or similar items given to employees under
special circumstances, e.g., on account of illness, marriage, birth of a baby, etc.; and
(j) Daily meal allowance for overtime work not exceeding twenty--five
percent (25%) of the basic minimum wage.60ChanRoblesVirtualawlibrary
The amount of 'de minimis' benefits conforming to the ceiling herein
prescribed shall not be considered in determining the P30,000.00 ceiling of 'other
benefits' excluded from gross income under Section 32(b)(7)(e) of the Code.
Provided that, the excess of the 'de minimis' benefits over their respective ceilings
prescribed by these regulations shall be considered as part of 'other benefits' and the
employee receiving it will be subject to tax only on the excess over the P30,000.00
ceiling. Provided, further, that MWEs rece1vmg 'other benefits' exceeding the
P30,000.00 limit shall be taxable on the excess benefits, as well as on his salaries,
wages and allowances, just like an employee receiving compensation income beyond
the SMW.
Any amount given by the employer as benefits to its employees, whether
classified as 'de minimis' benefits or fringe benefits, shall constitute [a] deductible
expense upon such employer.
Where compensation is paid in property other than money, the employer shall
make necessary arrangements to ensure that the amount of the tax required to be
withheld is available for payment to the Bureau of Internal Revenue.
xxxxChanRoblesVirtualawlibrary
(B) Exemptions from Withholding Tax on Compensation. - The following income
payments are exempted from the requirements of withholding tax on compensation:
xxxx
(13) Compensation income of MWEs who work in the private sector and being
paid the Statutory Minimum Wage (SMW), as fixed by Regional Tripartite Wage
and Productivity Board (RTWPB)/National Wages and Productivity Commission
(NWPC), applicable to the place where he/she is assigned.
The aforesaid income shall likewise be exempted from income tax.
"Statutory Minimum Wage" (SMW) shall refer to the rate fixed by the Regional
Tripartite Wage and Productivity Board (RTWPB), as defined by the Bureau of
Labor and Employment Statistics (BLES) of the Department of Labor and
Employment (DOLE). The RTWPB of each region shall determine the wage rates in
the different regions based on established criteria and shall be the basis of exemption
from income tax for this purpose.
Holiday pay, overtime pay, night shift differential pay and hazard pay earned by
the aforementioned MWE shall likewise be covered by the above exemption.
Provided, however, that an employee who receives/earns additional compensation
such as commissions, honoraria, fringe benefits, benefits in excess of the allowable
statutory amount of P30,000.00, taxable allowances and other taxable income other
than the SMW, holiday pay, overtime pay, hazard pay and night shift differential pay
shall not enjoy the privilege of being a MWE and, therefore, his/her entire earnings
are not exempt form income tax, and consequently, from withholding tax.
MWEs receiving other income, such as income from the conduct of trade,
business, or practice of profession, except income subject to final tax, in addition to
compensation income are not exempted from income tax on their entire income
earned during the taxable year. This rule, notwithstanding, the [statutory minimum
wage], [h]oliday pay, overtime pay, night shift differential pay and hazard pay shall
still be exempt from withholding tax.
For purposes of these regulations, hazard pay shall mean xxx.
In case of hazardous employment, xxx
The NWPC shall officially submit a Matrix of Wage Order by region xxx
Any reduction or diminution of wages for purposes of exemption from income tax
shall constitute misrepresentation and therefore, shall result to the automatic
disallowance of expense, i.e. compensation and benefits account, on the part of the
employer. The offenders may be criminally prosecuted under existing laws.
(14) Compensation income of employees in the public sector with compensation
income of not more than the SMW in the non-agricultural sector, as fixed by
RTWPB/NWPC, applicable to the place where he/she is assigned.
The aforesaid income shall likewise be exempted from income tax.

The basic salary of MWEs in the public sector shall be equated to the SMW in the
non-agricultural sector applicable to the place where he/she is assigned. The
determination of the SMW in the public sector shall likewise adopt the same
procedures and consideration as those of the private sector.
Holiday pay, overtime pay, night shift differential pay and hazard pay earned by
the aforementioned MWE in the public sector shall likewise be covered by the above
exemption. Provided, however, that a public sector employee who receives
additional compensation such as commissions, honoraria, fringe benefits, benefits in
excess of the allowable statutory amount of P30,000.00, taxable allowances and
other taxable income other than the SMW, holiday pay, overtime pay, night shift
differential pay and hazard pay shall not enjoy the privilege of being a MWE and,
therefore, his/her entire earnings are not exempt from income tax and, consequently,
from withholding tax.
MWEs receiving other income, such as income from the conduct of trade,
business, or practice of profession, except income subject to final tax, in addition to
compensation income are not exempted from income tax on their entire income
earned during the taxable year. This rule, notwithstanding, the SMW, Holiday pay,
overtime pay, night shift differential pay and hazard pay shall still be exempt from
withholding tax.
For purposes of these regulations, hazard pay shall mean xxx
In case of hazardous employment, xxx
xxxx
SECTION 3. Section 2.79 of RR 2-98, as amended, is hereby further amended to
read as follows:
Sec. 2.79. Income Tax Collected at Source on Compensation Income.-
(A) Requirement of Withholding. - Every employer must withhold from
compensation paid an amount computed in accordance with these Regulations.
Provided, that no withholding of tax shall be required on the SMW, including
holiday pay, overtime pay, night shift differential and hazard pay of MWEs in the
private/public sectors as defined in these Regulations. Provided, further, that an
employee who receives additional compensation such as commissions, honoraria,
fringe benefits, benefits in excess of the allowable statutory amount of P30,000.00,
taxable allowances and other taxable income other than the SMW, holiday pay,
overtime pay, hazard pay and night shift differential pay shall not enjoy the privilege
of being a MWE and, therefore, his/her entire earnings are not exempt from income
tax and, consequently, shall be subject to withholding tax.
xxxx
For the year 2008, however, being the initial year of implementation of R.A. 9504,
there shall be a transitory withholding tax table for the period from July 6 to
December 31, 2008 (Annex "D") determined by prorating the annual personal and
additional exemptions under R.A. 9504 over a period of six months. Thus, for
individuals, regardless of personal status, the prorated personal exemption is
P25,000, and for each qualified dependent child (QDC),
P12,500.ChanRoblesVirtualawlibrary
On the other hand, the pertinent provisions of law, which are supposed to be
implemented by the above-quoted sections of RR 10-2008, read as follows:
chanRoblesvirtualLawlibrary
SECTION 1. Section 22 of Republic Act No. 8424, as amended, otherwise known
as the National Internal Revenue Code of 1997, is hereby further amended by adding
the following definitions after Subsection (FF) to read as follows:
chanRoblesvirtualLawlibrary
Section 22. Definitions. - when used in this Title:61
(A) xxx
(FF) xxx
(GG) The term 'statutory minimum wage' shall refer to the rate fixed by the
Regional Tripartite Wage and Productivity Board, as defined by the Bureau of Labor
and Employment Statistics (BLES) of the Department of Labor and Employment
(DOLE).
(HH) The term 'minimum wage earner' shall refer to a worker in the private
sector paid the statutory minimum wage, or to an employee in the public sector with
compensation income of not more than the statutory minimum wage in the non-
agricultural sector where he/she is assigned.ChanRoblesVirtualawlibrary
SECTION 2. Section 24(A) of Republic Act No. 8424, as amended, otherwise
known as the National Internal Revenue Code of 1997, is hereby further amended to
read as follows:
chanRoblesvirtualLawlibrary
SEC. 24. Income Tax Rates. -
(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of
the Philippines. -
(1) xxx

xxxx; and
(c) On the taxable income defined in Section 31 of this Code, other than income
subject to tax under Subsections (B), (C) and (D) of this Section, derived for each
taxable year from all sources within the Philippines by an individual alien who is a
resident of the Philippines.
(2) Rates of Tax on Taxable Income of Individuals.
The tax shall be computed in accordance with and at the rates established in the
following schedule:
xxxx
For married individuals, the husband and wife, subject to the provision of
Section 51 (D) hereof, shall compute separately their individual income tax based on
their respective total taxable income: Provided, That if any income cannot be
definitely attributed to or identified as income exclusively earned or realized by
either of the spouses, the same shall be divided equally between the spouses for the
purpose of determining their respective taxable income.
Provided, That minimum wage earners as defined in Section 22(HH) of this
Code shall be exempt from the payment of income tax on their taxable income:
Provided, further, That the holiday pay, overtime pay, night shift differential pay and
hazard pay received by such minimum wage earners shall likewise be exempt from
income tax.
xxxxChanRoblesVirtualawlibrary
SECTION 5. Section 51(A)(2) of Republic Act No. 8424, as amended, otherwise
known as the National Internal Revenue Code of 1997, is hereby further amended to
read as follows:
chanRoblesvirtualLawlibrary
SEC. 51. Individual Return. -
(A) Requirements. -
(1) Except as provided in paragraph (2) of this Subsection, the following
individuals are required to file an income tax return:
(a) xxx
xxxx
(2) The following individuals shall not be required to file an income tax return:
(a) xxx
(b) An individual with respect to pure compensation income, as defined in
Section 32(A)(1), derived from sources within the Philippines, the income tax on
which has been correctly withheld under the provisions of Section 79 of this Code:
Provided, That an individual deriving compensation concurrently from two or
more employers at any time during the taxable year shall file an income tax
return;chanrobleslaw
(c) xxx; and
(d) A minimum wage earner as defined in Section 22(HH) of this Code or an
individual who is exempt from income tax pursuant to the provisions of this Code
and other laws, general or special.
xxxxChanRoblesVirtualawlibrary
SECTION 6. Section 79(A) of Republic Act No. 8424, as amended, otherwise
known as the National Internal Revenue Code of 1997, is hereby further amended to
read as follows:
chanRoblesvirtualLawlibrary
SEC. 79. Income Tax Collected at Source. -
(A) Requirement of Withholding. - Except in the case of a minimum wage
earner as defined in Section 22(HH) of this Code, every employer making payment
of wages shall deduct and withhold upon such wages a tax determined in accordance
with the rules and regulations to be prescribed by the Secretary of Finance, upon
recommendation of the Commissioner. (Emphases
supplied)ChanRoblesVirtualawlibrary
Nowhere in the above provisions of R.A. 9504 would one find the qualifications
prescribed by the assailed provisions of RR 10-2008. The provisions of the law are
clear and precise; they leave no room for interpretation - they do not provide or
require any other qualification as to who are MWEs.
To be exempt, one must be an MWE, a term that is clearly defined. Section 22(HH)
says he/she must be one who is paid the statutory minimum wage if he/she works in
the private sector, or not more than the statutory minimum wage in the non-
agricultural sector where he/she is assigned, if he/she is a government employee.
Thus, one is either an MWE or he/she is not. Simply put, MWE is the status acquired
upon passing the litmus test - whether one receives wages not exceeding the
prescribed minimum wage.
The minimum wage referred to in the definition has itself a clear and definite
meaning. The law explicitly refers to the rate fixed by the Regional Tripartite Wage
and Productivity Board, which is a creation of the Labor Code.62 The Labor Code
clearly describes wages and Minimum Wage under Title II of the Labor Code.
Specifically, Article 97 defines "wage" as follows:
chanRoblesvirtualLawlibrary
(f) "Wage" paid to any employee shall mean the remuneration or earnings,
however designated, capable of being expressed in terms of money, whether fixed or
ascertained on a time, task, piece, or commission basis, or other method of
calculating the same, which is payable by an employer to an employee under a
written or unwritten contract of employment for work done or to be done, or for
services rendered or to be rendered and includes the fair and reasonable value, as
determined by the Secretary of Labor and Employment, of board, lodging, or other
facilities customarily furnished by the employer to the employee. "Fair and
reasonable value" shall not include any profit to the employer, or to any person
affiliated with the employer.ChanRoblesVirtualawlibrary
While the Labor Code's definition of "wage" appears to encompass any payments of
any designation that an employer pays his or her employees, the concept of
minimum wage is distinct.63 "Minimum wage" is wage mandated; one that
employers may not freely choose on their own to designate in any which way.
In Article 99, minimum wage rates are to be prescribed by the Regional Tripartite
Wages and Productivity Boards. In Articles 102 to 105, specific instructions are
given in relation to the payment of wages. They must be paid in legal tender at least
once every two weeks, or twice a month, at intervals not exceeding 16 days, directly
to the worker, except in case of force majeure or death of the worker.
These are the wages for which a minimum is prescribed. Thus, the minimum wage
exempted by R.A. 9504 is that which is referred to in the Labor Code. It is distinct
and different from other payments including allowances, honoraria, commissions,
allowances or benefits that an employer may pay or provide an employee.
Likewise, the other compensation incomes an MWE receives that are also exempted
by R.A. 9504 are all mandated by law and are based on this minimum wage.
Additional compensation in the form of overtime pay is mandated for work beyond
the normal hours based on the employee's regular wage.64
Those working between ten o'clock in the evening and six o'clock in the morning are
required to be paid a night shift differential based on their regular wage.65
Holiday/premium pay is mandated whether one works on regular holidays or on
one's scheduled rest days and special holidays. In all of these cases, additional
compensation is mandated, and computed based on the employee's regular wage.66
R.A. 9504 is explicit as to the coverage of the exemption: the wages that are not in
excess of the minimum wage as determined by the wage boards, including the
corresponding holiday, overtime, night differential and hazard pays.
In other words, the law exempts from income taxation the most basic compensation
an employee receives - the amount afforded to the lowest paid employees by the
mandate of law. In a way, the legislature grants to these lowest paid employees
additional income by no longer demanding from them a contribution for the
operations of government. This is the essence of R.A. 9504 as a social legislation.
The government, by way of the tax exemption, affords increased purchasing power
to this sector of the working class.
This intent is reflected in the Explanatory Note to Senate Bill No. 103 of Senator
Roxas:
chanRoblesvirtualLawlibrary
This bill seeks to exempt minimum wage earners in the private sector and
government workers in Salary Grades 1 to 3, amending certain provisions of
Republic Act 8424, otherwise known as the National Internal Revenue Code of
1997, as amended.
