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GENERAL PRINCIPLES OF TAXATION JLM

INHERENT POWERS OF THE STATE


Three inherent powers of a state:
1. Police Power – it refers to the inherent power of a sovereign state to enact laws to promote
public health, public safety, public morals and the common good.

2. Power of Eminent Domain – it refers to the inherent power of a sovereign state to take
private property for public use upon payment of a just compensation.

3. Power of Taxation – inherent power of a sovereign state acting through its legislature to
impose a proportionate burden upon persons, property, rights or transaction to raise
revenue to support government expenditure and as a tool for general and economic
welfare (PUBLIC PURPOSE)

SIMILARITIES:
1. They are indispensable to government existence.
2. They can exist independent of the constitution.
3. They are means by which the state interferes with private rights and properties.
4. They are generally exercised by the legislature.
5. They contemplate an equivalent compensation or benefit.

Point of Distinction Police Power Eminent Domain Taxation


Purpose To regulate the To purchase/buy To raise Revenue and
activities for Property is taken for support of the
welfare/Property is public use government
taken for public Constitution and
use Public purpose and
Limitation Public purpose just compensation Inherent Limitations
Exercising Authority Government Government or private Government
entities
Amount of Imposition Sufficient to cover No imposition, the Unlimited
the costs of owner is paid the fair
regulation market value of his
property
Compensation Compensation is Compensation is the Compensation is the
the intangible, full and fair equivalent protection and public
altruistic feeling of the property taken. improvements
that the individual – Just compensation instituted by the
has contributed to government for the
the public good. taxes paid
Object/Persons liberty and property rights Property
affected property Owner of the property Community or class of
Community or individuals
class of individuals

Non-Impairment Superior to the Superior and may Inferior to the “Non-


Clause/Relationship “Non-Impairment override the “Non- Impairment Clause” of
with the Constitution Clause” of the Impairment Clause” of the Constitution
Constitution the Constitution

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Theory of Taxation
- government’s necessity for funding
The Lifeblood Doctrine
– Taxes are indispensable to the continued subsistence of the government. Without
taxes, the government would be paralyzed for lack of motive power to activate or
operate it. (CIR vs. Algue)
– Implication of the Lifeblood Doctrine in taxation:
– Tax is imposed even in the absence of a Constitutional grant
– Claims for tax exemption are construed against taxpayers.
– The government reserves the right to choose the objects of taxation.
– The courts are not allowed to interfere with the collection of taxes.
– In income taxation:
– Income received in advance is taxable upon receipt.
– Deduction for capital expenditures and prepayments is not allowed as it
effectively defers the collection of income tax.
– A lower amount of deduction is preferred when a claimable expense is
subject to limit.
– A higher tax base is preferred when the tax object has multiple tax bases.

Basis of Taxation
– The mutuality of support between the people and the government
– Receipt of benefits is conclusively presumed
Theories of Cost Allocation
1. Benefit Received Theory
 Presupposes that the more benefit ones receive from the government, the more
taxes he should pay.
2. Ability to pay Theory
 Presupposes that taxation should also consider the taxpayers’ ability to pay.
 Vertical Equity – proposes that the extent of one's ability to pay is directly
proportional to the level of his tax base
 GROSS Concept
 Horizontal Equity - requires consideration of the particular circumstance
of the taxpayer.
 NET Concept
PURPOSES OF TAXATION
1. Primary purpose is to raise revenue
2. Secondary purposes:
a) Regulation
b) Promotion of General Welfare
c) Reduction of Social Inequality
d) Encourages Economic Growth

NATURE AND CHARACTERISTICS


KEY: LeNS
1. Legislative in character
2. Inherent power
3. Subject to inherent and constitutional limitations.

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INHERENT LIMITATIONS (KEY: D – PINES)


1. Double Taxation
2. Public purpose
3. International comity or treaty
4. Non-delegability of the Taxing power
5. Exemption of the government
6. Situs of taxation or territoriality
KINDS OF DOUBLE TAXATION:
1) Direct Duplicate Taxation – Prohibited.
It means:
a. taxing twice
b. same object/subject
c. same period
d. same purpose
e. same kind of tax
f. same taxing authority
2) Indirect Duplicate Taxation – not legally objectionable.

