protest, saying that the amount of the erroneous remittance that they
1. CIR V JAVIER July 31, 1991 Sarmiento J disposed were taxable. It imposed 50% fraud penalty against them. CTA
SUMMARY: This is the so called million-dollar case. Javier erroneously
received $1million from the US, and a case was filed against them to
return the money. When they filed an Income Tax Return, CIR wanted to
assess 50% penalty for fraud for not reporting such income. CTA removed
the penalty, and SC upheld CTA decision, saying that there was a
footnote which basically showed that Javier spouses did not intend to
defraud the government.
DOCTRINE: Under sec 72 of the tax code, a taxpayer who files a false
return is liable to pay the fraud penalty of 50% of the tax due from him or
of the deficiency tax in case payment has been made on the basis of
return filed before the discovery of the falsity or fraud.
Fraud must amount to intentional wrong doing with the sole object of
avoiding tax. Mere mistake cannot be considered fraudulent.
Implied: Income wrongfully received is still taxable, based on the events
in this case.
FACTS:
Victoria Javier, wife of respondent Javier, received from Prudential Bank
$999,973.70 remitted by her sister Mrs. Dolores Ventosa, through banks in
the US including Mellon Bank. Mellon filed a case in CFI Rizal against Javier
claiming that the remittance of $1million was a clerical error, and it should
have been $1000 only, praying the excess be returned, since the Javiers
were only trustees of an implied trust for the benefit of Mellon. Sps Javier
were charged with estafa for misappropriating, misapplying, and converting
the money to their own personal use.
A year after, Javier filed his Income Tax Return for taxable year 1977 which
showed gross income of P53K, and net income P48K and stating in a
footnote that “taxpayer was recipient of some money received from
abroad which he presumed to be a gift but turned out to be an error and is
now subject of litigation”.
Acting Commissioner of Internal Revenue assessed deficiency taxes
P1,615.96 and P9.28million as deficiency assessments for years 1976, 1977
respectively. Javier agreed to pay 1976 deficiency, but prayed that the final
court decision on the case filed against him be waited. CIR sent a letter
deleted the 50% fraud penalty upon appeal, saying that there was no fraud.
ISSUES: WON there was actual fraud which would justify the 50% penalty
RULING: No, there was no actual fraud.
RATIO:
Under sec 72 of the tax code, a taxpayer who files a false return is liable to
pay the fraud penalty of 50% of the tax due from him or of the deficiency
tax in case payment has been made on the basis of return filed before the
discovery of the falsity or fraud.
The SC agrees with the CTA, quoted the latter: "Taxpayer was the recipient
of some money from abroad which he presumed to be a gift but turned out
to be an error and is now subject of litigation that it was an "error or
mistake of fact or law" not constituting fraud, that such notation was
practically an invitation for investigation and that Javier had literally "laid his
cards on the table."
In Aznar v CA, it was said that the fraud contemplated by the law is actual,
not constructive, and must be intentional fraud. It must amount to
intentional wrong-doing with the sole object of avoiding tax. Mere mistake
cannot be considered fraudulent. Fraud is never imputed and the courts
never sustain findings of fraud upon circumstances which, at
most, create only suspicion and the mere understatement of a tax is not
itself proof of fraud for the purpose of tax evasion.
In this case , there was no actual and intentional fraud. The government was
not induced to give up some legal right and place itself at a disadvantage so
as to prevent its lawful agents from proper assessment of tax liabilities
because Javier did not conceal anything.
 2. CONWI vs. CTA
213 SCRA 83 NOCON, August 31, 1992
NATURE
Petition for Review on Certiorari
FACTS
-Petitioners were Filipino citizens who were employees of P & G Phils.
During 1970 to 1971, they were assigned to other subsidiaries of P & G
outside RP, thus, were paid in US dollars as compensation for services in
their foreign assignments. So when they filed their income tax returns (ITR)
for 1970, they computed the tax due by applying the dollar-to-peso
conversation on the basis of the floating rate ordained under BIR Ruling No.
70-27 (rates under Revenue Memorandum Circulars Nos. 7-71 and
41-71) dated May 14, 19701. The same conversion rate was used for their
1971 ITR.
However, on February 8, 1973, the petitioners filed with CIR an amended
ITR for 1970 & 1971 which used par value of the peso as prescribed in RA
265, Sec.48 in relation to CA 699, Sec.6 for converting their dollar income
into pesos for purposes of computing and paying the corresponding income
tax due from them. The amended ITR resulted into alleged
overpayments/refund and/or tax credit. Therefore, the petitioners claimed
for refund from CIR.
-CTA: the proper conversion rate for the purpose of reporting and paying
the Philippine income tax on the dollar earnings of petitioners are the rates
prescribed under RMC Nos. 7-71 and 41-71. Claim for refund denied.
ISSUE
WON the petitioners are entitled to refund (What exchange rate should be
used to determine the peso equivalent of the foreign earnings of petitioners
for income tax purposes).
HELD
NO.
Definition of Income: an amount of money coming to a person or
corporation within a specified time, whether as payment for services,
interest or profit from investment. Unless otherwise specified, it means cash
or its equivalent. Income can also be thought of as a flow of the fruits of
one's labor.
Definition of foreign exchange transactions (petitioners claim that their
dollar earnings were not foreign exchange transactions): a transaction in