As per estimates by the National Wages and Productivity Board, there are 7
million workers earning the minimum wage and even below. While these workers
are in the verge of poverty, it is unfair and unjust that the Government, under the
law, is taking away a portion of their already subsistence-level income.
Despite this narrow margin from poverty, the Government would still be
mandated to take a slice away from that family's meager resources. Even if the
Government has recently exempted minimum wage earners from withholding taxes,
they are still liable to pay income taxes at the end of the year. The law must be
amended to correct this injustice. (Emphases supplied)ChanRoblesVirtualawlibrary
The increased purchasing power is estimated at about P9,500 a year.67 RR 10-2008,
however, takes this away. In declaring that once an MWE receives other forms of
taxable income like commissions, honoraria, and fringe benefits in excess of the non-
taxable statutory amount of P30,000, RR 10-2008 declared that the MWE
immediately becomes ineligible for tax exemption; and otherwise non-taxable
minimum wage, along with the other taxable incomes of the MWE, becomes taxable
again.
Respondents acknowledge that R.A. 9504 is a social legislation meant for social
justice,68 but they insist that it is too generous, and that consideration must be given
to the fiscal position and financial capability of the government.69 While they
acknowledge that the intent of the income tax exemption of MWEs is to free low-
income earners from the burden of taxation, respondents, in the guise of clarification,
proceed to redefine which incomes may or may not be granted exemption. These
respondents cannot do without encroaching on purely legislative prerogatives.
By way of review, this P30,000 statutory ceiling on benefits has its beginning in
1994 under R. A. 7833, which amended then Section 28(b)(8) of the 1977 NIRC. It
is substantially carried over as Section 32(B) (Exclusion from Gross Income) of
Chapter VI (Computation of Gross Income) of Title II (Tax on Income) in the 1997
NIRC (R.A. 8424). R.A. 9504 does not amend that provision of R.A. 8424, which
reads:
chanRoblesvirtualLawlibrary
SEC. 32. Gross Income. -
(A) General Definition. - xxx
(B) Exclusions from Gross Income. - The following items shall not be included in
gross income and shall be exempt from taxation under this title:
chanRoblesvirtualLawlibrary
(1) xxx
xxxx
(7) Miscellaneous Items. -
(a) xxx
xxxx
(e) 13th Month Pay and Other Benefits. - Gross benefits received by officials
and employees of public and private entities: Provided, however, That the total
exclusion under this subparagraph shall not exceed Thirty thousand pesos (P30,000)
which shall cover:
chanRoblesvirtualLawlibrary
(i) Benefits received by officials and employees of the national and local
government pursuant to Republic Act No. 668670;chanrobleslaw
(ii) Benefits received by employees pursuant to Presidential Decree No.
85171, as amended by Memorandum Order No. 28, dated August 13,
1986;chanrobleslaw
(iii) Benefits received by officials and employees not covered by Presidential
decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986;
and
(iv) Other benefits such as productivity incentives and Christmas bonus:
Provided, further, That the ceiling of Thirty thousand pesos (P30,000) may be
increased through rules and regulations issued by the Secretary of Finance, upon
recommendation of the Commissioner, after considering among others, the effect on
the same of the inflation rate at the end of the taxable year.
(f) xxxChanRoblesVirtualawlibrary
The exemption granted to MWEs by R.A. 9504 reads:
chanRoblesvirtualLawlibrary
Provided, That minimum wage earners as defined in Section 22(HH) of this Code
shall be exempt from the payment of income tax on their taxable income: Provided,
further, That the holiday pay, overtime pay, night shift differential pay and hazard
pay received by such minimum wage earners shall likewise be exempt from income
tax.ChanRoblesVirtualawlibrary
"Taxable income" is defined as follows:
chanRoblesvirtualLawlibrary
SEC. 31. Taxable Income Defined. - The term taxable income means the pertinent
items of gross income specified in this Code, less the deductions and/or personal and
additional exemptions, if any, authorized for such types of income by this Code or
other special laws.
REVENUE REGULATIONS NO. 2
-
98
issued May 17, 1998 prescribes the regulations to implement
Republic Act (RA) No. 8424 relative to the Withholding on Income subject to the
Expanded Withholding
Tax and Final Withholding Tax, With
holding of Income Tax on Compensation, Withholding of Creditable
Value
-
Added Tax and Other Percentage Taxes. Said Regulations will take effect on
compensation
income paid beginning January 1,1998. No penalties for non
-
compliance with the new features of t
he
Tax Code will apply until May 15, 1998
 (RMC) No. 41-09 was issued essentially defining th
e terms managerial and/or technical
positions of Filipino personnel employed by Regiona
l or Area Headquarters (RHQs) and
Regional Operating Headquarters (ROHQs) of multinat
ional companies. The phrase
managerial and technical positions appears in Sec
tion 2.57.1(D) of Revenue
Regulations (RR) No. 2-98, as amended by, among ot
hers, RR No. 12-2001,
implementing Section 25(C) of the Tax Code. Thus:
(D) Income Derived by Alien Individuals Employed
1 by Regional
REPUBLIC OF THE PHILIPPINES or Area Headquarters and Regional Operating Headqua
DEPARTMENT OF FINANCE rters of
BUREAU OF INTERNAL REVENUE Multinational Companies. A final withholding tax
October 26, 2010 equivalent to fifteen
REVENUE REGULATIONS NO. 11-2010 percent (15%) shall be withheld by the withholding
SUBJECT agent from the gross
: income received by every alien individual occupying
Further Clarifying the Term Managerial and Technic managerial
al Positions and
Under Section 2.57.1(D) of Revenue Regulations (RR) technical positions
No. 2-98, as in regional or area headquarters and regional
Amended, by RR No. 12-2001, Implementing Section 2 operating headquarters and representative offices e
5(C) of the stablished in the
National Internal Revenue Code of 1997 (Tax Code), Philippines by multinational companies as salaries,
as Amended wages, annuities,
and Modifying for this Purpose Revenue Memorandum C compensation, remuneration, and other emoluments, s
ircular uch as honoraria and
(RMC) No. 41-09 Including Guidelines on Availment allowances, except income which is subject to fring
of the Fifteen e benefits tax, from
Percent (15% such regional or area headquarters and regional ope
) Preferential Income Tax Rate rating headquarters.
for qualified Filipino The same tax treatment shall apply to Filipinos em
personnel employed by Regional or Area Headquarters ployed and
(RHQs) and occupying the same positions as those aliens employ
Regional Operating Headquarters (ROHQs) of multinat ed by regional or area
ional headquarters and regional operating headquarters of
companies multinational
TO companies, regardless of whether or not there is an
: alien executive
All Revenue Officials and Personnel and Others Conc occupying the same position. Provided, that such F
erned ilipinos shall have the
SECTION 1. Background. - option to be taxed at either 15% of gross income or
On July 23, 2009 Revenue Memorandum Circular at the regular rate on
2 Section 2.57-1(D) of RR No. 2-98, as
their taxable income in accordance with the Tax Cod
e of 1997, if the
employer (Regional or Operating headquarters/Region
al or Area
headquarters) is governed by Book III of E.O. 226,
as amended by R.A.
No. 8756. In case the Filipino opted to be taxed at
the regular tax rate
under Sec. 24 of the Tax Code of 1997, the provisio
ns of Sec. 2.79(A) to
(D) of Revenue Regulations No. 2-98 shall apply.
The term multinational company means a foreign f
irm or entity
engaged in international trade with its affiliates
or subsidiaries or branch
offices in the Asia-Pacific Region and other foreig
n markets. (emphasis
supplied)
In defining the term managerial employee, RMC No.
41-09 cited
Philippine
Appliance Corp. vs. Laguesma
, 226 SCRA 730 (1993) and
Villuga vs. NLRC
, 225 SCRA
537 (1993).
RMC No. 041-09 also defined the term technical pos
ition as being limited only
to positions that are highly technical in nature or
where there are no Filipinos who are
competent, able and willing to perform the services
for which the aliens are desired.
Finally, the language of RMC No. 41-09 implied that
in order to enjoy the fifteen
percent (15%) final income tax rate on their gross
compensation income, Filipino
nationals in ROHQs or RHQs must be employed in a ma
nagerial and
highly technical
position.
Thus, the issuance of RMC No. 41-09 has resulted in
some confusion among the
tax treatment of Filipinos employed by ROHQs or RHQ
s. These regulations are
therefore being issued to clarify the provisions of
amended.
SECTION 2. Who are qualified.
Filipinos employed by ROHQs or RHQs in
a managerial or
technical position shall have the option to be tax
ed at either fifteen
percent (15%) of their gross income or at the regul
ar income tax rate on taxable
compensation income in accordance with Section 24 o
f the Tax Code, if the employer is
governed by Book III of Executive Order (EO) No. 22
6, as amended by Republic Act
(RA) No. 8756. All other employees are consider
ed as regular employees who are
subject to the regular income tax rate on their tax
able compensation income.
SECTION 3.
Eligibility to the 15% Preferential Tax Rate.
Filipinos
exercising the option to be taxed at fifteen percen
t (15%) preferential rate for occupying
the same managerial or technical position as that o
f an alien employed in an ROHQ or
RHQ must meet all the following requirements:
(a)
Position and Function Test. - The employee must occ
upy a managerial position or
technical position AND must actually be exercising
such managerial or technical
functions pertaining to said position;
3
(b)
Compensation Threshold Test - In order to be consid
ered a managerial or
technical employee for income tax purposes, the emp
loyee must have received, or
is due to receive under a contract of employment, a
gross annual taxable
compensation of at least PhP 975,000.00 (whether or
not this is actually received);
Provided
that, a change in compensation as a consequence of
which, such
employee subsequently receiving less than the compe
nsation threshold stated in
this section shall, for the calendar year when the
change becomes effective, result
in the employee being subject to the regular income
tax rate.
Beginning December 31, 2013 and on December 31 eve
ry three years
thereafter, the compensation threshold shall be adj
usted to its present value using
the Philippine Consumer Price Index (CPI), as publi
shed by the National Statistics
Office. The adjusted compensation, shall take effec
t not earlier than the first day
of the calendar month immediately following the iss
uance of a corresponding
Revenue Memorandum Circular (RMC) on the matter.
For clarity in the implementation hereof, the form
ula for determining the
adjusted compensation threshold shall be:
Adjusted
threshold
amount
= pay/benefits (whether or not taxable), as well as i
Previous
threshold
amount
x Provided that the foregoing shall be considered in
CPI for the current year
CPI for the previous revaluation year
(c)
Exclusivity Test The Filipino managerial or techn
ical employee must be
exclusively working
for the RHQ or ROHQ as a regular employee and not
just a
consultant or contractual personnel. Exclusivity m
eans having just one employer
at a time.
SECTION 4.
Gross Compensation.
- Under Section 2.78.1(A) of RR No. 2-98,
as amended, gross compensation includes salaries, w
ages, emoluments and honoraria,
allowances, commissions and fees (including directo
rs fees if the director is at the same
time an employee of the employer), taxable bonuses,
and fringe benefits (except those
that are subject to fringe benefits tax).
Section 2.79(B)(3) of RR No. 2-98, as amended, cate
gorizes taxable
compensation income into regular taxable compensati
on income and supplementary
compensation income. Under the said regulations, re
gular taxable compensation income
includes basic salary, fixed allowances for represe
ntation, transportation and other
allowances paid to an employee per payroll period.
Supplementary compensation is
defined by the same regulations as payments made to
an employee in addition to the
regular compensation such as commission, overtime p
ay, taxable bonus and other taxable
benefits, with or without regard to a payroll perio
d.
For purposes of determining the compensation thresh
old under Section 3(b) of
these regulations, gross compensation shall not inc
lude retirement and/or separation
tems considered as
de minimis
benefits.
determining the income tax due at the
time of the employee's retirement or separation.
REPUBLIC OF THE PHILIPPINES
DEPARTMENT OF FINANCE
BUREAU OF INTERNAL REVENUE
Quezon City
REVENUE REGULATIONS No. 7-2010
SUBJECT
: Implementing the Tax Privileges Provisions of Re
public Act No. 9994, Otherwise Known
as the "Expanded Senior Citizens Act of 2010", and Pr
escribing the Guidelines for the
Availment Thereof
TO
: All Internal Revenue Officers and Others Concerned
SECTION 1
.
Scope.
 Pursuant to Section 244 of the National Internal
Revenue Code of
1997, as amended (Tax Code), in relation to Section
2 of Republic Act No. 9994 (Act), otherwise known
as the "Expanded Senior Citizens Act of 2010" (herein
after referred to as the Act) and Section 2,
Article 4, Rule II of the Implementing Rules and Reg
ulations of the Act, these Regulations are hereby
promulgated to prescribe the guidelines for:
1.
The availment of the income tax exemption of Senior
Citizens;
2.
The value-added tax exemption privileges granted to
VAT-registered taxpayers selling goods
and services identified in the Act to Senior Citizens;
3.
The tax privileges granted to establishments giving di
scount on their sale of goods and
services to Senior Citizens;
4.
The tax implication of taking care and supporting sen
ior citizens by their benefactors; and,
5.
The tax privileges granted to private entities who en
gage Senior Citizens as their employees.
SEC. 2
. benefactor to claim the additional personal exemptio
Definitions.
For purposes of these Regulations, the following ter
ms and phrases shall
be defined as follows:
a.
Senior Citizen or Elderly refers to any Filipino c
itizen who is a resident of the Philippines,
and who is sixty (60) years old or above. It may app
ly to senior citizens with dual
citizenship status provided they prove their Filipin
o citizenship and have at least six (6)
months residency in the Philippines.
b.
Resident Citizen a Filipino Citizen with permanent
/legal residence in the Philippines, and
shall include one, who, having migrated to a foreign
country, has returned to the Philippines
with a definite intention to reside therein, and wh
ose immigrant visa has been surrendered
to the foreign government.
c.
