Professional Documents
Culture Documents
TAXATION
By
These Notes in the form of review questions and textual materials were
specially prepared by the author for the exclusive use of Bar Candidates who
attended his lectures in Taxation. They are to be used as supplements to his Bar
Reviewer in Taxation, Vols, I and II.
It is suggested that the reviewee should cover the suggested answers while
reading the questions. This should force him to recall the applicable law and
jurisprudence. If there is time, the answers should be written on a grade school
notebook using the sign pen to be used during the actual exams. Each question
should be answered within a span of nine (9) minutes only. Check your answers
referring to the SUGGESTED ANSWERS.
IMPORTANT: The questions asked in the Bar may not be worded in the same
manner as the questions shown in these notes, therefore the reviewee is warned
that it should be the concepts shown in the questions and suggestions that he
should master and not the questions and answers per se. Be specially careful
where the Bar questions are variations of the questions included because the
answers may be different. It is suggested that particular attention be given to
questions and areas which are marked ***
WARNING:
These materials are copyrighted and are only authorized for the use of bar
candidates who have attended the Tax Review lectures of Prof. Domondon and
others he has personally authorized. These include those who have attended the
lectures conducted by Primus Management Unlimited Services, Inc., held at the
Asian Social Institute, Inc., Lex Bar Reviews and Seminars, Inc., University of the
Philippines, University of Santo Tomas, Ateneo de Manila University, San
Sebastian College-Recolletos and Far Eastern University. Students of other
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schools and reviewees of other review centers are not authorized to use these
notes. These materials are copyrighted. UNAUTHORIZED USERS SHALL BE
SUBJECT TO THE LAW OF KARMA SUCH THAT THEY WILL NEVER
PASS THE BAR.
*** 1. When may the power to tax include the power to destroy? When is exercise
of the power to tax not destructive of taxpayer’s property?
SUGGESTED ANSWER:
The power to tax includes the power to destroy, where the tax is a valid tax. This
is so because a taxpayer could not seek the nullification of the valid tax solely upon the
premise that the tax will impoverish him.
The exercise of the power to tax is not destructive of taxpayer’s property where it
is an invalid tax, which violates the inherent or constitutional limitations. This is so
because there is a sympathetic court that shall come to the succor of the taxpayer and
declare such tax as invalid.
6. Republic Act No. 7227 created the Subic Special Economic Zone (SSEZ),
and provides that the SSEZ shall be managed as a separate customs territory with
such incentives as tax and duty-free importations of raw materials, capital and
equipment. It further provides that “no taxes, local and national, shall be imposed
within the SSEZ”, but in lieu thereof, 3% of the gross income earned by businesses
therein shall be remitted to the National Government with 1% each to the local
government units affected by the declaration of the zone in proportion to their
population area and other factors. In addition, a development fund of 1% of the
gross income earned by all businesses within the SSEZ shall be utilized for the
development of municipalities outside Olongapo City and the Municipality of Subic
and other municipalities contiguous to the base areas.
On June 10, 1993, President Ramos issued Executive Order No. 97 clarifying
that tax and import duty-free importations shall apply only to raw materials, capital
goods and equipment brought in by business enterprises in the SSEZ. On June 19,
1993, President Ramos issued Executive Order No, 97-A specifying that the secured
areas that shall be completely tax and duty-free in the SSEZFPZ consists of the
“presently fenced-in former Subic Naval Base.”
Executive No. 97-A is challenged for being violative of the equal protection of
the law clause because of its bias in favor of big investors. Is there merit in the
challenge ? Explain briefly.
SUGGESTED ANSWER: No. Equal protection of the law clause is subject to
reasonable classification. If the groupings are characterized by substantial distinctions
that make real differences, one class may be treated and regulated differently from another.
The classification must also be germane to the purpose of the law and must apply to all
those belonging to the same class.
*** Classification, to be valid, must (1) rest on substantial distinctions, (2) be germane
to the purpose of the law, (3) not be limited to existing conditions only, and (4) apply
equally to all members of the same class.
In issuing E.O. No. 97-A delimiting incentives within the confines of the former
Subic military base, the President reasonably made a classification that is germane to the
purpose of Republic Act No. 7227. The purpose of Republic Act No. 7227 is to
accelerate the conversion of military reservations into productive uses. It was reasonable
for the President to have delimited the application of some incentives to the confines of
the former Subic military base. The classification is therefore germane to the purposes of
the law.
There are substantial differences between big investors being enticed to the
“secured area” and the business operators outside that are in accord with the equal
protection clause that does not require territorial uniformity of laws. Of course the
outsiders, possessing the requisite investment capital can always avail of the same benefits
by channeling their resources or business operations into the fenced-off free port zone.
The classification set forth by E.O. No. 97-A does not merely apply to existing
conditions. As laid down in R.A. No. 7227, the objective is to establish a “self-sustaining,
industrial, commercial, financial and investment center” in the area. There will, therefore,
be a long-term difference between such investment center and the areas outside it.
The classification applies equally to al the resident individuals and businesses
within the ‘secured area.” The residents, being in like circumstances o contributing
directly to the achievement of the end purpose of the law, are not categorized further.
Instead, they are similarly treated, both in privileges granted and obligations required.
(Tiu, et al., v. Court of Appeals, et al., G.R. No. 127410, January 20, 1999)
7. On July 1, 1993, or a month after the enactment and two days before the
effectivity of Republic Act No. 7654, the BIR issued RMC No. 37-93 which
considered Hope Luxury, Premium More and Champion cigarettes being
manufactured by Fortune Tobacco corporation as locally manufactured cigarettes
bearing a foreign brand subject to the higher 55% ad valorem tax on cigarettes.
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The following day, on July 2, 1993, at about 5:50 p.m., the BIR sent via fax a
copy of RMC No. 37-93 to Fortune Tobacco but was addressed to no one in
particular. On July 15, 1993 Fortune Tobacco received, by ordinary mail, a certified
xerox copy of RMC No. 37-93.
Fortune Tobacco now claims that its constitutional right to due process was
violated because there was no hearing before BIR issued RMC No. 37-93. Do your
agree ? Explain.
SUGGESTED ANSWER:
Yes. There was a violation of Fortune Tobacco’s right to due process.
BIR issued RMC No. 37-93 for the purpose of placing Hope Luxury, Premium
More and Champion within the scope of the amendatory law and subject them to the
increased tax rate.
In so doing, the BIR did not simply interpret the law, it issued a legislative rule
which is in the nature of subordinate legislation, designed to implement a primary
legislation by providing the details thereof. In the same way that laws must have the
benefit of public hearing, it is generally required that before a legislative rule is adopted
there must be a hearing and publication as required under the Administrative Code.
On the other hand, if what is issued is merely an interpretative rule (which is not
the rule issued in this case),no hearing or publication is required since an interpretative
rule is designed merely to provide guidelines of the law which the administrative agency is
in charge of enforcing. (Commissioner of Internal Revenue v. Court of Appeals, et al.,
261 SCRA 236 )
*** 10. A fixed annual license fee on those engaged in the business of general
enterprise was also imposed on the sale of bibles by a religious sect. Is this valid ?
SUGGESTED ANSWER: No, because it violates the constitutionally guaranteed
freedom of the press, and of religion..
As a license fee is fixed in amount and unrelated to the receipts of the taxpayer,
such a license fee, when applied to a religious sect is actually imposed as a condition for
the free exercise of religion. A license fee “restrains in advance those constitutional
liberties of press and religion and inevitably tends to suppress their exercise.”
***11. The EVAT Law imposes a VAT registration fee of P1,000.00 on non-VAT
enterprises which includes among others, religious sects which sells and distributes
religious literature. Is this violative of religious freedom ?
SUGGESTED ANSWER: No. The P1,000.00 VAT registration fee, although a
fixed amount is not imposed for the exercise of a privilege but only for the purpose of
defraying part of the cost of registration.
The registration requirement is a central feature of the VAT system. It is designed
to provide a record of tax credits because any person who is subject to the payment of the
VAT pays an input tax, even as he collects an output tax on sales made or services
rendered. The registration fee is thus more of an administrative fee, one not imposed on
the exercise of a privilege, much less a constitutional right. (Tolentino v. Secretary of
Finance, et al., and companion cases, 235 SCRA 630)
*** 12. Airlines, Inc. was granted a legislative franchise to operate scheduled
flight services between Manila and Cebu and vice-versa. It was subject to a
franchise tax of 2% qualified by the “magic words,” which “shall be in lieu of all
taxes.” Subsequently, Congress enacted Republic Act No. 7716, the Expanded
Value-Added Tax (EVAT) Law which imposes a 10% VAT on all services offered by
Airlines, Inc.
Airlines, Inc. assails the validity of R.A. No. 7716 for being violative of the
non-impairment clause. It cites Commissioner of Internal Revenue v. Lingayen Gulf
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Electric Power Co., Inc., et al., 164 SCRA 27 (1988) where it was held that the
imposition of a tax on franchise holders with the “magic words” is violative of the
non-impairment clause.
The Supreme Court in the Lingayen Gulf case held that charters or special
laws granted by the legislature are in the nature of private contracts. Rule on the
contention of Airlines, Inc.
SUGGESTED ANSWER: The EVAT does not violate the non-impairment
clause. Tolentino v. Secretary of Finance and its companion cases, 235 SCRA 630, 249
SCRA.628, provides the reasons why there is no violation:
a. Article XII, Sec. 11 of the Constitution provides that the grant of a franchise
for the operation of a public utility is subject to amendment. alteration or repeal by
Congress when the common good requires;
b. Not only existing laws but also the reservation of essential attributes of
sovereignty is read into contracts as a postulate of the legal order;
c. Contracts must be understood as having been made in reference to the possible
exercise of the rightful authority of the government and no obligation of contract can
extend to defeat that authority;
d. A lawful tax on a new subject, or an increased tax on an old one, does not
interfere with a contract or impairs its obligation, within the meaning of the constitution.
Even though such taxation may affect particular contracts, as it may increase the debt of
one person and lessen the security of another, or may impose additional burdens upon one
class and release the burdens of another, still the tax must be paid unless prohibited by the
constitution, nor can it be said that it impairs the obligations of any existing contract in its
true and legal sense.
*** 13. Meralco was granted a franchise to operate an electric light and power
service in Calamba, Laguna sometime in 1983 under P.D. No. 551. Under the
franchise Meralco pays 2% franchise tax on of its gross receipts and “any law to the
contrary notwithstanding be in lieu of all taxes and assessments of whatever nature
imposed by any national or local authority or earnings, receipts, income and
privilege of generation, distribution and sale of electric current.” Pursuant to the
Local Government Code, the province of Laguna enacted an ordinance imposing a
franchise of 50% of 1% of the gross annual receipts of business enjoying a franchise
realized during the preceding calendar year within the province including cities
located therein. Rule on the validity of the tax ordinance.
SUGGESTED ANSWER: The tax ordinance is valid. Under the now prevailing
Constitution, where there is neither a grant nor prohibition by statute, the tax power must
be deemed to exist although Congress may provide statutory limitations and guidelines.
The basic rationale for the current rule is to safeguard the viability and self-sufficiency of
local government units by directly granting them general and broad tax powers.
The Local Government Code explicitly authorizes provinces and cities,
notwithstanding “any exemption granted by any law or other special law” to impose a tax
on businesses enjoying a franchise. Indicative of the legislative intent to carry out the
constitutional mandate of vesting broad tax powers to local government units, the Local
Government Code has withdrawn tax exemptions or incentives theretofore enjoyed by
certain entities.
In addition, the Local Government Code contains a general repealing clause. The
phrase in “lieu of all taxes” has to give way to the peremptory language of the Local
Government Code which specifically provides for the withdrawal of all exemptions. The
Court has viewed its previous rulings as laying stress on the legislative intent of the
amendatory law whether the tax exemption privilege is to be withdrawn or not rather than
on whether the law can or cannot withdraw the tax exemption, without violating the
constitution. (Manila Electric Company v. Province of Laguna, et al., G.R. No. 131359,
May 5, 1999)
The Local Government Code provisions on withdrawal of tax exemptions
prescribes the general rule, viz. the tax exemptions or incentives granted to or presently
enjoyed by natural or juridical persons are withdrawn with the effectivity of the Local
Government Code except with respect to those expressly enumerated. (City Government
of San Pablo, Laguna, et al., v. Reyes, et al., G.R. No. 127708, March 25, 1999)
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NOTES AND COMMENTS: It is possible that the Bar question might come from
one of the following areas:
*** Power of local governments to tax. Local governments do not have the inherent
power to tax except to the extent that such power might be delegated to them either by
the basic law or statute. Presently, under Article X of the 1987 Constitution a general
delegation of that power has been given in favor of local government units.
Nevertheless, the fundamental law did not intend the delegation to be absolute and
unconditional, the constitutional objective obviously is to ensure that, while local
government units are being strengthened and made more autonomous, the legislature must
still see to it that:
a. the taxpayer will not be over-burdened or saddled with multiple and
unreasonable impositions;
b. each local government unit will have its fair share of available resources;
c. the resources of the national government will be unduly disturbed; and
d. local taxation will be fair, uniform and just. (Manila Electric Company v.
Province of Laguna, et al., G.R. No. 131359, May 5, 1999)
The Manila Electric Company case doctrine reversed the holding in City
Government of San Pablo, Laguna, et al., v. Reyes, et al., G.R. No. 127708, March 25,
1999 that municipal corporations are vested by the Constitution with the power to tax. It
may be exercised by local legislative bodies, no longer by virtue of a valid delegation as
before, but pursuant to direct authority conferred by the Constitution.
The non-impairment clause. Questionable ruling. The non-impairment clause
cannot be invoked by franchises, as franchises are always subject to police power, as well
as the power to tax (?), which like police power cannot be contracted away (?). (City
Government of San Pablo, Laguna, et al., v. Reyes, et al., G.R. No. 127708, March 25,
1999) The author considers this ruling to be questionable because the taxing power is
inferior to the nonimpairment clause.
While the Court has, not too infrequently, referred to tax exemptions contained in
special franchises as being in the nature of contracts and a part of the inducement for
carrying out the franchise, these exemptions, nevertheless far from being strictly
contractual in nature.
*** Constitutional tax exemptions, in the real sense of the term and where the non-
impairment clause of the Constitution can rightly be invoked, are those agreed to by the
taxing authority in contracts, such as those contained in government bonds or debentures,
lawfully entered into by them under enabling laws in which the government, acting in its
private capacity sheds its cloak of authority and waives its government immunity.
Truly, tax exemptions of this kind may not be revoked without impairing the
obligations of contracts. A franchise partakes of the nature of a grant which is not beyond
the purview of the non-impairment clause. Indeed the 1987 Constitution like its
precursors the 1935 and the 1973 Constitutions is explicit that no franchise for the
operation of a public utility shall be granted except under the condition that such privilege
shall be subject to amendment, alteration or repeal by Congress as and when the common
good so requires. (Manila Electric Company v. Province of Laguna, et al., G.R. No.
131359, May 5, 1999)
The reader should take note of the conflicting doctrines espoused by the Manila
Electric case and the City Government of San Pablo, Laguna case. It may interest the
reader also to know that the ponente in the Manila Electric case is Justice Jose Vitug,
while the ponente in the City Government of San Pablo, Laguna is Justice Minerva
Gonzaga-Reyes.
b) Taxing authority
c) Taxing purpose
d) Taxing period
2) Taxing all of the subjects or objects for the first time without taxing all
of them for the second time.
If any of the elements are absent then there is indirect duplicate taxation
which is not prohibited by the constitution.
NOTES AND COMMENTS: There may be a problem on double taxation,
including compensation and set-off.
*** 16. What are the methods for avoidance of double taxation ? Explain each
briefly but comprehensively.
SUGGESTED ANSWER: The following are the methods of avoiding double
taxation:
a. Tax treaties which exempts foreign nationals from local taxation and local
nationals from foreign taxation under the principle of reciprocity.
b. Tax credits where foreign taxes are allowed as deductions from local taxes that
are due to be paid.
c. Allowing foreign taxes as a deduction from gross income.
NOTES AND COMMENTS:
a. Purpose of tax treaties. To reconcile the national fiscal legislations of the
contracting parties in order to help the taxpayer avoid simultaneous taxation in two
different jurisdictions. More precisely, the tax conventions are drafted with a view towards
the elimination of international juridical double taxation.
b. Rationale for avoiding double taxation. To encourage the free flow of goods
and services and the movement of capital, technology and persons between countries,
conditions deemed vital in creating robust and dynamic economies. Foreign investments
will only thrive in a fairly predictable and reasonable international investment climate and
the protection against double taxation is crucial in creating such a climate.