1From January 1 to February 20, 1970 at the conversion rate of P3.90 to
U.S. $1.00; From February 21 to December 31, 1970 at the conversion rate
of P6.25 to U S. $1.00 foreign exchange, foreign exchange being "the
conversion of an amount of money or currency of one country into an
equivalent amount of money or currency of another." There was no
conversion (petitioners earned dollars, also spent dollars during
their stay abroad) so no foreign exchange transaction.
On what should be the basis for conversion:
RMCs 7-71 and 41-71
CB Circular No. 289: shows that the subject matters involved therein are
export products, invisibles, receipts of foreign exchange, foreign exchange
payments, new foreign borrowing and investments nothing by way of
income tax payments. Thus, petitioners are in error by concluding that since
C.B. Circular No. 289 does not apply to them, the par value of the peso
should be the guiding rate used for income tax purposes.
RMCs 7-71 and 41-71: issued to prescribe a uniform rate of exchange from
US dollars to Philippine pesos for INTERNAL REVENUE TAX PURPOSES for the
years 1970 and 1971, respectively. Said revenue circulars were a valid
exercise of the authority given to the Secretary of Finance by the Legislature
which enacted the Internal Revenue Code. And these are presumed to
be a valid interpretation of said code until revoked by the Secretary of
Finance himself. Petitioners, who were arguing that there were no
remittances and acceptances of their salaries and wages in US dollars into
RP, they are exempt from the coverage of the RMCs, are NOT EXEMPT from
the RMCs as they are citizens of the Philippines, and their income, within
or without, and in these cases wholly without, are subject to income tax.
Sec. 21, NIRC2, as amended, does not brook any exemption.
Disposition. WHEREFORE" the petitions are denied for lack of merit. The
dismissal by the respondent Court of Tax Appeals of petitioners' claims for
tax refunds for the income tax period for 1970 and 1971 is AFFIRMED. Costs
against petitioners.SO ORDERED.
RMC 7-71
SUBJECT: Prescribing a uniform rate for U.S. Dollars to Philippine Pesos for
Internal Revenue Tax Purposes.
TO: All Internal Revenue Officers and others concerned:
2 Sec. 21. Rates of tax on citizens or residents. A tax is hereby imposed upon
the taxable net income received during each taxable year from all sources
by every individual, whether a citizen of the Philippines residing therein or
abroad or an alien residing in the Philippines, determined in accordance
with the following schedule:
xxx xxx xxx
And in the implementation for the proper enforcement of the National
Internal Revenue Code, Section 338 thereof empowers the Secretary of
Finance to "promulgate all needful rules and regulations" to effectively
enforce its provisions.
For the Purpose of establishing a uniform rate of exchange to U.S. dollars to
Philippine pesos for internal revenue tax purposes for the year 1970, the
following schedule of exchange rates are hereby prescribed for reference
and guidelines of all concerned;
Schedule of Exchange Rates
1. In all cases of transactions involving remittances and acceptances of U.S.
dollars occurring during the period from January 1 to February 20, 1970, the
official rate of exchange of P3.90 to $1.00 shall be used.
2. The case of transactions involving remittances or acceptance of U.S.
dollars occurring after February 20, 1970 the following rules shall govern:
(a) In the case of regular or habitual transactions involving remittances and
acceptances of U.S. dollars, such as salaries, royalty payments and the like,
the uniform rate of P6.25 to U.S. $1.00 shall be used; provided however,
that an the case of transactions involving the computation of advance sales
or compensating taxes, the rates used by the Bureau of Customs at the time
of the payment of such taxes shall prevail.
(b) In the case of an isolated or casual transaction involving remittances or
acceptances of U.S. dollars, such as dividends, occasional sales of property
and the like the exchange rate quoted by the Foreign Exchange Department
of the Central bank of the Philippines prevailing at the time of such
remittances or acceptance shall be used.
Enforcement and Publicity
All internal revenue officers and others charged with the enforcement of
internal revenue laws are enjoined to enforce the provisions of this circular
accordingly and to give as wide a publicity as possible.
(Sgd.) MISAEL P. VERA
Commissioner of Internal Revenue
APPROVED:
(Sgd.) CESAR VIRATA
Secretary of Finance
RMC 41-71
SUBJECT: Prescribing a uniform exchange rate for U.S. dollars to Philippine
pesos for internal revenue tax purposes.
TO: All Internal Revenue Officers and others concerned:
For the purpose of establishing a uniform rate of exchange to U.S. dollars or
other foreign currencies to Philippine pesos for internal revenue tax
purposes for the year 1971, the following schedule of exchange rates are
hereby prescribed for reference and guidelines of all
concerned:
Schedule of Exchange Rates
In all cases of transactions involving remittances and acceptances of U.S.
dollars and other foreign currencies occurring during the year 1971, the
following rules shall govern:
(a) In the case of regular or habitual transactions involving remittances or
acceptances of US dollars or other foreign currencies such as salaries,
wages, fees or other renominations for personal services, royalties, rents,
interests or other fixed or determinable annual or periodical income, the
uniform rate of P6.25 to U.S. $1.00 shall be used.
(b) In the case of transactions involving the computation of advance sales or
compensating taxes, the rate of exchange used by the Bureau of Customs at
the time of the payment of such taxes shall prevail.