Benefactor refers to any person whether related or
not to the senior citizen who provides
care or who gives any form of assistance to him/her, a
nd on whom the senior citizen is
dependent on for primary care and material support,
as certified by the City or Municipal
Social Welfare and Development Officer (C/MSWDO)
SEC
.
11. Personal Exemptions of
Benefactors of Senior Citizens
. A Benefactor of a Senior
Citizen shall be entitled to claim the basic personal
exemption of fifty thousand pesos (P50,000.00)
which is the amount of basic personal exemption allow
ed under Republic Act No. 9504 for all taxpayers
required to file income tax returns thereby removing
the classification of tax filers into single, head o
f
the family and married. A Senior Citizen who is not
gainfully employed, living with and dependent upon
his benefactor for chief support, although treated a
s dependent under the Act, will not entitle the
n of twenty five thousand pesos (P25,000.00). The
entitlement to claim the additional personal exempti
on per dependent (not exceeding four) is allowable
only to individual taxpayers with a qualified depend
ent child or children subject to the conditions set
forth under Section 35(B) of the Tax Code, as amende
d.
If required to file an income tax return (ITR), the
Benefactor shall state therein the name,
birthday and OSCA ID number of the dependent Senior
Citizen.
REVENUE
REGULATIONS
NO.
10
-
2012
SUBJECT: or
J consortium formed for the purpose of
oint Venture or Consortium Formed For The Purpose Of Undertaking undertaking construction projects
Construction Projects not considered as
and Mandatory Enrollment of Local Contractors in the corporation
Electronic Filing and Payment System (EFPS) under
All Internal Revenue Officers, Employees and Others Concerned Sec 22 of the NIRC of 1997 as amended,
Section 1. COVERAGE. should be
Pursuant to the provisions of Sec 244 and 245 of the :
National Internal Revenue Code of 1997, as amended (1)
, for the undertaking of
these Regulations are hereby a construction project
promulgated to properly implement exclusion to the definition of what is considered ;
as a and
corporation pursuant to Sec 22 (B) of the NIRC of 1997, in particular, those (2)
concerning joint should involve
venture undertakings involving construction joining
projects. or pooling
Section 2. BACKGROUND of resources by
. licensed
Pursuant to Section 22(B) of the NIRC of 1997, as local
amended, the term corporation shall include partnerships, no matter how created or contracts
organized, joint ; that
- is,
stock companies, joint accounts licensed as general contractor by the Philippine Contractors Accreditation
(cuentas en participacion), Board (PCAB) of the Department of Trade and Industry (DTI);
associ (3)
ations, or these local contractors are
insurance companies, but does not include general professional partnerships and a engaged in construction business
joint ;
venture or consortium formed for the purpose of undertaking construction projects or and
engaging in petroleum, coal, geothermal and other energy operations purs (4)
uant to an the Joint Venture itself must likewise be duly licens
operating or consortium agreement under a service contract with the Government. ed as such by the Philippine
The tax exemption of joint ventures formed for the purpose of construction projects Contractors Accreditation Board (PCAB) of the Department of Trade and
was Industry (DTI)
pursuant to Presidential Decree (PD) No. 929 (dated 4 May 1976) to assist l Joint ventures involving foreign contr
ocal actors may also be treated as a non
contractors in achieving competitiveness with foreign contractors by pooling their -
resources taxable
in undertaking big construction projects. corporation only if the member foreign contractor is covered by a
Section 3. JOINT VENTURES special license as
NOT TAXABLE AS CORPORATIONS contractor by the Philippine Contractors Accreditation Board (PCAB) of the
. Department
A of Trade and Industry (DTI); and the cons
joint venture truction project is certified by the appropriate
Tendering Agency (government office) that the project is a foreign financed/
internationally
- managed the Batangas Transportation, while Martin Olson was the manager of the
funded project and that international bidding is allowed under the
Bilateral Agreement entered into by and between
the Philippine Government and the
foreign / international financing institution
pursuant to the implementing rules and
regulations of Republic Act No. 4566 otherwise known as Contractors License Law.
Absent any one the aforesaid requirements, the joint
venture or consortium formed
for the purpose of undertaking construction projects shall be considered as taxable
corporations.
In addition, the tax
- of Directors. The head office of the Laguna Bus in San Pablo City was made the
exempt joint venture or consortium as herein defined shall not
include those who are mere suppliers of good
s, services or capital to a construction project.
The member to a Joint Venture not taxable as corporation shall each be responsible
in reporting and paying appropriate income taxes on their respective share to the
joint
ventures profit.
G.R. No. L-9692 January 6, 1958
COLLECTOR OF INTERNAL REVENUE, petitioner,
vs.
BATANGAS TRANSPORTATION COMPANY and LAGUNA-TAYABAS
BUS COMPANY, respondents.
Office of the Solicitor General Ambrosio Padilla, Solicitor Conrado T. Limcaoco
and Zoilo R. Zandoval for petitioner.
Ozaeta, Lichauco and Picazo for respondents.
MONTEMAYOR, J.:
This is an appeal from the decision of the Court of Tax Appeals (C.T.A.), which
reversed the assessment and decision of petitioner Collector of Internal Revenue,
later referred to as Collector, assessing and demanding from the respondents
Batangas Transportation Company, later referred to as Batangas Transportation, and
Laguna-Tayabas Bus Company, later referred to as Laguna Bus, the amount of
P54,143.54, supposed to represent the deficiency income tax and compromise for the
years 1946 to 1949, inclusive, which amount, pending appeal in the C.T.A., but
before the Collector filed his answer in said court, was increased to P148,890.14.
The following facts are undisputed: Respondent companies are two distinct and
separate corporations engaged in the business of land transportation by means of
motor buses, and operating distinct and separate lines. Batangas Transportation was
organized in 1918, while Laguna Bus was organized in 1928. Each company now
has a fully paid up capital of Pl,000,000. Before the last war, each company
maintained separate head offices, that of Batangas Transportation in Batangas,
Batangas, while the Laguna Bus had its head office in San Pablo Laguna. Each
company also kept and maintained separate books, fleets of buses, management,
personnel, maintenance and repair shops, and other facilities. Joseph Benedict
Laguna Bus. To show the connection and close relation between the two companies,
it should be stated that Max Blouse was the President of both corporations and
owned about 30 per cent of the stock in each company. During the war, the
American officials of these two corporations were interned in Santo Tomas, and said
companies ceased operations. They also lost their respective properties and
equipment. After Liberation, sometime in April, 1945, the two companies were able
to acquire 56 auto buses from the United States Army, and the two companies
diveded said equipment equally between themselves,registering the same separately
in their respective names. In March, 1947, after the resignation of Martin Olson as
Manager of the Laguna Bus, Joseph Benedict, who was then managing the Batangas
Transportation, was appointed Manager of both companies by their respective Board
main office of both corporations. The placing of the two companies under one sole
mangement was made by Max Blouse, President of both companies, by virtue of the
authority granted him by resolution of the Board of Directors of the Laguna Bus on
August 10, 1945, and ratified by the Boards of the two companies in their respective
resolutions of October 27, 1947.
According to the testimony of joint Manager Joseph Benedict, the purpose of the
joint management, which was called, "Joint Emergency Operation", was to
economize in overhead expenses; that by means of said joint operation, both
companies had been able to save the salaries of one manager, one assistant manager,
fifteen inspectors, special agents, and one set of office of clerical force, the savings
in one year amounting to about P200,000 or about P100,000 for each company. At
the end of each calendar year, all gross receipts and expenses of both companies
were determined and the net profits were divided fifty-fifty, and transferred to the
book of accounts of each company, and each company "then prepared its own
income tax return from this fifty per centum of the gross receipts and expenditures,
assets and liabilities thus transferred to it from the `Joint Emergency Operation' and
paid the corresponding income taxes thereon separately".
Under the theory that the two companies had pooled their resources in the
establishment of the Joint Emergency Operation, thereby forming a joint venture, the
Collector wrote the bus companies that there was due from them the amount of
P422,210.89 as deficiency income tax and compromise for the years 1946 to 1949,
inclusive. Since the Collector caused to be restrained, seized, and advertized for sale
all the rolling stock of the two corporations, respondent companies had to file a
surety bond in the same amount of P422,210.89 to guarantee the payment of the
income tax assessed by him.
After some exchange of communications between the parties, the Collector, on
January 8, 1955, informed the respondents "that after crediting the overpayment
made by them of their alleged income tax liabilities for the aforesaid years, pursuant
to the doctrine of equitable recoupment, the income tax due from the `Joint
Emergency Operation' for the years 1946 to 1949, inclusive, is in the total amount of
P54,143.54." The respondent companies appealed from said assessment of
P54,143.54 to the Court of Tax Appeals, but before filing his answer, the Collector
set aside his original assessment of P54,143.54 and reassessed the alleged income tax
liability of respondents of P148,890.14, claiming that he had later discovered that
said companies had been "erroneously credited in the last assessment with 100 per
cent of their income taxes paid when they should in fact have been credited with only
75 per cent thereof, since under Section 24 of the Tax Code dividends received by
them from the Joint Operation as a domestic corporation are returnable to the extent
of 25 per cent". That corrected and increased reassessment was embodied in the
answer filed by the Collector with the Court of Tax Appeals.
The theory of the Collector is the Joint Emergency Operation was a corporation
distinct from the two respondent companies, as defined in section 84 (b), and so
liable to income tax under section 24, both of the National Internal Revenue Code.
After hearing, the C.T.A. found and held, citing authorities, that the Joint Emergency
Operation or joint management of the two companies "is not a corporation within the
contemplation of section 84 (b) of the National Internal Revenue Code much less a
partnership, association or insurance company", and therefore was not subject to the
income tax under the provisions of section 24 of the same Code, separately and
independently of respondent companies; so, it reversed the decision of the Collector
assessing and demanding from the two companies the payment of the amount of
P54,143.54 and/or the amount of P148,890.14. The Tax Court did not pass upon the
question of whether or not in the appeal taken to it by respondent companies, the
Collector could change his original assessment by increasing the same from
P54,143.14 to P148,890.14, to correct an error committed by him in having credited
the Joint Emergency Operation, totally or 100 per cent of the income taxes paid by
the respondent companies for the years 1946 to 1949, inclusive, by reason of the
principle of equitable recoupment, instead of only 75 per cent.
The two main and most important questions involved in the present appeal are: (1)
whether the two transportation companies herein involved are liable to the payment
of income tax as a corporation on the theory that the Joint Emergency Operation
organized and operated by them is a corporation within the meaning of Section 84 of
the Revised Internal Revenue Code, and (2) whether the Collector of Internal
Revenue, after the appeal from his decision has been perfected, and after the Court of
Tax Appeals has acquired jurisdiction over the same, but before said Collector has
filed his answer with that court, may still modify his assessment subject of the appeal
by increasing the same, on the ground that he had committed error in good faith in
making said appealed assessment.
The first question has already been passed upon and determined by this Tribunal in
the case of Eufemia Evangelista et al., vs. Collector of Internal Revenue et al.,* G.R.
No. L-9996, promulgated on October 15, 1957. Considering the views and rulings
embodied in our decision in that case penned by Mr. Justice Roberto Concepcion, we
deem it unnecessary to extensively discuss the point. Briefly, the facts in that case
are as follows: The three Evangelista sisters borrowed from their father about
P59,000 and adding thereto their own personal funds, bought real properties, such as
a lot with improvements for the sum of P100,000 in 1943, parcels of land with a total
area of almost P4,000 square meters with improvements thereon for P18,000 in
1944, another lot for P108,000 in the same year, and still another lot for P237,000 in
the same year. The relatively large amounts invested may be explained by the fact
that purchases were made during the Japanese occupation, apparently in Japanese
military notes. In 1945, the sisters appointed their brother to manage their properties,
with full power to lease, to collect and receive rents, on default of such payment, to
bring suits against the defaulting tenants, to sign all letters and contracts, etc. The
properties therein involved were rented to various tenants, and the sisters, through
their brother as manager, realized a net rental income of P5,948 in 1945, P7,498 in
1946, and P12,615 in 1948.
In 1954, the Collector of Internal Revenue demanded of them among other things,
payment of income tax on corporations from the year 1945 to 1949, in the total
amount of P6,157, including surcharge and compromise. Dissatisfied with the said
assessment, the three sisters appealed to the Court of Tax Appeals, which court
decided in favor of the Collector of Internal Revenue. On appeal to us, we affirmed
the decision of the Tax Court. We found and held that considering all the facts and
circumstances sorrounding the case, the three sisters had the purpose to engage in
real estate transactions for monetary gain and then divide the same among
themselves; that they contributed to a common fund which they invested in a series
of transactions; that the properties bought with this common fund had been under the
management of one person with full power to lease, to collect rents, issue receipts,
bring suits, sign letters and contracts, etc., in such a manner that the affairs relative to
said properties have been handled as if the same belonged to a corporation or
business enterprise operated for profit; and that the said sisters had the intention to
constitute a partnership within the meaning of the tax law. Said sisters in their appeal
insisted that they were mere co-owners, not co-partners, for the reason that their acts
did not create a personality independent of them, and that some of the characteristics
of partnerships were absent, but we held that when the Tax Code includes
"partnerships" among the entities subject to the tax on corporations, it must refer to
organizations which are not necessarily partnerships in the technical sense of the
term, and that furthermore, said law defined the term "corporation" as including
partnerships no matter how created or organized, thereby indicating 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"; that besides, said section 84 (b)
provides that the term "corporation" includes "joint accounts" (cuentas en
participacion) and "associations", none of which has a legal personality independent
of that of its members. The decision cites 7A Merten's Law of Federal Income
Taxation.
In the present case, the two companies contributed money to a common fund to pay
the sole general manager, the accounts and office personnel attached to the office of
said manager, as well as for the maintenance and operation of a common
maintenance and repair shop. Said common fund was also used to buy spare parts,
and equipment for both companies, including tires. Said common fund was also used
to pay all the salaries of the personnel of both companies, such as drivers,
conductors, helpers and mechanics, and at the end of each year, the gross income or
receipts of both companies were merged, and after deducting therefrom the gross
expenses of the two companies, also merged, the net income was determined and
divided equally between them, wholly and utterly disregarding the expenses incurred
in the maintenance and operation of each company and of the individual income of
said companies.