*** c. Methods resorted to by a tax treaty in order to eliminate double taxation:
First Method: It sets out the respective rights to tax of the state of source or situs
and of the state of residence with regard to certain classes of income or capital. In some
cases, an exclusive right to tax is conferred on one of the contracting states; however, for
other items of income or capital, both states are given the right to tax, although the
amount of tax that may be imposed by the state of source is limited.
Second Method: The state of source is given a full or limited right to tax together
with the state of residence. In this case, the treaties make it incumbent upon the state of
residence to allow relief in order to avoid double taxation. Two methods of relief are
used:
1) The exemption method – the income or capital which is taxable in the
state of source or situs is exempted in the state of residence, although in some
instances it may be taken into account in determining the rate of tax applicable to
the taxpayer’s remaining income or capital.
2) The credit method – although the income or capital which is taxed in
the state of source is still taxable in the state of residence, the tax paid in the
former is credited against the tax levied in the latter. (Commissioner of Internal
Revenue v. S.C. Johnson and Son, Inc., et al., G.R. No. 127105, prom. June 25,
1999)
Difference between the exemption method and the credit method. The exemption
method focuses on income or capital itself while the credit method focuses upon the tax. .
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(Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc., et al., G.R. No.
127105, prom. June 25, 1999)
*** 17. The RP-West Germany Tax Treaty provides a 10% tax on royalties. but
expressly allows against German income and corporate tax of 20% of the gross
royalties paid under the law of the Philippines. On the other hand the RP-US Tax
Treaty does not provide for a similar tax crediting. Thus, the tax on royalties earned
by U.S. firms in the Philippines may either be of three rates: 25 percent of the
gross amount of the royalties; 15 percent when the royalties are paid by a
corporation registered with the Philippine Board of Investments and engaged in
preferred areas of activities; or the lowest rate of Philippine tax that may be imposed
on royalties of the same kind paid under similar circumstances to a resident of a
third state.
May U.S. Corporations claim entitlement to the “most favored nation” tax
rate of 10% on royalties as provided in the RP-US Tax Treaty in relation to the RP-
West Germany Tax Treaty ? Explain with reasons.
SUGGESTED ANSWER: No. The entitlement of the 10% rate by U.S. firms
despite the absence of a matching credit (20% for royalties) would derogate from the
design behind the most favored nation clause to grant equality of international treatment
since the tax burden laid upon the income of the investor is not the same in the two
countries. The similarity in the circumstances of payment of taxes is a condition for the
enjoyment of the most favored nation treatment precisely to underscore the need for
equality of treatment. (Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc.,
et al., G.R. No. 127105, prom. June 25, 1999)
NOTES AND COMMENTS:
a. Intention behind adoption of provision on “relief from double taxation.”
The intention should be considered in the light of the purpose behind the most favored
nation (MFN) clause which is to grant to the contracting party treatment not less favorable
than which has been or may be granted to the “most favored” among other countries.
The MFN is intended to establish the principle of equality of international
treatment by providing that the citizens or subjects of the contracting nations may enjoy
privileges accorded by either party to those of the most favored nation. The essence of
the principle is to allow the taxpayer in one state to avail of more liberal provisions
granted in another tax treaty to which the country of residence of such taxpayer is also a
party provided that the subject matter of taxation is the same as that in the tax treaty under
which the taxpayer is liable. (Commissioner of Internal Revenue v. S.C. Johnson and Son,
Inc., et al., G.R. No. 127105, prom. June 25, 1999)
18. The Expanded Value-Added Tax Law is an indirect tax which may be
considered as regressive in character. It is a fixed tax therefore the lower is the
income the taxes that are paid are proportionately higher. Is this violative of the
constitution which mandates that Congress shall evolve a progressive system of
taxation ? Explain.
SUGGESTED ANSWER: There is no violation of the constitutional mandate
for the following reasons:
a. The mandate to Congress is not to prescribe but to evolve a progressive system
of taxation. Otherwise, sales taxes which perhaps are the oldest form of indirect taxes,
would have been prohibited with the proclamation of the constitutional provision. Sales
taxes are also regressive.
b. The Constitution does not really prohibit the imposition of indirect taxes which,
like the VAT, are regressive. The constitutional provision means simply that indirect taxes
should be minimized.
c. Resort to indirect taxes should be minimized but not avoided entirely because it
is difficult, if not impossible, to avoid imposing such taxes according to the taxpayer’s
ability to pay.
In the case of VAT, the law minimizes the regressive effects of this imposition by
providing for zero rating of certain transactions while granting exemptions to other
transactions. The transactions which are subject to VAT are those which involve goods
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and services which are used or availed of mainly by higher income groups. (Tolentino v.
Secretary of Finance and companion cases, 249 SCRA 628)
***19. The Constitution requires that all revenue bills shall originate exclusively
from the House of Representatives. Was this violated when the EVAT bill that
originated from the House did not become the EVAT law ? Explain.
a. The Constitution simply means that the initiative for filing revenue, tariff or tax
bills must come from the House of Representatives on the theory that, elected as they are
from the districts, the Members of the House can be expected to be more sensitive to the
local needs and problems.
b. It is not the law - but the revenue bill - which is required by the Constitution to
“originate exclusively” in the House of Representatives because a bill originating in the
House may undergo such extensive changes in the Senate that the result may be a
rewriting of the whole, and a distinct bill may be produced.
c. To insist that a revenue statute - not only the bill which initiated the legislative
process culminating in the enactment of the law - must substantially be the same as the
House bill would be to deny the Senate’s power not only to “concur with amendments”
but also to “propose amendment.” It would be to violate the coequality of legislative
power of the two houses of Congress and in fact make the House superior to the Senate.
Given the power of the Senate to propose amendments, it can propose its own
version even with respect to bills which are required by the Constitution to originate in the
House.
d. Nor does the Constitution prohibit the filing in the Senate of a substitute bill in
anticipation of its receipt of the bill from the House, so long as action by the Senate as a
body is withheld pending receipt of the House bill. (Tolentino v. Secretary of Finance and
companion cases, 235 SCRA 630)
*** 22. Mr. Gaerlan is the owner of a 5,000 sq. m. parcel of land located in the
city limits of San Fernando City. He leased the property for P50,000.00 a year to a
religious congregation for a period of fifteen (15) years (1990-2005). The religious
congregation built on a 1,000 sq. m. portion a seminary and a chapel which it used
in connection with its religious activities. It constructed a ten (10) story building on
the remaining 4,000 sq. m. which it rented out to various commercial
establishments, the proceeds of which go to the support of its various seminaries
located throughout the Philippines. These seminaries are organized as non-profit
and non-stock educational institutions.
Is Mr. Gaerlan exempt from the payment of real property taxes ? What
about the religious congregation ? Explain. Is the religious congregation exempt
from the payment of income taxes on the rental receipts ? Explain.
SUGGESTED ANSWER:
Mr. Gaerlan is exempt from the payment of real property taxes on the 1,000 sq. m.
portion of his 5,000 sq. m. lot, as well as on the remaining 4,000 sq.m. On the other hand
the religious congregation should pay real property taxes on the 4,000 sq. m. parcel of
land and the 10-story building.
Mr. Gaerlan is exempt from real property taxation, whether on the 1,000 sq.m. or
on the 4,000 sq. m. because the basis for taxation of real property is use and not
ownership. The religious congregation is exempt from real property taxes on the 1,000
sq. m. parcel of land as well as on the improvements the chapel and the seminary. This is
so be cause they are actually, directly and exclusively used for religious purposes. The
treatment is different with regard to the 4,000 sq. m. lot and its improvement the 10 storey
building. While it is true that the proceeds are used for the support of its seminaries, this
is at the most indirect use, hence not subject to the tax exemption.
The religious congregation is subject to income taxation. (For reasons, refer to
question no. 23, infra) While it is true that all the seminaries are organized as non-profit
non-stock educational institutions, it is not their incomes which is the subject of the
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problem but that of the religious congregation which is not a non-profit non-stock
educational institution.
*** 23. YMCA was established as “a welfare, educational and charitable non-
profit corporation” earned an income of P600 thousand from leasing out a portion
of its premises to small shop owners, like restaurants an canteen operators, and P44
thousand from parking fees collected from non-members. It was subjected to an
assessment for non-payment of income taxes on the foregoing income.
YMCA claims that it is tax exempt claiming for the reason that the leasing to
small shop owners and the operation of the parking lot are reasonably necessary for
the accomplishment of its objectives. It premises its claim on the provisions of the
1987 Constitution. Is the income derived from rentals of the real property subject to
income tax ? Reason out your answer.
SUGGESTED ANSWER: Yes, the income is subject to income tax. The NIRC
recognizes the exemption from tax of the incomes of civic leagues or organizations not
organized for profit but operated exclusively for the promotion of social welfare, as well
as clubs organized and operated exclusively for pleasure, recreation, and other non-
profitable purposes where no part of the net income inures to the benefit of any private
stockholder or member.
However, the tax exemption so recognized does not flow to 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, which shall be subject to income taxes.
Furthermore, the constitutional tax exemptions refer only to real property that are
actually, directly and exclusively used for religious, charitable or educational purposes, and
that the only constitutionally recognized exemption from taxation of revenues are those
earned by non-profit, non-stock educational institutions which are actually, directly and
exclusively used for educational purposes. YMCA is not an educational institution
embraced under this particular concept. (Commissioner of Internal Revenue v. Court of
Appeals, et al., 298 SCRA 83)
b. The income derived from the tuition fees is exempt from the income taxes as
these are to be actually, directly and exclusively used for educational purposes being
devoted to meet the increased school operational expenditures.
c. The passive income in the form of interests on bank deposits may be exempt
from income taxes and the withholding taxes of 20% if they are reflected on the school’s
annual information returns and duly audited financial statements, supported by a
certification from the depository bank as to the amount of interest income earned from
passive investments not subject to the 20% final withholding tax, a resolution of the
school’s Board of Trustees on the proposed projects to be funded out of the money
deposited in the bank, and a certification of actual utilization of said interest income for
actual, direct and exclusive use for educational purposes. (Finance Department Order No.
149-95, issued November 24, 1995 amending Department Order No. 137-87 as amended
by Department Order No. 92-88).
d. While it is true that the US$10,000.00 is to be utilized for administration
purposes, and under Sec. 94(A-3) of the NIRC, may be subject to tax, it is to be noted
that Republic Act No. 7798 which amended B.P. Blg. 232 provides that, “Taxes shall not
be due on donations to educational institutions.” It is to be noted that exemptions to
educational institutions are not subject to the so-called strictissimi juris strict
interpretation against the taxpayer and liberally in favor of the government.
e. The computers could be imported, exempt from the payment of customs duties
and value-added tax as there is showing of their actual, direct and exclusive use for
educational purposes.
25. Why is it important to know the distinctions between a tax and a debt.
What are the distinctions between a tax and a debt ?
SUGGESTED ANSWER: It is important to know the distinctions because non-
payment of a tax (except a poll tax) could subject a person to imprisonment while no
person could be imprisoned for non-payment of a debt. Furthermore, a debt could be
compensated by another debt, but a debt or another tax could not be compensated for a
tax in accordance with the lifeblood doctrine.
*** Distinctions between a tax and a debt:
a. BASIS. Tax is based on law WHILE debt is based on contract or judgment.
b. FAILURE TO PAY. Failure to pay a tax (except a poll tax) may result in
imprisonment WHILE there is no imprisonment for failure to pay a debt.
c. MODE OF PAYMENT. Tax is generally payable in money WHILE debt may
be payable in money, property or services.
d. ASSIGNABILITY. A tax is not assignable WHILE a debt is assignable.
e. INTEREST. A tax does not draw interest unless delinquent WHILE a debt
draws interest if stipulated or delayed.
f. AUTHORITY. Taxes are imposed by public authority WHILE debt can be
imposed by private individuals.
g. PRESCRIPTION. Prescriptive periods for tax are determined under the NIRC
WHILE debt, under the Civil Code.
26. Are there distinctions between a tax and a license fee ? Why is it
important to know the distinctions ?
SUGGESTED ANSWERS: The following are the distinctions between a tax and a
license fee:
a. PURPOSE:A tax is imposed for revenue purposes WHILE a license fee is
imposed for regulatory purposes.
b. BASIS: A tax is imposed under the power of taxation WHILE a license fee is
imposed under police power.
c. AMOUNT: There is no limit as to the amount of a tax WHILE the amount of
license fee that could be collected is limited to the cost of the license and the expenses of
police surveillance and regulation.
d. TIME OF PAYMENT: Taxes are normally paid after the start of a business
WHILE a license fee before the commencement of business.
e. EFFECT OF NON-PAYMENT: Failure to pay a tax does not make the
business illegal WHILE failure to pay a license fee makes the business illegal.
15
27. What is the Court of Tax Appeals ? What is the nature of the Court of
Tax Appeals ? Why was it created ?
SUGGESTED ANSWER:
a. The Court of Tax Appeals is the special tax court created under Republic Act
No. 1125 composed of a Presiding Judge and Two Associate Judges, appointed by the
President of the Philippines from nominees of the Judicial and Bar Council.
b. It is not a mere administrative agency or tribunal but a regular court vested with
exclusive appellate jurisdiction over cases arising under the National Internal Revenue
Code and the Tariff and Customs Code.
*** c. The Court of Tax Appeals was created:
1) To prevent delay in the disposition of tax cases by the then Courts of
First Instance (now RTCs), in view of the backlog of civil, criminal, and cadast-
ral cases accumulating in the dockets of such courts; and
2) To have a body with special knowledge which ordinary Judges of the
then Courts of First Instance (now RTCs), are not likely to possess, thus pro-
viding for an adequate remedy for a speedy determination of tax cases.
*** c. Instances where the Court of Tax Appeals would have jurisdiction even if there
is no decision yet of the Commissioner of Internal Revenue:
1) Where the Commissioner has not acted on the disputed assessment after
a period of 180 days from submission of complete supporting documents, the
taxpayer has a period of 30 days from the expiration of the 180 day period within
which to appeal to the Court of Tax Appeals. (last par., Sec. 228 (e), NIRC of
1997)
2) Where the Commissioner has not acted on an application for refund or
credit and the two year period from the time of payment is about to expire, the
taxpayer has to file his appeal with the Court of Tax Appeals before the expiration
of two years from the time the tax was paid.
*** d. Instances where the Court of Tax Appeals would have jurisdiction even if there
is no decision of the Commissioner of Customs:
1) Decisions of the Secretary of Trade and Industry or the Secretary of
Agriculture in anti-dumping and countervailing duty cases are appealable to the
Court of Tax Appeals within thirty (30) days from receipt of such decisions.
2) In case of automatic review by the Secretary of Finance in seizure or
forfeiture cases where the value of the importation exceeds P5 million or where the
decision of the Collector of Customs which fully or partially releases the shipment
seized is affirmed by the Commissioner of Customs.
*** 29. Only Commissioner’s final decision denying the dispute is subject of
appeal. Words to the effect that the matter would be referred to the Collection
Enforcement Division for the issuance of a warrant of levy and distraint is not a final
decision appealable to CTA (Solid Cement Corporation vs. Court of Tax Appeals, et al.,
CA-GR SP No. 33516, February 28, 1995). Even the actual issuance of a warrant of
distraint and levy in certain cases still cannot be considered a final decision on a
disputed assessment. (Commissioner of Internal Revenue v. Union Shipping Corp.,
185 SCRA 547)
NOTES AND COMMENTS:
*** a. Acts of BIR Commissioner considered as denial of protest which serve as
basis for appeal to the Court of Tax Appeals:
1) Filing by the BIR of a civil suit for collection of the deficiency tax is
considered a denial of the request for reconsideration. (Commissioner of Internal
Revenue v. Union Shipping Corporation, 185 SCRA 547)
2) An indication to the taxpayer by the Commissioner “in clear and
unequivocal language” of his final denial not the issuance of the warrant of
distraint and levy. What is the subject of the appeal is the final decision not the
warrant of distraint. Commissioner of Internal Revenue v. Union Shipping
Corporation, 185 SCRA 547)
3) A BIR demand letter sent to the taxpayer after his protest of the
assessment notice is considered as the final decision of the Commissioner on the
protest. (Surigao Electric Co., Inc. v. Court of Tax Appeals, et al., 57 SCRA 523)
4) A letter of the BIR Commissioner reiterating to a taxpayer his previous
demand to pay an assessment is considered a denial of the request for
reconsideration or protest and is appealable to the Court of Tax Appeals.
(Commissioner v. Ayala Securities Corporation, 70 SCRA 204)
*** b. Requisites for validity of the Commissioner’s decision on the dispute. The
decision of the Commissioner or his duly authorized representative shall (a) state the facts,
the applicable law, rules and regulations, or jurisprudence on which such decision is based,
otherwise, the decision shall be void, in which case the same shall not be considered a
decision on the disputed assessment; and (b) that the same is his final decision. (Sec.