(c) In the case of an isolated or casual transaction involving remittances of

acceptances of U.S. dollars or other foreign currencies such as dividends,
interests, capital gains or other gains from occasional sales of property and
the like, the exchange rate quoted by the Foreign Exchange Department of
the Central Bank of the Philippines prevailing at the time of such
remittances or acceptances shall be used.

(d) Where the currency involved is other than U.S. dollars, the foreign
currency shall first be converted to U.S. dollars at the prevailing rate of
exchange between the two currencies. The resulting amount shall then be
converted to Philippine pesos in accordance with the above-promulgated
rules.

All internal revenue officers and others charged with the enforcement of
internal revenue laws are enjoined to enforce the provisions of this circular
accordingly and to give it as wide a publicity as possible.

(SGD.) MISAEL P. VERA

Commissioner of Internal Revenue.
APPROVED:
(SGD.) CESAR VIRATA
 3. Obillos vs. CIR and CTA
FACTS:
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. 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 P
313,OSO. They derived from the sale a total profit of P 134,341.88
or P 33,S84 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 fiveyear
prescriptive period, the Commissioner of Internal Revenue
required the four petitioners to pay corporate income tax on the
total profit of P 134,336 in addition to individual income tax on
their shares thereof He assessed P37,018 as corporate income tax,
P 18,S09 as so% fraud surcharge and P 15,S47.S6 as 42%
accumulated interest, or a total of P71,o74S6. Not only that. He
considered the share of the profits of each petitioner in the sum
of P33,S84 as taxable in full (not a mere capital gain of which 1f2
is taxable) and required them to pay deficiency income taxes
aggregating PS6,707.20 including the 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.
The petitioners contested the assessments. Two Judges of
the Tax Court sustained the same. Judge Roaquin dissented.
Hence, the instant appeal.
ISSUE:
Whether or not the petitioners formed a taxable partnership that
should be subjected to corporate income tax on the total profit of P134,336,
in addition to individual income tax on their shares thereof.
RULING:
The Supreme Court held 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 P
178,708.12 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 coownership
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.
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.
All co-ownerships are not deemed unregistered partnership.
-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.

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.
 4. CIR vs St. Luke’s Medical Center
Facts:
1. Luke’s Medical Center, Inc. is a hospital organized as a non-stock
and non-profit corporation.
2. The BIR assessed St. Luke’s deficiency taxes amounting to
P76,063,116.06 for 1998, comprised of deficiency income tax, VAT,
withholding tax on compensation and expanded withholding tax.
3. Luke’s filed an administrative protest with the BIR against the
deficiency tax assessments.
4. The BIR argued before the CTA that Section 27(B) of the NIRC, which
imposes a 10% preferential tax rate on the income of proprietary
non-profit hospitals, should be applicable to St. Luke’
5. The BIR claimed that St. Luke’s was actually operating for profit in
1998 because only 13% of its revenues came from charitable
purposes. Moreover, the hospital’s board of trustees, officers and
employees directly benefit from its profits and assets. St. Luke’s had
total revenues of P1,730,367,965 or approximately P1.73 billion
from patient services in 1998.
6. Luke’s contended that the BIR should not consider its total
revenues, because its free services to patients was P218,187,498 or
65.20% of its 1998 operating income of P334,642,615. St. Luke’s
also claimed that its income does not inure to the benefit of any
individual.
7. Luke’s maintained that it is a non-stock and non-profit institution
for charitable and social welfare purposes under Section 30(E) and
(G) of the NIRC. It argued that the making of profit per se does not
destroy its income tax exemption.
Issue: Whether St. Luke’s is liable for deficiency income tax in 1998 under
Section 27(B) of the NIRC, which imposes a preferential tax rate of 10% on
the income of proprietary non-profit hospitals.
Ruling:
The issue raised by the BIR is a purely legal one. It involves the effect of the
introduction of Section 27(B) in the NIRC of 1997 vis-à-vis Section 30(E) and
(G) on the income tax exemption of charitable and social welfare
institutions. The 10% income tax rate under Section 27(B) specifically
pertains to proprietary educational institutions and proprietary non-profit
hospitals.
Section 27(B) of the NIRC does not remove the income tax exemption of
proprietary non-profit hospitals under Section 30(E) and (G). Section 27(B)
on one hand, and Section 30(E) and (G) on the other hand, can be construed
together without the removal of such tax exemption.
The effect of the introduction of Section 27(B) is to subject the taxable
income of two specific institutions, namely, proprietary non-profit
educational institutions and proprietary non-profit hospitals, among the
institutions covered by Section 30, to the 10% preferential rate under
Section 27(B) instead of the ordinary 30% corporate rate under the last
paragraph of Section 30 in relation to Section 27(A)(1).
The only qualifications for hospitals are that they must be proprietary and
non-profit. “Proprietary” means private, following the definition of a
“proprietary educational institution” as “any private school maintained and
administered by private individuals or groups” with a government permit.
“Non-profit” means no net income or asset accrues to or benefits any
member or specific person, with all the net income or asset devoted to the
institution’s purposes and all its activities conducted not for profit.
“Non-profit” does not necessarily mean “charitable.”
The Court defined “charity” in Lung Center of the Philippines v. Quezon City
as “a gift, to be applied consistently with existing laws, for the benefit of an
indefinite number of persons, either by bringing their minds and hearts
under the influence of education or religion, by assisting them to establish
themselves in life or by otherwise lessening the burden of government.”
To be a charitable institution, however, an organization must meet the
substantive test of charity in Lung Center. The issue in Lung Center concerns
exemption from real property tax and not income tax. However, it provides
for the test of charity in our jurisdiction.
In other words, charitable institutions provide for free goods and services to
the public which would otherwise fall on the shoulders of government.
Thus, as a matter of efficiency, the government forgoes taxes which should
have been spent to address public needs, because certain private entities
already assume a part of the burden. This is the rationale for the tax
exemption of charitable institutions.
Charitable institutions, however, are not ipso facto entitled to a tax
exemption. The requirements for a tax exemption are specified by the law
granting it. The requirements for a tax exemption are strictly construed
against the taxpayer because an exemption restricts the collection of taxes
necessary for the existence of the government.
The Court in Lung Center declared that the Lung Center of the Philippines is
a charitable institution for the purpose of exemption from real property
taxes. This ruling uses the same premise as Hospital de San Juan and Jesus
Sacred Heart College which says that receiving income from paying patients
does not destroy the charitable nature of a hospital.
For real property taxes, the incidental generation of income is permissible
because the test of exemption is the use of the property. The test of
exemption is not strictly a requirement on the intrinsic nature or character
of the institution. The test requires that the institution use the property in a
certain way, i.e. for a charitable purpose. Thus, the Court held that the Lung
Center of the Philippines did not lose its charitable character when it used a
portion of its lot for commercial purposes. The effect of failing to meet the
use requirement is simply to remove from the tax exemption that portion of
the property not devoted to charity.
In the NIRC, Congress decided to extend the exemption to income taxes.
However, the way Congress crafted Section 30(E) of the NIRC is materially
different from Section 28(3), Article VI of the Constitution. Section 30(E) of
the NIRC defines the corporation or association that is exempt from income
tax. On the other hand, Section 28(3), Article VI of the Constitution does not
define a charitable institution, but requires that the institution “actually,
directly and exclusively” use the property for a charitable purpose.
Section 30(E) of the NIRC provides that a charitable institution must be:
 A non-stock corporation or association;
 Organized exclusively for charitable purposes;
 Operated exclusively for charitable purposes;
 No part of its net income or asset shall belong to or inure to the
benefit of any member, organizer, officer or any specific person.
Thus, both the organization and operations of the charitable institution
must be devoted “exclusively” for charitable purposes. The organization of
the institution refers to its corporate form, as shown by its articles of
incorporation, by-laws and other constitutive documents.
Section 30(E) of the NIRC specifically requires that the corporation or
association be non-stock, which is defined by the Corporation Code as “one
where no part of its income is distributable as dividends to its members,
trustees, or officers” and that any profit “obtained as an incident to its
operations shall, whenever necessary or proper, be used for the furtherance
of the purpose or purposes for which the corporation was organized.”
However, the last paragraph of Section 30 of the NIRC qualifies the words
“organized and operated exclusively” by providing that: Notwithstanding
the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or
personal, or from any of their activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax imposed under this
Code.
In 1998, St. Luke’s had total revenues of P1,730,367,965 from services to
paying patients. It cannot be disputed that a hospital which receives
approximately P1.73 billion from paying patients is not an institution
“operated exclusively” for charitable purposes. Clearly, revenues from
paying patients are income received from “activities conducted for profit.”
Indeed, St. Luke’s admits that it derived profits from its paying patients. St.
Luke’s declared P1,730,367,965 as “Revenues from Services to Patients” in
contrast to its “Free Services” expenditure of P218,187,498.
Services to paying patients are activities conducted for profit. They cannot
be considered any other way. There is a “purpose to make profit over and
above the cost” of services. The P1.73 billion total revenues from paying
patients is not even incidental to St. Luke’s charity expenditure of
P218,187,498 for non-paying patients.