From the standpoint of the income tax law, this procedure and practice of
determining the net income of each company was arbitrary and unwarranted,
disregarding as it did the real facts in the case. There can be no question that the
receipts and gross expenses of two, distinct and separate companies operating
different lines and in some cases, different territories, and different equipment and
personnel at least in value and in the amount of salaries, can at the end of each year
be equal or even approach equality. Those familiar with the operation of the business
of land transportation can readily see that there are many factors that enter into said
operation. Much depends upon the number of lines operated and the length of each
line, including the number of trips made each day. Some lines are profitable, others
break above even, while still others are operated at a loss, at least for a time,
depending, of course, upon the volume of traffic, both passenger and freight. In some
lines, the operator may enjoy a more or less exclusive exclusive operation, while in
others, the competition is intense, sometimes even what they call "cutthroat
competition". Sometimes, the operator is involved in litigation, not only as the result
of money claims based on physical injuries ar deaths occassioned by accidents or
collisions, but litigations before the Public Service Commission, initiated by the
operator itself to acquire new lines or additional service and equipment on the lines
already existing, or litigations forced upon said operator by its competitors. Said
litigation causes expense to the operator. At other times, operator is denounced by
competitors before the Public Service Commission for violation of its franchise or
franchises, for making unauthorized trips, for temporary abandonement of said lines
or of scheduled trips, etc. In view of this, and considering that the Batangas
Transportation and the Laguna Bus operated different lines, sometimes in different
provinces or territories, under different franchises, with different equipment and
personnel, it cannot possibly be true and correct to say that the end of each year, the
gross receipts and income in the gross expenses of two companies are exactly the
same for purposes of the payment of income tax. What was actually done in this case
was that, although no legal personality may have been created by the Joint
Emergency Operation, nevertheless, said Joint Emergency Operation joint venture,
or joint management operated the business affairs of the two companies as though
they constituted a single entity, company or partnership, thereby obtaining
substantial economy and profits in the operation.
For the foregoing reasons, and in the light of our ruling in the Evangelista vs.
Collector of Internal Revenue case, supra, we believe and hold that the Joint
Emergency Operation or sole management or joint venture in this case falls under the
provisions of section 84 (b) of the Internal Revenue Code, and consequently, it is
liable to income tax provided for in section 24 of the same code.
The second important question to determine is whether or not the Collector of
Internal Revenue, after appeal from his decision to the Court of Tax Appeals has
been perfected, and after the Tax Court Appeals has acquired jurisdiction over the
appeal, but before the Collector has filed his answer with the court, may still modify
his assessment, subject of the appeal, by increasing the same. This legal point,
interesting and vital to the interests of both the Government and the taxpayer,
provoked considerable discussion among the members of this Tribunal, a minority of
which the writer of this opinion forms part, maintaining that for the information and
guidance of the taxpayer, there should be a definite and final assessment on which he
can base his decision whether or not to appeal; that when the assessment is appealed
by the taxpayer to the Court of Tax Appeals, the collector loses control and
jurisdiction over the same, the jurisdiction being transferred automatically to the Tax
Court, which has exclusive appellate jurisdiction over the same; that the jurisdiction
of the Tax Court is not revisory but only appellate, and therefore, it can act only
upon the amount of assessment subject of the appeal to determine whether it is valid
and correct from the standpoint of the taxpayer-appellant; that the Tax Court may
only correct errors committed by the Collector against the taxpayer, but not those
committed in his favor, unless the Government itself is also an appellant; and that
unless this be the rule, the Collector of Internal Revenue and his agents may not
exercise due care, prudence and pay too much attention in making tax assessments,
knowing that they can at any time correct any error committed by them even when
due to negligence, carelessness or gross mistake in the interpretation or application
of the tax law, by increasing the assessment, naturally to the prejudice of the
taxpayer who would not know when his tax liability has been completely and
definitely met and complied with, this knowledge being necessary for the wise and
proper conduct and operation of his business; and that lastly, while in the United
States of America, on appeal from the decision of the Commissioner of Internal
Revenue to the Board or Court of Tax Appeals, the Commissioner may still amend
or modify his assessment, even increasing the same the law in that jurisdiction
expressly authorizes the Board or Court of Tax Appeals to redetermine and revise
the assessment appealed to it.
The majority, however, holds, not without valid arguments and reasons, that the
Government is not bound by the errors committed by its agents and tax collectors in
making tax assessments, specially when due to a misinterpretation or application of
the tax laws, more so when done in good faith; that the tax laws provide for a
prescriptive period within which the tax collectors may make assessments and
reassessments in order to collect all the taxes due to the Government, and that if the
Collector of Internal Revenue is not allowed to amend his assessment before the
Court of Tax Appeals, and since he may make a subsequent reassessment to collect
additional sums within the same subject of his original assessment, provided it is
done within the prescriptive period, that would lead to multiplicity of suits which the
law does not encourage; that since the Collector of Internal Revenue, in modifying
his assessment, may not only increase the same, but may also reduce it, if he finds
that he has committed an error against the taxpayer, and may even make refunds of
amounts erroneously and illegally collected, the taxpayer is not prejudiced; that the
hearing before the Court of Tax Appeals partakes of a trial de novo and the Tax
Court is authorized to receive evidence, summon witnesses, and give both parties,
the Government and the taxpayer, opportunity to present and argue their sides, so
that the true and correct amount of the tax to be collected, may be determined and
decided, whether resulting in the increase or reduction of the assessment appealed to
it. The result is that the ruling and doctrine now being laid by this Court is, that
pending appeal before the Court of Tax Appeals, the Collector of Internal Revenue
may still amend his appealed assessment, as he has done in the present case.
There is a third question raised in the appeal before the Tax Court and before this
Tribunal, namely, the liability of the two respondent transportation companies for 25
per cent surcharge due to their failure to file an income tax return for the Joint
Emergency Operation, which we hold to be a corporation within the meaning of the
Tax Code. We understand that said 25 per cent surcharge is included in the
assessment of P148,890.14. The surcharge is being imposed by the Collector under
the provisions of Section 72 of the Tax Code, which read as follows:
The Collector of Internal Revenue shall assess all income taxes. In case of
willful neglect to file the return or list within the time prescribed by law, or
in case a false or fraudulent return or list is willfully made the collector of
internal revenue shall add to the tax or to the deficiency tax, in case any
payment has been made on the basis of such return before the discovery of
the falsity or fraud, a surcharge of fifty per centum of the amount of such
tax or deficiency tax. In case of any failure to make and file a return list
within the time prescribed by law or by the Collector or other internal
revenue officer, not due to willful neglect, the Collector, shall add to the tax
twenty-five per centum of its amount, except that, when the return is
voluntarily and without notice from the Collector or other officer filed after
such time, it is shown that the failure was due to a reasonable cause, no such
addition shall be made to the tax. The amount so added to any tax shall be
collected at the same time in the same manner and as part of the tax unless
the tax has been paid before the discovery of the neglect, falsity, or fraud, in
which case the amount so added shall be collected in the same manner as
the tax.
We are satisfied that the failure to file an income tax return for the Joint Emergency
Operation was due to a reasonable cause, the honest belief of respondent companies
that there was no such corporation within the meaning of the Tax Code, and that
their separate income tax return was sufficient compliance with the law. That this
belief was not entirely without foundation and that it was entertained in good faith, is
shown by the fact that the Court of Tax Appeals itself subscribed to the idea that the
Joint Emergency Operation was not a corporation, and so sustained the contention of
respondents. Furthermore, there are authorities to the effect that belief in good faith,
on advice of reputable tax accountants and attorneys, that a corporation was not a
personal holding company taxable as such constitutes "reasonable cause" for failure
to file holding company surtax returns, and that in such a case, the imposition of
penalties for failure to file holding company surtax returns, and that in such a case,
the imposition of penalties for failure to file return is not warranted 1
In view of the foregoing, and with the reversal of the appealed decision of the Court
of Tax Appeals, judgment is hereby rendered, holding that the Joint Emergency
Operation involved in the present is a corporation within the meaning of section 84
(b) of the Internal Revenue Code, and so is liable to incom tax under section 24 of
the code; that pending appeal in the Court of Tax Appeals of an assessment made by
the Collector of Internal Revenue, the Collector, pending hearing before said court,
may amend his appealed assessment and include the amendment in his answer before
the court, and the latter may on the basis of the evidence presented before it,
redetermine the assessment; that where the failure to file an income tax return for
and in behalf of an entity which is later found to be a corporation within the meaning
of section 84 (b) of the Tax Code was due to a reasonable cause, such as an honest
belief based on the advice of its attorneys and accountants, a penalty in the form of a
surcharge should not be imposed and collected. The respondents are therefore
ordered to pay the amount of the reassessment made by the Collector of Internal
Revenue before the Tax Court, minus the amount of 25 per cent surcharge. No costs.
Bengzon, Paras, C.J., Padilla, Labrador, Concepcion, Reyes, J.B.L., Endencia, and
Felix, JJ., concur.
Reyes, A. J., concurs in the result.
G.R. No. L-19342 May 25, 1972
LORENZO T. OA and HEIRS OF JULIA BUALES, namely: RODOLFO B.
OA, MARIANO B. OA, LUZ B. OA, VIRGINIA B. OA and LORENZO
B. OA, JR., petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
Orlando Velasco for petitioners.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General
Felicisimo R. Rosete, and Special Attorney Purificacion Ureta for respondent.
BARREDO, J.:p
Petition for review of the decision of the Court of Tax Appeals in CTA Case No.
617, similarly entitled as above, holding that petitioners have constituted an
unregistered partnership and are, therefore, subject to the payment of the deficiency
corporate income taxes assessed against them by respondent Commissioner of
Internal Revenue for the years 1955 and 1956 in the total sum of P21,891.00, plus
5% surcharge and 1% monthly interest from December 15, 1958, subject to the
provisions of Section 51 (e) (2) of the Internal Revenue Code, as amended by
Section 8 of Republic Act No. 2343 and the costs of the suit,1 as well as the
resolution of said court denying petitioners' motion for reconsideration of said
decision.
The facts are stated in the decision of the Tax Court as follows:
Julia Buales died on March 23, 1944, leaving as heirs her
surviving spouse, Lorenzo T. Oa and her five children. In 1948,
Civil Case No. 4519 was instituted in the Court of First Instance of
Manila for the settlement of her estate. Later, Lorenzo T. Oa the
surviving spouse was appointed administrator of the estate of said
deceased (Exhibit 3, pp. 34-41, BIR rec.). On April 14, 1949, the
administrator submitted the project of partition, which was
approved by the Court on May 16, 1949 (See Exhibit K). Because
three of the heirs, namely Luz, Virginia and Lorenzo, Jr., all
surnamed Oa, were still minors when the project of partition was
approved, Lorenzo T. Oa, their father and administrator of the
estate, filed a petition in Civil Case No. 9637 of the Court of First
Instance of Manila for appointment as guardian of said minors. On
 November 14, 1949, the Court appointed him guardian of the
1955 100,786.00 120,249.78 169,262.52
persons and property of the aforenamed minors (See p. 3, BIR
rec.). 1956 175,028.68 135,714.68 169,262.52
The project of partition (Exhibit K; see also pp. 77-70, BIR rec.)
shows that the heirs have undivided one-half (1/2) interest in ten (See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 102-104)
parcels of land with a total assessed value of P87,860.00, six From said investments and properties petitioners derived such
houses with a total assessed value of P17,590.00 and an incomes as profits from installment sales of subdivided lots, profits
undetermined amount to be collected from the War Damage from sales of stocks, dividends, rentals and interests (see p. 3 of
Commission. Later, they received from said Commission the Exhibit 3; p. 32, BIR rec.; t.s.n., pp. 37-38). The said incomes are
amount of P50,000.00, more or less. This amount was not divided recorded in the books of account kept by Lorenzo T. Oa where
among them but was used in the rehabilitation of properties owned the corresponding shares of the petitioners in the net income for
by them in common (t.s.n., p. 46). Of the ten parcels of land the year are also known. Every year, petitioners returned for
aforementioned, two were acquired after the death of the decedent income tax purposes their shares in the net income derived from
with money borrowed from the Philippine Trust Company in the said properties and securities and/or from transactions involving
amount of P72,173.00 (t.s.n., p. 24; Exhibit 3, pp. 31-34 BIR rec.). them (Exhibit 3, supra; t.s.n., pp. 25-26). However, petitioners did
The project of partition also shows that the estate shares equally not actually receive their shares in the yearly income. (t.s.n., pp.
with Lorenzo T. Oa, the administrator thereof, in the obligation of 25-26, 40, 98, 100). The income was always left in the hands of
P94,973.00, consisting of loans contracted by the latter with the Lorenzo T. Oa who, as heretofore pointed out, invested them in
approval of the Court (see p. 3 of Exhibit K; or see p. 74, BIR real properties and securities. (See Exhibit 3, t.s.n., pp. 50, 102-
rec.). 104).
Although the project of partition was approved by the Court on On the basis of the foregoing facts, respondent (Commissioner of
May 16, 1949, no attempt was made to divide the properties Internal Revenue) decided that petitioners formed an unregistered
therein listed. Instead, the properties remained under the partnership and therefore, subject to the corporate income tax,
management of Lorenzo T. Oa who used said properties in pursuant to Section 24, in relation to Section 84(b), of the Tax
business by leasing or selling them and investing the income Code. Accordingly, he assessed against the petitioners the amounts
derived therefrom and the proceeds from the sales thereof in real of P8,092.00 and P13,899.00 as corporate income taxes for 1955
properties and securities. As a result, petitioners' properties and and 1956, respectively. (See Exhibit 5, amended by Exhibit 17, pp.
investments gradually increased from P105,450.00 in 1949 to 50 and 86, BIR rec.). Petitioners protested against the assessment
P480,005.20 in 1956 as can be gleaned from the following year- and asked for reconsideration of the ruling of respondent that they
end balances: have formed an unregistered partnership. Finding no merit in
petitioners' request, respondent denied it (See Exhibit 17, p. 86,
ear Investment Land Building BIR rec.). (See pp. 1-4, Memorandum for Respondent, June 12,
1961).
