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GENERAL PRINCIPLES OF TAXATION

01 - CIR v. Manuel Pineda (1967) (income tax liability, liable not more than his share of inheritance, right of
contribution)
Doctrines:

The Bureau of Internal Revenue should be given the necessary discretion to avail itself of the most expeditious
way to collect the tax as may be envisioned in the particular provision of the Tax Code above quoted, because
taxes are the lifeblood of government and their prompt and certain availability is an imperious need.

Facts:
Atanasio Pineda died, survived by his wife and 15 children. One of whom is Manuel Pineda (petitioner), who is a
lawyer. Estate proceedings were held and Manuel Pinedas share amounted to P2,500.
After the estate proceedings were closed, the BIR investigated the income tax liability of the estate for the years
1945-1948 and found out that the corresponding income tax returns were not filed. The BIR sent an assessment to
Manuel but he contested it alleging that he was appealing only that proportionate part or portion pertaining to him as one
of the heirs.
(Note: Prescription part might be asked) Pineda was saying that the right to assess and collect the tax had already
prescribed. For 1945 and 1946 the returns were filed on 1953, assessments for both taxable years were made within five
years from 1957. For taxable year 1947, the return was filed on 1948, assessment was made on 1953, more than five
years from the date return was filed; hence the right to assess income tax for 1947 had prescribed.
The CIR appealed proposed to hold Manuel Pineda liable for the payment of all the taxes found by the Tax Court
to be due from the estate in the total amount of P760.28 instead of only for the amount of taxes corresponding to his
share in the estate.
Manuel B. Pineda opposes the proposition on the ground that as an heir he is liable for unpaid income tax due the estate
only up to the extent of and in proportion to any share he received.
Issues:
1. W/N the government can compel Pineda to pay the whole P760.28 (tax of whole estate)
Held/Ratio:
1. YES.
Pineda is liable for the assessment as an heir and as a holder-transferee of property belonging to the
estate/taxpayer. As an heir he is individually answerable for the part of the tax proportionate to the share he
received from the inheritance. His liability, however, cannot exceed the amount of his share.
As a holder of property belonging to the estate, Pineda is liable for the tax up to the amount of the property in
his possession. The reason is that the Government has a lien on the P2,500 received by him from the estate as
his share in the inheritance, for unpaid income taxes.
By virtue of such lien, the Government has the right to subject the property in Pinedas possession, i.e., the
P2,500, to satisfy the income tax assessment in the sum of P760.28. After such payment, Pineda will have a
right of contribution from his co-heirs, to achieve an adjustment of the proper share of each heir in the
distributable estate.
Government has two ways of collecting tax:
a. Going after ALL heirs and collecting from each one of them the amount to the tax proportionate to the
inheritance received. (Achieves 2 results: payment of the tax and adjustment of shared of each heir in the
distributed estate as lessened by the tax)

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b. Section 315 of Tax Code lien of the govt. The govt places a lien by subjecting the said property of
the estate which is in the hands of an heir or transferee to the payment of the tax due. (This was used in
this case). The BIR should be given the necessary discretion to avail itself of the most expeditious way to
collect the tax because taxes are the lifeblood of the government and their prompt and certain availability
is an imperious need.

02 - Vera v. Fernandez (1979) (Estate of Tongoy, Motion for allowance of claim)

Doctrines:

The reason for the more liberal treatment of claims for taxes against a decedents estate in the form of exception
from the application of the statute of non-claims, is not hard to find. Taxes are the lifeblood of the Government
and their prompt and certain availability are imperious need.

Upon taxation depends the Governments ability to serve the people for whose benefit taxes are collected.

Facts:
This case is about the Motion for allowance of claim and for payment of taxes dated May 28, 1969 and filed
June 3, 1969. The claim represents the indebtedness to the Government by the Estate of the late Luis D. Tongoy for
deficiency income taxes amounting to P3,254.80. The Administrator opposed the motion on the ground that the claim was
barred under Sec5, Rule 86 of the Rules of Court. Respondent Judge Fernandez dismissed the motion filed by petitioner,
Regional Director of BIR. Sept 18, 1969, a motion for reconsideration was filed but was denied. Thus, this appeal on
certiorari.
Issues:
1. W/N a claim for taxes against a decedents estate is an exception from the application of the statute of non-claims
(Sec 5, Rule 86 of Rules of Court)?
Held/Ratio:
1. YES
The court recognized the liberal treatment of claims for taxes charged against the estate of the decedent.
Such taxes were exempted from the application of the statute of non-claims, and this is justified by the
necessity of government funding, immortalized in the maxim that taxes are the lifeblood of the government.
Taxes assessed against the estate of a deceased person, after administration is opened, need not be submitted to
the committee on claims in the ordinary course of administration. In the exercise of its control over the
administrator, the court may direct the payment of such taxes upon motion showing that the taxes have been
assessed against the estate.
Such liberal treatment of internal revenue taxes in the probate proceedings applies even to allowing the
enforcement of tax obligations against the heirs of the decedent, even after distribution of the estates properties.
Claims for taxes, whether assessed before or after the death of the deceased, can be collected from the heirs
even after the distribution of the properties of the decedent. They are exempted from the application of the
statute of non-claims. The heirs shall be liable therefor, in proportion to their share in the inheritance