The Court finds that St. Luke’s is a corporation that is not “operated
exclusively” for charitable or social welfare purposes insofar as its revenues
from paying patients are concerned. This ruling is based not only on a strict
interpretation of a provision granting tax exemption, but also on the clear
and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC
requires that an institution be “operated exclusively” for charitable or social
welfare purposes to be completely exempt from income tax.
 5. CIR vs DLSU
The Commissioner submits the following arguments:
DLSU's rental income is taxable regardless of how such income is derived,
used or disposed of. DLSU's operations of canteens and bookstores within
its campus even though exclusively serving the university community do not
negate income tax liability.
Article XIV, Section 4 (3) of the Constitution and Section 30 (H) of the Tax
Code:
“the income of whatever kind and character of [a non-stock and non-profit
educational institution] from any of [its] properties, real or personal, or
from any of (its] activities conducted for profit regardless of the disposition
made of such income, shall be subject to tax imposed by this Code.”
The Commissioner posits that a tax-exempt organization like DLSU is
exempt only from property tax but not from income tax on the rentals
earned from property. Thus, DLSU's income from the leases of its real
properties is not exempt from taxation even if the income would be used
for educational purposes.
DLSU stresses that Article XIV, Section 4 (3) of the Constitution is clear that
all assets and revenues of non-stock, non-profit educational institutions
used actually, directly and exclusively for educational purposes are exempt
from taxes and duties.
ISSUE: Whether DLSU's income and revenues proved to have been used
actually, directly and exclusively for educational purposes are exempt from
duties and taxes.
RULING: YES.
The requisites for availing the tax exemption under Article XIV, Section 4 (3),
namely:
(1) the taxpayer falls under the classification non-stock, non-profit
educational institution; and (2) the income it seeks to be exempted from
taxation is used actually, directly and exclusively for educational purposes.
A plain reading of the Constitution would show that Article XIV, Section 4 (3)
does not require that the revenues and income must have also been
sourced from educational activities or activities related to the purposes of
an educational institution. The phrase all revenues is unqualified by any
reference to the source of revenues. Thus, so long as the revenues and
income are used actually, directly and exclusively for educational purposes,
then said revenues and income shall be exempt from taxes and duties.
Thus, when a non-stock, non-profit educational institution proves that it
uses its revenues actually, directly, and exclusively for educational purposes,
it shall be exempted from income tax, VAT, and LBT. On the other hand,
when it also shows that it uses its assets in the form of real property for
educational purposes, it shall be exempted from RPT.
We further declare that the last paragraph of Section 30 of the Tax Code is
without force and effect for being contrary to the Constitution insofar as it
subjects to tax the income and revenues of non-stock, non-profit
educational institutions used actually, directly and exclusively for
educational purpose. We make this declaration in the exercise of and
consistent with our duty to uphold the primacy of the Constitution. We
stress that our holding here pertains only to non-stock, non-profit
educational institutions and does not cover the other exempt organizations
under Section 30 of the Tax Code.
For all these reasons, we hold that the income and revenues of DLSU
proven to have been used actually, directly and exclusively for educational
purposes are exempt from duties and taxes.
 6. CIR vs YMCA
Doctrine:
– Rental income derived by a tax-exempt organization from the lease of its
properties, real or personal, is not exempt from income taxation, even if such
income is exclusively used for the accomplishment of its objectives.
– A claim of statutory exemption from taxation should be manifest and
unmistakable from the language of the law on which it is based. Thus, it
must expressly be granted in a statute stated in a language too clear to be
mistaken. Verba legis non est recedendum — where the law does not
distinguish, neither should we.
– The bare allegation alone that one is a non-stock, non-profit educational
institution is insufficient to justify its exemption from the payment of income
tax. It must prove with substantial evidence that (1) it falls under the
classification non-stock, non-profit educational institution; and (2) the
income it seeks to be exempted from taxation is used actually, directly, and
exclusively for educational purposes.
– The Court cannot change the law or bend it to suit its sympathies and
appreciations. Otherwise, it would be overspilling its role and invading the
realm of legislation. The Court, given its limited constitutional authority,
cannot rule on the wisdom or propriety of legislation. That prerogative
belongs to the political departments of government.
Facts:
Private Respondent YMCA is a non-stock, non-profit institution, which
conducts various programs and activities that are beneficial to the public,
especially the young people, pursuant to its religious, educational and
charitable objectives.
YMCA earned income from leasing out a portion of its premises to small
shop owners, like restaurants and canteen operators, and from parking fees
collected from non-members. Petitioner issued an assessment to private
respondent for deficiency taxes. Private respondent formally protested the
assessment. In reply, the CIR denied the claims of YMCA.
Issue:
Whether or not the income derived from rentals of real property owned by
YMCA subject to income tax
Held:
Yes. Income of whatever kind and character of non-stock non-profit
organizations from any of their properties, real or personal, or from any of
their activities conducted for profit, regardless of the disposition made of
such income, shall be subject to the tax imposed under the NIRC.
Rental income derived by a tax-exempt organization from the lease of its
properties, real or personal, is not exempt from income taxation, even if
such income is exclusively used for the accomplishment of its objectives.
Because taxes are the lifeblood of the nation, the Court has always applied
the doctrine of strict in interpretation in construing tax exemptions
(Commissioner of Internal Revenue v. Court of Appeals, 271 SCRA 605, 613,
April 18, 1997). Furthermore, a claim of statutory exemption from taxation
should be manifest and unmistakable from the language of the law on
which it is based. Thus, the claimed exemption “must expressly be granted
in a statute stated in a language too clear to be mistaken” (Davao Gulf
Lumber Corporation v. Commissioner of Internal Revenue and Court of
Appeals, G.R. No. 117359, p. 15 July 23, 1998).
Verba legis non est recedendum. The law does not make a distinction. The
rental income is taxable regardless of whence such income is derived and
how it is used or disposed of. Where the law does not distinguish, neither
should we.
Private respondent also invokes Article XIV, Section 4, par. 3 of the
Constitution, claiming that it “is a non-stock, non-profit educational
institution whose revenues and assets are used actually, directly and
exclusively for educational purposes so it is exempt from taxes on its
properties and income.” This is without merit since the exemption provided
lies on the payment of property tax, and not on the income tax on the
rentals of its property. The bare allegation alone that one is a non-stock,
non-profit educational institution is insufficient to justify its exemption from
the payment of income tax.
For the YMCA to be granted the exemption it claims under the above
provision, it must prove with substantial evidence that (1) it falls under the
classification non-stock, non-profit educational institution; and (2) the
income it seeks to be exempted from taxation is used actually, directly, and
exclusively for educational purposes. Unfortunately for respondent, the
Court noted that not a scintilla of evidence was submitted to prove that it
met the said requisites.