Account Account Account
The original assessment was as follows:
1955
P87,860.00 P17,590.00
Net income as per investigation ................ P40,209.89
P24,657.65 128,566.72 96,076.26
Income tax due thereon ............................... 8,042.00
51,301.31 120,349.28 110,605.11 25% surcharge .............................................. 2,010.50
Compromise for non-filing .......................... 50.00
67,927.52 87,065.28 152,674.39 Total ............................................................... P10,102.50
1956
61,258.27 84,925.68 161,463.83 Net income as per investigation ................ P69,245.23
Income tax due thereon ............................... 13,849.00
63,623.37 99,001.20 167,962.04 25% surcharge .............................................. 3,462.25
Compromise for non-filing .......................... 50.00
Total ............................................................... P17,361.25
 (See Exhibit 13, page 50, BIR records)
Upon further consideration of the case, the 25% surcharge was
eliminated in line with the ruling of the Supreme Court in
Collector v. Batangas Transportation Co., G.R. No. L-9692, Jan.
6, 1958, so that the questioned assessment refers solely to the
income tax proper for the years 1955 and 1956 and the
"Compromise for non-filing," the latter item obviously referring to
the compromise in lieu of the criminal liability for failure of
petitioners to file the corporate income tax returns for said years.
(See Exh. 17, page 86, BIR records). (Pp. 1-3, Annex C to Petition)
Petitioners have assigned the following as alleged errors of the Tax Court:
I.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT
THE PETITIONERS FORMED AN UNREGISTERED
PARTNERSHIP;
II.
THE COURT OF TAX APPEALS ERRED IN NOT HOLDING
THAT THE PETITIONERS WERE CO-OWNERS OF THE
PROPERTIES INHERITED AND (THE) PROFITS DERIVED
FROM TRANSACTIONS THEREFROM (sic);
III.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT
PETITIONERS WERE LIABLE FOR CORPORATE INCOME
TAXES FOR 1955 AND 1956 AS AN UNREGISTERED
PARTNERSHIP;
IV.
ON THE ASSUMPTION THAT THE PETITIONERS
CONSTITUTED AN UNREGISTERED PARTNERSHIP, THE
COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT
THE PETITIONERS WERE AN UNREGISTERED
PARTNERSHIP TO THE EXTENT ONLY THAT THEY
INVESTED THE PROFITS FROM THE PROPERTIES OWNED
IN COMMON AND THE LOANS RECEIVED USING THE
INHERITED PROPERTIES AS COLLATERALS;
V.
ON THE ASSUMPTION THAT THERE WAS AN
UNREGISTERED PARTNERSHIP, THE COURT OF TAX
APPEALS ERRED IN NOT DEDUCTING THE VARIOUS
AMOUNTS PAID BY THE PETITIONERS AS INDIVIDUAL
INCOME TAX ON THEIR RESPECTIVE SHARES OF THE
PROFITS ACCRUING FROM THE PROPERTIES OWNED IN
COMMON, FROM THE DEFICIENCY TAX OF THE
UNREGISTERED PARTNERSHIP.
In other words, petitioners pose for our resolution the following questions: (1) Under
the facts found by the Court of Tax Appeals, should petitioners be considered as co-
owners of the properties inherited by them from the deceased Julia Buales and the
profits derived from transactions involving the same, or, must they be deemed to
have formed an unregistered partnership subject to tax under Sections 24 and 84(b)
of the National Internal Revenue Code? (2) Assuming they have formed an
unregistered partnership, should this not be only in the sense that they invested as a
common fund the profits earned by the properties owned by them in common and the
loans granted to them upon the security of the said properties, with the result that as
far as their respective shares in the inheritance are concerned, the total income
thereof should be considered as that of co-owners and not of the unregistered
partnership? And (3) assuming again that they are taxable as an unregistered
partnership, should not the various amounts already paid by them for the same years
1955 and 1956 as individual income taxes on their respective shares of the profits
accruing from the properties they owned in common be deducted from the deficiency
corporate taxes, herein involved, assessed against such unregistered partnership by
the respondent Commissioner?
Pondering on these questions, the first thing that has struck the Court is that whereas
petitioners' predecessor in interest died way back on March 23, 1944 and the project
of partition of her estate was judicially approved as early as May 16, 1949, and
presumably petitioners have been holding their respective shares in their inheritance
since those dates admittedly under the administration or management of the head of
the family, the widower and father Lorenzo T. Oa, the assessment in question refers
to the later years 1955 and 1956. We believe this point to be important because,
apparently, at the start, or in the years 1944 to 1954, the respondent Commissioner of
Internal Revenue did treat petitioners as co-owners, not liable to corporate tax, and it
was only from 1955 that he considered them as having formed an unregistered
partnership. At least, there is nothing in the record indicating that an earlier
assessment had already been made. Such being the case, and We see no reason how
it could be otherwise, it is easily understandable why petitioners' position that they
are co-owners and not unregistered co-partners, for the purposes of the impugned
assessment, cannot be upheld. Truth to tell, petitioners should find comfort in the
fact that they were not similarly assessed earlier by the Bureau of Internal Revenue.
The Tax Court found that instead of actually distributing the estate of the deceased
among themselves pursuant to the project of partition approved in 1949, "the
properties remained under the management of Lorenzo T. Oa who used said
properties in business by leasing or selling them and investing the income derived
therefrom and the proceed from the sales thereof in real properties and securities," as
a result of which said properties and investments steadily increased yearly from
P87,860.00 in "land account" and P17,590.00 in "building account" in 1949 to
P175,028.68 in "investment account," P135.714.68 in "land account" and
P169,262.52 in "building account" in 1956. And all these became possible because,
admittedly, petitioners never actually received any share of the income or profits
from Lorenzo T. Oa and instead, they allowed him to continue using said shares as
part of the common fund for their ventures, even as they paid the corresponding
income taxes on the basis of their respective shares of the profits of their common
business as reported by the said Lorenzo T. Oa.
It is thus incontrovertible that petitioners did not, contrary to their contention, merely
limit themselves to holding the properties inherited by them. Indeed, it is admitted
that during the material years herein involved, some of the said properties were sold
at considerable profit, and that with said profit, petitioners engaged, thru Lorenzo T.
Oa, in the purchase and sale of corporate securities. It is likewise admitted that all
the profits from these ventures were divided among petitioners proportionately in
accordance with their respective shares in the inheritance. In these circumstances, it
is Our considered view that from the moment petitioners allowed not only the
incomes from their respective shares of the inheritance but even the inherited
properties themselves to be used by Lorenzo T. Oa as a common fund in
undertaking several transactions or in business, with the intention of deriving profit
to be shared by them proportionally, such act was tantamonut to actually contributing
such incomes to a common fund and, in effect, they thereby formed an unregistered
partnership within the purview of the above-mentioned provisions of the Tax Code.
It is but logical that in cases of inheritance, there should be a period when the heirs
can be considered as co-owners rather than unregistered co-partners within the
contemplation of our corporate tax laws aforementioned. Before the partition and
distribution of the estate of the deceased, all the income thereof does belong
commonly to all the heirs, obviously, without them becoming thereby unregistered
co-partners, but it does not necessarily follow that such status as co-owners continues
until the inheritance is actually and physically distributed among the heirs, for it is
easily conceivable that after knowing their respective shares in the partition, they
might decide to continue holding said shares under the common management of the
administrator or executor or of anyone chosen by them and engage in business on
that basis. Withal, if this were to be allowed, it would be the easiest thing for heirs in
any inheritance to circumvent and render meaningless Sections 24 and 84(b) of the
National Internal Revenue Code.
It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated, among the
reasons for holding the appellants therein to be unregistered co-partners for tax
purposes, that their common fund "was not something they found already in
existence" and that "it was not a property inherited by them pro indiviso," but it is
certainly far fetched to argue therefrom, as petitioners are doing here, that ergo, in all
instances where an inheritance is not actually divided, there can be no unregistered
co-partnership. As already indicated, for tax purposes, the co-ownership of inherited
properties is automatically converted into an unregistered partnership the moment
the said common properties and/or the incomes derived therefrom are used as a
common fund with intent to produce profits for the heirs in proportion to their
respective shares in the inheritance as determined in a project partition either duly
executed in an extrajudicial settlement or approved by the court in the corresponding
testate or intestate proceeding. The reason for this is simple. From the moment of
such partition, the heirs are entitled already to their respective definite shares of the
estate and the incomes thereof, for each of them to manage and dispose of as
exclusively his own without the intervention of the other heirs, and, accordingly he
becomes liable individually for all taxes in connection therewith. If after such
partition, he allows his share to be held in common with his co-heirs under a single
management to be used with the intent of making profit thereby in proportion to his
share, there can be no doubt that, even if no document or instrument were executed
for the purpose, for tax purposes, at least, an unregistered partnership is formed. This
is exactly what happened to petitioners in this case.
In this connection, petitioners' reliance on Article 1769, paragraph (3), of the Civil
Code, providing that: "The sharing of gross returns does not of itself establish a
partnership, whether or not the persons sharing them have a joint or common right or
interest in any property from which the returns are derived," and, for that matter, on
any other provision of said code on partnerships is unavailing. In Evangelista, supra,
this Court clearly differentiated the concept of partnerships under the Civil Code
from that of unregistered partnerships which are considered as "corporations" under
Sections 24 and 84(b) of the National Internal Revenue Code. Mr. Justice Roberto
Concepcion, now Chief Justice, elucidated on this point thus:
To begin with, the tax in question is one imposed upon
"corporations", which, strictly speaking, are distinct and different
from "partnerships". When our Internal Revenue Code includes
"partnerships" among the entities subject to the tax on
"corporations", said Code must allude, therefore, to organizations
which are not necessarily "partnerships", in the technical sense of
the term. Thus, for instance, section 24 of said Code exempts from
the aforementioned tax "duly registered general partnerships,"
which constitute precisely one of the most typical forms of
partnerships in this jurisdiction. Likewise, as defined in section
84(b) of said Code, "the term corporation includes partnerships, no
matter how created or organized." This qualifying expression
clearly indicates that a joint venture need not be undertaken in any
of the standard forms, or in confirmity with the usual requirements
of the law on partnerships, in order that one could be deemed
constituted for purposes of the tax on corporation. Again, pursuant
to said section 84(b),the term "corporation" includes, among
others, "joint accounts,(cuentas en participacion)" and
"associations", none of which has a legal personality of its own,
independent of that of its members. Accordingly, the lawmaker
could not have regarded that personality as a condition essential to
the existence of the partnerships therein referred to. In fact, as
above stated, "duly registered general co-partnerships" which
are possessed of the aforementioned personality have been
expressly excluded by law (sections 24 and 84[b]) from the
connotation of the term "corporation." ....
xxx xxx xxx
Similarly, the American Law
... provides its own concept of a partnership.
Under the term "partnership" it includes not only
a partnership as known in common law but, as
well, a syndicate, group, pool, joint venture, or
other unincorporated organization which carries
on any business, financial operation, or venture,
and which is not, within the meaning of the
 Code, a trust, estate, or a corporation. ... . (7A
Merten's Law of Federal Income Taxation, p.
789; emphasis ours.)
The term "partnership" includes a syndicate,
group, pool, joint venture or other
unincorporated organization, through or by
means of which any business, financial
operation, or venture is carried on. ... . (8
Merten's Law of Federal Income Taxation, p.
562 Note 63; emphasis ours.)
For purposes of the tax on corporations, our National Internal
Revenue Code includes these partnerships with the exception
only of duly registered general copartnerships within the
purview of the term "corporation." It is, therefore, clear to our
mind that petitioners herein constitute a partnership, insofar as said
Code is concerned, and are subject to the income tax for
corporations.
We reiterated this view, thru Mr. Justice Fernando, in Reyes vs. Commissioner of
Internal Revenue, G. R. Nos. L-24020-21, July 29, 1968, 24 SCRA 198, wherein the
Court ruled against a theory of co-ownership pursued by appellants therein.
As regards the second question raised by petitioners about the segregation, for the
purposes of the corporate taxes in question, of their inherited properties from those
acquired by them subsequently, We consider as justified the following ratiocination
of the Tax Court in denying their motion for reconsideration:
In connection with the second ground, it is alleged that, if there
was an unregistered partnership, the holding should be limited to
the business engaged in apart from the properties inherited by
petitioners. In other words, the taxable income of the partnership
should be limited to the income derived from the acquisition and
sale of real properties and corporate securities and should not
include the income derived from the inherited properties. It is
admitted that the inherited properties and the income derived
therefrom were used in the business of buying and selling other
real properties and corporate securities. Accordingly, the
partnership income must include not only the income derived from
the purchase and sale of other properties but also the income of the
inherited properties.
Besides, as already observed earlier, the income derived from inherited properties
may be considered as individual income of the respective heirs only so long as the
inheritance or estate is not distributed or, at least, partitioned, but the moment their
respective known shares are used as part of the common assets of the heirs to be used
in making profits, it is but proper that the income of such shares should be
considered as the part of the taxable income of an unregistered partnership. This, We
hold, is the clear intent of the law.
Likewise, the third question of petitioners appears to have been adequately resolved
by the Tax Court in the aforementioned resolution denying petitioners' motion for
reconsideration of the decision of said court. Pertinently, the court ruled this wise:
In support of the third ground, counsel for petitioners alleges:
Even if we were to yield to the decision of this
Honorable Court that the herein petitioners have
formed an unregistered partnership and,
therefore, have to be taxed as such, it might be
recalled that the petitioners in their individual
income tax returns reported their shares of the
profits of the unregistered partnership. We think
it only fair and equitable that the various
amounts paid by the individual petitioners as
income tax on their respective shares of the
unregistered partnership should be deducted
from the deficiency income tax found by this
Honorable Court against the unregistered
partnership. (page 7, Memorandum for the
Petitioner in Support of Their Motion for
Reconsideration, Oct. 28, 1961.)