3.1.6, Rev. Regs. 12-99)
*** 30. The BIR Commissioner discovered that a taxpayer keeps no records or
that whatever records kept are inadequate, or that there is strong suspicion that the
taxpayer has received income from undisclosed sources, or that no return was filed
or the return filed was false and fraudulent. What methods have been developed by
17
the BIR in order to determine the income of the taxpayer which should be subject
to tax ? Explain each method briefly but comprehensively.
SUGGESTED ANSWER: The following are the general methods developed by
the Bureau of Internal Revenue for reconstructing a taxpayer’s income:
a. Percentage method. The computed amount of revenues based on the
percentage computation is compared to the amount of revenues reflected on the return.
The percentages used may be obtained from the taxpayer, industry publication, prior
year’s audit results, or third parties. The comparison will provide an indication on the
possibility of revenue being understated.
Among the significant ratios and trends to be analyzed are the percentage mark-up,
gross profits ratio or gross margin percentage, profit margin, total assets turnover, and
inventory turnover.
b. Net worth method. A method of reconstructing income which is based on the
theory that if the taxpayer’s net worth has increased in a given year in an amount larger
than his reported income, he has understated his income for that year. The net worth on a
fixed starting date is compared with the net worth on a fixed ending date. Any increase in
net worth is presumed to be income not declared for tax purposes.
The difficulty of establishing the opening net worth of a tax payer has led to the
“Cohan Rule” which means the use estimates or approximations of the amount of cash and
other asserts where the taxpayer lacks adequate records.
c. Bank deposit method. The bank records of the taxpayer are analyzed and the
BIR estimates income on the basis of the total bank deposits after eliminating non-income
items. This method stands on the premise that deposits represent taxable income unless
otherwise explained as being non-taxable items. This method may be used only where the
BIR has been legally allowed access to the taxpayer’s bank records.
d. Cash expenditure method. This method assumes that the excess of a taxpayer’s
expenditures during the tax period over his reported income for that period is taxable to
the extent not disproved otherwise.
e. Unit and value method. The determination or verification of gross receipts may
be computed by applying price and profit figures to the known ascertainable quality of
business of the taxpayer. For example, in order to determine the gross receipts of a pizza
parlor, multiply the pounds of flour used by the number of pizzas per pound which in turn
would then be multiplied by the average price per pizza.
f. Third party information or access to records method. The BIR may require
third parties, public or private to supply information to the BIR.
g. Surveillance and assessment method. (Chapter XIII. Indirect Approach to
Investigation, Handbook on Audit Procedures and Techniques – Volume I, pp. 68-74)
*** 31. The BIR discovered that Elvie, a businesswoman, did not file her income
tax returns for the taxable years 1998 and 1999. A pre-assessment notice for back
taxes was then issued in the amount of P2 million which ultimately matured into an
assessment notice. The BIR arrived at the additional tax due after using the “net
worth” method and access to Elvie’s purchases from her suppliers of raw materials.
She now disputes the assessment for lack of legal basis because of the use of the “net
worth” which is not authorized under the Tax Code, and for violation of her
constitutional rights when her purchase records were accessed from her suppliers.
Rule on her dispute.
SUGGESTED ANSWER: Elvie’s contentions are bereft of merit. Since Elvie did
not file her income tax returns, which reports are required by law as a basis for
assessment, then the BIR Commissioner shall assess the tax on the best evidence available.
The BIR Commissioner is authorized to secure records from public or private entities to
assist him in the assessment. Furrthermore, the BIR may use such method as in the
opinion of the Commissioner clearly reflects the income.
NOTES AND COMMENTS:
a. General Rule. “The taxable income shall be computed upon the basis of the
taxpayer’s annual accounting period (fiscal year or calendar year, as the case may be) in
accordance with the method of accounting regularly employed in keeping the books of
such taxpayer; but if no such method of accounting has been so employed, or if the
method employed does not clearly reflect the income, the computation shall be in
18
accordance with such method as in the opinion of the Commissioner clearly reflects the
income.” (Sec. 43, NIRC of 1997)
b. Failure to Submit Required Returns, Statements, Reports or Other Documents.
“When a report required by law as a basis for the assessment of any national internal
revenue tax shall not be forthcoming within the time fixed by laws or rules and regulations
or when there is reason to believe that any such report is false, incomplete or erroneous,
the Commissioner shall assess the proper tax on the best evidence obtainable.
In case a person fails to file a required return or other document at the time
prescribed by law, or willfully or otherwise files a false or fraudulent return or other
document, the Commissioner shall make or amend the return from his own knowledge and
from such information as he can obtain through testimony or otherwise, which shall be
prima facie correct and sufficient for all legal purposes.” [Sec. 6 (B), NIRC of 1997]
*** c. Power of the Commissioner to Obtain Information. “In ascertaining the
correctness of any return, or in making a return when none has been made, or in
determining the liability of a person for any internal revenue tax, or in collecting any such
liability, or in evaluating tax compliance, the Commissioner is authorized: xxx
To obtain on a regular basis from any person other than the person whose internal
revenue tax laibility is subject to audit or investigation, or from any office or officer of the
national and local governments, government agencies and instrumentalities including the
Bangko Sentral ng Pilipinas and government-owned or –controlled corporations, any
information such as, but not limited to, costs and volume of production, receipts or sales
and gross incomes of taxpayers, and the names , addresses, and financial statements of
corporations, mutual fund companies, insurance companies, regional operating
headquarters or multinational companies, joint accounts, associations, joint ventures or
consortia and registered partnerships, and their members; xxx” [Sec. 5 (B), NIRC of
1997)
33. On the basis of a Letter of Authority, for the examination of the books of
accounts and other accounting records of Pascor Realty and Development
Corporation (PRDC), BIR examiners recommended the issuance of an assessment
notice in the amounts of P7 million and P 3 million for the years 1986 and 1987
respectively.
On March 1, 1995, the BIR filed a criminal complaint with the Department
of Justice against PRDC, its President and Treasurer alleging evasion of taxes in the
total amount of P10 million. This was supported by an affidavit-report of the
examiners detailing the computation of the alleged tax evasion. PRDC, its
19
The prescriptive periods for making assessments are three (3) years from the
last day within which to file a return or when the return was actually filed and ten years
from discovery of the failure to file the tax return or discovery of falsity or fraud in the
return.
*** 35. “X” Corporation filed its income tax returns in January, 1995 for its
income for the year 1994. In October, 1997, March, 1998 and May, 1998, “X”
through it’s authorized representative signed three (3) separate waivers of the
“Statute of Limitations under the NIRC.” The waivers were not signed by the BIR
Commissioner or his agents.
In 1999, the BIR issued letters of demand, accompanied by assessment
notices asking the corporation to pay the deficiency internal revenue taxes for its
income for the year 1994. “X” disputed the assessment and requested a
reinvestigation. The BIR Commissioner denied the protest. “X” appealed to the
Court of Tax Appeals, on the ground of prescription. Decide.
SUGGESTED ANSWER: The BIR’s authority to assess already prescribed. The
three (3) waivers did not suspend the running of the prescriptive period.
The only agreement that could suspend the running of the prescriptive period for
the collection of the tax in question is a written agreement between “X” corporation an the
BIR entered into before the expiration of the three (3) year prescriptive period. extending
the said period.
Since, what is required is the signatures of both the Commissioner and the
taxpayer, a unilateral waiver on the part of the taxpayer does not suspend the prescriptive
period. (Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 115712,
February 25, 1999 (Carnation case)
NOTES AND COMMENTS: Grounds for suspending statute of limitations or
prescriptive periods for assessment, beginning or distraint or levy or proceeding in
court.
The holding in Commissioner of Internal Revenue v. Court of Appeals, et al., G.R.
No. 115712, February 25, 1999 (Carnation case) that the waiver of the period for
assessment must be in writing and have the written consent of the BIR Commissioner is
still doctrinal because of the provisions of Sec. 223, NIRC of 1997 which provides:
a. When the Commissioner is prohibited from making the assessment, or
beginning distraint, or levy or proceeding in court and for sixty (60) days thereafter;
b. When the taxpayer requests for and is granted a reinvestigation by the
commissioner;
c. When the commissioner could not be located in the address given by him in the
return filed upon which the tax is being assessed or collected;
d. When the warrant of distraint and levy is duly served upon the taxpayer, his
authorized representative, or a member of his household with sufficient discretion, and no
property could be located; and
21
***38. 41 non-life insurance corporations organized and existing under the laws
of the Philippines organized a pool of machinery insurers for the purpose of entering
into a Quota Share Reinsurance Treaty and a Surplus Reinsurance Treaty with the
Munchener Ruckversicherungs-Gesselschaft (Munich for brevity), a non-resident
foreign insurance corporation.
22
On April 14, 1976 the pool submitted a financial statement and filed an
“Information Return of Organization Exempt from Income Tax” for the year ending
1975, on the basis of which the pool was assessed deficiency corporate income tax of
P1.8 million and withholding tax in the amount of P1.7 million and P89 thousand
and to the pool on dividends paid to Munich and the pool members respectively.
The pool raises the following issues why they should not be subject to the
deficiency taxes:
1. They have not formed an unregistered partnership to be treated as a
corporation for tax purposes;
2. There would be double taxation if they would be made to pay the
deficiency taxes; and
3. The right of the government to collect has already prescribed.
Rule on the issues raised discussing each one of them.
SUGGESTED ANSWERS:
1. They have formed an association which should be taxable like a corporation.
The Tax Code has included under the term “corporation” partnerships, no matter how
created or organized, joint-stock companies, joint accounts (cuentas en participacion),
associations, or insurance companies. [Sec. 24 now Sec. 24 (B) of the NIRC of 1997].
In Evangelista v. Collector, 102 Phil. 140, the Supreme Court already held citing
Mertens that the term partnership includes a syndicate, group, pool, joint venture or other
unincorporated organization, through or by means of which any business, financial
operation, or venture is carried on.
There is no question that the 41 non-life corporations entered into a Pool
Agreement or an association that would handle all the insurance businesses covered under
their quota-share reinsurance treaty and surplus reinsurance treaty with Munich. This
unmistakably indicates a partnership or an association which is considered under the Tax
Code as a partnership or association treated like a corporation.
2. There is no double taxation which means taxing the same property twice when
it should be taxed only once. The Pool is a taxable entity separate and distinct from the
individual corporate entities of the Pool.
3. The prescriptive period was not suspended because it may be suspended only
“if the taxpayer informs the Commissioner of Internal Revenue of any change in the
address.” The fact that the Pool’s information return filed in 1980 indicated therein its
“present address” is not sufficient compliance with the legal requirement.
***NOTES AND COMMENTS: The Bar examination question may be with respect
to the income of an estate that has not been partitioned or to a case where there is co-
ownership.
Certain business organizations do not fall under the category of
“corporations” under the Tax Code, and therefore not subject to tax as
corporations. They include:
1. General professional partnerships;
2. Joint venture or consortium formed for the purpose of undertaking
construction projects engaging in petroleum, coal, geothermal, and other energy
operations, pursuant to an operation or consortium agreement under a service contract
with the Government. [1st sentence, Sec. 22 (B), BIRC of 1997]
*** 40. Agustin died in December, 1999 leaving to his two sons, Fernando and
Jose, an apartment building. After the settlement of Agustin’s estate, his two sons
decided not to partition the apartment building and just divided the rentals among
themselves for the year 2000.
a. Was a partnership formed which is subject to corporate income taxes for
the year 2000 ? Reason out your answer.
23
b. If, instead of dividing the rentals in 2000, the brothers invested the same
in the purchase of a house to be rented out. How shall the income from the rentals
of the house be treated for tax purposes ? Explain briefly. Would your answer be
different if the house was not purchased for the purpose of renting out the same but
was later sold ? Explain briefly.
SUGGESTED ANSWERS:
a. No. Co-heirs who own inherited properties which produce income should not
automatically be considered as partners of an unregistered corporation subject to income
tax for the following reasons:
1. 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. (Obillos, Jr. v.
Commissioner of Internal Revenue, 139 SCRA 436)
2. There is no contribution or investment of additional capital to increase
or expand the inherited properties, merely continuing the dedication of the
property to the use to which it had been put by their forebears. (Ibid.)
3. Persons who contribute property or funds to a common enterprise and
agree to share the gross returns of that enterprise in proportion to their
contribution, but who severally retain the title to their respective contribution, are
not thereby rendered partners. They have no common stock capital, and no
community of interest as principal proprietors in the business itself from which the
proceeds were derived. (Elements of the Law of Partnership by Floyd R. Mechem,
2nd Ed., Sec. 83, p. 74 cited in Pascual v. Commissioner of Internal Revenue, 166
SCRA 560)
4. In order to constitute a partnership inter sese there must be: (a) an
intent to form the same; (b) generally participating in both profits and losses; (c)
and such a community of interest, as far as third persons are concerned as enables
each party to make a contract, manage the business, and dispose of the whole
property. (Municipality Paving Co. v. Herring, 150 O. 1067, 50 Ill. 470, Ibid.)
5. The common ownership of property does not itself create a partnership
between the owners, though they may use it for purpose of making gains, and they
may, without becoming partners, are among themselves as to the management and
use of such property and the application of the proceeds therefrom.. (Spurlock v,.
Wilson, 142 S.W. 363, 160 No. App. 14, Ibid.)
b. The income from the rental of the house shall be treated as the income of an
unregistered partnership to be taxable as a corporation because of the clear intention of
the brothers to join together in a venture for making money out of rentals.
The answer would be different because there was no intention to enter into a profit
making venture. They merely formed a co-ownership. This is evident from the following
authorities:
Where the plaintiff, his brother and, and another agreed to become owners of a
single tract of realty holding as tenants in common, and to divide the profits of disposing
of it, the brother and the other not being entitled to share in plaintiff’s commissions, no
partnership existed as between the three parties, whatever their relation may have been as
to third parties. (Magee v. Magee, 123 N.E. 673, 233 Mass. 341 cited in Pascual v.
Commissioner of Internal Revenue, 166 SCRA 560)
41. Liboro is a practicing lawyer who on 15 April 1995 filed his income tax
return for the year 1994. Upon examination, the BIR found his return deficient of
P14,009.84. On 30 September and 30 November 1995, Liboro was notified of his tax
deficiency. He responded with a protest letter dated 19 December 1995.
On 11 May 1996, the Commissioner of Internal Revenue denied Liboro’s
protest for lack of legal basis. He then seasonably filed a petition for review before
the Court of Tax Appeals. On 29 March 1998, the CTA rendered a decision
dismissing the appeal which Liboro received on 29 May 1998. Thus, he had until 13
June 1998 to file a petition for review before the Court of Appeals.
On 11 June 1998, instead of filing a petition for review with the Court of
Appeals, Liboro filed a Notice of Appeal with the Court of Appeals, and on 13 June
24
1998, a motion for an extension of thirty (30) days to file a petition for review before
the Court of Appeals.
May the Court of Appeals grant Liboro an extension of time to file the
petition for review?
SUGGESTED ANSWER: Yes. The prohibition against granting an extension of
time applies only in a case where ordinary appeal is required to perfect an appeal and
nothing more. However, it is different in a petition for review where the pleading is
required to be verified.
A petition for review, unlike an ordinary appeal, requires careful preparation and
research in order to put up a persuasive and formidable position. In other words, the
drafting of a petition for review entails more time and effort than merely filing a notice of
appeal. (Liboro v. Court of Appeals, et al., G.R. No. 101132 and Commissioner of
Internal Revenue v. Court of Appeals, et al., January 29, 1993)
NOTES AND COMMENTS:: Sec. 4, Rule 43 of the 1997 Rules of Civil
Procedure provides, “The appeal shall be taken within fifteen (15) days from notice of the
... judgment.... Upon proper motion and the payment of the full amount of the docket fee
before the expiration of the reglementary period, the Court of Appeals may grant an
additional period of fifteen (15) days only within which to file the petition for review. No
further extension shall be granted except for the most compelling reason and in no case to
exceed fifteen (15) days.” (paraphrasing supplied)
*** 42. Is there a necessity for an administrative determination that a tax is due
before initiation of criminal prosecution for tax evasion ?
SUGGESTED ANSWER: No, because of the following reasons, which
distinguishes a criminal charge from an assessment:
a. Criminal charge need only be supported by a prima facie showing of failure to
file a required return WHILE the fact of failure to file a return need not be proven by an
assessment.
b. Before an assessment is issued, there is, by practice, a pre-assessment notice
sent to the taxpayer WHILE such is not so with a criminal charge. The charge is filed
directly with the Department of Justice.
c. A criminal complaint is instituted not to demand payment, but to penalize the
taxpayer for violation of the Tax Code WHILE the purpose of the issuance of an
assessment is to collect the tax. (Commissioner of Internal Revenue v. Pascor Realty and
Development Corporation, et al., G.R. No. 128315, June 29, 1999)
NOTES AND COMMENTS: For Bar examination purposes take note of the
distinction between the Fortune Tobacco case (Commissioner of Internal Revenue v.