The Court appreciates the nobility of respondent’s cause. However, the

Court’s power and function are limited merely to applying the law fairly and
objectively. It cannot change the law or bend it to suit its sympathies and
appreciations. Otherwise, it would be overspilling its role and invading the
realm of legislation. The Court regrets that, given its limited constitutional
authority, it cannot rule on the wisdom or propriety of legislation. That
prerogative belongs to the political departments of government.
 7. SMI-ED Philippine Technology vs CIR
Doctrines:
In an action for the refund of taxes allegedly erroneously paid, the Court of
Tax Appeals may determine whether there are taxes that should have been
paid in lieu of the taxes paid. Determining the proper category of tax that
should have been paid is not an assessment. It is incidental to determining
whether there should be a refund.
A Philippine Economic Zone Authority (PEZA)-registered corporation that has
never commenced operations may not avail the tax incentives and
preferential rates given to PEZA-registered enterprises. Such corporation is
subject to ordinary tax rates under the National Internal Revenue Code of
1997.
Facts:
 SMI-Ed Philippines is a PEZA-registered corporation authorized "to
engage in the business of manufacturing ultra high-density
microprocessor unit package."
 After its registration on June 29, 1998, SMI-Ed Philippines
constructed buildings and purchased machineries and equipment.
 SMI-Ed Philippines "failed to commence operations." Its factory was
temporarily closed, effective October 15, 1999. On August 1, 2000,
it sold its buildings and some of its installed machineries and
equipment to Ibiden Philippines, Inc., another PEZA-registered
enterprise. SMI-Ed Philippines was dissolved on November 30, 2000.
 In its quarterly income tax return for year 2000, SMI-Ed Philippines
subjected the entire gross sales of itsproperties to 5% final tax on
PEZA registered corporations. SMI-Ed Philippines paid taxes
amounting to P44,677,500.00.
 On February 2, 2001, after requesting the cancellation of its PEZA
registration and amending its articles of incorporation to shorten its
corporate term, SMI-Ed Philippines filed an administrative claim for
the refund of P44,677,500.00 with the Bureauof Internal Revenue
(BIR). SMIEd Philippines alleged that the amount was erroneously
paid.
 The BIR did not act on SMI-Ed Philippines’ claim, which prompted
the latter to file a petition for review before the Court of Tax
Appeal.
 CTA denied SMI-ED claim for refund. It held that:
1. fiscal incentives given to PEZA-registered enterprises may be availed only
by PEZA-registered enterprises that had already commenced operations.
Since SMI-Ed Philippines had not commenced operations, it was not entitled
to the incentives of either the income tax holiday or the 5% preferential tax
rate. Payment of the 5% preferential tax amounting to P44,677,500.00 was
erroneous.
2. It found that the properties sold by SMI-ED were capital assets under
Section 39(A)(1) of the National Internal Revenue Code of 1997, hence it
subjected the sale of SMIEd Philippines’ assets to 6% capital gains tax. It was
found liable for capital gains tax amounting to
P53,613,000.00.20. Therefore, SMIEd Philippines must still pay the balance
of P8,935,500.00 as deficiency tax.
 SMI-ED filed a peitition for review with the CTA en banc.
 CTA en banc affirmed the CTA second division.
 SMI-Ed Philippines filed a petition for review before the Supreme
Court praying for the grant of its claim for refund and the reversal of
the Court of Tax Appeals En Banc’s decision.
SMI-ED’s Arguments:
 It argued that the Court of Tax Appeals Second Division erroneously
assessed the 6% capital gains tax on the sale of SMI-Ed Philippines’
equipment, machineries, and buildings. It also argued that the Court
of Tax Appeals Second Division cannot make an assessment at the
first instance. Even if the Court of Tax Appeals Second Division has
such power, the period to make an assessment had already
prescribed.
Issues w/ Ruling:
1. WON CTA En Banc grievously erred and acted beyond its
jurisdiction when it assessed for deficiency tax in the first instance
- NO
The term "assessment" refers to the determination of amounts due from a
person obligated to make payments. In the context of national internal
revenue collection, it refers the determination of the taxes due from a
taxpayer under the National Internal Revenue Code of 1997. The power and
duty to assess national internal revenue taxes are lodged with the BIR.
The Court of Tax Appeals has no powerto make an assessment at the first
instance. On matters such as tax collection, tax refund, and others related to
the national internal revenue taxes, the Court of Tax Appeals’ jurisdiction is
appellate in nature.
Based on the law, the following must be present for the Court of Tax
Appeals to have jurisdiction over a case involving the BIR’s decisions or
inactions:
a) A case involving any of the following:
i. Disputed assessments;
ii. Refunds of internal revenue taxes, fees, or other charges,
penalties in relation thereto; and
iii. Other matters arising under the National Internal Revenue Code
of 1997.
b) Commissioner of Internal Revenue’s decision or inaction in a case
submitted to him or her.
Thus, the BIR first has to make an assessment of the taxpayer’s liabilities.
When the BIR makes the assessment, the taxpayer is allowed to dispute that
assessment before the BIR. If the BIR issues a decision that is unfavorable to
the taxpayer or if the BIR fails to act on a dispute brought by the taxpayer,
the BIR’s decision or inaction may be brought on appeal to the Court of Tax
Appeals. The Court of Tax Appeals then acquires jurisdiction over the case.
When the BIR’s unfavorable decision is brought on appeal to the Court of
Tax Appeals, the Court of Tax Appeals reviews the correctness of the BIR’s
assessment and decision. In reviewing the BIR’s assessment and decision,
the Court of Tax Appeals had to make its own determination of the
taxpayer’s tax liabilities. The Court of Tax Appeals may not make such
determination before the BIR makes its assessment and before a dispute
involving such assessment is brought to the Court of Tax Appeals on appeal.
In this case, the Court of Tax Appeals’ jurisdiction was acquired because
petitioner brought the case on appeal before the Court of Tax Appeals after
the BIR had failed to act on petitioner’s claim for refund of erroneously
paid taxes. The Court of Tax Appeals did not acquire jurisdiction as a result
of a disputed assessment of a BIR decision.
As earlier established, the Court of Tax Appeals has no assessment powers.
In stating that petitioner’s transactions are subject to capital gains tax,
