Lutz vs Araneta

Facts: Commonwealth Act No. 567, otherwise known as Sugar Adjustment Act was promulgated
in 1940 to stabilize the sugar industry so as to prepare it for the eventuality of the loss of its
preferential position in the United States market and the imposition of export taxes. Plaintiff,
Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate of Antonio Jayme
Ledesma, seeks to recover from the Collector of Internal Revenue the sum of P14,666.40 paid by
the estate as taxes, under Sec.3 of the Act, alleging that such tax is unconstitutional and void,
being levied for the aid and support of the sugar industry exclusively, which in plaintiffs opinion
is not a public purpose for which a tax may be constitutionally levied. The action has been
dismissed by the Court of First Instance.

Issue: Whether or not the tax imposed is constitutional.

Held: Yes. The act is primarily an exercise of the police power. It is shown in the Act that the tax
is levied with a regulatory purpose, to provide means for the rehabilitation and stabilization of
the threatened sugar industry.

It is inherent in the power to tax that a state be free to select the subjects of taxation, and it has
been repeatedly held that inequalities which result from a singling out of one particular class
for taxation or exemption infringe no constitutional limitation.

The funds raised under the Act should be exclusively spent in aid of the sugar industry, since it is
that very enterprise that is being protected. It may be that other industries are also in need of
similar protection; but the legislature is not required by the Constitution to adhere to a policy of
all or none.












CALTEX PHILIPPINES, INC., petitioner, vs. THE HONORABLE COMMISSION ON AUDIT, HONORABLECOMMISSIONER
BARTOLOMEC.FERNANDEZandHONORABLECOMMISSIONERALBERTOP.CRUZ, respondents.
Topic: (1) tax vs. ordinary debt, (2) purpose/objective of taxation: non-revenue / special / regulatory
DOCTRINE:
A taxpayer may not offset taxes due from the claims that he may have against the government.
QUICK FACTS: Caltex Philippines questions the decisions of COA for disallowing the offsetting of its claims for
reimbursement with its due OPSF remittance

FACTS:
The Oil Price Stabilization Fund (OPSF) was created under Sec. 8, PD 1956, as amended by EO 137
for the purpose of minimizing frequent price changes brought about by exchange rate adjustments. It will be used
to reimburse the oil companies for cost increase and possible cost under recovery incurred due to reduction of
domestic prices.COA sent a letter to Caltex directing the latter to remit to the OPSF its collection. Caltex requested
COA for an early release of its reimbursement certificates which the latter denied.COA disallowed recover of
financing charges, inventory losses and sales to marcopper and atlas but allowed the recovery of product sale or
those arising from export sales.
Petitioners Contention: Department of Finance issued Circular No. 4-88 allowing reimbursement. Denial of claim
for reimbursement would be inequitable. NCC (compensation)and Sec. 21, Book V, Title I-B of the Revised
Administrative Code (Retention of Money for Satisfaction of Indebtedness to Government) allows
offsetting.Amounts due do not arise as a result of taxation since PD 1956 did not create asource of taxation, it
instead established a special fund. This lack of publicpurpose behind OPSF exactions distinguishes it from tax.
Respondents Contention:Based on Francia v. IAC, theres no offsetting of taxes against the the claimsthat a
taxpayer may have against the government, as taxes do not arise fromcontracts or depend upon the will of the
taxpayer, but are imposed by law.

ISSUE: WON Caltex is entitled to offsetting
DECISION:NO.COA AFFIRMED
HELD:
It is settled that a taxpayer may not offset taxes due from the claimsthat he may have against
the government. Taxes cannot be subject of compensation because the government and
taxpayer are not mutuallycreditors and debtors of each other and a claim for taxes is not such
adebt, demand, contract or judgment as is allowed to be set-off.
Technically, the oil companies merely act as agents for the Governmentin the latters collection
since the taxes are, in reality, passed unto theend-users the consuming public. Their primary obligation is
to accountfor and remit the taxes collection to the administrator of the OPSF.
There is not merit in Caltexs contention that the OPSF contributions arenot f or a publ i c
pur pos e bec aus e t hey go t o a s pec i al f und of t he government. Taxation is no
longer envisioned as a measure merely toraise revenue to support the existence of the government; taxes
may belevied with a regulatory purpose to provide means for the rehabilitationand stabilization of a
threatened industry which is affected with publicinterest as to be within the police power of the State.
The oil industry is greatly imbued with public interest as it vitally affectsthe general welfare.
PD 1956, as amended by EO No. 137 explicitly provides that the sourceof OPSF is taxation.