Court of Appeals, et al., G.R. No. 119322, June 4, 1996) on one hand with the above
Pascor case and that of Ungab v. Cusi, 97 SCRA 877 (1980), which allowed the tax
evasion case to proceed notwithstanding no showing of an administrative finding that a tax
is due. In Ungab, there was a prima facie attempt to evade taxes because of the
taxpayer’s failure to declare in his income tax return “his income derived from banana
saplings,” WHILE in the Fortune Tobacco case, the registered wholesale price of the
goods, approved by the BIR is presumed to be the actual wholesale price, therefore, not
fraudulent and unless and until the BIR has made a final determination of what is supposed
to be the correct taxes, the taxpayer should not be placed in the crucible of criminal
prosecution
*** 43. What are the tax cases which may be the subject of a compromise
settlement with the BIR ?
SUGGESTED ANSWER: The following may be the subject matter of
compromise settlement:
a. Delinquent accounts;
b. Cases under administrative protest pending in the Regional Offices, Revenue
District Offices, Legal Service, Large Taxpayer Service (LTS), Enforcement Service (ES),
Excise Taxpayer Service (ETS) and Collection Service (CS);
c. Civil tax cases being disputed before the courts, e.g. CTA, CA, SC;
d. Collection cases filed in courts; and
25
e. Criminal violations, other than those already filed in court, or those involving
criminal tax fraud. (Sec. 2, Rev. Regs. No. 6-2000)
NOTES AND COMMENTS:
a. Tax cases which could not be the subject of compromise:
1) Withholding tax cases;
2) Criminal tax fraud cases;
3) Criminal violations already filed in court; and
4) Delinquent accounts with duly approved schedule of installment
payments. (Sec. 2, Rev. Regs. No. 6-2000)
*** 44. On June 15, 1996, Mr. Grant O. Neal, paid his income tax for the year
1995. On March 15, 1998, he discovered that the BIR excessively collected from his
the amount of P75,000.00. Thus, on the same day he filed with the Commissioner of
Internal Revenue a written claim for refund. On August 15, 1998 he received the
Commissioner’s letter denying his claim for refund. On September 1, 1998, or
within thirty (30) days from receipt of the letter, he filed a petition for review with
the Court of Appeals for the refund of the P75,000.00. In conformance with the
material data rule, he alleged that Section 11 of Republic Act No. 1125, provides that
a taxpayer adversely affected by a ruling or decision of the Commissioner of Internal
Revenue may appeal to the Court of Tax Appeals within thirty (30) days from
receipt of the adverse decision. Decide the case.
SUGGESTED ANSWER: The petition should be dismissed for having been filed
out of time. Sec. 229, NIRC of 1997 provides that court action for the recovery of
internal revenue tax should be filed within two (2) years from the date such tax was paid.
The petition should have been filed no later than June 16, 1998. There was as yet
no decision of the Commissioner to be appealed but this contention is bereft of merit, as it
would leave the taxpayer at the mercy of the BIR Commissioner without any positive and
expedient relief from the Court. It is disheartening enough to a taxpayer to be kept
waiting for an indefinite period for the ruling,. It would make matters more exasperating
for the taxpayer if the doors of justice would be closed for such a relief until after the
Commissioner, would have, at his personal convenience, given his go signal.
(Commissioner of Customs, et al, v. Court of Tax Appeals, et al., G.R. No. 82618, prom.
March 16, 1989, unrep.)
*** 45. Philippine Bank of Communications filed its quarterly income tax
returns for the first and second quarters of 1985, reporting profits and paid the total
income tax of P5 million. The taxes due were settled by applying the Bank’s tax
credit memos, and accordingly, the BIR issued the appropriate Tax Debit Memos.
Subsequently, the Bank suffered losses so that when it filed its Annual
Income Tax Returns for the year-ended December 31, 1985, it declared a net loss of
P25 million, thereby showing no tax liability. For the succeeding year, ending
December 31, 1986, it likewise reported a net loss of P14 million and thus declared
no income tax payable for the year.
During 1985 and 1986, the Bank earned rental income from leased
properties from where the lessees withheld and remitted to the BIR withholding
creditable taxes of P282 thousand for 1985, and P234 thousand for 1986.
On August 7, 1987, the Bank requested the Commissioner of Internal
Revenue, among others for a tax credit of P5 million representing the overpayment
of taxes in the first and second quarters of 1985. Thereafter, on July 25, 1988, the
Bank filed a claim for refund of creditable taxes withheld by its lessees from
property rentals in 1985 and in 1986. Both the request and the claim were
seasonably filed within the ten (10) year period for filing claims of excess quarterly
income tax payments as provided for in RMC 7-85 issued by the then Actg. BIR
Commissioner.
On November 18, 1988 the Bank instituted a Petition for Review before the
Court of Tax Appeals. Would the petition prosper ?
SUGGESTED ANSWER: No. It was filed out of time and since the taxpayer
decided to avail of the tax credit it could not anymore seek a refund.
26
The two (2) year prescriptive period should be computed from the time of filing
the Adjustment Return and final payment of the tax for the year. (Philippine Bank of
Communications v. Commissioner of Internal Revenue, et al., G.R. No. 112024, January
28, 1999)
The claim for refund should be exercised within the time fixed by law. REASON:
The Bureau of Internal Revenue being an administrative body enforced to collect taxes, its
functions should not be unduly delayed or hampered by incidental matters. (Ibid.)
The issuance of RMC 7-85 changing the statutory prescriptive period of two (2)
years to ten (10) years on claims of excess quarterly income tax payments did not merely
interpret the law, rather it legislated guidelines contrary to the statute passed by Congress.
Revenue Memorandum Circulars are considered administrative rulings (in the
sense of more specific and less general interpretations of tax laws) which are issued from
time to time by the Commissioner of Internal Revenue. It is widely accepted that the
interpretation placed upon a statute by the executive officers, whose duty it is to enforce
it, is entitled to great respect by the courts. Nevertheless, such interpretation is not
conclusive and will be ignored if judicially found to be erroneous. Rules and regulations
issued by administrative officials to implement a law cannot go beyond the terms and
provisions of the latter. Further, fundamental is the rule that the State cannot be put in
estoppel by the mistakes or errors of its officials or agents. (supra)
Finally, Sec. 69 of the 1977 NIRC (now Sec. 76 of the 1997 NIRC) provides that
any excess of the total quarterly payments over the actual income tax computed in the
adjustment or final corporate income tax return, shall either (a) be refunded to the
corporation, or (b) may be credited against the estimated quarterly income tax liabilities
for the quarters of the succeeding taxable year. To ease the administration of tax
collection, these remedies are in the alternative and the choice of one precludes the other.
Since the Bank has chosen the tax credit approach it cannot anymore avail of the tax
refund.. (supra)
*** 46. On July 18, 1986, the BIR issued to Salud V. Hizon a deficiency income
tax assessment. Since the assessment was not contested, the BIR on January 12,
1989, served warrants of distraint and levy to collect the tax deficiency. For
unknown reasons, the BIR did not proceed to dispose of the attached properties.
On November 3, 1992, Salud wrote the BIR requesting a reconsideration of
her tax deficiency assessment. The BIR, in a letter dated August 11, 1994, denied.
On January 1, 1997, the BIR filed with the RTC a case to collect the tax deficiency.
The complaint was signed by the Chief of the Legal Division of the Region and
verified by the Regional Director.
Salud now seeks the dismissal of the case on the following grounds:
a. The complaint was not filed upon authority of the BIR Commissioner as
required under Section 220 of the Tax Code;
b. The action has already prescribed. Resolve the issues raised.
SUGGESTED ANSWERS:
a. Revenue Administrative Order No. 10-95 specifically authorizes the Litigation
and Prosecution Section of the Legal Division of the regional district offices to institute
the necessary civil and criminal actions for tax collection. As the complaint filed in this
case was signed by the BIR’s Chief of Legal Division for the region and verified by the
Regional Director, there was, therefore, compliance with the law. Sec. 7 of the present
Tax Code authorizes the BIR Commissioner to delegate some of his powers.
b .Sec. 228 of the NIRC of 1997 mandates that a request for reconsideration must
be made within 30 days from the taxpayer’s receipt of the tax deficiency assessment,
otherwise the assessment becomes final, unappealable and, therefore demandable. The
notice was received by Salud on July 18, 1986 and she made her request for
reconsideration thereof only on November 3, 1992. Even assuming that she first learned
of the notice on the day the warrants were served on January 12, 1989, her request for
reconsideration was still filed beyond the 30 day period. Hence, her request for
reconsideration did not suspend the running of the prescriptive period. Although the
Commissioner acted on Salud’s request, eventually denying it on August 11, 1994, this is
of no moment and does not detract from the fact that the assessment had long become
27
demandable. (Republic of the Philippines, etc. v. Hizon, G.R. No. 1304, prom. December
13, 1999)
NOTES AND COMMENTS:
a. Effect of service of warrant of distraint or levy. The timely service of a
warrant of distraint or levy suspends the running of the period to collect the tax deficiency
in the sense that the disposition of the attached properties might well take time to
accomplish, extending even after the lapse of the statutory period for collections.
(Advertising Associates, Inc., v. Court of Appeals, 133 SCRA 765; Palanca v.
Commissioner of Internal Revenue, 114 Phil. 203). In those cases, the BIR did not file
any collection case but merely relied on the summary remedy of distraint and levy to
collect the tax deficiency.
Thus, the enforcement of tax collection through summary proceedings may be
carried out beyond the statutory period. (Republic of the Philippines, etc. v. Hizon, G.R.
No. 1304, prom. December 13, 1999) The statutory period for collection applies only
where a court suit is availed of for collection.
b. Form and Mode of Proceeding in Actions Arising under the Tax Code.
“Civil and criminal actions and proceedings instituted in behalf of the Government under
the authority of this Code or other law enforced by the Bureau of Internal Revenue shall
be brought in the name of the Government of the Philippines and shall be conducted by
legal officers of the Bureau of Internal Revenue but no civil or criminal action for the
recovery of taxes or the enforcement of any fine, penalty or forfeiture under this Code
shall be filed in court without the approval of the Commissioner." (Sec. 220, NIRC of
1997)
*** 47. After dissolution of Paramount on March 31, 1986, BPI acted as
liquidator. On May 30, 1985 Paramount paid P308,779.00 in income taxes for the
1st quarter; for the 2nd quarter, it paid P626,000.00 on August 29, 1985; for the 3 rd
quarter, it paid P284,161.00 on November 29, 1985.
On April 2, 1986, Paramount filed its corporate annual income tax return for
the calendar year ending December 31, 1985. All in all, Paramount paid the total
amount of P1,218,940.00 thereby showing a refundable amount of P65,259.00.
On April 14, 1988, BPI, as liquidator of Paramount, filed with the Court of
Tax Appeals a letter dated April 12, 1988 reiterating its claim for the refund of
P65,259.00 as overpaid income tax for calendar year 1985. On April 15, 1988, the
Paramount representative, filed with the Court of Tax Appeals a petition to toll the
running of the prescriptive period for filing a claim for refund of overpaid income
taxes.
The Court of Tax Appeals ruled that the two-year prescriptive period
commenced to run from April 15, 1986, the last day for filing the corporate income
tax return and granted the refund. Was the grant of the refund proper ?
SUGGESTED ANSWER: No. The two-year prescriptive period for actions for
refund of corporate income tax should be computed from the time of actual filing of the
Final Adjustment Return or Annual Income Tax Return. REASON: At That point, it can
already be determined whether there has been an overpayment made by the taxpayer.
Moreover, payment is made at the time the return is filed.
Since Paramount filed its corporate annual income tax return on April 2, 1986, it
had only two-years from date within which to file its written claim for refund. When it
filed a written claim for refund on April 14, 1988, and a petition for refund only on April
15, 1988, both claim and action for refund were thus barred by prescription.
(Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 117254, January
21, 1999)
NOTES AND COMMENTS: For corporations, the two year prescriptive period
under Sec. 230 (now Sec. 229, NIRC of 1997), for instituting tax refund cases in court
commence to run only from the time the refund is ascertained, which can only be
determined after a final adjustment return is accomplished. Two years not jurisdictional
and may be suspended. ( Commissioner of Internal Revenue v. The Philippine Life
Insurance Co.,et al. G.R. No. 105208, May 29, 1995 reiterating the TMX case).
28
The two year period applies only to recovery of taxes or penalties NOT to tax
credits availment. Absent a specific provision in the Tax Code or special laws, the period
would be 10 years. (Justice Vitug, concurring in the above case )
A simultaneous filing of the application with the BIR for refund/credit and the
institution of the court suit with the CTA is allowed. No need to wait for a BIR denial.
REASONS:
a. The positive requirement of Section 230 NIRC (now Sec. 229, NIRC of 1997);
b. The doctrine that delay of the Commissioner in rendering decision does not
extend the peremptory period fixed by the statute;
c. The law fixed the same period two years for filing a claim for refund with the
Commissioner under Sec. 204, par. 3, NIRC (now Sec. 204 [C], NIRC of 1997), and for
filing suit in court under Sec. 230, NIRC (now Sec. 229, NIRC of 1997), unlike in
protests of assessments under Sec. 229 (now Sec. 228, NIRC of 1997), which fixed the
period (thirty days from receipt of decision) for appealing to the court, thus clearly
implying that the prior decision of the Commissioner is necessary to take cognizance of
the case. (Commissioner of Internal Revenue v. Bank of Philippine Islands, etc. et al., CA-
G.R. SP No. 34102, September 9, 1994; Gibbs v. Collector of Internal Revenue and Court
of Tax Appeals, 107 Phil, 232; Johnston Lumber Co. v. CTA, 101 Phil. 151)
If the protest is denied in whole or in part or n the instance where the
Commissioner of Internal Revenue does not act within one hundred eighty (180) days
from submission of documents, the taxpayer adversely affected may appeal to the Court of
Tax Appeals within thirty (30) days from receipt of the said decision, or from the lapse of
the one hundred eighty (180) days, otherwise the decision shall become final, executory
and demandable. (last par., Sec. 228, NIRC of 1997)
A tax amnesty, much like a tax exemption, is never favored nor presumed in law
and if granted by statute, the terms of the amnesty like that of a tax exemption must be
construed strictly against the taxpayer and liberally in favor of the taxing authority.
(Banas, Jr. v. Court of Appeals, et al., G.R. No. 102967, prom. February 10, 2000)
and publication. Illustration: Revenue Memorandum Circular No. 37-93 which placed
Hope Luxury, Premium More and Champion cigarettes within the scope of the
amendatory law R.A. No. 7654 and subjected them to the increased tax rate requires
notice, hearing and publication. (Commissioner of Internal Revenue v. Court of Appeals,
et al., 261 SCRA 236)
NOTES AND COMMENTS:
The rulings and circulars promulgated by the Commissioner do not have
retroactive application if the revocation, modification, or reversal would be prejudicial to
the taxpayers. (Sec. 246, NIRC of 1997; Commissioner of Internal Revenue v. Court of
Appeals, et al., 267 SCRA 557)
Exceptions: Instances when revenue rulings and regulations have retroactive
effect even if prejudicial to the taxpayer:
a. Where the taxpayer deliberately misstates or omits material facts from his return
or in any document required of him by the BIR;
b. Where the facts subsequently gathered by the BIR are materially different from
the facts on which the ruling is based, or
c. Where the taxpayer acted in bad faith. (Sec. 246, NIRC of 1997)
*** 54. The Commissioner of Internal Revenue is authorized under the Tax Code
to delegate the powers vested in him under the pertinent provisions of the Tax Code
to any subordinate official with the rank equivalent to a division chief or higher.
What are the exceptions to this rule on delegation or alternatively speaking,
what are the powers of the Commissioner that he could not delegate ?