however, the Court of Tax Appeals was not making an assessment. It was
merely determining the proper category of tax that petitioner should have
paid, in view of its claim that it erroneously imposed upon itself and paid
the 5% final tax imposed upon PEZA-registered enterprises.
The determination of the proper category of tax that petitioner should have
paid is an incidental matter necessary for the resolution of the principal
issue, which is whether petitioner was entitled to a refund.
The issue of petitioner’s claim for tax refund is intertwined with the issue of
the proper taxes that are due from petitioner. A claim for tax refund carries
the assumption that the tax returns filed were correct. If the tax return filed
was not proper, the correctness of the amount paid and, therefore, the
claim for refund become questionable. In that case, the court must
determine if a taxpayer claiming refund of erroneously paid taxes is more
properly liable for taxes other than that paid.
In this case, petitioner’s claim that it erroneously paid the 5% final tax is an
admission that the quarterly tax return it filed in 2000 was improper. Hence,
to determine if petitioner was entitled to the refund being claimed, the
Court of Tax Appeals has the duty to determine if petitioner was indeed not
liable for the 5% final tax and, instead, liable for taxes other than the 5%
final tax. As in South African Airways, petitioner’s request for refund can
neither be granted nor denied outright without such determination.
Any liability in excess of the refundable amount, however, may not be
collected in a case involving solely the issue of the taxpayer’s entitlement to
refund. The question of tax deficiencyis distinct and unrelated to the
question of petitioner’s entitlement to refund. Tax deficiencies should be
subject to assessment procedures and the rules of prescription. The court
cannot be expected to perform the BIR’s duties whenever it fails to do so
either through neglect or oversight. Neither can court processes be used as
a tool to circumvent laws protecting the rights of taxpayers.
2. WON SMI-ED is entitled to the benefits given to PEZA-registered
enterprises including the 5% preferential tax rate.
NO. This is because it never began its operation.
Essentially, the purpose of Republic Act No. 7916 is to promote
development and encourage investments and business activities that will
generate employment. Giving fiscal incentives to businesses is one of the
means devised to achieve this purpose. It comes with the expectation that
persons who will avail these incentives will contribute to the purpose’s
achievement. Hence, to avail the fiscal incentives under Republic Act No.
7916, the law did not say that mere PEZA registration is sufficient.
The fiscal incentives and the 5% preferential tax rate are available only to
businesses operating within the Ecozone. A business is considered in
operation when it starts entering into commercial transactions that are not
merely incidental to but are related to the purposes of the business. It is
similar to the definition of "doing business," as applied in actions
involvingthe right of foreign corporations to maintain court actions. The
terms "doing" or "engaging in" or "transacting" business": impl[y] a
continuity of commercial dealings and arrangements, and contemplates, to
that extent, the performance of acts or works or the exercise of some of the
functions normally incident to, and in progressive prosecution of, the
purpose and object of its organization. Petitioner never started its
operations since its registration on June 29, 199863 because of the Asian
financial crisis. It is not entitled to the preferential tax rate of 5% on gross
income in lieu of all taxes. Because petitioner is not entitled to a preferential
rate, it is subject to ordinary tax rates under the National Internal Revenue
Code of 1997.
3. WON CTA erred in imposing the capital gains tax on the sale of SMI-Ed’s
buildings, equipments, and machineries-
With respect to the sale of buildings and and land, wala nasayup ang CA
With respect to the sale of machineries and equipments, nasayup ang CA
For petitioner’s properties to be subjected to capital gains tax, the
properties must form part of petitioner’s capital assets. The properties
involved in this case include petitioner’s buildings, equipment, and
machineries. They are not among the exclusions enumerated in Section
39(A)(1) of the National Internal Revenue Code of 1997. None of the
properties were used in petitioner’s trade or ordinary course of business
because petitioner never commenced operations. They were not part of the
inventory. None of themwere stocks in trade. Based on the definition of
capital assets under Section 39 of the National Internal Revenue Code of
1997, they are capital assets.
As regards machineries and equipments, these should not be subjected to
the capital gains tax since these are not real properties. Only the presumed
gain from the sale of petitioner’s land and/or building may be subjected to
the 6% capital gains tax. The income from the sale of petitioner’s
machineries and equipment is subject to the provisions on normal
corporate income tax.
To determine, therefore, if petitioner is entitled to refund, the amount of
capital gains tax for the sold land and/or building of petitioner and the
amount of corporate income tax for the sale of petitioner’s machineries and
equipment should be deducted from the total final tax paid.
Petitioner indicated, however, in its March 1, 2001 income tax return for the
11-month period ending on November 30, 2000 that it suffered a net loss of
P2,233,464,538.00.69 This declaration was made under the pain of perjury.
The BIR did not make a deficiency assessment for this declaration. Neither
did the BIR dispute this statement in its pleadings filed before this court.
There is, therefore, no reason todoubt the truth that petitioner indeed
suffered a net loss in 2000. Since petitioner had not started its operations, it
was also not subject to the minimum corporate income tax of 2% on gross
income. Therefore, petitioner is not liable for any income tax.
The BIR, however, did not initiate any assessment for deficiency capital
gains tax.78 Since more than a decade have lapsed from the filing of
petitioner's return, the BIR can no longer assess petitioner for deficiency
capital gains taxes, if petitioner is later found to have capital gains tax
liabilities in excess of the amount claimed for refund.
The Court of Tax Appeals should not be expected to perform the BIR's duties
of assessing and collecting taxes whenever the BIR, through neglect or
oversight, fails to do so within the prescriptive period allowed by law.