In other words, it is the position of petitioners that the taxable
income of the partnership must be reduced by the amounts of
income tax paid by each petitioner on his share of partnership
profits. This is not correct; rather, it should be the other way
around. The partnership profits distributable to the partners
(petitioners herein) should be reduced by the amounts of income
tax assessed against the partnership. Consequently, each of the
petitioners in his individual capacity overpaid his income tax for
the years in question, but the income tax due from the partnership
has been correctly assessed. Since the individual income tax
liabilities of petitioners are not in issue in this proceeding, it is not
proper for the Court to pass upon the same.
Petitioners insist that it was error for the Tax Court to so rule that whatever excess
they might have paid as individual income tax cannot be credited as part payment of
the taxes herein in question. It is argued that to sanction the view of the Tax Court is
to oblige petitioners to pay double income tax on the same income, and, worse,
considering the time that has lapsed since they paid their individual income taxes,
they may already be barred by prescription from recovering their overpayments in a
separate action. We do not agree. As We see it, the case of petitioners as regards the
point under discussion is simply that of a taxpayer who has paid the wrong tax,
assuming that the failure to pay the corporate taxes in question was not deliberate. Of
course, such taxpayer has the right to be reimbursed what he has erroneously paid,
but the law is very clear that the claim and action for such reimbursement are subject
to the bar of prescription. And since the period for the recovery of the excess income
taxes in the case of herein petitioners has already lapsed, it would not seem right to
virtually disregard prescription merely upon the ground that the reason for the delay
is precisely because the taxpayers failed to make the proper return and payment of
the corporate taxes legally due from them. In principle, it is but proper not to allow
any relaxation of the tax laws in favor of persons who are not exactly above
suspicion in their conduct vis-a-vis their tax obligation to the State.
IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax Appeals
appealed from is affirm with costs against petitioners.
G.R. No. L-68118 October 29, 1985
JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and
REMEDIOS P. OBILLOS, brothers and sisters, petitioners
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX
APPEALS, respondents.
Demosthenes B. Gadioma for petitioners.
AQUINO, J.:
This case is about the income tax liability of four brothers and sisters who sold
two parcels of land which they had acquired from their father.
On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd.
on two lots with areas of 1,124 and 963 square meters located at Greenhills, San
Juan, Rizal. The next day he transferred his rights to his four children, the
petitioners, to enable them to build their residences. The company sold the two
lots to petitioners for P178,708.12 on March 13 (Exh. A and B, p. 44, Rollo).
Presumably, the Torrens titles issued to them would show that they were co-
owners of the two lots.
In 1974, or after having held the two lots for more than a year, the petitioners
resold them to the Walled City Securities Corporation and Olga Cruz Canda
for the total sum of P313,050 (Exh. C and D). They derived from the sale a total
profit of P134,341.88 or P33,584 for each of them. They treated the profit as a
capital gain and paid an income tax on one-half thereof or of P16,792.
In April, 1980, or one day before the expiration of the five-year prescriptive
period, the Commissioner of Internal Revenue required the four petitioners to
pay corporate income tax on the total profit of P134,336 in addition to
individual income tax on their shares thereof He assessed P37,018 as corporate
income tax, P18,509 as 50% fraud surcharge and P15,547.56 as 42%
accumulated interest, or a total of P71,074.56.
Not only that. He considered the share of the profits of each petitioner in the
sum of P33,584 as a " taxable in full (not a mere capital gain of which is
taxable) and required them to pay deficiency income taxes aggregating
P56,707.20 including the 50% fraud surcharge and the accumulated interest.
Thus, the petitioners are being held liable for deficiency income taxes and
penalties totalling P127,781.76 on their profit of P134,336, in addition to the tax
on capital gains already paid by them.
The Commissioner acted on the theory that the four petitioners had formed an
unregistered partnership or joint venture within the meaning of sections 24(a)
and 84(b) of the Tax Code (Collector of Internal Revenue vs. Batangas Trans.
Co., 102 Phil. 822).
The petitioners contested the assessments. Two Judges of the Tax Court
sustained the same. Judge Roaquin dissented. Hence, the instant appeal.
We hold that it is error to consider the petitioners as having formed a
partnership under article 1767 of the Civil Code simply because they allegedly
contributed P178,708.12 to buy the two lots, resold the same and divided the
profit among themselves.
To regard the petitioners as having formed a taxable unregistered partnership
would result in oppressive taxation and confirm the dictum that the power to
tax involves the power to destroy. That eventuality should be obviated.
As testified by Jose Obillos, Jr., they had no such intention. They were co-
owners pure and simple. To consider them as partners would obliterate the
distinction between a co-ownership and a partnership. The petitioners were not
engaged in any joint venture by reason of that isolated transaction.
Their original purpose was to divide the lots for residential purposes. If later on
they found it not feasible to build their residences on the lots because of the high
cost of construction, then they had no choice but to resell the same to dissolve
the co-ownership. The division of the profit was merely incidental to the
dissolution of the co-ownership which was in the nature of things a temporary
state. It had to be terminated sooner or later. Castan Tobeas says:
Como establecer el deslinde entre la comunidad ordinaria o copropiedad y la
sociedad?
El criterio diferencial-segun la doctrina mas generalizada-esta: por razon del
origen, en que la sociedad presupone necesariamente la convencion, mentras
que la comunidad puede existir y existe ordinariamente sin ela; y por razon del
fin objecto, en que el objeto de la sociedad es obtener lucro, mientras que el de
la indivision es solo mantener en su integridad la cosa comun y favorecer su
conservacion.
Reflejo de este criterio es la sentencia de 15 de Octubre de 1940, en la que se
dice que si en nuestro Derecho positive se ofrecen a veces dificultades al tratar
de fijar la linea divisoria entre comunidad de bienes y contrato de sociedad, la
moderna orientacion de la doctrina cientifica seala como nota fundamental de
diferenciacion aparte del origen de fuente de que surgen, no siempre uniforme,
la finalidad perseguida por los interesados: lucro comun partible en la sociedad,
y mera conservacion y aprovechamiento en la comunidad. (Derecho Civil
Espanol, Vol. 2, Part 1, 10 Ed., 1971, 328- 329).
Article 1769(3) of the Civil Code provides that "the sharing of gross returns
does not of itself establish a partnership, whether or not the persons sharing
them have a joint or common right or interest in any property from which the
returns are derived". There must be an unmistakable intention to form a
partnership or joint venture.*
Such intent was present in Gatchalian vs. Collector of Internal Revenue, 67
Phil. 666, where 15 persons contributed small amounts to purchase a two-peso
sweepstakes ticket with the agreement that they would divide the prize The
ticket won the third prize of P50,000. The 15 persons were held liable for
income tax as an unregistered partnership.
The instant case is distinguishable from the cases where the parties engaged in
joint ventures for profit. Thus, in Oa vs.
** This view is supported by the following rulings of respondent Commissioner:
Co-owership distinguished from partnership.We find that the case at bar is
fundamentally similar to the De Leon case. Thus, like the De Leon heirs, the
Longa heirs inherited the 'hacienda' in question pro-indiviso from their
deceased parents; they did not contribute or invest additional ' capital to
increase or expand the inherited properties; they merely continued dedicating
the property to the use to which it had been put by their forebears; they
individually reported in their tax returns their corresponding shares in the
income and expenses of the 'hacienda', and they continued for many years the
status of co-ownership in order, as conceded by respondent, 'to preserve its (the
'hacienda') value and to continue the existing contractual relations with the
Central Azucarera de Bais for milling purposes. Longa vs. Aranas, CTA Case
No. 653, July 31, 1963).
All co-ownerships are not deemed unregistered pratnership.Co-Ownership
who own properties which produce income should not automatically be
considered partners of an unregistered partnership, or a corporation, within the
purview of the income tax law. To hold otherwise, would be to subject the
income of all
co-ownerships of inherited properties to the tax on corporations, inasmuch as if
a property does not produce an income at all, it is not subject to any kind of
income tax, whether the income tax on individuals or the income tax on
corporation. (De Leon vs. CI R, CTA Case No. 738, September 11, 1961, cited in
Araas, 1977 Tax Code Annotated, Vol. 1, 1979 Ed., pp. 77-78).
Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where
after an extrajudicial settlement the co-heirs used the inheritance or the
incomes derived therefrom as a common fund to produce profits for themselves,
it was held that they were taxable as an unregistered partnership.
It is likewise different from Reyes vs. Commissioner of Internal Revenue, 24
SCRA 198, where father and son purchased a lot and building, entrusted the
administration of the building to an administrator and divided equally the net
income, and from Evangelista vs. Collector of Internal Revenue, 102 Phil. 140,
where the three Evangelista sisters bought four pieces of real property which
they leased to various tenants and derived rentals therefrom. Clearly, the
petitioners in these two cases had formed an unregistered partnership.
In the instant case, what the Commissioner should have investigated was
whether the father donated the two lots to the petitioners and whether he paid
the donor's tax (See Art. 1448, Civil Code). We are not prejudging this matter.
It might have already prescribed.
WHEREFORE, the judgment of the Tax Court is reversed and set aside. The
assessments are cancelled. No costs.
SO ORDERED.
G.R. No. 78133 October 18, 1988
MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX
APPEALS, respondents.
De la Cuesta, De las Alas and Callanta Law Offices for petitioners.
The Solicitor General for respondents
GANCAYCO, J.:
The distinction between co-ownership and an unregistered partnership or joint
venture for income tax purposes is the issue in this petition.
On June 22, 1965, petitioners bought two (2) parcels of land from Santiago
Bernardino, et al. and on May 28, 1966, they bought another three (3) parcels of
land from Juan Roque. The first two parcels of land were sold by petitioners in
1968 toMarenir Development Corporation, while the three parcels of land were
sold by petitioners to Erlinda Reyes and Maria Samson on March 19,1970.
Petitioners realized a net profit in the sale made in 1968 in the amount of
P165,224.70, while they realized a net profit of P60,000.00 in the sale made in
1970. The corresponding capital gains taxes were paid by petitioners in 1973
and 1974 by availing of the tax amnesties granted in the said years.
However, in a letter dated March 31, 1979 of then Acting BIR Commissioner
Efren I. Plana, petitioners were assessed and required to pay a total amount of
P107,101.70 as alleged deficiency corporate income taxes for the years 1968 and
1970.
Petitioners protested the said assessment in a letter of June 26, 1979 asserting
that they had availed of tax amnesties way back in 1974.
In a reply of August 22, 1979, respondent Commissioner informed petitioners
that in the years 1968 and 1970, petitioners as co-owners in the real estate
transactions formed an unregistered partnership or joint venture taxable as a
corporation under Section 20(b) and its income was subject to the taxes
prescribed under Section 24, both of the National Internal Revenue Code 1 that
the unregistered partnership was subject to corporate income tax as
distinguished from profits derived from the partnership by them which is
subject to individual income tax; and that the availment of tax amnesty under
P.D. No. 23, as amended, by petitioners relieved petitioners of their individual
income tax liabilities but did not relieve them from the tax liability of the
unregistered partnership. Hence, the petitioners were required to pay the
deficiency income tax assessed.
Petitioners filed a petition for review with the respondent Court of Tax Appeals
docketed as CTA Case No. 3045. In due course, the respondent court by a
majority decision of March 30, 1987, 2 affirmed the decision and action taken
by respondent commissioner with costs against petitioners.
It ruled that on the basis of the principle enunciated in Evangelista 3 an
unregistered partnership was in fact formed by petitioners which like a
corporation was subject to corporate income tax distinct from that imposed on
the partners.
In a separate dissenting opinion, Associate Judge Constante Roaquin stated that
considering the circumstances of this case, although there might in fact be a co-
ownership between the petitioners, there was no adequate basis for the
conclusion that they thereby formed an unregistered partnership which made
"hem liable for corporate income tax under the Tax Code.
Hence, this petition wherein petitioners invoke as basis thereof the following
alleged errors of the respondent court:
A. IN HOLDING AS PRESUMPTIVELY CORRECT THE
DETERMINATION OF THE RESPONDENT COMMISSIONER, TO THE
EFFECT THAT PETITIONERS FORMED AN UNREGISTERED
PARTNERSHIP SUBJECT TO CORPORATE INCOME TAX, AND THAT
THE BURDEN OF OFFERING EVIDENCE IN OPPOSITION THERETO
RESTS UPON THE PETITIONERS.
B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE
TRANSACTIONS, THAT AN UNREGISTERED PARTNERSHIP EXISTED
THUS IGNORING THE REQUIREMENTS LAID DOWN BY LAW THAT
WOULD WARRANT THE PRESUMPTION/CONCLUSION THAT A
PARTNERSHIP EXISTS.
C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE
EVANGELISTA CASE AND THEREFORE SHOULD BE DECIDED
ALONGSIDE THE EVANGELISTA CASE.
D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE
PETITIONERS FROM PAYMENT OF OTHER TAXES FOR THE PERIOD
COVERED BY SUCH AMNESTY. (pp. 12-13, Rollo.)
The petition is meritorious.
The basis of the subject decision of the respondent court is the ruling of this
Court in Evangelista. 4
In the said case, petitioners borrowed a sum of money from their father which
together with their own personal funds they used in buying several real
properties. They appointed their brother to manage their properties with full
power to lease, collect, rent, issue receipts, etc. They had the real properties
rented or leased to various tenants for several years and they gained net profits
from the rental income. Thus, the Collector of Internal Revenue demanded the
payment of income tax on a corporation, among others, from them.
In resolving the issue, this Court held as follows:
The issue in this case is whether petitioners are subject to the tax on
corporations provided for in section 24 of Commonwealth Act No. 466,
otherwise known as the National Internal Revenue Code, as well as to the
residence tax for corporations and the real estate dealers' fixed tax. With
respect to the tax on corporations, the issue hinges on the meaning of the terms
corporation and partnership as used in sections 24 and 84 of said Code, the
pertinent parts of which read:
Sec. 24. Rate of the tax on corporations.There shall be levied, assessed,
collected, and paid annually upon the total net income received in the preceding
taxable year from all sources by every corporation organized in, or existing
under the laws of the Philippines, no matter how created or organized but not
including duly registered general co-partnerships (companies collectives), a tax
upon such income equal to the sum of the following: ...