CONSTITUTIONAL LIMITATIONS
1. Observance of due process of law
2. Equal protection of law
3. Uniformity in taxation
4. Progressive scheme of taxation
5. Non-imprisonment for non-payment of poll tax
6. Non-impairment of the obligations and contracts
7. Free-worship clause
8. Exemption of charitable institutions, churches, parsonages, or convents appurtenant
thereto, mosques, and non-profit cemeteries, and all lands, buildings and improvements
actually, directly and exclusively used for religious, charitable or educational purposes.
9. Exemption from taxes of the revenues and assets of non-profit, non-stock educational
institutions including grants, endowments, donations or contributions for educational
purposes.
10. Non-appropriation of public funds or property for the benefit of any church, sect or
system of religion, etc.
11. No money shall be paid out of the Treasury except in pursuance of an appropriation
made by law.
12. Concurrence of a majority of ALL members of Congress for the passage of a law
granting tax exemption
13. Non-diversification of tax collections
14. The President shall have the power to veto any particular item (s) in an appropriation,
revenue or tariff, but the veto shall not affect the item (s) to which no objection has been
made.
15. Non-impairment of the jurisdiction of the Supreme Court to review tax cases
16. Appropriations, revenue or tariff bills shall originate exclusively in the House of
Representatives, but the Senate may propose or concur with amendments.
17. Each local government unit shall exercise the power to create its own sources of
revenue and shall have a just share in the national taxes

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ASPECTS or STAGES or PROCESS OF TAXATION


1. Levying/imposition of tax
Matters of legislative discretion in the exercise of Taxation
1. Determining the subjects/objects to be taxed
2. Determining the purpose of the tax
3. Setting the amount/rate of the tax
4. Kind of tax to be imposed
5. Apportionment of the tax between the national and local government
6. Situs of Taxation
7. manner and means of collection of the tax
2. Assessment/collection of tax
3. Payment

SITUS OF TAXATION
Situs is a Latin term which means “situation”, “location”, or “place.” In short, its literal
meaning refers to a place taxation.

FACTORS IN DETERMINING THE SITUS


1. Subject Matter/Object – what is being taxed
2. Nature of tax – which tax to impose
3. Citizenship of the taxpayer
4. Residence of the taxpayer

Object/Subject of situs of taxation:


1. Persons – residence of the taxpayer
2. Real Property or Tangible personal property – location of the property
3. Intangible personal property - DOMICILE of the owner
4. Income - Citizenship or residence of taxpayer or place where income is earned
5. Business, Occupation, and Transaction – place of operation of business,
6. Gratuitous transfer of property - Citizenship or residence of taxpayer or place

Other Fundamental DOCTRINES IN TAXATION


1. Marshall Doctrine – “the power to tax involves the power to destroy”. Taxation
power can be used as an instrument of police power. It can be used to discourage or
prohibit undesirable activities or occupation.

2. Holme’s Doctrine – “taxation power is not the power to destroy while the court
sits.” It may be used to build or encourage beneficial activities or industries by the
grant of tax incentives.

3. Prospectivity of tax laws – Tax laws are generally prospective in operation.

4. Non- compensation or set – off – Taxes are not subject to automatic set – off or
compensation.
Exceptions:

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a. where the taxpayer’s claim has already become due and demandable such as
when the government already recognized the same and an appropriation for
refund was made
b. Cases of obvious overpayment of taxes
c. Local taxes
5. Non – assignment of taxes – tax obligations cannot be assigned or transferred to
another entity by contract.

6. Imprescriptibility in taxation – as a rule, taxes do not prescribe unless the law itself
provides for prescription
- under NIRC, tax prescribes if not collected within 5 years from the date of its
assessment. In the absence of an assessment, tax prescribes if not collected by judicial
action within 3 years from the date the return is required to be filed. However, taxes due
from taxpayers who did not file a return or those who filed fraudulent returns do not
prescribe.
7. Doctrine of Estoppel – any misrepresentation made by one party toward another who
relied therein in good faith will be held true and binding against that person who made
the misrepresentation.
- The GOVERNMENT is not subject to estoppel

8. Judicial Non-interference – generally, courts are not allowed to issue injunction against
the government’s pursuit to collect tax exemption. This is anchored on the Lifeblood
Doctrine.