4. WON the government can still collect for the deficiency taxes (kay 5% DISPOSITION:
preferential tax rate raman tu ya gibayran when it should have been 6%  BIR is ordered to refund petitioner SMI-Ed Philippines Technology,
capital gains tax rate)- NOT ANYMORE Inc. the amount of 5% final tax paid to the BIR, less the 6% capital
gains tax on the sale of petitioner SMI-Ed Philippines Technology,
Section 203 of the National Internal Revenue Code of 1997 provides that as Inc. 's land and building.
a general rule, the BIR has three (3) years from the last day prescribed by
law for the filing of a return to make an assessment. If the return is filed  In view of the lapse of the prescriptive period for assessment, any
beyond the last day prescribed by law for filing, the three-year period shall capital gains tax accrued from the sale of its land and building that is
run from the actual date of filing. in excess of the 5% final tax paid to the Bureau of Internal Revenue
may no longer be recovered from petitioner SMI-Ed Philippines
This court said that the prescriptive period to make an assessment of Technology, Inc.
internal revenue taxes is provided "primarily to safeguard the interests of
taxpayers from unreasonable investigation." This court explained in
Commissioner of Internal Revenue v. FMF Development Corporation72 the
reason behind the provisions on prescriptive periods for tax assessments:
Accordingly, the government must assess internal revenue taxes on time so
as not to extend indefinitely the period of assessment and deprive the
taxpayer of the assurance that it will no longer be subjected to further
investigation for taxes after the expiration of reasonable period of time.