Sec. 84(b). The term "corporation" includes partnerships, no matter how
created or organized, joint-stock companies, joint accounts (cuentas en
participation), associations or insurance companies, but does not include duly
registered general co-partnerships (companies colectivas).
Article 1767 of the Civil Code of the Philippines provides:
By the contract of partnership two or more persons bind themselves to
contribute money, property, or industry to a common fund, with the intention
of dividing the profits among themselves.
Pursuant to this article, the essential elements of a partnership are two, namely:
(a) an agreement to contribute money, property or industry to a common fund;
and (b) intent to divide the profits among the contracting parties. The first
element is undoubtedly present in the case at bar, for, admittedly, petitioners
have agreed to, and did, contribute money and property to a common fund.
Hence, the issue narrows down to their intent in acting as they did. Upon
consideration of all the facts and circumstances surrounding the case, we are
fully satisfied that their purpose was to engage in real estate transactions for
monetary gain and then divide the same among themselves, because:
1. Said common fund was not something they found already in existence. It was
not a property inherited by them pro indiviso. They created it purposely. What
is more they jointly borrowed a substantial portion thereof in order to establish
said common fund.
2. They invested the same, not merely in one transaction, but in a series of
transactions. On February 2, 1943, they bought a lot for P100,000.00. On April
3, 1944, they purchased 21 lots for P18,000.00. This was soon followed, on April
23, 1944, by the acquisition of another real estate for P108,825.00. Five (5) days
later (April 28, 1944), they got a fourth lot for P237,234.14. The number of lots
(24) acquired and transcations undertaken, as well as the brief interregnum
between each, particularly the last three purchases, is strongly indicative of a
pattern or common design that was not limited to the conservation and
preservation of the aforementioned common fund or even of the property
acquired by petitioners in February, 1943. In other words, one cannot but
perceive a character of habituality peculiar to business transactions engaged in
for purposes of gain.
3. The aforesaid lots were not devoted to residential purposes or to other
personal uses, of petitioners herein. The properties were leased separately to
several persons, who, from 1945 to 1948 inclusive, paid the total sum of
P70,068.30 by way of rentals. Seemingly, the lots are still being so let, for
petitioners do not even suggest that there has been any change in the utilization
thereof.
4. Since August, 1945, the properties have been under the management of one
person, namely, Simeon Evangelists, with full power to lease, to collect rents, to
issue receipts, to bring suits, to sign letters and contracts, and to indorse and
deposit notes and checks. Thus, the affairs relative to said properties have been
handled as if the same belonged to a corporation or business enterprise
operated for profit.
5. The foregoing conditions have existed for more than ten (10) years, or, to be
exact, over fifteen (15) years, since the first property was acquired, and over
twelve (12) years, since Simeon Evangelists became the manager.
6. Petitioners have not testified or introduced any evidence, either on their
purpose in creating the set up already adverted to, or on the causes for its
continued existence. They did not even try to offer an explanation therefor.
Although, taken singly, they might not suffice to establish the intent necessary
to constitute a partnership, the collective effect of these circumstances is such as
to leave no room for doubt on the existence of said intent in petitioners herein.
Only one or two of the aforementioned circumstances were present in the cases
cited by petitioners herein, and, hence, those cases are not in point. 5
In the present case, there is no evidence that petitioners entered into an
agreement to contribute money, property or industry to a common fund, and
that they intended to divide the profits among themselves. Respondent
commissioner and/ or his representative just assumed these conditions to be
present on the basis of the fact that petitioners purchased certain parcels of land
and became co-owners thereof.
In Evangelists, there was a series of transactions where petitioners purchased
twenty-four (24) lots showing that the purpose was not limited to the
conservation or preservation of the common fund or even the properties
acquired by them. The character of habituality peculiar to business transactions
engaged in for the purpose of gain was present.
In the instant case, petitioners bought two (2) parcels of land in 1965. They did
not sell the same nor make any improvements thereon. In 1966, they bought
another three (3) parcels of land from one seller. It was only 1968 when they
sold the two (2) parcels of land after which they did not make any additional or
new purchase. The remaining three (3) parcels were sold by them in 1970. The
transactions were isolated. The character of habituality peculiar to business
transactions for the purpose of gain was not present.

In Evangelista, the properties were leased out to tenants for several years. The
business was under the management of one of the partners. Such condition
existed for over fifteen (15) years. None of the circumstances are present in the
case at bar. The co-ownership started only in 1965 and ended in 1970.
Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista
he said:
I wish however to make the following observation Article 1769 of the new Civil
Code lays down the rule for determining when a transaction should be deemed
a partnership or a co-ownership. Said article paragraphs 2 and 3, provides;
(2) Co-ownership or co-possession does not itself establish a partnership,
whether such co-owners or co-possessors do or do not share any profits made by
the use of the property;
(3) The sharing of gross returns does not of itself establish a partnership,
whether or not the persons sharing them have a joint or common right or
interest in any property from which the returns are derived;
From the above it appears that the fact that those who agree to form a co-
ownership share or do not share any profits made by the use of the property
held in common does not convert their venture into a partnership. Or the
sharing of the gross returns does not of itself establish a partnership whether or
not the persons sharing therein have a joint or common right or interest in the
property. This only means that, aside from the circumstance of profit, the
presence of other elements constituting partnership is necessary, such as the
clear intent to form a partnership, the existence of a juridical personality
different from that of the individual partners, and the freedom to transfer or
assign any interest in the property by one with the consent of the others
(Padilla, Civil Code of the Philippines Annotated, Vol. I, 1953 ed., pp. 635-636)
It is evident that an isolated transaction whereby two or more persons
contribute funds to buy certain real estate for profit in the absence of other
circumstances showing a contrary intention cannot be considered a partnership.
Persons who contribute property or funds for a common enterprise and agree
to share the gross returns of that enterprise in proportion to their contribution,
but who severally retain the title to their respective contribution, are not
thereby rendered partners. They have no common stock or capital, and no
community of interest as principal proprietors in the business itself which the
proceeds derived. (Elements of the Law of Partnership by Flord D. Mechem
2nd Ed., section 83, p. 74.)
A joint purchase of land, by two, does not constitute a co-partnership in respect
thereto; nor does an agreement to share the profits and losses on the sale of land
create a partnership; the parties are only tenants in common. (Clark vs.
Sideway, 142 U.S. 682,12 Ct. 327, 35 L. Ed., 1157.)
Where plaintiff, his brother, and another agreed to become owners of a single
tract of realty, holding as tenants in common, and to divide the profits of
disposing of it, the brother and the other not being entitled to share in plaintiffs
commission, no partnership existed as between the three parties, whatever their
relation may have been as to third parties. (Magee vs. Magee 123 N.E. 673, 233
Mass. 341.)
In order to constitute a partnership inter sese there must be: (a) An intent to
form the same; (b) generally participating in both profits and losses; (c) and
such a community of interest, as far as third persons are concerned as enables
each party to make contract, manage the business, and dispose of the whole
property.-Municipal Paving Co. vs. Herring 150 P. 1067, 50 III 470.)
The common ownership of property does not itself create a partnership between
the owners, though they may use it for the purpose of making gains; and they
may, without becoming partners, agree among themselves as to the
management, and use of such property and the application of the proceeds
therefrom. (Spurlock vs. Wilson, 142 S.W. 363,160 No. App. 14.) 6
The sharing of returns does not in itself establish a partnership whether or not
the persons sharing therein have a joint or common right or interest in the
property. There must be a clear intent to form a partnership, the existence of a
juridical personality different from the individual partners, and the freedom of
each party to transfer or assign the whole property.
In the present case, there is clear evidence of co-ownership between the
petitioners. There is no adequate basis to support the proposition that they
thereby formed an unregistered partnership. The two isolated transactions
whereby they purchased properties and sold the same a few years thereafter did
not thereby make them partners. They shared in the gross profits as co- owners
and paid their capital gains taxes on their net profits and availed of the tax
amnesty thereby. Under the circumstances, they cannot be considered to have
formed an unregistered partnership which is thereby liable for corporate
income tax, as the respondent commissioner proposes.
And even assuming for the sake of argument that such unregistered partnership
appears to have been formed, since there is no such existing unregistered
partnership with a distinct personality nor with assets that can be held liable for
said deficiency corporate income tax, then petitioners can be held individually
liable as partners for this unpaid obligation of the partnership p. 7 However, as
petitioners have availed of the benefits of tax amnesty as individual taxpayers in
these transactions, they are thereby relieved of any further tax liability arising
therefrom.
WHEREFROM, the petition is hereby GRANTED and the decision of the
respondent Court of Tax Appeals of March 30, 1987 is hereby REVERSED and
SET ASIDE and another decision is hereby rendered relieving petitioners of the
corporate income tax liability in this case, without pronouncement as to costs.
SO ORDERED.
AFISCO INSURANCE CORPORATION; CCC INSURANCE CORPORATION;
CHARTER INSURANCE CO., INC.; CIBELES INSURANCE CORPORATION;
COMMONWEALTH INSURANCE COMPANY; CONSOLIDATED
INSURANCE CO., INC.; DEVELOPMENT INSURANCE & SURETY
CORPORATION; DOMESTIC INSURANCE COMPANY OF THE PHILIPPINES;
EASTERN ASSURANCE COMPANY & SURETY CORP.; EMPIRE
INSURANCE COMPANY; EQUITABLE INSURANCE CORPORATION;
FEDERAL INSURANCE CORPORATION INC.; FGU INSURANCE
CORPORATION; FIDELITY & SURETY COMPANY OF THE PHILS., INC.;
FILIPINO MERCHANTS INSURANCE CO., INC.; GOVERNMENT SERVICE
INSURANCE SYSTEM; MALAYAN INSURANCE CO., INC.; MALAYAN
ZURICH INSURANCE CO., INC.; MERCANTILE INSURANCE CO., INC.;
METROPOLITAN INSURANCE COMPANY; METRO-TAISHO INSURANCE
CORPORATION; NEW ZEALAND INSURANCE CO., LTD.; PAN-MALAYAN
INSURANCE CORPORATION; PARAMOUNT INSURANCE CORPORATION;
PEOPLES TRANS-EAST ASIA INSURANCE CORPORATION; PERLA
COMPANIA DE SEGUROS, INC.; PHILIPPINE BRITISH ASSURANCE CO.,
INC.; PHILIPPINE FIRST INSURANCE CO., INC.; PIONEER INSURANCE &
SURETY CORP.; PIONEER INTERCONTINENTAL INSURANCE
CORPORATION; PROVIDENT INSURANCE COMPANY OF THE
PHILIPPINES; PYRAMID INSURANCE CO., INC.; RELIANCE SURETY &
INSURANCE COMPANY; RIZAL SURETY & INSURANCE COMPANY;
SANPIRO INSURANCE CORPORATION; SEABOARD-EASTERN
INSURANCE CO., INC.; SOLID GUARANTY, INC.; SOUTH SEA SURETY &
INSURANCE CO., INC.; STATE BONDING & INSURANCE CO., INC.;
SUMMA INSURANCE CORPORATION; TABACALERA INSURANCE CO.,
INC.all assessed as POOL OF MACHINERY INSURERS, petitioners, vs. COURT
OF APPEALS, COURT OF TAX APPEALS and COMMISSIONER OF
INTERNAL REVENUE, respondents.
DECISION
PANGANIBAN, J.:
Pursuant to reinsurance treaties, a number of local insurance firms formed
themselves into a pool in order to facilitate the handling of business contracted with
a nonresident foreign reinsurance company. May the clearing house or insurance
pool so formed be deemed a partnership or an association that is taxable as a
corporation under the National Internal Revenue Code (NIRC)? Should the pools
remittances to the member companies and to the said foreign firm be taxable as
dividends? Under the facts of this case, has the governments right to assess and
collect said tax prescribed?
The Case
These are the main questions raised in the Petition for Review on Certiorari before
us, assailing the October 11, 1993 Decisioni[1] of the Court of Appealsii[2]in CA-
GR SP 29502, which dismissed petitioners appeal of the October 19, 1992
Decisioniii[3] of the Court of Tax Appealsiv[4] (CTA) which had previously
sustained petitioners liability for deficiency income tax, interest and withholding tax.
The Court of Appeals ruled:
WHEREFORE, the petition is DISMISSED, with costs against petitioners.v[5]
The petition also challenges the November 15, 1993 Court of Appeals (CA)
Resolutionvi[6] denying reconsideration.
The Facts
The antecedent facts,vii[7] as found by the Court of Appeals, are as follows:
The petitioners are 41 non-life insurance corporations, organized and existing under
the laws of the Philippines. Upon issuance by them of Erection, Machinery
Breakdown, Boiler Explosion and Contractors All Risk insurance policies, the
petitioners on August 1, 1965 entered into a Quota Share Reinsurance Treaty and a
Surplus Reinsurance Treaty with the Munchener Ruckversicherungs-Gesselschaft
(hereafter called Munich), a non-resident foreign insurance corporation. The
reinsurance treaties required petitioners to form a [p]ool. Accordingly, a pool
composed of the petitioners was formed on the same day.
On April 14, 1976, the pool of machinery insurers submitted a financial statement
and filed an Information Return of Organization Exempt from Income Tax for the
year ending in 1975, on the basis of which it was assessed by the Commissioner of
Internal Revenue deficiency corporate taxes in the amount of P1,843,273.60, and
withholding taxes in the amount of P1,768,799.39 and P89,438.68 on dividends paid
to Munich and to the petitioners, respectively. These assessments were protested by
the petitioners through its auditors Sycip, Gorres, Velayo and Co.