9. Strict Construction of Tax Laws - “Taxation is the rule, exemption is the exception.”
in case of VAGUE laws –
Vague tax laws are construed against the government and in favor of the taxpayers.
in case of VAGUE exemption laws –
Vague exemption laws are construed against the taxpayer and in favor of the
government.

ESCAPES FROM TAXATION


1. Tax EVASION – taxpayer resorts to unlawful means to lessen or to get away with his tax
liability.
- known as “TAX DODGING”
2. Tax CAPITALIZATION – same with tax transformation except that mark-up is reduced
in order that the tax paid can be added to the selling price.
3. Tax SHIFTING – process of transferring tax liabilities from one taxpayer to another
without violating any provisions of the tax laws.
e.g. Forward shifting – E-Vat
Backward shifting –
Onward shifting – transfer tax burden twice or more.
4. Tax EXEMPTION – privilege of not being levied with a particular tax wherein other
individuals are obliged to pay.
“Tax Holiday”
e.g. PEZA

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5. Tax AVOIDANCE – taxpayer minimizes his tax liability by taking advantage of legally
available tax planning opportunities
- known as “TAX PLANNING”
6. Tax TRANSFORMATION – escape from tax burden wherein the producer of goods
absorbs the tax.
- Improving the process of production to reduce cost of sales.

TAX AMNESTY VS. TAX CONDONATION

Tax Amnesty – a general pardon granted by the government for erring taxpayers to give them
chance to reform and to enable them a fresh start to be part of a society with a clean slate. It is
an absolute forgiveness or waiver by the government on its right to collect and is retrospective
in application
Tax Condonation – is forgiveness of the tax obligation of a certain taxpayer under certain
justifiable grounds. Also known as “tax remission”

TAX LAWS, TAXES, AND TAX ADMINISTRATION


Taxation Laws
– Taxation laws refers to any law that arises from the exercise of the taxation power
Types of Taxation Laws
1. Tax Laws
2. Tax Exemption Laws
1. Tax Laws – laws that provide for the assessment and collection of taxes
1. The National Internal Revenue Code (NIRC)
2. The Tariff and Customs Code
3. The Local Tax Code
4. The Real Property Tax Code
2. Tax exemption laws – laws that grant immunity from taxation
1. The Minimum Wage Law (MWEs’)
2. The Omnibus Investment Code of 1987 (E.O. 226)
3. Barangay Micro Business Enterprise Law (BMBE’s)
4. Cooperative Development Act (CDA)

SOURCES of Tax Laws


1. 1987 Constitution
2. Tax Statutes
3. Executive Orders
4. Local Tax Ordinances
5. Tax Treaties
6. Judicial Decisions
7. Rules and Regulations (BIR, BOC, DOF)
8. Administrative Interpretations and

Types of Administrative Issuances


1. Revenue Regulations
issuances signed by the Secretary of Finance upon recommendation of the
Commissioner of Internal Revenue (CIR) that specify prescribe, or define rules

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and regulations for the effective enforcement of the provisions of the National
Internal Revenue Code (NIRC) and related statutes.
Revenue regulations are formal pronouncements intended to clarify or explain
the tax law and carry into effect its general provisions by providing details of
administration and procedure.
Revenue regulation has the force and effect of a law, but is not intended to
expand or limit the application of the law; otherwise, it is void.

2. Revenue Memorandum Orders


issuances that provide directives or instructions; prescribe guidelines; and outline
processes, operations, activities, workflows, methods, and procedures necessary
in the implementation of stated policies, goals, objectives, plans, and programs of
the Bureau in all areas of operations except auditing.