Commissioner of Internal Revenue vs. Algue Inc.
GR No. L-28896 | Feb. 17, 1988

Facts:
Algue Inc. is a domestic corp engaged in engineering, construction and other allied activities
On Jan. 14, 1965, the corp received a letter from the CIR regarding its delinquency income
taxes from 1958-1959, amtg to P83,183.85
A letter of protest or reconsideration was filed by Algue Inc on Jan 18
On March 12, a warrant of distraint and levy was presented to Algue Inc. thru its counsel, Atty.
Guevara, who refused to receive it on the ground of the pending protest
Since the protest was not found on the records, a file copy from the corp was produced and
given to BIR Agent Reyes, who deferred service of the warrant
On April 7, Atty. Guevara was informed that the BIR was not taking any action on the protest
and it was only then that he accepted the warrant of distraint and levy earlier sought to be
served
On April 23, Algue filed a petition for review of the decision of the CIR with the Court of Tax
Appeals
CIR contentions:
- the claimed deduction of P75,000.00 was properly disallowed because it was not an ordinary
reasonable or necessary business expense
- payments are fictitious because most of the payees are members of the same family in
control of Algue and that there is not enough substantiation of such payments
CTA: 75K had been legitimately paid by Algue Inc. for actual services rendered in the form of
promotional fees. These were collected by the Payees for their work in the creation of the
Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of the
properties of the Philippine Sugar Estate Development Company.

Issue: W/N the Collector of Internal Revenue correctly disallowed the P75,000.00 deduction
claimed by Algue as legitimate business expenses in its income tax returns

Ruling:
Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance, made in accordance with law.
RA 1125: the appeal may be made within thirty days after receipt of the decision or ruling
challenged
During the intervening period, the warrant was premature and could therefore not be served.
Originally, CIR claimed that the 75K promotional fees to be personal holding company income,
but later on conformed to the decision of CTA
There is no dispute that the payees duly reported their respective shares of the fees in their
income tax returns and paid the corresponding taxes thereon. CTA also found, after examining
the evidence, that no distribution of dividends was involved
CIR suggests a tax dodge, an attempt to evade a legitimate assessment by involving an
imaginary deduction
Algue Inc. was a family corporation where strict business procedures were not applied and
immediate issuance of receipts was not required. at the end of the year, when the books were
to be closed, each payee made an accounting of all of the fees received by him or her, to make
up the total of P75,000.00. This arrangement was understandable in view of the close
relationship among the persons in the family corporation
The amount of the promotional fees was not excessive. The total commission paid by the
Philippine Sugar Estate Development Co. to Algue Inc. was P125K. After deducting the said fees,
Algue still had a balance of P50,000.00 as clear profit from the transaction. The amount of
P75,000.00 was 60% of the total commission. This was a reasonable proportion, considering that
it was the payees who did practically everything, from the formation of the Vegetable Oil
Investment Corporation to the actual purchase by it of the Sugar Estate properties.
Sec. 30 of the Tax Code: allowed deductions in the net income Expenses - All the ordinary
and necessary expenses paid or incurred during the taxable year in carrying on any trade or
business, including a reasonable allowance for salaries or other compensation for personal
services actually rendered xxx
the burden is on the taxpayer to prove the validity of the claimed deduction
In this case, Algue Inc. has proved that the payment of the fees was necessary and reasonable
in the light of the efforts exerted by the payees in inducing investors and prominent
businessmen to venture in an experimental enterprise and involve themselves in a new business
requiring millions of pesos.
Taxes are what we pay for civilization society. Without taxes, the government would be
paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural
reluctance to surrender part of one's hard earned income to the taxing authorities, every person
who is able to must contribute his share in the running of the government. The government for
its part, is expected to respond in the form of tangible and intangible benefits intended to
improve the lives of the people and enhance their moral and material values
Taxation must be exercised reasonably and in accordance with the prescribed procedure. If it
is not, then the taxpayer has a right to complain and the courts will then come to his succor

Algue Inc.s appeal from the decision of the CIR was filed on time with the CTA in accordance
with Rep. Act No. 1125. And we also find that the claimed deduction by Algue Inc. was
permitted under the Internal Revenue Code and should therefore not have been disallowed by
the CIR




CREBA VS ROMULO
FACTS:
CREBA assails the imposition of the minimum corporate income tax (MCIT) as being violative of
the due process clause as it levies income tax even if there is no realized gain. They also
question the creditable withholding tax (CWT) on sales of real properties classified as ordinary
assets stating that (1) they ignore the different treatment of ordinary assets and capital assets;
(2) the use of gross selling price or fair market value as basis for the CWT and the collection of
tax on a per transaction basis (and not on the net income at the end of the year) are
inconsistent with the tax on ordinary real properties; (3) the government collects income tax
even when the net income has not yet been determined; and (4) the CWT is being levied upon
real estate enterprises but not on other enterprises, more particularly those in the
manufacturing sector.