On January 27, 1986, the Commissioner of Internal Revenue denied the protest and
ordered the petitioners, assessed as Pool of Machinery Insurers, to pay deficiency
income tax, interest, and with[h]olding tax, itemized as follows:
Net income per information
return P3,737,370.00
===========
Income tax due thereon P1,298,080.00
Add: 14% Int. fr. 4/15/76
to 4/15/79 545,193.60
TOTAL AMOUNT DUE & P1,843,273.60
COLLECTIBLE ===========
Dividend paid to Munich
Reinsurance Company P3,728,412.00
===========
35% withholding tax at
source due thereon P1,304,944.20
Add: 25% surcharge 326,236.05
 14% interest from or earn income as a reinsurer.xii[12] Its role was limited to its principal function of
1/25/76 to 1/25/79 137,019.14 allocating and distributing the risk(s) arising from the original insurance among the
Compromise penalty- signatories to the treaty or the members of the pool based on their ability to absorb
non-filing of return 300.00 the risk(s) ceded[;] as well as the performance of incidental functions, such as
late payment 300.00 records, maintenance, collection and custody of funds, etc.xiii[13]
TOTAL AMOUNT DUE & P1,768,799.39 Petitioners belie the existence of a partnership in this case, because (1) they, the
COLLECTIBLE =========== reinsurers, did not share the same risk or solidary liability;xiv[14] (2) there was no
Dividend paid to Pool Members P 655,636.00 common fund;xv[15] (3) the executive board of the pool did not exercise control and
=========== management of its funds, unlike the board of directors of a corporation;xvi[16] and
10% withholding tax at (4) the pool or clearing house was not and could not possibly have engaged in the
source due thereon P 65,563.60 business of reinsurance from which it could have derived income for itself.xvii[17]
Add: 25% surcharge 16,390.90 The Court is not persuaded. The opinion or ruling of the Commission of Internal
14% interest from Revenue, the agency tasked with the enforcement of tax laws, is accorded much
1/25/76 to 1/25/79 6,884.18 weight and even finality, when there is no showing that it is patently wrong,xviii[18]
Compromise penalty- particularly in this case where the findings and conclusions of the internal revenue
non-filing of return 300.00 commissioner were subsequently affirmed by the CTA, a specialized body created
late payment 300.00 for the exclusive purpose of reviewing tax cases, and the Court of Appeals.xix[19]
TOTAL AMOUNT DUE & P 89,438.68 Indeed,
COLLECTIBLE ===========viii[8] [I]t has been the long standing policy and practice of this Court to respect the
The CA ruled in the main that the pool of machinery insurers was a partnership conclusions of quasi-judicial agencies, such as the Court of Tax Appeals which, by
taxable as a corporation, and that the latters collection of premiums on behalf of its the nature of its functions, is dedicated exclusively to the study and consideration of
members, the ceding companies, was taxable income. It added that prescription did tax problems and has necessarily developed an expertise on the subject, unless there
not bar the Bureau of Internal Revenue (BIR) from collecting the taxes due, because has been an abuse or improvident exercise of its authority.xx[20]
the taxpayer cannot be located at the address given in the information return filed. This Court rules that the Court of Appeals, in affirming the CTA which had
Hence, this Petition for Review before us.ix[9] previously sustained the internal revenue commissioner, committed no reversible
The Issues
error. Section 24 of the NIRC, as worded in the year ending 1975, provides:
Before this Court, petitioners raise the following issues: SEC. 24. Rate of tax on corporations. -- (a) Tax on domestic corporations. -- A tax is
1.Whether or not the Clearing House, acting as a mere agent and performing strictly hereby imposed upon the taxable net income received during each taxable year from
administrative functions, and which did not insure or assume any risk in its own all sources by every corporation organized in, or existing under the laws of the
name, was a partnership or association subject to tax as a corporation; Philippines, no matter how created or organized, but not including duly registered
2.Whether or not the remittances to petitioners and MUNICHRE of their respective general co-partnership (compaias colectivas), general professional partnerships,
shares of reinsurance premiums, pertaining to their individual and separate contracts private educational institutions, and building and loan associations xxx.
of reinsurance, were dividends subject to tax; and Ineludibly, the Philippine legislature included in the concept of corporations those
3.Whether or not the respondent Commissioners right to assess the Clearing House entities that resembled them such as unregistered partnerships and associations.
had already prescribed.x[10] Parenthetically, the NLRCs inclusion of such entities in the tax on corporations was
The Courts Ruling
made even clearer by the Tax Reform Act of 1997,xxi[21] which amended the Tax
The petition is devoid of merit. We sustain the ruling of the Court of Appeals that the Code. Pertinent provisions of the new law read as follows:
pool is taxable as a corporation, and that the governments right to assess and collect SEC. 27. Rates of Income Tax on Domestic Corporations. --
the taxes had not prescribed. (A) In General. -- Except as otherwise provided in this Code, an income tax of
First Issue:
thirty-five percent (35%) is hereby imposed upon the taxable income derived during
Pool Taxable as a Corporation
each taxable year from all sources within and without the Philippines by every
Petitioners contend that the Court of Appeals erred in finding that the pool or corporation, as defined in Section 22 (B) of this Code, and taxable under this Title as
clearing house was an informal partnership, which was taxable as a corporation a corporation xxx.
under the NIRC. They point out that the reinsurance policies were written by them SEC. 22. -- Definition. -- When used in this Title:
individually and separately, and that their liability was limited to the extent of their xxx xxx xxx
allocated share in the original risks thus reinsured.xi[11] Hence, the pool did not act
 (B) The term corporation shall include partnerships, no matter how
created or organized, joint-stock companies, joint accounts (cuentas en
participacion), associations, or insurance companies, but does not include
general professional partnerships [or] a joint venture or consortium
formed for the purpose of undertaking construction projects or engaging
in petroleum, coal, geothermal and other energy operations pursuant to an
operating or consortium agreement under a service contract without the
Government. General professional partnerships are partnerships
formed by persons for the sole purpose of exercising their common
profession, no part of the income of which is derived from engaging in
any trade or business.
xxx xxx xxx."
Thus, the Court in Evangelista v. Collector of Internal Revenuexxii[22] held that
Section 24 covered these unregistered partnerships and even associations or joint
accounts, which had no legal personalities apart from their individual
members.xxiii[23] The Court of Appeals astutely applied Evangelista:xxiv[24]
xxx Accordingly, a pool of individual real property owners dealing in real estate
business was considered a corporation for purposes of the tax in sec. 24 of the Tax
Code in Evangelista v. Collector of Internal Revenue, supra. The Supreme Court
said:
The term partnership includes a syndicate, group, pool, joint venture or other
unincorporated organization, through or by means of which any business,
financial operation, or venture is carried on. * * * (8 Mertens Law of Federal
Income Taxation, p. 562 Note 63)
Article 1767 of the Civil Code recognizes the creation of a contract of partnership
when two or more persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the profits among
themselves.xxv[25] Its requisites are: (1) mutual contribution to a common stock,
and (2) a joint interest in the profits.xxvi[26] In other words, a partnership is formed
when persons contract to devote to a common purpose either money, property, or
labor with the intention of dividing the profits between themselves.xxvii[27]
Meanwhile, an association implies associates who enter into a joint enterprise x x x
for the transaction of business.xxviii[28]
In the case before us, the ceding companies entered into a Pool Agreementxxix[29]
or an associationxxx[30] that would handle all the insurance businesses covered
under their quota-share reinsurance treatyxxxi[31] and surplus reinsurance
treatyxxxii[32]with Munich. The following unmistakably indicates a partnership or
an association covered by Section 24 of the NIRC:
(1) The pool has a common fund, consisting of money and other valuables that are
deposited in the name and credit of the pool.xxxiii[33] This common fund pays for
the administration and operation expenses of the pool.xxxiv[34]
(2) The pool functions through an executive board, which resembles the board of
directors of a corporation, composed of one representative for each of the ceding
companies.xxxv[35]
(3) True, the pool itself is not a reinsurer and does not issue any insurance policy;
however, its work is indispensable, beneficial and economically useful to the
business of the ceding companies and Munich, because without it they would not
have received their premiums. The ceding companies share in the business ceded to
the pool and in the expenses according to a Rules of Distribution annexed to the Pool
Agreement.xxxvi[36] Profit motive or business is, therefore, the primordial reason
for the pools formation. As aptly found by the CTA:
xxx The fact that the pool does not retain any profit or income does not
obliterate an antecedent fact, that of the pool being used in the transaction
of business for profit. It is apparent, and petitioners admit, that their
association or coaction was indispensable [to] the transaction of the
business. x x x If together they have conducted business, profit must have
been the object as, indeed, profit was earned. Though the profit was
apportioned among the members, this is only a matter of consequence, as
it implies that profit actually resulted.xxxvii[37]
The petitioners reliance on Pascual v. Commissionerxxxviii[38] is misplaced,
because the facts obtaining therein are not on all fours with the present case. In
Pascual, there was no unregistered partnership, but merely a co-ownership which
took up only two isolated transactions.xxxix[39] The Court of Appeals did not err in
applying Evangelista, which involved a partnership that engaged in a series of
transactions spanning more than ten years, as in the case before us.
Second Issue:
Pools Remittances Are Taxable
Petitioners further contend that the remittances of the pool to the ceding companies
and Munich are not dividends subject to tax. They insist that taxing such remittances
contravene Sections 24 (b) (I) and 263 of the 1977 NIRC and would be tantamount
to an illegal double taxation, as it would result in taxing the same premium income
twice in the hands of the same taxpayer.xl[40] Moreover, petitioners argue that since
Munich was not a signatory to the Pool Agreement, the remittances it received from
the pool cannot be deemed dividends.xli[41] They add that even if such remittances
were treated as dividends, they would have been exempt under the previously
mentioned sections of the 1977 NIRC,xlii[42] as well as Article 7 of paragraph
1xliii[43] and Article 5 of paragraph 5xliv[44] of the RP-West German Tax
Treaty.xlv[45]
Petitioners are clutching at straws. Double taxation means taxing the same property
twice when it should be taxed only once. That is, xxx taxing the same person twice
by the same jurisdiction for the same thing.xlvi[46] In the instant case, the pool is a
taxable entity distinct from the individual corporate entities of the ceding companies.
The tax on its income is obviously different from the tax on the dividends received
by the said companies. Clearly, there is no double taxation here.
The tax exemptions claimed by petitioners cannot be granted, since their entitlement
thereto remains unproven and unsubstantiated. It is axiomatic in the law of taxation
that taxes are the lifeblood of the nation. Hence, exemptions therefrom are highly
disfavored in law and he who claims tax exemption must be able to justify his claim
or right.xlvii[47] Petitioners have failed to discharge this burden of proof. The
sections of the 1977 NIRC which they cite are inapplicable, because these were not
yet in effect when the income was earned and when the subject information return
for the year ending 1975 was filed.

Referring to the 1975 version of the counterpart sections of the NIRC, the Court still
cannot justify the exemptions claimed. Section 255 provides that no tax shall xxx be
paid upon reinsurance by any company that has already paid the tax xxx. This cannot
be applied to the present case because, as previously discussed, the pool is a taxable
entity distinct from the ceding companies; therefore, the latter cannot individually
claim the income tax paid by the former as their own.
On the other hand, Section 24 (b) (1)xlviii[48] pertains to tax on foreign
corporations; hence, it cannot be claimed by the ceding companies which are
domestic corporations. Nor can Munich, a foreign corporation, be granted exemption
based solely on this provision of the Tax Code, because the same subsection
specifically taxes dividends, the type of remittances forwarded to it by the pool.
Although not a signatory to the Pool Agreement, Munich is patently an associate of
the ceding companies in the entity formed, pursuant to their reinsurance treaties
which required the creation of said pool.
Under its pool arrangement with the ceding companies, Munich shared in their
income and loss. This is manifest from a reading of Articles 3xlix[49] and 10l[50] of
the Quota Share Reinsurance Treaty and Articles 3li[51] and 10lii[52] of the Surplus
Reinsurance Treaty. The foregoing interpretation of Section 24 (b) (1) is in line with
the doctrine that a tax exemption must be construed strictissimi juris, and the
statutory exemption claimed must be expressed in a language too plain to be
mistaken.liii[53]
Finally, the petitioners claim that Munich is tax-exempt based on the RP-West
German Tax Treaty is likewise unpersuasive, because the internal revenue
commissioner assessed the pool for corporate taxes on the basis of the information
return it had submitted for the year ending 1975, a taxable year when said treaty was
not yet in effect.liv[54] Although petitioners omitted in their pleadings the date of
effectivity of the treaty, the Court takes judicial notice that it took effect only later,
on December 14, 1984.lv[55]
Third Issue: Prescription
Petitioners also argue that the governments right to assess and collect the subject tax
had prescribed. They claim that the subject information return was filed by the pool
on April 14, 1976. On the basis of this return, the BIR telephoned petitioners on
November 11, 1981, to give them notice of its letter of assessment dated March 27,
1981. Thus, the petitioners contend that the five-year statute of limitations then
provided in the NIRC had already lapsed, and that the internal revenue commissioner
was already barred by prescription from making an assessment.lvi[56]
We cannot sustain the petitioners. The CA and the CTA categorically found that the
prescriptive period was tolled under then Section 333 of the NIRC,lvii[57] because
the taxpayer cannot be located at the address given in the information return filed
and for which reason there was delay in sending the assessment.lviii[58] Indeed,
whether the governments right to collect and assess the tax has prescribed involves
facts which have been ruled upon by the lower courts. It is axiomatic that in the
absence of a clear showing of palpable error or grave abuse of discretion, as in this
case, this Court must not overturn the factual findings of the CA and the CTA.
Furthermore, petitioners admitted in their Motion for Reconsideration before the
Court of Appeals that the pool changed its address, for they stated that the pools
information return filed in 1980 indicated therein its present address. The Court finds
that this falls short of the requirement of Section 333 of the NIRC for the suspension
of the prescriptive period. The law clearly states that the said period will be
suspended only if the taxpayer informs the Commissioner of Internal Revenue of any
change in the address.
WHEREFORE, the petition is DENIED. The Resolutions of the Court of Appeals
dated October 11, 1993 and November 15, 1993 are hereby AFFIRMED. Costs
against petitioners.
SO ORDERED.