3. Revenue Memorandum Rulings


rulings, opinions and interpretations of the CIR with respect to the provisions of
the Tax Code and other tax laws as applied to a specific set of facts, with or
without established precedents, and which the CIR may issue from time to time
for the purpose of providing taxpayers guidance on the tax consequences in
specific situations. BIR Rulings, therefore, cannot contravene duly issued RMRs;
otherwise, the Rulings are null and void ab initio

4. Revenue Memorandum Circulars


issuances that publish pertinent and applicable portions as well as amplifications
of laws, rules, regulations, and precedents issued by the BIR and other
agencies/offices.

5. Revenue Bulletin
refer to periodic issuances, notices, and official announcements of the
Commissioner of Internal Revenue that consolidate the Bureau of Internal
Revenue's position on certain specific issues of law or administration in relation
to the provisions of the Tax Code, relevant tax laws, and other issuances for the
guidance of the public.

6. BIR Rulings
BIR Rulings are official positions of the Bureau to queries raised by taxpayers
and other stakeholders relative to clarification and interpretation of tax laws.
Rulings are merely advisory or a sort of information service to the taxpayer such
that none of them is binding except to the addressee and may be reversed by the
BIR at anytime.
Types of rulings
1. Value Added Tax (VAT) rulings
2. International Tax Affairs Division (ITAD) rulings
3. BIR rulings
4. Delegated Authority (DA) rulings

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Tax Laws vs. PFRS/ PAS


In case of difference between the provisions of the Tax Code and the rules and regulations
implementing Tax Code and the rules and regulations implementing PFRS/PAS, TAX CODE
shall prevail.

NATURE OF PHILIPPINE TAX LAWS


- Civil and NOT political/penal in nature

Nature and Characteristics of Tax Laws


a. Tax Laws are prospective, in general
b. Revenue laws are not political in nature
c. Legislative intent
d. Tax Laws are special laws, and prevail over general laws
e. Tax Laws are not penal in character

Philippine TAX LAWS and Taxes


NIRC of 1997 (PD 1158, as amended)
1. Income taxes (individual and corporate)
2. Estate and Donor’s Tax
3. VAT
4. OPT
5. Excise Tax
6. Documentary Stamp Tax

Taxes defined:
Enforced proportional contribution from persons and property levied by the lawmaking body of
the State by virtue of its sovereignty for the support of the government, all public needs and
generally payable in money.

Essential Characteristics of Tax


1. It is an enforced contribution
2. It is levied by the law-making body of the state
3. It is generally payable in money
4. It is proportionate in character
5. It is imposed for the purpose of raising revenue
6. It is levied for public purpose

Classification of Taxes
As to subject matter or object
a. Personal, Poll or Capitation - a tax on a persons who are residents of a particular
territory.
“No person shall be imprison of non-payment of POLL, PERSONAL or CAPITATION
tax”
“CEDULA”
b. Property – tax imposed on property whether REAL or PERSONAL in proportion to its
value or in accordance with some other reasonable apportionment
e.g. Real Estate Tax/Property Tax

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c. Excise – tax imposed on PERFORMANCE of an act, the enjoyment of privilege or the


engaging in an occupation.
e.g. Estate tax, Donor’s tax, Income tax, VAT

As to WHO BEARS THE BURDEN/Incidence


a. Direct – tax demanded from the persons who are intended or bound by law to pay tax.
e.g. Community tax, income tax, Donor’s Tax, Estate tax

b. Indirect – tax which the taxpayer can shift to another.


e.g. Customs Duties, VAT

As to DETERMINATION of AMOUNT
c. Specific – tax imposed based on the PHYSICAL unit of measurement as by head,
numbers, weight or length or volume.
e. g. cigars, wines
fireworks
d. Ad Valorem – tax of a FIXED PROPORTION of the value of property; needs an
independent appraiser to determine the value
e.g. real estate tax, customs duties, excise taxes on cigarettes and gasoline

As to PURPOSE
a. General, Fiscal or revenue – tax with no particular purpose or object for which the
revenue is raised, but is simply raised for whatever need may arise.
e.g. Income tax, VAT

b. Special or Regulatory – tax imposed for a special purpose regardless of whether


revenue is raised or not, and is intended to achieve some social or economic end.
e.g. Protective Tariffs or customs duties
c. Sumptuary – a tax levied to achieve some social or economic objectives