SUGGESTED ANSWER: The following are some of the powers that he could
not delegate:
a. The power to recommend the rules and regulations by the Secretary of Finance;
b. The power to issue rulings of first impression or to reverse, revoke, or modify
any existing ruling of the Bureau;
c. The power to compromise or abate, any tax deficiency, Provided, however, that
assessments issued by the Regional Offices involving basic deficiency taxes of
P500,000.00 or less, and minor criminal violations as may be determined by rules and
regulations to be promulgated by the Secretary of Finance, upon the recommendation of
the Commissioner, discovered by regional and district officials, may be compromised by a
regional evaluation board which shall be composed of the Regional Director as Chairman,
the Assistant Regional Director, heads of the Legal, Assessment and Collection Divisions
and the Revenue District Officer having jurisdiction over the taxpayer, as members; and
d. The power to assign or reassign internal revenue officers to establishments
where articles subject to excise tax are produced or kept. (Sec. 7, NIRC of 1997 cited in
Republic of the Philippines, etc. v. Hizon, G.R. No. 130430, prom. December 13, 1999)
INCOME TAXATION
31
*** 56. What are the general principles of income taxation in the Philippines ?
a. A citizen of the Philippines residing therein is taxable on all income derived
from sources within and without the Philippines.
b. A nonresident citizen is taxable only on income derived from sources within the
Philippines.
c. An individual citizen of the Philippines who is working and deriving income
from abroad as an overseas contract worker is taxable only on income from sources within
the Philippines, Provided, That a seaman who is a citizen of the Philippines and who
receives compensation for services rendered abroad as a member of the complement of a
vessel engaged exclusively in international trade shall be treated as an overseas contact
worker.
d. An alien individual, whether a resident or not of the Philippines, is taxable only
on income derived from sources within the Philippines.
e. A domestic corporation is taxable on all income derived from sources within
and without the Philippines.
f. A foreign corporation, whether engaged or not in trade or business in the
Philippines, is taxable only on income derived from sources within the Philippines. (Sec.
23, NIRC of 1997)
Essentially, the corporation gets back some of its stock, distributes cash or
property to the shareholder in payment for the stock, and continues in business as before.
The redemption of stock dividends previously issued is used as a veil for the constructive
distribution of cash dividends. (Commissioner of Internal Revenue v. Court of Appeals, et
al., G.R. No. 108576, January 20, 1999)
NOTES AND COMMENT: Taxability of redemption by issuing corporation of
shares of stock. It is suggested that the Bar reviewee ignores the concepts of taxability of
redemption of shares is stock by the issuing corporation as discussed in Commissioner of
Internal Revenue v. Court of Appeals, et al., G.R. No. 108576, January 20, 1999 (the
ANSCOR case), where the present provisions of the Tax Code on transaction tax [Sec.
127 (A), NIRC of 1997], and capital gains tax find application. The only concepts that
should be retained is the definition of redemption, and the applicability of the ANSCOR
case concept of redemption where the shares of stock that are redeemed are ordinary
assets. The tax treatment of redemption of shares of stock, under the present provisions of
the Tax Code shall be discussed below.
Tax treatment of redemption by issuing corporation of shares of stock under
the present provisions of the Tax Code, not under the former provisions of the Tax
Code as interpreted in the ANSCOR case. The tax treatment would be dependent upon
the following factors:
a. The nature of the shares of stock being disposed of, whether the shares are
capital assets or ordinary assets;
b. Whether or not the shares of stock are listed and traded and listed in the stock
exchange.
Taxability of sales, barter or exchange of shares of stocks:
a. Shares of stock are capital assets and not listed and traded in the stock
exchange. Where the shares of stock are capital assets because the seller is not engaged
in the business of buying and selling shares of stock (a dealer in securities), and not listed
and traded in the stock exchange, the sale is subject to a 5% tax on net capital gain not
over P100,000.00 while the net capital gain over P100,000.00 is subject to a tax of 10%.
Note that the holding period is not applied. The capital gains tax is an income tax because
the tax falls under title II of the Tax Code, entitled, “Income Tax”
b. Shares of stock whether capital or ordinary assets but are listed and
traded in the stock exchange are subject to the transaction tax of ½ of 1% of the gross
selling or transaction price. The holding period is not applied and the transaction tax is in
lieu of all income taxes that may be collected.
c. Shares of stock ordinary assets but not listed and traded in the stock
exchange. If the shares of stock are ordinary assets because the seller is engaged in the
business of buying and selling shares of stock (dealer in securities), the transaction shall be
subject to inclusion in the income tax return depending on certain circumstances. See
discussion on tax treatment of redemption of shares of sock where the shares that are
redeemed are ordinary assets and not listed and traded in the stock exchange.
Tax treatment of redemption of shares of stock where the shares that are
redeemed are ordinary assets and not listed and traded in the stock exchange.
Whether the transaction is to be subject to income taxation or not would be
dependent upon the nature and character of the shares of stock that are the subject of
redemption.
If the source is the original capital subscriptions upon the establishment of the
corporation or from initial capital investment in an existing enterprise, the redemption to
the concurrent value of acquisition is not subject to income taxation, as it is not income
but a mere return of capital.
On the contrary, if the redeemed shares are from stock dividend declarations other
than as initial capital investment, the proceeds of the redemption is additional wealth, for it
is not merely a return of capital but a gain therefrom.
The test for taxability therefor, as would make the redemption “essentially
equivalent to the distribution of a taxable dividend,” is whether the redemption resulted
into a flow of wealth. If no wealth is realized from the redemption, there may not be a
dividend equivalence treatment. (Commissioner of Internal Revenue v. Court of Appeals,
et al., G.R. No. 108576, January 20, 1999)
33
e. Interest on loan at less than market rate to the extent of the difference between
the market rate and actual rate granted;
f. Membership fees, dues and other expenses borne by the employer for the
employee in social and athletic clubs or other similar organizations;
g. Expenses for foreign travel;
h. Holiday and vacation expenses;
i. Educational assistance to the employee or his dependents; and
j. Life or health insurance and other non-life insurance premiums or similar
amounts in excess of what the law allows. [Sec. 33 (B), NIRC of 1997; 1st par., Sec. 2.33
(B), Rev. Regs. No. 3-98]
*** 63. What are the kinds of fringe benefits that are not subject to the fringe
benefits tax ?
SUGGESTED ANSWER:
a. When the fringe benefit is required by the nature of, or necessary to the trade,
business or profession of the employer; or
b. When the fringe benefit is for the convenience or advantage of the employer.
[Sec. 32(A), NIRC of 1997; 1st par., Sec. 2.33 (A), Rev. Regs. No. 3-98]
c. Fringe benefits which are authorized and exempted from income tax under the
Tax Code or under any special law;
d. Contributions of the employer for the benefit of the employee to retirement,
insurance and hospitalization benefit plans;
e. Benefits given to the rank and file employees, whether granted under a
collective bargaining agreement or not; and
f. De minimis benefits as defined in the rules and regulations to be promulgated by
the Secretary of Finance upon recommendation of the Commissioner of Internal Revenue.
[1st par., Sec. 32 (C), NIRC of 1997; Sec. 2.33 (C), Rev. Regs. No. 3-98]
*** 65. What are considered as de minimis benefits not subject to withholding
tax on compensation income of both managerial and rank and file employees ?
SUGGESTED ANSWER: The following shall be considered as de minimis
benefits not subject to withholding tax on compensation income of both managerial and
rank and file employees:
a. Monetized unused vacation leave credits of employees not exceeding ten (10)
days during the year;
b. Medical cash allowance to dependents of employees not exceeding P750.00 per
employee per semester or P125 per month;
c. Rice subsidiy of P1,000.00 or one (1) sack of 50-kg. rice per month amounting
to not more than P1,000.00;
d. Uniforms and clothing allowance not exceeding P3,000.00 per annum;
e. Actual yearly medical benefits not exceeding P10,000.00 per annum;
f. Laundry allowance not exceeding P300 per month;
g. Employees achievement awards, e.g. for length of service or safety
achievement, which must be in the form of a tangible persona property other than cash or
gift certificate, with an annual monetary value not exceeding P10,000.00 received by an
employee under an established written plan which does not discriminate in favor of highly
paid employees;
h. Gifts given during Christmas and major anniversary celebrations not exceeding
P5,000 per employee per annum;
36
*** 66. The following were the events and transactions of Rosalinda, a resident
alien, in 2000:
a. Received P7.0 million as commissions for being the agent of actor Mikey
and actress Meggy;
b. Received P2.0 million as blackmail money for not exposing the
indiscretions of movie actress Alma;
c. Sold her residential condominium at Ayala Avenue for P30 million. She
bought the same in 1997 for only P10 million;
d. Made a “killing” at the stock market when she sold for P5.0 million
Primus, Inc. shares which were not traded in the stock exchange. She bought the
shares in 1985 for only P500,000.00;
e. During her birthday, Mrs. Water Lily, the famous producer gave her a ten
carat diamond ring worth P750,000.00;
f. Received P360,000.00 annual salary as P.R.O. of Regal Productions;
g. Awarded P1.5 million damages from the libel suit she filed against actress
Natalia;
h. Was sent by Regal Productions to Hollywood, U.S.A. to observe movie
making at various studios. She traveled at Regal ’s expense through First Class
Airfare, and Regal spent US$500.00 a day for her hotel and accommodations which
were all reimbursed to Rosalinda;
i. Received P750,000.00 from Regal Productions as separation pay when
she was terminated as the result of her involvement in a well publicized scandal;
j. Upon nomination of her friend, Rosalinda was awarded the best P.R.O. of
the year with the accompanying trophy worth P50,000.00 and cash price of
P100,000. She was required to deliver at least 12 lectures before P.R.O.s;
k. Won a brand new Mercedes Benz C600Z worth P6,500,000.00 during a
raffle conducted by a well-known supermarket;
l. P250,000.00 proceeds of a bouncing check she issued to her friend Ms. Cris
Ty, who instituted a criminal case for violation of B.P. Blg. 22; and
m. P500,000.00 which constituted the sales proceeds of the jewelry she stole
from movie producer, Aling Pepa.
1) What items are to be included as part of Rosalinda’'s compensation
income, or income from self-employment? Explain.
2) Why were the items you excluded not includible as part of Rosalinda’s
compensation income or income from self-employment? Explain.
SUGGESTED ANSWER:
a. The following are the items to be included as part of Rosalinda’s compensation
income because they were derived from employer-employee relationship from Regal
Productions:
1.) The P360,000.00 annual salary as P.R.O. of Regal Productions.
2.) The cost of the First Class Airfare Ticket exceeding the cost of a
business class ticket for the travel to Hollywood in pursuit by Rosalinda of Regal's trade
37
The following are the items to be included as part of Rosalinda’s income from self-
employment engaged in the business of being an agent for actors and actresses:
1) The P7.0 million commissions for being the agent of actor Mikey and
actress Meggy;
2) The P2.0 million blackmail money is considered as other income coming
from sources other than those mentioned in Sec. 3(A) of Revenue Regulation No. 2-93 as
well as income from whatever source derived. (Section 32 [A], NIRC of 1997) The same
is true with the P250,000.00 proceeds of the bouncing check and the P500,000.00 sales
proceeds of the jewelry she stole. Thus, all incomes, illegal or legal, are included. For
Philippine tax purposes all income not expressly excluded or exempted from the class of
taxable income, irrespective of the voluntary or involuntary action of the taxpayer in
producing the income are subject to income taxation.
NOTES AND COMMENTS: The rule is different in the United States. In
Commissioner of Internal Revenue v. Wilcox, 286 U.S. 417, the U.S. Supreme Court held
that a swindler, embezzler, thief or robber has an unqualified duty and obligation to return
the money. to collect a tax would give the government an unjustified preference as to the
part of the money which rightfully belongs to the victim.
In U.S. v. Lozia, 104, 104 F. Supp. (D.C.J.D.N.Y. 1952), it was held that the
money or other proceeds of the sale or other disposition of stolen property is subject to
income tax because the felon has an obligation to return the property taken. The proceeds
were not the property taken. The proceeds may not even be the equivalent of the property
taken.
3) P1.5 million damages, because they are not compensation arising from
under Sec. 32 (B) [4] of the NIRC of 1997. These are not damages which arose from
personal injuries, hence subject to income tax.
4) The P50,000.00 prize as Best P.R.O. While it is true that Rosalinda
was selected without any action on her part to enter the contest or proceeding, she is
required to deliver 15 lectures, which is considered as substantial future services as a
condition to receiving the prize. (Sec. 32 [B] {7} (c) {ii} of the NIRC of 1997)
b. The following are the excluded items and reasons for their exclusion:
1) P30 million proceeds from the sale of her residential condominium
because the same is subject to final taxes in the form presumed capital gains taxes from the
sale of real property under Sec. 24 (D) of the NIRC of 1997).
2) The gains from the sale of Primus shares because the gains are subject
to final taxes for the capital gains from sales of stock not traded in the stock exchange
under Sec. 24 (C) of the NIRC of 1997.
3) The P750,000.00 diamond ring because it is a gift excluded from gross
income (Sec. 32 [B] {3} of the NIRC of 1997) It is subject to gift taxes under Sec. 98 of
the NIRC of 1997. The giving of the gift was a pure act of liberality and not in
consideration of any service.
4) P750,000.00 separation pay as Rosalinda’s services were terminated for
a cause beyond her control in accordance with Sec. 32 (B) [6] {b} of the NIRC of 1997,
hence excluded from gross income.
5) The P6,500,000.00 value of the Mercedes Benz she won because it is
subject to a final tax of 20% on passive income under the provisions of Sec. 24 (B) [1] of
the NIRC of 1997.
67. In 1998, Mang Joe Liby after thirty (30) years experience as a mechanic
for Mercedes Benz decided to establish his own auto repair shop with two of his
former supervisors as his partners. For the year 2000, the auto repair shop incurred
the following:
a. Advertising expenses;
38
68. After ten (10) years experience working as the General Manager of a
fastfood chain, Wendy decided to become self employed and opened an eatery which
she called “McWendy’s Pizza.” She registered the eatery as a single proprietorship.
In 2000, Wendy had the following income items:
a. Gross receipts from operation of “McWendy’s Pizza” amounting to P5
million.
b. Proceeds from the sale of her house and lot amounting to P3 million which
she invested in “McWendy’s Pizza”.
c. Cash prize of P15,000 which she won in a singing contest.
d. Cash dividends of P35,000.00 which she received from MERALCO, a
domestic corporation.
e. Life insurance proceeds which she received from the death of her pet dog
amounting to P15,000.00.
f. P25,000.00 cash prize for being the Best Pizza Parlor in Metro Manila.
The award was made by an independent body comprised of selected pizza parlor
operators which, without the knowledge of pizza parlor operators, went around
Metro Manila sampling the food, rating the facilities and personnel. There were no
entries to the contest as the winners were chosen by the independent body.
g. Two round trip tickets for the U.S.A. valued at U.S. $3,500.00 with
U.S.$5,000.00 pocket money won from the annual raffle of her depository bank.
h. P45,000.00 interest earned from her time deposit with a local bank.
I. P40,000.00 dowry from her prospective mother-in-law, an American living
in New York, U.S.A., as Wendy was getting married in 1999.
j. P50,000.00 net profit from the sale of Primus Corporation stocks which
were not traded at the Phil. Stock Exchange.
Upon the other hand, Wendy had the following disbursements:
a. P50,000.00 legal fees for the organization of “McWendy’s Pizza;”
b. P120,000.00 for radio and TV time to advertise “McWendy’s Pizza;”
39
The following items are excluded from her income reportable in her income tax
returns:
1) P3 million proceeds from sale of house and lot as subject to capital
gains from sale of real property which is a final tax. (Sec. 24 [D], NIRC of 1997)
2) P35,000.00 dividends from MERALCO, a domestic corporation is
subject to a final tax on dividends under Sec. 24 (B) [2], NIRC of 1997.
3) P15,000.00 won in a singing contest as this is a prize exceeding
P10,000.00 subject to a final tax on passive income in accordance with Sec. 24 (B) [1],
NIRC of 1997.
4) Value of the tickets and pocket money won from the annual raffle of
Wendy’s Bank for the same reason as above.
5) P45,000.00 interest income for the same reason as above.
6) Net profit from sale of Primus shares as these are subject to final tax on
the sales of shares of stock not traded in the stock exchange under Sec. 24 (C) of the
NIRC of 1997.
7) P40,000.00 dowry because it is a gift. (Sec. 32 [B] {3}, NIRC of
1997)
40
4) The same must be actually charged off the books of accounts of the
taxpayer as of the end of the taxable year; and
5) The same must be actually ascertained to be worthless and uncollectible
as of the end of the taxable year. (Sec. 3, Rev. Regs. 5-99)
b. The following steps must be undertaken by the taxpayer to proved that it
exerted diligent efforts to collect the debts:
1) Sending of statements of accounts;
2) Sending of collection letters;
3) Giving the account to a lawyer for collection;
4) Filing a collection case in court. While it is not required to file suit, a
taxpayer is at least expected by the law to produce reasonable proof that the debts
are uncollectible although diligent efforts were exerted to collect the same. (Phil.