ISSUE:
Are the impositions of the MCIT on domestic corporations and CWT on income from sales of
real properties classified as ordinary assets unconstitutional?

HELD:
NO. MCIT does not tax capital but only taxes income as shown by the fact that the MCIT is
arrived at by deducting the capital spent by a corporation in the sale of its goods, i.e., the cost of
goods and other direct expenses from gross sales. Besides, there are sufficient safeguards that
exist for the MCIT: (1) it is only imposed on the 4th year of operations; (2) the law allows the
carry forward of any excess MCIT paid over the normal income tax; and (3) the Secretary of
Finance can suspend the imposition of MCIT in justifiable instances.

The regulations on CWT did not shift the tax base of a real estate business income tax from net
income to GSP or FMV of the property sold since the taxes withheld are in the nature of advance
tax payments and they are thus just installments on the annual tax which may be due at the end
of the taxable year. As such the tax base for the sale of real property classified as ordinary assets
remains to be the net taxable income and the use of the GSP or FMV is because these are the
only factors reasonably known to the buyer in connection with the performance of the duties as
a withholding agent.
Neither is there violation of equal protection even if the CWT is levied only on the real industry
as the real estate industry is, by itself, a class on its own and can be validly treated different
from other businesses.

Roxas vs. CTA
GR No. L-25043 | April 26, 1968

Facts:
Don Pedro Roxas and Dona Carmen Ayala, both Spanish, transmitted to their grandchildren by
hereditary succession the following properties:
a. Agricultural lands with a total area of 19,000 hectares in Nasugbu, Batangas
- Tenants who have been tilling the lands expressed their desire to purchase from Roxas y Cia,
the parcels which they actually occupied
- The govt, in line with the constitutional mandate to acquire big landed estates and apportion
them among landless tenants-farmers, persuaded the Roxas brothers to part with their
landholdings
- The brothers agreed to sell 13,500 hec to the govt for P2.079Mn, plus 300K survey and
subdivision expenses
- Unfortunately, the govt did not have funds
- A special arrangement was made with the Rehabilitation Finance Corporation to advance to
Roxas y Cia the amount of P1.5Mn as loan
- Under the arrangement, Roxas y Cia. allowed the farmers to buy the lands for the same price
but by installment, and contracted with the RFC to pay its loan from the proceeds of the yearly
amortizations paid by the farmers
- In 1953 and 1955, Roxas y Cia. derived from said installment payments a net gain of
P42,480.83 and P29,500.71. 50% of said net gain was reported for income tax purposes as gain
on the sale of capital asset held for more than one year pursuant to Sec. 34 of the Tax Code

b. Residential house and lot at Wright St., Malate, Manila
- After the marriage of Antonio and Eduardo, Jose lived in the house where he paid rentals of
8K/year to Roxas y Cia

c. Shares of stocks in different corporations

To manage the properties, Antonio Roxas, Eduardo Roxas and Jose Roxas, the children, formed
a partnership called Roxas y Compania
On 1958, CIR demanded from Roxas y Cia the payment of real estate dealer's tax for 1952
amtg to P150.00 plus P10.00 compromise penalty for late payment, and P150.00 tax for dealers
of securities plus P10.00 compromise penalty for late payment.
- Basis: house rentals received from Jose, pursuant to Art. 194 of the Tax Code stating that an
owner of a real estate who derives a yearly rental income therefrom in the amount of P3,000.00
or more is considered a real estate dealer and is liable to pay the corresponding fixed tax
The Commissioner further assessed deficiency income taxes against the brothers for 1953 and
1955, resulting from the inclusion as income of Roxas y Cia of the unreported 50% of the net
profits derived from the sale of the Nasugbu farm lands to the tenants, and the disallowance of
deductions from gross income of various business expenses and contributions claimed by Roxas
y Cia and the Roxas brothers
The brothers protested the assessment but was denied, thus appealing to the CTA
CTA decision: sustained the assessment except the demand for the payment of the fixed tax on
dealer of securities and the disallowance of the deductions for contributions to the Philippine
Air Force Chapel and Hijas de Jesus' Retiro de Manresa