As to IMPOSING AUTHORITY OR SCOPE


a. National – tax imposed by national government.
e.g. Internal Revenue Taxes, tariff and Duties
b. Municipal or Local – tax imposed by municipal governments for specific needs.
e. g. Real Estate Taxes, Municipal License

As to GRADUATION OR RATE
a. Proportional – tax based on a fixed percentage of the amount of property income or
another basis to be taxed.
e.g. Percentage taxes, Real Estate Taxes
b. Progressive or Graduated – tax rate increases as the tax base increases.
e.g. Income Taxes, Estate Tax, Donor’s Tax
c. Regressive – tax rate decreases as the tax base increases.

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DISTINCTION OF TAXES WITH SIMILAR ITEMS

TAX VS. TOLL


Tax Toll
Demand of sovereignty Demand of ownership
One’s support for the government Compensation for the use of somebody else’s
property
Imposed only by the government May be imposed by the government or by private
individuals
Based on government needs Determined by the cost of the property or
improvements thereon

TAX VS. PENALTY


Tax Penalty
to regulate conduct through
Purpose to raise revenue punishment and suppression of
injurious act
Exercising authority the government the government or by private
individuals
Source Law Law or contract
Mode of settlement in money in money or in kind

TAX VS. SPECIAL ASSESSMENT


Tax Special Assessment
Subject of the business, interests, transactions, Land
imposition rights, persons, properties or
privileges
Effect on the person May be made a personal liability Cannot be made the personal
owning the subject of the person assessed liability of the person assessed,
because it is the land that
answers for the liability
Basis of Imposition Necessity with no hope of direct Entirely on benefits received
or immediate benefit to the
taxpayer
Coverage of application General application Exceptional in application

TAX VS. LICENSE


Point of distinction Tax License
Purpose For revenue For regulation
Amount No limit Limited to cost of regulation
Subject of Imposition Person, properties, business Required for the
rights, interests, privilege, acts commencement of a
and transactions business profession
Effect of non-compliance Does not necessarily make the Makes the business illegal
act, business or profession
illegal
Revocability Has a nature of permanence Always revocable

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Scope The power to tax includes the Power to license does not
power to license include the power to tax
When imposed Post-activity Pre-activity
Basis of imposition Current data Preceding year or quarter
date. If new business, based
on capitalization
Sources of Power Taxing power of the Police power of the
government government

TAX VS. DEBT


Tax Debt
Basis Law Contract
Effect of non- May involved imprisonment, No imprisonment
compliance except for poll tax
Assignable? No Yes
Mode of settlement Generally money Cash or In kind
Set-off? Generally not subject to set-off Subject to set-off
Interest Does not earn interest except Draws interest when stipulated
when delinquent or when in default

TAX VS. REVENUE


Tax Revenue
Refers to the amount imposed Refers to the amount collected
Only one of the sources of government The product of taxation. It refers to all the
revenues funds derived by the government whether from
tax or from other sources. Revenue is broader
than Tax

TAX VS. TARIFF


Tariff refers to a book of rates containing names of merchandises with corresponding duties to be
paid for the same. Tariff refers to the duties payable on goods imported or exported. It is a system
or principle of imposing duties on the importation or exportation of goods.

TAX SYSTEM
• Global - All items of gross income is subject to a single progressive rate
• Schedular - Different types of income are subject to different sets of graduated or flat rates
Types of Tax System according to Imposition
1. Progressive employed in the taxation of income of individuals, and transfers of properties
by individuals
2. Proportional - employed in taxation of corporate income and business
3. Regressive - not employed in the Philippines

Types of Tax System according to Impact


1. A progressive tax system is one that emphasizes direct taxes. A direct tax a cannot be
shifted. Hence, it encourages economic efficiency as it leaves no other resort to taxpayers
than to be efficient. This type of tax system impacts more upon the rich.