Refining Company, etc., v. Court of Appeals, 256 SCRA 667)
NOTES AND COMMENTS: Related parties.
a. Members of the same family. The family of an individual shall include only his
brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal
descendants;
b. An individual and a corporation more than fifty percent (50%) in value of the
outstanding stock of which is owned, directly or indirectly, by or for such individual;
c. Two corporations more than fifty percent (50%) in value of the outstanding
stock of which is owned, directly or indirectly, by or for the same individual;
d. A grantor and a fiduciary of any trust; or
e. The fiduciary of a trust and the fiduciary of another trust if the same person is a
grantor with respect to each trust; or
f. A fiduciary of a trust and a beneficiary of such. [Sec. 36 (B), NIRC of 1997]
*** 74. What are ordinary and necessary expenses for tax purposes. What are
the requirements before business expenses may be deducted from gross income ?
SUGGESTED ANSWER:
a. Ordinary expenses are those which are common to incur in the trade or business
of the taxpayer WHILE capital expenditures are those incurred to improve assets and
benefits for more than one taxable year. Ordinary expenses are usually incurred during a
taxable year and benefits such taxable year. Necessary expenses are those which are
appropriate or helpful to the business.
b. The following are the requisites for deductibility of business expenses:
1) Compliance with the business test:
a) Must be ordinary and necessary;
b) Must be paid or incurred within the taxable year;
c) Must be paid or incurred in carrying on a trade or business.
d) Must not be bribes, kickbacks or other illegal expenditures
2) Compliance with the substantiation test. Proof by evidence or records
the deductions allowed by law including compliance with the business test.
75. In 2000, Mara, Inc., incurred P350,000.00 in order to promote the sale of
its line of ladies dresses which were specially designed and targetted the Valentine’s
day market for that year. It likewise incurred P500,000.00 to promote its image in
the local market and another P250,000.00 to promote the sale of its shares of stock
which it was offering to the general public for sale.
It asks your advice on how to treat these advertising expenses.
SUGGESTED ANSWER:
a. It should deduct the P350,000.00 from its 2000 gross income as ordinary and
necessary expenses because these are advertising expenses used to stimulate the current
sale of merchandise.
b. It should not deduct the P500,000.00 advertising expense from its 2000 gross
income as these are advertising expenses designed to stimulate the future sale of
merchandise. These are expenditures in order to create or maintain some form of
goodwill for Mara, Inc.’s trade or business. These expenditures are to be spread over a
reasonable period of time because they are considered that a capital asset which has a
determinable life has been acquired. (General Foods [Phils.], Inc. v. Commissioner of
Internal Revenue, CTA Case No. 4386, prom. February 8, 1994)
c. It should likewise spread the P250,000.00 over a reasonable period of time
because these are expenses incurred to create a favorable image for the corporation to
generate sales of its shares of stock. These constitute capital investment because the
particular advertising expense was incurred in relation to the capital asset or equity of the
company. (Atlas Consolidated Mining and Development Corporation v. Commissioner of
Internal Revenue, 102 SCRA 246)
** *76. Mikey Corporation issued preferred shares with the following condition:
“The holders of preferred shares shall be entitled to an annual 7% interest, and shall
likewise participate in the general distribution of dividends to common shares.” In
2000 Mikey Corporation paid P4 million to its preferred shareholders representing
the 7% interest. It seeks your advise whether it could deduct the said amount from
its gross income. What would your advice be ?
SUGGESTED ANSWER: It is not allowed to deduct said interests. Preferred
shares are considered capital regardless of the conditions under which such shares are
issued and dividends or “interests” paid thereon are not allowed as deductions from the
gross income of corporations. (Revenue Memorandum Circular No. 17-71)
*** 77. Jack, 45 years old with 10 years service with his employer, decided to
avail of the liberal early voluntary retirement program offered by his employer. The
program was part of the profit improvement program of the company. The
positions of those who would avail of the program would not be filled up once they
are vacated as a result of the voluntary early retirement. Are any amounts received
by Jack as a result of his availment of such program tax-free ? What should be done
in order to have his retirement pay be exempt from taxation ? Explain briefly.
43
78, What are the prizes that are excluded from gross income, hence not
taxable ?
SUGGESTED ANSWER:
a. Prizes and awards made primarily in recognition of religious, charitable,
scientific, educational, artistic, literary, or civic achievement but only if
1) The recipient was selected without any action on his part to enter the
contest or proceeding; and
2) The recipient is not required to render substantial future services as a
condition to receiving the prize or award. [Sec. 32 (B) {7} {c}, NIRC of 1997]
b. All prizes and awards
1) Granted to athletes
2) In local and international sports tournaments and competitions
3) Whether held in the Philippines or abroad, and
4) Sanctioned by their national sports associations [Sec. 32(B) {7} {d},
NIRC of 1997], which per BIR ruling is accreditation with the Philippine Olympic
Committee. Note that the exemption refers only to amateur sports. For
professional boxing, a special law grants the exemption not the NIRC.
*** 79. “A” was seriously injured in a vehicular accident. As a result of his
injuries, he was able to recover P1 million representing unearned income, and P5
million for moral and exemplary damages. Are the amounts subject to tax ?
SUGGESTED ANSWER: No. Excluded from gross income, hence exempt from
income tax are amounts received as compensation for personal injuries plus the amounts
of any damages received whether by suit or agreement on account of such injuries. [Sec.
32 {B} {4}, NIRC of 1997; Sec. 2.78 (B) {9}, Rev. Regs. No. 2-98]
NOTES AND COMMENTS: The above is the prevailing view. The author
submits that the amount of P1 million, being in the nature of replacement of income lost is
44
taxable. This is so, because exclusions are in the nature of tax exemptions, hence they
must be strictly construed against the taxpayer.
*** 80. In 1986 Bella purchased a parcel, of land adjoining the City Camp
Lagoon in Baguio City for P2.5 million. She intended to build her family home on
the said parcel of land. Unfortunately for her, the embankment was destroyed
during the July 6, 2001 flash floods causing erosion which led to a deterioration of
the market value to only P1.5 million. The City Assessor assessed the property for
tax purposes at P1.2 million while the BIR zonal valuation is P1.4 million.
a. Supposing that on August 31, 2001, the owner of the adjoining property
buys the property at P1.3 million, what would be the tax consequences to Bella
considering that she suffered a loss? Explain.
b. Would your answer be the same if the government expropriated the
property at its present market value of P1.5 million? Why?
SUGGESTED ANSWERS:
a. The parcel of land is a capital asset of Bella. This is so because it is not her
stock in trade, or property includible as part of her inventory at the end of the taxable
year, or property primarily held by her for sale to customers in the ordinary course of
trade or business, or property used in trade or business subject to depreciation, or real
property used by Bella in her trade or business. (Sec. 33 [A] {1}, NIRC of 1997)
Consequently, irrespective of the holding period under the provisions of Sec. 39
(B) of the NIRC of 1997, the capital gains presumed to have been realized from the sale
shall be taxed at the rate of 6% based on the gross selling price or the fair market value at
the time of the sale whichever is higher. (Sec. 24 [D], NIRC of 1997) Since the market
value of P1.5 million is higher than the gross selling price of P1.3 million, then the
presumed capital gains tax of 6% should be based on P1.5 million not P1.3 million.
The tax is denominated as a presumed capital gains tax hence it is imposed even if
there was a loss.
b. No. The taxpayer, in this case Bella, has the option of reporting her actual
gains from the expropriation as part of her income subject to the rates for compensation
income under Sec 21(a) of the National Internal Revenue Code or to pay a 6% presumed
capital gains tax based on the fair market value of P1.5 million. (Sec. 24 (D) [1], NIRC of
1997) Since she suffered a loss and there is no gain, she should choose the first option;
she should not be subjected to any tax.
82. Define net loss carry-over and net operating loss carry-over. Distinguish
the two concepts and discuss tax implications of each.
SUGGESTED ANSWER:
a. Net loss carry-over means the deduction from net capital gains of a succeeding
year the net capital loss suffered during the prior year. Net operating loss carry-over is the
deduction from gross income for the next three (3) consecutive taxable years following the
year of such loss, the excess of allowable deduction over the gross income .
45
b. Distinctions between net loss carry-over and net operating loss carry-over.
Source: The source of net loss carry-over are capital losses only WHILE the source of
net operating loss carry-over are from the ordinary trade and business of the taxpayer.
Who may enjoy the carry-over: Only taxpayers other than corporations may enjoy net loss
carry-over WHILE only corporations may enjoy the net operating loss carry-over.
c. Any taxpayer, other than a corporation (individuals including trusts and estates),
who sustains in any taxable year a net capital loss from capital transactions involving
capital assets (other than real property or shares of stock not listed or traded in the stock
exhange), is allowed to treat during the succeeding year such net capital loss as a loss
from the sale or exchange of a capital asset (other than real property or shares of stock not
listed and traded in the stock exchange), held for more than twelve months. (Sec. 39 [D],
NIRC of 1997)
83. In 1995, Ms. Ma Ganda bought a diamond ring worth P75,000.00 for use
during her debut. On September 5, 2001, having no further use for the ring, she
decided to sell it to Mrs. M. Ayaman for P350,000.00. Without going into
arithmetical computations, how should Ms. Ganda be taxed on the sale of her ring.
SUGGESTED ANSWER:
The ring is Ms. Ganda’s capital asset because she is not in the business of buying
and selling jewelry. She bought the ring for her personal use and not for trade or business.
Consequently, she should determine the net profit from the sales of the ring and applying
the holding period should report fifty percent (50%) of such net profit in her income tax
return for 1999 as part of ordinary income. The holding period should be applied because
she held the diamond ring, her capital asset, for more than twelve (12) months.
*** 84. In 1980, China Banking Corporation made a 53% equity investment in
the First CBC Capital (Asia) Ltd., a Hongkong subsidiary engaged in financing and
investment with “deposit-taking” function. The investment amounted to
P16,227,851.80, consisting of 106,000 shares with a par value of P100 per share.
Subsequently, First CBC Capital (Asia), Ltd., has become insolvent. China
Banking treated the investment in its 1987 Income Tax Return as a bad debt or as
an ordinary loss deductible from its gross income. The BIR disallowed the
deduction because the investment should not be classified as “worthless.” Rule on
the disallowance.
SUGGESTED ANSWER: BIR was correct. The equity investment is capital in
character, the loss of which could be deductible only from capital gains, and not from any
other income of the taxpayer.
First CBC Capital (Asia), Ltd., the investee corporation, is a subsisidary
corporation of China Banking whose shares in said investee corporation are not intended
for purchase or sale but an investment. (China Banking Corporation v. Court of Appeals,
et al., G.R. No. 12508, prom. July 19, 2000)
NOTES AND COMMENTS:
*** a. When securities become worthless, the law deems the loss to be a loss from
the sale or exchange of capital assets. An equity investment is a capital, not ordinary,
asset of the investor, the sale or exchange of which results in either a capital gain or a
capital loss. The gain or the loss is ordinary when the property sold or exchanged is not a
capital asset.
The loss sustained by the holder of the securities, which are capital assets (to him),
is to be treated as a capital loss as if incurred from a sale or exchange transaction. A
capital gain or a capital loss normally requires the concurrence of two conditions for it to
result:
1) There is a sale or exchange; and
2) The thing sold or exchanged is a capital asset.
When securities become worthless there is strictly no sale or exchange but
the law deems the loss anyway to be “a loss from the sale or exchange of capital assets.”
(China Banking Corporation v. Court of Appeals, et al., G.R. No. 12508, prom. July 19,
2000)
b. Securities, defined for deductibility of bad debts. Shares of stock in a
corporation and rights to subscribe for or to receive such shares. The term includes
46
TRANSFER TAXES
*** 87. Don Cesar Soriano, a Spanish national, died on September 5, 2000 in his
villa at Lucerne, Switzerland. He executed a will before his death leaving all of his
properties to his girl friend Maricel Montano, a Filipino residing in Bruge, Belgium.
The girl friend decided to bring the remains of Don Cesar, who was a resident of the
Philippines from 1935 up to 1997 to the Philippines for burial because that was his
wish as most of his friends are still living in the Philippines. She spent about
P750,000.00 for funeral expenses. On September 17, 2000 Maricel met you in
Hongkong and engaged your services in order to settle the estate of Don Cesar in
accordance with the will which was properly probated in Switzerland. She presents
to you an inventory of the properties left by Don Cesar with their corresponding
values as of September 5, 2000, Don Cesar’s date of death. The villa in Switzerland
US$1 million; an apartment building located in New York, US$5 million; a
hacienda in Davao P25 million but the present valuation is now P40 million because
of road constructions which enhanced the value of the property; US$15 million the
value of life insurance proceeds from an insurance taken out by Don Cesar on his
own life designating his estate as beneficiary from the Canton Swiss Insurance at
Canton, Switzerland; P25 million proceeds of life insurance taken by Don Cesar on
his own life from Philamlife Insurance in the Philippines payable to Maricel as
irrevocable beneficiary; outstanding bank balance with Philippine Bank of
Commerce in the amount of P5 million with Nanette as his and/or co-depositor.
Shares of stock of a Hongkong company but managed from the Philippines and a
P15 million apartment located in Manila, Philippines which he donated to his close
friend on April 25, 1989 subject to the condition that the friend remits to Don
Cessar all the rentals of the property during the lifetime of Don Cesar.
a. What should be reported as part of Don Cesar’s gross estate and what
deductions are allowable to determine his net estate? Explain.
b. Are the proceeds of the P25 million life insurance to be considered as part
of the gross estate of Don Cesar or Maricel’s income? Why?
c. Supposing Maricel wants to withdraw the P5 million from the bank, what
advise should you give her?
d. Is Maricel being the sole beneficiary liable for the payment of the estate
taxes?
SUGGESTED ANSWER:
a. Since Don Cesar was a “non-resident decedent who at the time of his death was
not a citizen of the Philippines, only that part of the entire gross estate which is situated in
the Philippines, shall be included in his taxable estate.” (Sec. 85, NIRC of 1997) The
problem is clear that Don Cesar resided in the Philippines only from 1935 to 1997.
Specifically, the part of his gross estate which are situated outside of the
Philippines and excluded from the taxable estate are the US$1 million villa in Switzerland,
the US$5 million apartment building in New York, U.S.A., and the proceeds of the US$15
million life insurance from the Canton Swiss Insurance.
The following properties are part of his gross estate because they are situated in
the Philippines. The P25 million Davao Hacienda, the P5 million bank balance with the
Philippine Bank of Commerce, the shares of stock in the Hongkong corporation and the
P15 million apartment.
The shares of stock have acquired a business situs in the Philippines because the
foreign corporation is managed from the Philippines hence, includible as part of Don
Cesar’s’s gross estate.
48
The P15 million apartment is part of the gross estate because it was transferred in
contemplation of death. Don Cesar has retained for his life the enjoyment of the fruits of
the property. (Sec. 85 (B), NIRC of 197)
b. The proceeds of the P25 million life insurance is neither part of the gross estate
nor income to Maricel. The proceeds are not part of the estate because the beneficiary is
not the estate of Don Cesar, his executor or administrator and the designation of the
beneficiary is irrevocable. (Sec. 85 (E), NIRC of 1997) The P25 million is not also
income to Maricel because life insurance proceeds paid to beneficiaries upon the death of
the insured are exclusions from gross income. (Sec. 32 [B] {1}, NIRC of 1997)
c. I would advise Maricel to first secure a certification from the Commissioner of
Internal Revenue that the appropriate estate taxes were already paid. If the amount to be
withdrawn does not exceed P20,000.00, she should secure an authorization from the
Commissioner even if said taxes have not yet been paid. (2nd par., Sec. 97, NIRC of
1997)
d. If Maricel is at the same time the executor or administrator of the estate, then
she is primarily liable. If she is not the executor or administrator, then being the
beneficiary, she is subsidiary liable to the said executor or administrator. (Sec. 91 [C},
NIRC of 1997)
NOTES AND COMMENTS: The valuation to be used is the valuation at the time
of the decedent’s death NOT at the time of filing return or payment of estate tax.
*** 88. The NIRC of 1997 allows as a deduction from the gross estate of a citizen
or resident of the Philippines “judicial expenses of the testamentary or intestate
proceedings” in order to arrive at the net estate subject to estate taxes. [Sec. 86 (A)
(b)]. Are notarial fees paid for the extrajudicial settlement of the estate as well as
attorneys fees for the guardian deductible from the gross estate as “judicial
expenses” ? Explain briefly.
SUGGESTED ANSWER: Yes. The notarial fee paid for the extrajudicial
settlement is clearly a deductible expense since such settlement effected a distribution of
the estate to his lawful heirs, Similarly, the attorney’s fees for a guardian of the property
during the decedent’s lifetime should also be considered as a deductible administration
expense. The guardian gives a detailed accounting of decedent’s property and gives
advice as to the proper settlement of the estate, acts which contributed towards the
collection of decedent’s assets and the subsequent settlement of the case. (Commissioner
of Internal Revenue v. Court of Appeals, et al., G.R. No. 123206, prom. March 22, 2000)
NOTES AND COMMENTS: Judicial expenses are expenses of administration.