Issue: Should Roxas y Cia be considered a real estate dealer because it engaged in the business
of selling real estate

Ruling: NO, being an isolated transaction
Real estate dealer: any person engaged in the business of buying, selling, exchanging, leasing
or renting property on his own account as principal and holding himself out as a full or part-time
dealer in real estate or as an owner of rental property or properties rented or offered to rent for
an aggregate amount of three thousand pesos or more a year:
Section 194 of the Tax Code, in considering as real estate dealers owners of real estate
receiving rentals of at least P3,000.00 a year, does not provide any qualification as to the
persons paying the rentals
The fact that there were hundreds of vendees and them being paid for their respective
holdings in installment for a period of ten years, it would nevertheless not make the vendor
Roxas y Cia. a real estate dealer during the 10-year amortization period
the sale of the Nasugbu farm lands to the very farmers who tilled them for generations was
not only in consonance with, but more in obedience to the request and pursuant to the policy of
our Government to allocate lands to the landless
It was the duty of the Government to pay the agreed compensation after it had persuaded
Roxas y Cia. to sell its haciendas, and to subsequently subdivide them among the farmers at very
reasonable terms and prices. But due to the lack of funds, Roxas y Cia. shouldered the
Government's burden, went out of its way and sold lands directly to the farmers in the same
way and under the same terms as would have been the case had the Government done it itself
The power of taxation is sometimes called also the power to destroy. Therefore it should be
exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be
exercised fairly, equally and uniformly
Therefore, Roxas y Cia. cannot be considered a real estate dealer for the sale in question.
Hence, pursuant to Section 34 of the Tax Code the lands sold to the farmers are capital assets,
and the gain derived from the sale thereof is capital gain, taxable only to the extent of 50%

As to the deductions
a. P40 tickets to a banquet given in honor of Sergio Osmena and P28 San Miguel beer given as
gifts to various persons representation expenses
Representation expenses: deductible from gross income as expenditures incurred in carrying
on a trade or business
In this case, the evidence does not show such link between the expenses and the business of
Roxas y Cia
b. Contributions to the Pasay police and fire department and other police departments as
Christmas funds
Contributions to the Christmas funds are not deductible for the reason that the Christmas
funds were not spent for public purposes but as Christmas gifts to the families of the members
of said entities
Under Section 39(h), a contribution to a government entity is deductible when used exclusively
for public purposes
As to the contribution to the Manila Police trust fund, such is an allowable deduction for said
trust fund belongs to the Manila Police, a government entity, intended to be used exclusively for
its public functions.
c. Contributions to the Philippines Herald's fund for Manila's neediest families
The contributions were not made to the Philippines Herald but to a group of civic spirited
citizens organized by the Philippines Herald solely for charitable purposes
There is no question that the members of this group of citizens do not receive profits, for all
the funds they raised were for Manila's neediest families. Such a group of citizens may be
classified as an association organized exclusively for charitable purposes mentioned in Section
30(h) of the Tax Code
d. Contribution to Our Lady of Fatima chapel at the FEU
University gives dividends to its stockholders
Located within the premises of the university, the chapel in question has not been shown to
belong to the Catholic Church or any religious organization
The contributions belongs to the Far Eastern University, contributions to which are not
deductible under Section 30(h) of the Tax Code for the reason that the net income of said
university injures to the benefit of its stockholders
No deficiency income tax is due for 1953 from Antonio Roxas, Eduardo Roxas and Jose Roxas.
For 1955 they are liable to pay deficiency income tax in the sum of P109.00, P91.00 and P49.00,
respectively









Progressive Devt Corp vs QC
Facts: The City Council of QC passed an ordinance known as the Market Code of QC, which
imposed a 5% supervision fee on gross receipts on rentals or lease of privately-owned market
spaces in QC.

In case of failure of the owners of the market spaces to pay the tax for three consecutive
months, the City shall revoke the permit of the privately-owned market to operate.

Progressive Development Corp, owner and operator of Farmers Market, filed a petition for
prohibition against QC on the ground that the tax imposed by the Market Code was in reality a
tax on income, which the municipal corporation was prohibited by law to impose.

Issue: Whether or not the supervision fee is an income tax or a license fee.