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03 - CIR V. Algue Inc. (1988)

Doctrines:

Taxation is a requirement in all democratic regimes that it be exercised reasonably and in accordance with the
prescribed procedure.

Rationale of taxation:
o

Taxes are what we pay for a civilized society.

Without taxes, the government would be paralyzed for lack of the motive power to activate and operate
it.

The government for its part, is expected to respond in the form of tangible and intangible benefits
intended to improve the lives of the people and enhance their moral and material values.

Sec. 30 (a) (1): All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on
any trade or business, including a reasonable allowance for salaries or other compensation for personal services
actually rendered

Revenue Regulations No. 2 Sec. 70 (1): The test of deductibility in the case of compensation payments is whether
they are reasonable and are, in fact, payments purely for service.

Facts:
Algue Inc., a domestic corporation engaged in engineering and construction, is claiming a P75,000 deduction
which represented payments for promotional fees to various persons. Apparently, this was incurred when Algue was
appointed as an agent of the Philippine Sugar Estate Development Company (PSEDC) which it was tasked to sell land,
factories, and oil manufacturing processes. Pursuant to such authority, several persons, including its counselAtty.
Guevarra, worked for the formation of the Vegetable Oil Investment Corporation of the Philippines (VOICP) by inducing
other persons to invest in it. Algue received P126,000 as commission and it was from this commission that the P75,000
promotional fees were paid to these several persons who aided Algue.
However, the Commissioner of Internal Revenue (CIR) claimed that these payments are not to be considered as
allowable deductions since, being members of the same family corporation, there was no indication that payments were
indeed given to those persons whether by check or in cash, and there is not enough substantiation of such payments. In
short, the CIR suggests that an attempt to evade taxes was done by involving imaginary deductions.
Issues:
1. (Substantive/Main Issue) W/N the P75,000 deduction is an allowable deduction from gross income.
2. (Procedural issue. Not related to topic, this will be taken later on Tax Remedies, but worth mentioning since Atty.
Gonzalez might ask a bit of it.) W/N the appeal was taken within the reglementary period.
Held/Ratio:
1. YES. The amount was considered to be an allowable deduction even though most of the payees were neither
employees nor stockholders of Algue Inc.
As a principle of taxation, the taxpayer shall have the burden of proving the validity of any deductions.
NIRC Sec. 30 (a)(1):
All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on
any trade or business, including a reasonable allowance for salaries or other compensation for
personal services actually rendered;

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Revenue Regulations No. 2 Sec. 70 (1):

The test of deductibility in the case of compensation payments is whether they are reasonable and
are, in fact, payments purely for service. This test and deductibility in the case of compensation
payments is whether they are reasonable and are, in fact, payments purely for service.
Algue Inc. successfully proved that the payment of the fees was necessary and reasonable in the light of the
efforts exerted by the payees in inducing investors and prominent businessmen to venture in an experimental
enterprise and involve themselves in a new business requiring millions of pesos. This was no mean feat and
should be, as it was, sufficiently recompensed by having 60% of the commission received by Algue.
2. YES. The appeal was filed in time since only 20 days of the 30-day reglementary period was consumed.
The protest filed had the effect of suspending on January 18, 1965, when it was filed, the reglementary period
which started on the date the assessment was received on January 14, 1965. The period started running again only
on April 7, 1965, when the private respondent was definitely informed of the implied rejection of the said protest
and the warrant was finally served on it. Hence, when the appeal was filed on April 23, 1965, only 20 days of the
reglementary period had been consumed.

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04 - Municipality of Makati v. CA (1990) (expropriation, garnishment)

Doctrines:

Public funds are not subject to levy and execution.

Municipal revenues derived from taxes, licenses and market fees, and which are intended primarily and
exclusively for the purpose of financing governmental activities and functions of the municipality, are
exempt from execution.