Administration expenses, as an allowable deduction from gross estate of the decedent for
purposes of arriving at the value of the net estate, have been construed to include all
expenses “essential to the collection of the assets, payment of debts or the distribution of
the property to the persons entitled to it.” In other words, the expenses must be essential
to the proper settlement of the estate.
Not deductible are expenditures incurred for the individual benefit of the heirs,
devisees or legatees. Thus, in Lorenzo v. Posadas, the Court construed the phrase
“judicial expenses of the testamentary or intestate proceedings” as not including the
compensation paid to a trustee of the decedent’s estate when it appeared that such trustee
was appointed for the purpose of managing the decedent’s real property for the benefit of
the testamentary heir. In another case, the Court disallowed the premiums paid on the
bond filed by the administrator as an expense of administration since the giving of a bond
is in the nature of a qualification for the office, and not necessary in the settlement of the
estate. Neither may attorney’s fees incident to litigation incurred by the heirs in asserting
their respective rights be claimed as a deduction from the gross estate. (Commissioner of
Internal Revenue v. Court of Appeals, et al., G.R. No. 123206, prom. March 22, 2000)
90. On September 29, 1989, former President Marcos died in Hawaii, U.S.A.
A special audit team created to conduct investigations and examinations of the tax
liability of the late president disclosed that the Marcoses failed to file a written
notice of death of the decedent and an estate tax return in violation of the NIRC.
The Commissioner of Internal Revenue thereby caused the preparation and
filing of the Estate Tax Return for the estate of the late president. On July 26, 1991,
the BIR issued a deficiency tax assessment against the estate which were served
constructively upon Ms. Imelda Marcos (through her caretaker Mr. Martinez) at
her last known address at No. 204 Ortega St., San Juan, M .M.
The deficiency tax assessment was not protested administratively by Mrs.
Marcos and the other heirs of the late president. On February 22, 1993, the BIR
Commissioner issued twenty-two notices of levy on real property against certain
parcels of land owned by the Marcoses - to satisfy the alleged estate tax, among
others.
Other notices of levy were made until the properties were sold at public
auction, with the lots being forfeited in favor of the government for lack of bidders.
The validity of the BIR's actions is now raised.
SUGGESTED ANSWER: The approval of the court sitting in probate, or as a
settlement tribunal over the estate of the deceased is not a mandatory requirement for the
collection of the estate. The probate court is determining issues which are not against the
property of the decedent, or a claim against the estate as such, but is against the interest or
50
property right which the heir, legatee, devisee, etc. has in the property formerly held by the
decedent.
The notices of levy were regularly issued within the prescriptive period.
The tax assessment having become final, executory and enforceable, the same can
no longer be contested by means of a disguised protest. (Marcos, II v. Court of Appeals,
et al., 273 SCRA 47)
91. Mr. Fil I. Pino, a Canadian citizen and a resident of Ontario, Canada,
sends a gift of US$20,000.00 to his future daughter-in-law who is to be married to
his only son in the Philippines. The marriage actually took place on the date the gift
was received.
a. Is the donation by Mr. Pino subject to tax ? Explain. Would your answer
be the same if Mr. Pino is a Filipino citizen but is a non-resident ?
b. What is the tax consequence, if any, to the Mr. Pino’s daughter-in-law ?
SUGGESTED ANSWER:
a. Yes, because a non-resident alien is exempt only from the payment of donor’s
taxes if his gifts are made to or for the use of the National Government or any entity
created by any of its agencies which is not conducted for profit, or to any political
subdivision of the said Government.
He is subject to tax because the gift was not made in favor of an educational
and/or charitable, religious, cultural or social welfare corporation, institution, foundation,
trust or philanthropic organization or research institution or corporation which does not
use more than 30% of the donation for administration purposes.
If Mr. Pino was a non-resident Filipino my answer would still be the same.
b. None. the amount should not be considered as part of her income as the same
is one of the exclusions, Neither is there any donor’s tax due from her because the tax is
to be paid by the donor and not the recipient.
RETURNS
92. What is the probative value of income tax returns as evidence ?
SUGGESTED ANSWER: Income tax returns being public documents, until
controverted by competent evidence, are competent evidence, are prima facie correct
with respect to the entries therein. (Ropali Trading v. NLRC, et al., 296 SCRA 309, 317)
NOTES AND COMMENTS: While the above cited case is a labor case, the
author suggests that the same could find application in taxation as well.
93. Bill and Hillary are married to each other. Bill is employed as a
government employee deriving annual gross compensation income amounting to
P120,000.00 while Hillary derives income from selling baby dresses. Her monthly
income fluctuates, but for the year 2000, she grossed P500,000.00. The couple have
no children. Are they allowed to file separate income tax returns ? Why ?
SUGGESTED ANSWER: No. As a general rule, they are not allowed to file
separate returns as only married individuals who are both earning purely compensation
income are allowed to file separate income tax returns.
Section 51 (D) of the NIRC of 1997 provides that, “Married individuals, whether
citizens, resident or non-resident aliens, who do not derive income purely from
compensation shall file a return for the taxable year to include the income of both spouses,
but where it is impracticable for the spouses to file one return, each spouse may file a
separate return of income but the returns so filed shall be consolidated by the Bureau for
purposes of verification” There is no showing in the problem that it is impracticable for
Bill and Hillary to file one return, hence they should file a single return.
*** 94. Who are the individuals required to file an income tax return ?
SUGGESTED ANSWER:
a. Every Filipino citizen residing in the Philippines;
b. Every Filipino citizen residing outside the Philippines on his income from
sources within the Philippines;
51
c. Every alien residing in the Philippines on income derived from sources within
the Philippines; and
d. Every nonresident alien engaged in trade or business or in the exercise of
profession in the Philippines. (Sec. 51 [A] {1}, NIRC of 1997)
***95. Who are the individuals who are not required to file an income tax return ?
SUGGESTED ANSWER:
a. An individual whose gross income does not exceed his total personal and
additional exemptions for dependents, Provided, That a citizen of the Philippines and any
alien individual engaged in business or practice of profession within the Philippines shall
file an income tax return regardless of the amount of gross income;
b. An individual with respect to pure compensation income for services in
whatever form paid, including, but not limited to fees, salaries, wages, commissions, and
similar items, derived from sources within the Philippines, the income tax on which has
been correctly withheld, Provided, That an individual deriving compensation concurrently
from two or more employers at any time during the taxable year shall file an income tax
return: Provided, further, That an individual whose pure compensation income derived
from sources within the Philippines exceeds Sixty thousand pesos (P60,000.00), shall also
file an income tax return;
c. An individual whose sole income has been subject to final withholding tax;
d. An individual who is exempt from income tax pursuant to the provisions of the
NIRC of 1997, and other laws, general or special. (Sec. 51 [A] {2}, NIRC of 1997)
NOTES AND COMMENTS: An individual who is not required to file an income
tax return may nevertheless be required to file an information return. (Sec. 51 [A] {3},
NIRC of 1997)
96. “F” Corporation brought to court the issue of whether it should be made
liable for the payment of the withholding tax at source since it is merely an agent
and not the tax payer. Rule on the issue with reasons.
SUGGESTED ANSWER: “F” Corporation as the withholding agent is explicitly
made personally liable under the Tax Code for the payment of the tax required to be
withheld.
Reason: The law sets no condition for the personal liability of the withholding
agent to attach. This is in order to compel the withholding agent to withhold the tax
under any and all circumstances. In effect, the responsibility for the collection of the tax as
well as the payment thereof is concentrated upon the person over whom the Government
has jurisdiction.
Thus, the withholding agent is the constituted agent both of the government and
the taxpayer. With respect to the collection and/or withholding of the tax, he is the
Government’s agent. In regard to the filing of the necessary income tax return and the
payment to the Government, he is the agent of the taxpayer. The withholding agent,
therefore, is no ordinary government agent especially because under the Tax Code he is
personally liable for the tax he is duty bound to withhold; whereas, the Commissioner of
Internal Revenue and his deputies are not made liable under the law. (Filipinas Synthetic
Fiber Corporation v. Court of Appeals, et al., G.R. Nos. 118498 & 124377, prom.
October 12, 1999)
NOTES AND COMMENTS: Do not confuse the above holding with question no.
97, infra. The issue in this question is the liability of the withholding agent for the unpaid
taxes WHILE under question no. 97 the issue is whether a withholding agent is within
legal contemplation a taxpayer who could avail of the tax amnesty.
The two (2) types of withholding at source are the 1) final withholding tax; and 2)
creditable withholding tax.
Under the final withholding tax system the amount of income tax withheld by the
withholding agent is constituted as a full and final payment of the income due from the
payee on the said income. [1st sentence, 1st par., Sec. 2.57 (A), Rev. Regs. No. 2-98]
The liability for payment of the tax rests primarily on the payor or the withholding
agent.. Thus, in case of his failure to withhold the tax or in case of under withholding, the
deficiency tax shall be collected from the payor withholding agent. The payee is not
required to file an income tax return for the particular income.
52
Example: Mara won P200,000.00 from the Pera or Bayong contest. It should be
the sponsor-payor who is required to deduct the appropriate withholding tax from the
P200,000.00 prize before it is given to Mara. Mara, the payee is not required to file an
income tax return for the P200,000.00. Failure to withhold subjects the sponsor-payee to
the tax.
Under the creditable withholding tax system, taxes withheld on certain income
payments are intended to equal or at least approximate he tax due from the payee on the
said income. The income recipient is still required to file an income tax return and/or pay
the difference between the tax withheld and the tax due on the income. [1 st and 2nd
sentences, Sec. 257(B), Rev. Regs. No. 2-98]
The two kinds of creditable withholding taxes are 1) taxes withheld on income
payments covered by the expanded withholding tax; and 2) taxes withheld on
compensation income.
Exemptions from the requirement of withholding or when no withholding taxes
required: Payments to the following:
1. National Government and its instrumentalities including provincial, city, or
municipal governments;
2. Persons enjoying exemption from payment of income taxes pursuant to the
provisions of any law, general or special, such as but not limited to the following:
a. Sales of real property by a corporation which is registered with and
certified by the HLURB or HUDCC as engaged in socialized housing project
where the selling price of the house and lot or only the lot does not exceed
P180,000.00 in Metro Manila and other highly urbanized areas and P150,000.00
in other areas or such adjusted amount of selling price for socialized housing as
may later be determined and adopted by the HLURB;
b. Corporations registered with the Board of Investments and enjoying
exemptions from income under the Omnibus Investment Code of 1997;
c. Corporations exempt from income tax under Sec. 30, of the Tax Code,
like the SSS, GSIS, the PCSO, etc. However, income payments arising from any
activity which is conducted for profit or income derived from real or personal
property shall be subject to a withholding tax. (Sec. 57.5, Rev. Regs. No. 2-98)
97. Andres Soriano, a U.S. citizen and resident, formed “A. Soriano Y Cia,”
which was subsequently renamed ANSCOR. He owned originally issued common
shares which subsequently earned stock dividends. When he died, part of the shares
passed on to his widow and another part to his estate. Stock dividends were again
declared. Subsequently, ANSCOR reclassified its existing common shares into
common and preferred shares. The widow and the estate exchanged their common
stockholdings for preferred shares, with the estate retaining some common shares.
ANSCOR then redeemed the common shares belonging to the estate after
which the BIR assessed ANSCOR for deficiency withholding tax-at source on the
transactions of exchange and redemption of stocks.
May ANSCOR, as the withholding agent avail of the beneficent provisions of
P.D. No. 67, which condones, “the collection of all internal revenue taxes including
the increments of penalties on account of non-payment as well as all civil, criminal
or administrative liabilities arising from or incident to” (voluntary) disclosures
under the NIRC of previously untaxed income and/or wealth “realized here or
abroad by any taxpayer, natural or juridical.” ?
SUGGESTED ANSWER: No. In the operation of the withholding tax system, the
withholding agent is the payor, a separate entity acting no more than an agent of the
government for the collection of the tax in order to ensure its payments. The payor of the
tax is the taxpayer, he is the person subject to tax imposed by law; and the payee is the
taxing authority.
In other words, the withholding agent is merely a tax collector, not a taxpayer.
Under the withholding system, however, the agent-payor becomes a payee by
fiction of law. His (agent) liability is direct and independent from the taxpayer, because
the income tax is still imposed on and due from the latter. The agent is not liable for the
tax as no wealth flowed into him, he earned no income. The Tax Code only makes the
agent personally liable for the tax arising from the breach of its legal duty to withhold as
53
distinguished from its duty to pay tax since, the government cause of action against the
withholding agent is not for the collection of income tax, but for the enforcement of the
withholding provisions of the Tax Code, compliance with which is imposed on the
withholding agent and not upon the taxpayer.
A withholding agent, not being a taxpayer is not covered by the protective embrace
of a tax amnesty because the provisions of the implementing rules of P.D. No. 370 which
expanded amnesty on previously untaxed income is explicit in excluding tax liabilities on
withholding tax at source. (Commissioner of Internal Revenue v. Court of Appeals, et al.,
G.R. No. 108576, January 20, 1999)
NOTES AND COMMENTS:
The above Commissioner of Internal Revenue v. Court of Appeals, et al.,
(ANSCOR), case may have an impact on the doctrine enunciated in Commissioner of
Internal Revenue v. Procter & Gamble Philippine Manufacturing Corporation, 204 SCRA
377, 383-386.
Procter & Gamble held that a taxpayer is defined under the NIRC as “any person
subject to tax.” Since, the withholding agent who is “required to deduct and withhold any
tax” is made “personally liable for such tax,” subject to and liable for deficiency
assessments, surcharges and penalties should the amount of the tax be finally determined
to be less than that required to he withheld by law, then he is a taxpayer. He has sufficient
legal interest to bring a suit for refund of taxes he believes were illegally collected from
him. (citing Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, 15
SCRA 1)
The reader should take note that, in case of doubt, tax amnesties are to be strictly
construed against the government. Tax statutes being burdens are not to be presumed
beyond what the tax amnesty expressly and clearly declares. (Republic v. Intermediate
Appellate Court, 196 SCRA 335)
To summarize, if the issue is application for refund, the withholding agent is a
taxpayer (Procter & Gamble), but for tax amnesty purposes, he is not. (Anscor)
*** 100. The Tariff and Customs Code provides for the imposition of special
customs duties. What are these duties and what is their nature and purpose ?
SUGGESTED ANSWER: Special customs duties are additional import duties
imposed on specific kinds of imported articles under certain conditions.
The special customs duties are the anti-dumping duty, the countervailing duty, the
discriminatory duty and the marking duty.
The special customs duties are imposed for the protection of consumers and
manufacturers, as well as Philippine products.
54
*** 101. Explain briefly what is meant by anti-dumping duty and when is it
imposed ?
SUGGESTED ANSWERS: A special duty imposed on the importation of a
product, commodity or article of commerce into the Philippines at less than its normal
value when destined for domestic consumption in the export country, which is the
difference between the export price and the normal value of such product, commodity or
article. (Sec. 301 (s) (1), TCC, as amended by R.A. No. 8752, “Anti-Dumping Act of
1999.”)
The anti-dumping duty is imposed where the importation of the product,
commodity or article of commerce described above is causing or is threatening to cause
material injury to a domestic industry, or materially retards the establishment of a domestic
industry producing the like product. (Sec. 301 (a), TCC, Ibid.”)
NOTES AND COMMENTS:
The definition under the R.A. No. 8752, the “Anti-Dumping Act of 1999,” is
substantially the definition provided for under R.A. No. 7843, the “Anti-Dumping Act of
1994.”
102. Explain the meaning of normal value for purposes of imposing the anti-
dumping duty.
SUGGESTED ANSWER: It is the comparable price at the date of sale of like
product, commodity, or article in the ordinary course of trade when destined for
consumption in the country of export. (Sec. 301 (s) (3 ), TCC, as amended by R.A. No.
8752, “Anti-Dumping Act of 1999.”)
*** 105. What is the amount of anti-dumping duty that may be imposed ?
SUGGESTED ANSWER: The difference between the export price and the
normal value of such product, commodity or article. (Sec. 301 (s) (1), TCC, as amended
by R.A. No. 8752, “Anti-Dumping Act of 1999.”)
The anti-dumping duty shall be equal to the margin of dumping on such product,
commodity or article thereafter imported to the Philippines under similar circumstances, in
addition to ordinary duties, taxes and charges imposed by law on the imported product,
commodity or article,
55
111. Acting on information that a shipment from Hongkong on board the S/S
Sa Dragon violated the Tariff and Customs Code, as amended, agents of the EIIB
seized the shipment. It was found that the 40 ft. van was made to appear as a
consolidation shipment consisting of 232 packages with Translink Int’l. Freight
Forwarded as shipper and Transglobe Int’l. Inc., as consignee; that there were eight
(8) shippers and eight (8) consignees declared as co-loaders and co-owners of the
contents of the van, when in truth the entire shipment belongs only to one entity;
that the items as declared (various industrial items) were found in the van, instead it
was found to be fully stuffed with textile piece goods.