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2. A regressive tax system is one that emphasizes indirect taxes. Indirect tax are shifted by
businesses to consumers; hence, the impact of taxation rests upon the bottom end of the
society. In effect, a regressive tax system is anti-poor.
1. It is widely believed that despite the Constitutional guarantee of a progressive
taxation, the Philippines has a dominantly regressive tax system due to the
prevalence of business taxes.

Tax Collection System


1. Withholding system
Withholding system - Under this collection system, the payor of the income
withholds or deducts the tax on the income before releasing the same to the payee
and remits the same to the government.
The following are the withholding taxes collected under this system:
1. Withholding tax on compensation a tax withheld by the employer from payments
of compensation income to employees
2. Expanded withholding tax - a withholding tax prescribed on certain income
payments and is creditable against the income tax due of the payee for the taxable
quarter or year in which the particular income was earned.
3. Final withholding tax a kind of withholding tax which is prescribed on certain
income payments and is not creditable against any income tax due of the payee
for the taxable year
4. Withholding tax on government payments -the tax withheld by the national
government agencies and instrumentalities so including government-owned and
controlled corporations on their payments to taxpayers, suppliers, or payees.

2. Voluntary Compliance System


1. Under this collection system, the taxpayer himself determines his income, reports
the same through income tax returns and pays the tax to the government. This
system is also referred to as the "Self-assessment method." A portion of the tax
due payable herein may have been withheld under the withholding system, such
as:
1. Withholding tax on compensation by compensation earners
2. Expanded withholding tax by taxpayer engaged in business or exercise of
profession
2. The taxes withheld are treated as tax credit (deduction) against the tax due of the
taxpayer in the income tax return. The taxpayer shall pay any balance still due after
such credit or claim refund or tax credit for excess tax withheld.

3. Assessment or enforcement System


1. Assessment or enforcement system - Under this collection system, the
government identifies non-compliant taxpayers, assesses their tax dues and
penalties, and enforces collections by coercive means such as summary
proceeding or judicial proceedings when necessary.

BASIC PRINCIPLES OF A SOUND TAX SYSTEM


• Fiscal Adequacy
Revenue = Expenditures

• Administrative Feasibility
Convenient, just and effective tax laws

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• Theoretical Justice
Progressive tax system

Tax Administration
It is a system involving assessment, collection and enforcement of taxes, including the execution
of judgement in all taxes cases decided in favor of the BIR by the courts.

Chief Officials of the Bureau of Internal Revenue


1. 1 Commissioner
2. 4 Deputy Commissioners, each to be designated to the following:
1. Operations group
2. Legal Enforcement group
3. Information Systems Group
4. Resource Management Group

Powers and duties of the BIR


1. Assessment and collection of all national internal revenues taxes, fees and charges
2. Enforcement of all forfeitures, penalties and fines connected therewith
3. Execution of judgement in all cases decided in its favor by CTA and ordinary courts
4. Give effects to and administer the supervisory and police power conferred to it by the NIRC
or other laws.

Powers and Duties of the Commissioner of Internal Revenue (CIR)


1. To interpret tax laws and to decide tax cases
2. To obtain information, and to summon, examine, and take testimony of persons
3. To make assessments and prescribe additional requirements for tax administration and
enforcement
4. Power to Compromise Taxes
 Reasonable doubt as to validity of claim against taxpayer
 Financial incapacity of taxpayer
5. Power to Abate or Cancel Tax Liabilities
 Excessive assessment
 Cost exceeds benefit
6. Power to Make Assessments
1. To examine returns and determine tax due
2. To conduct inventory-taking, surveillance and to prescribe presumptive gross sales
and receipts
3. To terminate taxable period
4. To prescribe real property values
5. To inquire into bank deposit accounts
 For determination of gross estate
 Compromise by reason of financial incapacity
6. To accredit and register tax agents
7. To prescribe additional procedural or documentary requirements

Non-delegable powers of the Commissioner

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1. The power to recommend the promulgation of rules and regulations by the Secretary of
Finance
2. The power to issue rulings of first impression or to reverse, revoke or modify any existing
ruling of the Bureau
3. The power to compromise or abate any tax liability
4. The power to assign or reassign internal revenue officers to establishments where articles
subject to excise tax are produced or kept

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