Facts:
[The tax bit in this case is tiny. Its more of expropriation and garnishment.]
Petitioner has the ff. bank accounts in PNB Buendia:
1. Account No. S/A 265-537154-3 exclusively for the expropriation of the subject property, with an
outstanding balance of P99,743.94.
2. Account No. S/A 263-530850-7 for statutory obligations and other purposes of the municipal government,
with a balance of P170,098,421.72, as of July 12, 1989.
The case is a resolution, an off-shoot of expropriation proceedings initiated by petitioner municipality against
private respondent Admiral Finance. Petitioner opened a bank account (AC No. 265-537154-3) containing P417,510.
Respondent moved for execution, which was granted. A Notice of Garnishment was served by the sheriff to the manager
of PNB Buendia Branch, where the account of petitioner was opened.
Petitioner filed for a motion to lift the garnishment, arguing that payment for expropriated property should be
done in installments. In the meantime, PSB (Philippine Savings Bank) consolidated title over the subject property of
Admiral Finance, having bought it in an extrajudicial sale. PSB and private respondent entered into a subsequent
compromise which was approved by the court. Among its terms are: a.) PNB Buendia should release P4,953,506, which
was the balance to the appraised value of the property from the garnished bank account; b.) PSB and Admiral Finance
were ordered to execute the necessary conveyance for the property.
Issue:
1. W/N petitioners funds in accounts 265-537154-3 and 263-530850-7 could be subject to execution.
Held/Ratio:
1. NO.
Admitting that its PNB Account No. S/A 265-537154-3 was specifically opened for expropriation proceedings it
had initiated over the subject property, petitioner poses no objection to the garnishment or the levy under
execution of the funds deposited therein amounting to P99,743.94. However, it is petitioners main contention that
inasmuch as the assailed orders of respondent RTC judge involved the net amount of P4,965,506.45, the funds
garnished by respondent sheriff in excess of P99,743.94, which are public funds earmarked for the
municipal governments other statutory obligations, are exempted from execution without the proper
appropriation required under the law.
The funds deposited in the second account are public funds of the municipality. Public funds are not subject to
levy and execution, unless otherwise provided for by statute. Municipal revenues derived from taxes, licenses
and market fees, and which are intended primarily and exclusively for the purpose of financing
governmental activities and functions of the municipality, are exempt from execution. There was yet no
ordinance from the City of Makati regarding the disbursement of the funds in the bank account.
However, the Court held that the municipality could be compelled by mandamus to enact the ordinance for the
disbursement of the funds, because the city had been enjoying the property for 3 years now without paying
anything they even turned the site into Makati West High School.

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05 - The Philippine Guaranty Co. v. Commissioner of Internal Revenue (1965)

Doctrines:

The power to tax is an attribute of sovereignty. It is necessary to protect the sovereignty, the citizenry and those
falling within the States territory and protection.

The Government is not estopped from collecting taxes based on the errors of its agents.

Source in Sec. 24 of the Tax Code (taxation of foreign corporations), has been held to mean activity,
service or property giving rise to the income.
a. Place of business must not be confused with place of activity. Business is a series of transactions while
activity may be a single transaction.
b. What is controlling in Sec. 24 is the place of activity.
c. Section 37 of the Tax Code is not an exclusive list of sources of income in the Philippines, other sources
must be considered.

Withholding tax is computed from the total amount ceded and not from that actually remitted to the foreign
reinsurers.