As a result of the above, the appropriate warrant of seizure was issued and
the goods forfeited in favor of the government.
The consignee filed a petition for redemption of the shipment and the hearing
officer recommended the release of the shipment upon the payment of its domestic
value as “the shipment consists of goods which are in legal contemplation not
prohibited, nor the release thereof to the claimant contrary to law.”
The Commissioner of Customs denied the offer of redemption on the grounds
(1) that the shipment was made to appear an innocuous consolidation shipment
destined for shipment outside of the CY-CFS in order to conceal the textile fabrics;
(2) the eight co-loaders/consignes of the shipment are all fictitious; and (3) CMO
87-92 provides for a denial of an offer of redemption when the seized shipment is
consigned to a fictitious person.
Would you allow the redemption ? Why ?
SUGGESTED ANSWER: Yes. There is absent the following circumstances
hence, it would be proper to allow the redemption of forfeited property upon payment of
its computed domestic market value. (Transglobe International, Inc. v. Court of Appeals,
et al., G.R. No. 126634, January 25, 1999)
a. There is fraud;
b. The importation is absolutely prohibited, or
c. The release of the property would be contrary to law. (Ibid.)
Misdeclarations in manifest and rider cannot be ascribed to a consignee since it
was not the one that prepared them. As said in Farolan, if at all, the wrongful making or
falsity of the documents can only be attributed to the foreign suppliers or shippers. .(Ibid.)
NOTES AND COMMENTS: Fraud as defined in Sec. 1, par. 1.a., CMO-87-92
must be actual, not constructive.
Sec. 1.a., CMO-87-92 is of the same tenor as Sec. 2530, pars., (f) and (m),
subpars. 3, 4 and 5, which deals with falsities committed by the owner, importer, exporter
or consignee or importation/exportation through any other practice or device.
In Aznar v. Court of Tax Appeals, 58 SCRA 519, reiterated in Farolan, Jr. v. Court
of Tax appeals, et al., 217 SCRA 298, the Supreme court clarified that the fraud
contemplated by law must be actual and not constructive. It must be intentional,
consisting of deception, willfully and deliberately done or resorted to in order to induce
another to give up some right.
*** Forfeiture proceedings are in the nature of proceedings in rem.
57
112. On April 10, 1997, the Collector of Customs conducted a public auction
sale of Lot No. 15 consisting of various marble processing machine and grinding
machine which included a Special Circular Saw and a Diamond Sawing Machine.
The award was made to Engr. Franklin Policarpio, the highest bidder. After Engr.
Policarpio signed the Gate Pass evidencing withdrawal of Lot No. 15 from customs
custody, he found that the two saws were missing and upon his investigation found
that the items were installed in the compound of Carrara Marble Philippines, Inc.
Consequently, for alleged violations of Section 2536 (non-payment of duties
and taxes) and Section 2530 [e] (illegal removal of articles from warehouse) of the
Tariff and Customs Code (TCC) the saws were seized by authority of a Warrant of
Seizure and Detention dated May 29, 1991, from the compound of Carrara Marble.
Carrara Marble failed to present evidence of payment of duties and taxes
and its defense is an alleged local sale evidenced by notarized Deeds of Sale. In the
meantime, Engr. Policarpio intervened and claimed ownership of the saws. Carrara
Marble then offered to settle the case in accordance with the provisions of the TCC.
However, the offer was refused by the Bureau of Customs, which then declared the
articles forfeited in favor of the Government. Resolve the following issues
explaining briefly the reasons for your answer:
a. Is it valid to forfeit an article found in the possession of a third party after
the sale at public auction ?
b. Has the importation been terminated ?
c. Who has the right to retain possession over the two (2) saws ?
SUGGESTED ANSWERS:
a. Yes, because there is showing that the imported saws were acquired by Carrara
Marble while they were in customs custody without showing that the correct duties and
taxes were paid thereon.
The TCC subjects to forefeiture any article which is removed contrary to law from
any public or private warehouse under customs supervision, or released irregularly from
customs custody. Before forfeiture proceedings are instituted, the law requires the
presence of probable cause. Once established the burden of proof is shifted to the
claimant. Customs officers with proper authorization from the Commissioner in writing,
may demand evidence of payment of duties and taxes on foreign articles openly offered for
sale or kept in storage; and if no such evidence can be produced, such articles may be
seized and subjected to forfeiture proceeding; provided however, that during such
proceedings the person or entity from whom such articles were seized shall be given an
opportunity to prove or show the source of such articles and the payment of duties and
taxes thereon. Under the circumstances, it is clear that before the delivery of the items to
Engr. Policarpio, the Bureau of Customs had custody of said saws. It was only when the
whole was handed over to Engr. Policarpio that it was discovered that the two saws were
missing.
In this case the forfeiture takes effect immediately upon the commission of the
offense. The forfeiture of the subject machineries, retroacted to the date they were
illegally withdrawn from customs custody. The government’s right to recover the
machineries proceeds from its right as lawful owner and possessor thereof upon
abandonment by the importer. Such right may be asserted no matter in whose hands the
58
property may have come, and the condemnation when obtained avoids all intermediate
alienations.
The forfeiture of the saws rests on a different statutory basis from Policarpio’s
right to receive the property as the winning bidder in the auction sale. It was based upon
the government’s right to recover property illegally withdrawn from its custody.
b. Importation was already terminated after Engr. Policarpio has signed the Gate
Pass evidencing withdrawal of Lot 15 from customs custody.
Importation is deemed terminated upon payment of duties, taxes and other charges
due or secured to be paid upon the articles at a port of entry, and upon the grant of a legal
permit for withdrawal; or in case said articles are free of duties, taxes and other charges,
until they have legally left the jurisdiction of the customs. The forfeiture of the subject
saws however, is not dependent on whether or not the importation was terminated; rather
it is premised on the illegal withdrawal of goods from customs custody.
Thus, regardless of the termination of importation, customs authorities may validly
seize goods which, for all intents and purposes, still belong to the government.
c. Compromise could not be allowed anymore since the subject machineries had
already been awarded to Policarpio, being the highest bidder in the public auction. The
government has the rightful possession of the saws but it should turnover the same to
Policarpio. (Carrara Marble Philippines, Inc., v. Commissioner of Customs, G.R. No.
129680, prom. September 1, 1999)
NOTES AND COMMENTS: Administrative and judicial procedures relative to
customs searches, seizures and forfeitures:
a. Determination of probable cause and issuance of warrant. The Collector of
Customs upon probable cause that the articles are imported or exported, or are attempted
to be imported or exported, in violation of the tariff and customs laws shall issue a warrant
of seizure. (Sec. 6, Title III, CAO No. 9-93)
If the search and seizure is to be conducted in a dwelling place, then a search
warrant should be issued by the regular courts not the Bureau of Customs.
There may be instances where no warrants issued by the Bureau of Customs or the
regular courts is required, as in search and seizures of motor vehicles and vessels.
b. Actual seizure of the articles. Master this procedure.
Requirements for release under bond of seized articles: This is a probable area
so master.
Settlement of seizure case by payment of fine or redemption of forfeited
property.
This is another probable area.
LOCAL TAXATIO N
*** 114. On June 26, 1992, the Sangguniang Panlalawigan of Bulacan passed
Provincial Ordinance No. 3, to take effect on July 1, 1992, which levies a tax of 10%
of the fair market value in the locality per cubic meter of ordinary stones, gravel,
sand, earth and other quarry resources extracted from areas of public land within its
territorial jurisdiction.
It now collects the said tax upon quarry resources extracted from private
lands by Republic Cement. It claims authority to do so under the provisions of the
Local Government Code as well as under the Regalian theory of State ownership
over all natural resources. Is the collection correct ?
59
SUGGESTED ANSWER: No, because the authority under the Local Government
Code to collect taxes on quarry resources applies only to those extracted from public
lands. (Sec. 134 in relation to Sec. 138, Local Government Code)
Furthermore, the Local Government Code prohibits local government units from
collecting excise taxes on articles enumerated under the NIRC, and taxes, fees or charges
on petroleum products. (Sec. 133 [h], Local Government Code in relation to the Tax
Code) The tax imposed is an excise tax upon the performance, carrying on, or the
exercise of an activity. While the Tax Code levies a tax on all quarry resources, regardless
of origin, whether extracted from public or private lands, the Local Government Code
authorizes the local government unit to impose such taxes on those taken from public
lands. Thus, those extracted from private lands are taxable under the NIRC and not by
local government units.
The Regalian doctrine may not be applied because taxes, being burdens, are not to
be presumed beyond what the applicable statute expressly and clearly declares, tax statutes
being construed stricitssimi juris against the government. (The Province of Bulacan, et
al., v. The Court of Appeals, etc., et al., 299 SCRA 442)
116. The City Treasurer discovered that the Knechts failed to pay their real
property taxes on their property consisting of a parcel of land with an area of 8,102
sq.m. The property was subsequently sold at public auction for the tax delinquency.
However, the Knechts did not receive any notice of their tax delinquency and that
the Rgister of Deeds did not order them to surrender their owner’s duplicate for
annotation of the tax lien prior to the sale. Neither did they have notice of the
auction sale nor was the certificate of sale annotated on their title nor with the title
in the possession of the Register of Deeds.
Is the tax sale valid ? Reason out your answer.
SUGGESTED ANSWER: No. It has been ruled that the notice and publication,
as well as the legal requirements for a tax delinquency sale, are mandatory, and the failure
60
to comply therewith can invalidate the sale. The prescribed notices must be sent to
comply with the requirements of due process. (De Knecht, et al,. v. Court of Appeals; De
Knecht, et al., v. Honorable Sayo, 290 SCRA 223,236)
The reason behind the notice requirement is that tax sales are administrative
proceedings which are in personam in nature. (Puzon v. Abbellera, 169 SCRA 789, 795;
De Asis v. I.A. C., 169 SCRA 314)
NOTES AND COMMENTS: All of the above cases were decided interpreting the
provisions of C.A. No. 470, the old Assessment Law, and P.D. No. 464, the Real Property
Tax Code, both of which required personal notice to the taxpayer in addition to the
requisite advertisement.
The provisions of Sec. 260 of the Local Government Code on “Advertisement and
Sale” does not require personal notice to the delinquent taxpayer.
In view of the above, the author believes that personal notice of the auction sale is
not required anymore under the provisions of the Local Government Code of 199 which
repealed C.A. No. 470 and P.D. No. 464)
120. The protest contemplated under Section 252 of R.A. No. 7160 is needed
where there is a question of reasonableness of the amount assessed, not where the
question raised is on the very authority and power of the assessor to impose the
assessment and of the treasurer to collect the tax. (Ty v. Trampe, 250 SCRA 500)
121. On April 3, 1987, Raul purchased from Estrella two lots, both located in
Cebu City. Lot no. 1 contained an area of 49 sq.m. while lot no. 2 contained an
area of 48 sq.m. more or less. Both lots had improvements, which were described as
"a residential house of strong materials constructed on the lots above-mentioned."
Raul declared the real property constructed on the said lots for purposes of
tax assessment as a residential house of strong materials with a floor area of 60 sq.m.
Effective 1987, the declared property was assessed by the City Assessor under Tax
Declaration 1 at a market value of P60,000.00 and an assessed value of P36,900.00.
61
raised, or (2) upon which the determination of the error properly assigned is dependent,
or (3) where the court or administrative agency finds that consideration of them is
necessary in arriving at a just decision of the case. There was no error, because Raul
himself is assailing the subject assessment as "excessive and unconscionable." Thus,
CBAA was duty-bound to review the factual antecedents of the case and to apply hereon
the pertinent provisions of law. In the process, CBAA has to apply Sec. 222 of the Local
Government Code which authorizes the collection of back taxes.
c. The excess areas resulting from the revision must be understood as never
having been declared before. This is evident from the provisions of Sec. 222 of the Local
Government Code which reads:
"Sec. 222. Assessment of Property Subject to Back Taxes. -Real property declared
for the first time shall be assessed for taxes for the period during which it would have been
liable but in no case for more than ten (10) years prior to the date of initial assessment:
Provided, however, That such taxes shall be computed on the basis of the applicable
schedule of values in force during the corresponding period."
It is neither just that a landowner should be permitted by an involuntary mistake or
through other causes, not to say bad faith, to state an area far less than that actually
contained in his land and pay a tax to the State a tax far below that which he should really
pay.
d. Raul's contention on the use of market value for the computation of the
assessed value is erroneous. Par. (l) Sec. 199 of the Local Government Code merely
defines "Fair Market Value." It does not in any way direct that the "Fair Market Value"
should be used as a basis for purposes of real property taxation. On the other hand, par.
(a), Sec. 198 of the same Code provides unequivocally that, "Real property shall be
appraised at its current and fair market value." The current value of like properties and
their actual or potential uses, among others, are also considered.
Unscrupulous sellers of real estate often understate the selling price in the deed of
sale to minimize their tax liability. Moreover, the value of real property does not remain
stagnant, it is unrealistic to expect that the current market value of a property is the same
as its cost of acquisition ten years ago. In this light, a general revision of real property
assessment is required by law within two (2) years after the effectivity of the Local
Government Code and every three (3) years thereafter. (Sec. 219, Local Government
Code)
e. When back taxes were imposed on Raul's property, there was no violation of the
rule that laws shall have only prospective applicability. The provisions of Sec. 25 of P.D.
No. 464, The Real Property Tax Code (now Sec. 222 of the Local Government Code) is
not penal in character, hence it may not be considered as an ex post facto law. (Sesbreno
v. Central Board of Assessment Appeals, et al., G.R. No. 106588, March 24, 1997)
122. What are the administrative remedies that are provided for under the
provisions of R.A. No. 7160, the Local Government Code, before resort to courts is
made relative to real property taxes ?
SUGGESTED ANSWER: A taxpayer may question the constitutionality or
legality of a tax ordinance on appeal within thirty (30) days from effectivity thereof, to the
Secretary of Justice. The taxpayer after finding that his assessment is unjust, confiscatory,
or excessive, must bring the case before the Secretary of Justice for questions of legality
or constitutionality of a city ordinance.
An owner of real property who is not satisfied with the assessment of his property
may, within sixty (60) days from notice of assessment, appeal to the Local Board of
Assessment Appeals.
Should the taxpayer question the excessiveness of the amount of tax, he must first
pay the amount due. Then, he must request the annotation of the phrase “paid under
protest” and accordingly appeal to the Local Board of Assessment Appeals by filing a
petition under oath together with copies of the tax declarations and affidavits or
documents to support his appeal. (Lopez v. City of Manila, et al., G.R. No. 127139,
February 19, 1999)
NOTES AND COMMENTS:
Remedies of real property owner who questions validity of tax ordinance:
63
123. What are the steps to be followed for the mandatory conduct of General
Revision of Real Property Assessments ?
a. Preparation of Schedule of Fair Market Values;
b . Enactment of Ordinances;
1) levying an annual “ad valorem” tax on real property and an
additional tax accruing to the Special Education Fund;
2) Fixing the assessment levels to be applied to the market values of real
properties;
3) Providing the necessary appropriations to defray expenses incident to
general revision of real property assessments,; and
4) Adopting the Schedule of Fair Market Values prepared by the assessors.
(Lopez v. City of Manila, et al., G.R. No. 127139, February 19, 1999)
NOTES AND COMMENTS:
Public hearings are required to be conducted prior to the enactment of an
ordinance imposing real property taxes. (Figuerres v. Court of Appeals, et al., G.R. No.
119172, March 25, 1999)
124. What are the steps to be followed in the preparation of fair market
values ?
a. The city or municipal assessor shall prepare a schedule of fair market values for
the different classes of real property situated in their respective Local Government Units
for the enactment of an ordinance by the sanggunian concerned; and
b. The schedule of fair market values shall be published in a newspaper of general
circulation in the province, city or municipality concerned or the posting in the provincial
capitol or other places as required by law. (Lopez v. City of Manila, et al., G.R. No.
127139, February 19, 1999)
NOTES AND COMMENTS: Proposed fair market values of real property in a
local government unit as well as the ordinance containing the schedule must be published
in full for three (3) consecutive days in a newspaper of local circulation, where available,
within ten (10) days of its approval, and posted in at lease two (2) prominent places in the
provincial capitol, city, municipal or barangay hall for a minimum of three (3) consecutive
weeks. (Figuerres v. Court of Appeals, et al,. G.R. No. 119172, March 25, 1999)