Held: It is a license fee. A LICENSE FEE is imposed in the exercise of the police power primarily
for purposes of regulation, while TAX is imposed under the taxing power primarily for purposes
of raising revenues.

If the generating of revenue is the primary purpose and regulation is merely incidental, the
imposition is a tax; but if regulation is the primary purpose, the fact that incidentally, revenue is
also obtained does not make the imposition a tax.

To be considered a license fee, the imposition must relate to an occupation or activity that so
engages the public interest in health, morals, safety, and development as to require regulation
for the protection and promotion of such public interest; the imposition must also bear a
reasonable relation to the probable expenses of regulation, taking into account not only the
costs of direct regulation but also its incidental consequences.

In this case, the Farmers Market is a privately-owned market established for the rendition of
service to the general public. It warrants close supervision and control by the City for the
protection of the health of the public by insuring the maintenance of sanitary conditions,
prevention of fraud upon the buying public, etc.

Since the purpose of the ordinance is primarily regulation and not revenue generation, the tax is
a license fee. The use of the gross amount of stall rentals as basis for determining the collectible
amount of license tax does not, by itself, convert the license tax into a prohibited tax on income.

Such basis actually has a reasonable relationship to the probable costs of regulation and
supervision of Progressives kind of business, since ordinarily, the higher the amount of rentals,
the higher the volume of items sold.

The higher the volume of goods sold, the greater the extent and frequency of supervision and
inspection may be required in the interest of the buying public.


PHILIPPINE AIRLINES, INC. v. EDU
G.R. No. L- 41383, August 15, 1988

FACTS:
The Philippine Airlines (PAL) is a corporation engaged in the air transportation business
under a legislative franchise, Act No. 42739. Under its franchise, PAL is exempt from the
payment of taxes.
Sometime in 1971, however, Land Transportation Commissioner Romeo F. Elevate
(Elevate) issued a regulation pursuant to Section 8, Republic Act 4136, otherwise known as the
Land and Transportation and Traffic Code, requiring all tax exempt entities, among them PAL to
pay motor vehicle registration fees.
Despite PAL's protestations, Elevate refused to register PAL's motor vehicles unless the
amounts imposed under Republic Act 4136 were paid. PAL thus paid, under protest, registration
fees of its motor vehicles. After paying under protest, PAL through counsel, wrote a letter dated
May 19,1971, to Land Transportation Commissioner Romeo Edu (Edu) demanding a refund of
the amounts paid. Edu denied the request for refund. Hence, PAL filed a complaint against Edu
and National Treasurer Ubaldo Carbonell (Carbonell).

The trial court dismissed PAL's complaint. PAL appealed to the Court of Appeals which in
turn certified the case to the Supreme Court.

ISSUE:
Whether or not motor vehicle registration fees are considered as taxes.

RULING:
Yes. If the purpose is primarily revenue, or if revenue is, at least, one of the real and
substantial purposes, then the exaction is properly called a tax. Such is the case of motor vehicle
registration fees. The motor vehicle registration fees are actually taxes intended for additional
revenues of the government even if one fifth or less of the amount collected is set aside for the
operating expenses of the agency administering the program.








CIR vs Central Luzon
FACTS:This is a petition for review under Rule 45 of Rules of Court seeking the nullificationof CA decision
granting respondents claim for tax equal to the amount of the 20% that itextended to senior
citizens on the latters purchases pursuant to Senior Citizens Act.Respondent deducted the total
amount of Php219,778 from its gross income for thetaxable year 1995 whereby respondent did not pay
tax for that year reporting a net loss of Php20,963 in its corporate income tax. In 1996, claiming
that the Php219,778 should beapplied as a tax credit, respondent claimed for refund in the
amount of Php150, 193.ISSUE:Whether or not the 20% discount granted by the respondent to
qualified seniorcitizens may be claimed as tax credit or as deduction from gross sales?RULING:Tax credit is
explicitly provided for in Sec4 of RA 7432. The discount given toSenior citizens is a tax credit, not a
deduction from the gross sales of the establishmentconcerned. The tax credit that is contemplated under
this Act is a form of justcompensation, not a remedy for taxes that were erroneously or illegally assessed
andcollected. In the same vein, prior payment of any tax liability is a pre-condition before
ataxable entity can benefit from tax credit. The credit may be availed of upon payment, if any.
Where there is no tax liability or where a private establishment reports a net loss for the period, the tax credit
can be availed of and carried over to the next taxable year.