Thus, the law on prescription, being a remedial measure, should be liberally

construed in order to afford such protection. As a corollary, the exceptions
to the law on prescription should perforce be strictly construed.

The BIR had three years from the filing of petitioner’s final tax return in
2000 to assess petitioner’s taxes. Nothing stopped the BIR from making the
correct assessment. The elevation of the refund claim with the Court of Tax
Appeals was not a bar against the BIR’s exercise of its assessment powers.
 8. Republic vs Soriano
Facts: Republic of the Philippines, represented by the Department of Public
Works and Highways (DPWH), filed an expropriation case against
respondent Arlene R. Soriano, pursuant to Republic Act (RA) No. 8974,
otherwise known as “An Act to Facilitate the Acquisition of Right-Of-Way,
Site or Location for National Government Infrastructure Projects and for
other Purposes”. The property sought to be expropriated shall be used in
implementing the construction of the North Luzon Expressway (NLEX)-
Harbor Link Project (Segment 9) from NLEX to MacArthur Highway,
Valenzuela City.
Petitioner duly deposited to the Acting Branch Clerk of Court the amount of
P420,000.00 representing 100% of the zonal value of the subject property.
According to the RTC, the records of the case reveal that petitioner adduced
evidence to show that the total amount deposited is just, fair, and
equitable.
On November 15, 2013, the RTC rendered its Decision, the dispositive
portion of which reads:
WHEREFORE, with the foregoing determination of just compensation,
judgment is hereby rendered:
3) Ordering the plaintiff to pay defendant Arlene R. Soriano Php2,100.00 per
square meter or the sum of Four Hundred Twenty Thousand Pesos
(Php420,000.00) for the 200 square meters as fair, equitable, and just
compensation with legal interest at 12% per annum from the taking of the
possession of the property, subject to the payment of all unpaid real
property taxes and other relevant
4) Plaintiff is likewise ordered to pay the defendant consequential damages
which shall include the value of the transfer tax necessary for the transfer of
the subject property from the name of the defendant to that of the plaintiff;
Petitioner filed a Motion for Reconsideration maintaining that pursuant to
Bangko Sentral ng Pilipinas (BSP) Circular No. 799, Series of 2013, which
took effect on July 1, 2013, the interest rate imposed by the RTC on just
compensation should be lowered to 6% for the instant case falls under a
loan or forbearance of money. In its Order dated March 10, 2014, the RTC
reduced the interest rate to 6% per annum not on the basis of the
aforementioned Circular, but on Article 2209 of the Civil Code in the nature
of indemnity for delay.
Issues: (1) WON Respondent is entitled to 6% per annum interest; (2) WON
Petitioners should pay for the transfer taxes
Held: The petition is partly meritorious.
(1) Payment of just compensation for the expropriated property amounts to
an effective forbearance on the part of the State. The law applicable is the
Central Bank Circular and not the Civil Code. RTC’s reliance on National
Power Corporation vs. Angas is misplaced for the same has already been
overturned by Republic v. Court of Appeals, where the court held that the
payment of just compensation for the expropriated property amounts to an
effective forbearance on the part of the State. In line with the recent
circular of the Monetary Board of the Bangko Sentral ng Pilipinas (BSP-MB)
No. 799, Series of 2013, the prevailing rate of interest for loans or
forbearance of money is six percent (6%) per annum.
However, the imposition of interest in this case is unnecessary because
petitioner was able to deposit with the trial court the amount representing
the zonal value of the property before its taking. The award of interest is
imposed in the nature of damages for delay in payment to ensure prompt
payment of the value of the land and limit the opportunity loss of the
owner. However, when there is no delay in the payment of just
compensation, there should be no imposition of interest.
(2) Regarding petitioner’s contention that it cannot be made to pay the
value of the transfer taxes in the nature of capital gains tax and
documentary stamp tax, the same is partly meritorious.
With respect to the capital gains tax, the court finds merit in petitioner’s
posture that pursuant to Sections 24(D) and 56(A)(3) of the 1997 National
Internal Revenue Code (NIRC), capital gains tax due on the sale of real
property is a liability for the account of the seller. It has been held that since
capital gains is a tax on passive income, it is the seller, not the buyer, who
generally would shoulder the tax.
As to the documentary stamp tax, petitioner cites Section 196 of the 1997
NIRC as its basis in saying that the documentary stamp tax is the liability of
the seller. The provision cited does not explicitly impute the obligation to
pay the documentary stamp tax on the seller. In fact, according to the BIR,
all the parties to a transaction are primarily liable for the documentary
stamp tax, as provided by Section 2 of BIR Revenue Regulations No. 9-2000.
As a general rule, any of the parties to a transaction shall be liable for the
full amount of the documentary stamp tax due, unless they agree among
themselves on who shall be liable for the same..

In this case, there is no agreement as to the party liable for the

documentary stamp tax due on the sale of the land to be expropriated. But
petitioner’s Citizen’s Charter, which functions as a guide for the procedure
to be taken by the DPWH in acquiring real property through expropriation
under RA 8974. The Citizen’s Charter, issued by petitioner DPWH itself on
December 4, 2013, explicitly provides that the documentary stamp tax,
transfer tax, and registration fee due on the transfer of the title of land in
the name of the Republic shall be shouldered by the implementing agency
of the DPWH, while the capital gains tax shall be paid by the affected
property owner.