Facts:
PhilGuaranty, a domestic insurance company, entered into several reinsurance contracts with foreign insurance
companies not doing business in the Philippines.1 PhilGuaranty agreed to cede to the foreign companies portions of
premiums coming from insurance policies issued by PhilGuaranty. In exchange, the foreign companies agreed to assume
the proportionate amount of risks arising from the issued insurance policies. Under the contract, the liability of the
foreign companies must be simultaneous with that of PhilGuaranty, risks ceded to the foreign companies were to be
recorded in a book binding upon them. They also agreed that the foreign reinsurers will pay the proportionate amount
of taxes on insurance premiums not recovered from the original assured. The all contracts were signed by PhilGuaranty
in the Philippines and the foreign corporations in their respective countries, except for one contract (with Swiss
Reinsurance)which was signed by both parties in Switzerland.
Based on these contracts, PhilGuaranty ceded to the reinsurers 842,466.71 (1953), and 721, 471.85 (1954). Said
premiums were not included by PhilGuaranty as part of their gross income upon filing of Income Tax Returns for the
years 1953 and 1954. Furthermore, it did not withhold or pay tax on them. The CIR assessed withholding tax for
PhilGuaranty on the said reinsurance premiums. For 1953 the CIR determined the gross premium to be P768,580 and
imposed a withholding tax due thereon at 24% or P184, 459, plus a penalty of P100 and surcharge of 25% of the
withholding tax , amounting to a total of P230,673. For 1954, the CIR assessed withholding tax to be P234,364 based on a
determined gross premium of P780,880.68, and computed under the same terms.
PhilGuaranty protested and argued that reinsurance premiums ceded to foreign corporations not doing business in
the Philippines cannot be subject to withholding tax. The CIR denied and the case was elevated to the Court of Tax
appeals which rendered judgment against PhilGuaranty. Thus this petition.
PhilGuaranty contends that, first, the reinsurance premiums in question did not constitute income from sources
within the Philippines because the foreign reinsurers did not engage in business in the Philippines, nor did they have
office here. Second, PhilGuaranty contends that reinsurance premiums are not under the list of sources provided in
Section 37 of the Tax Code. Third, it contends that they merely relied, in good faith, on prior rulings of the CIR that the
reinsurance premiums in question are not subject to withholding tax. Fourth, that if it be subject to withholding tax, the
tax should be computed from the actual amount remitted, and not from the total amount ceded to the foreign
corporations, and because they did not make any remittance, they should not be subject to withholding tax.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1.

Imperio Compaia de Seguros, La Union y El Fenix Espaol, Overseas Assurance Corp., Ltd., Socieded Anonima de Reaseguros Alianza,
Tokio Marino & Fire Insurance Co., Ltd., Union Assurance Society Ltd., Swiss Reinsurance Company and Tariff Reinsurance Limited. (Not
really important but just in case he asks for the names.)

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Issues:
1. W/N foreign corporations not doing business in the Philippines are subject to withholding tax.
2. (TOPIC) W/N Section 37 is an exclusive list
3. (TOPIC) W/N the government is estopped from collecting taxes based on the wrongdoings of its agents.
4. W/N the tax should be computed from the actual amount remitted.
Held/Ratio:
1. YES. Place of Business must not be confused with place of activity. Business is a continuing series of
transactions while activity may consist only of one single transaction. An activity may occur outside the place
of business. The Tax Code does not require that the corporation must be doing business in the Philippines, it
merely requires that the source or activity creating the income is performed or done in the Philippines. The
reinsurance contracts show that the transactions are done in the Philippines: the liability of the foreign reinsurers
were simultaneous with PhilGuaranty, they were bound by the books of PhilGuaranty recording the risks, and
moreover, they agreed that whatever differences between the parties were subject to arbitration in the City of
Manila.
2. NO. Section 37 is not an all-inclusive enumeration, for it merely directs that the kinds of income mentioned
therein should be treated as income from sources within the Philippines but it does not require that other kinds
of income should not be considered likewise. The power to tax is an attribute of sovereignty, emanating
from necessity. It is necessary to collect taxes to fund an army and a navy for the protection of its citizenry and
those under the States territory. It is also necessary to fund government projects for the use and enjoyment of the
public. Considering that the reinsurance premiums in question were afforded protection by the government
and the recipient foreign reinsurers exercised rights and privileges guaranteed by our laws, such
reinsurance premiums and reinsurers should share the burden of maintaining the state.
3. NO. The government cannot be estopped from collecting taxes. The defense of the petitioner that they merely
relied on prior rulings of the CIR cannot exculpate them from paying taxes but can only exculpate them from
paying penalties and surcharges.
4. NO. The code provides that it should be computed based on the total amount ceded and not that actually remitted.
The grounds for deductions are enumerated in Section 53 and the reinsurance premiums in question do not fall
under said grounds.

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06 - Collector of Internal Revenue v. J.C. Yuseco and The Court of Tax Appeals (1961) (CTA, appellate
jurisdiction)
Doctrines:

Taxes, being the chief source of revenue for the government, must be paid immediately and without delay.

The CTA is a regular court vested with exclusive appellate jurisdiction over cases arising under the NIRC,
Customs Law and Assessment Law.

Facts:
J.C. Yuseco did not file income tax returns for the years 1945 and 1946. The revenue examiners assessed against
and demanded from Yuseco the sums of P134.15 and P7,563.28 representing alleged income taxes and corresponding
surcharges for 1945 and 1946. Yuseco requested that he be informed as to how the assessments were made. The Collector
of Internal Revenue (CIR) furnished the information and demanded payment from Yuseco. Yuseco asked that he be given
an opportunity to present his side of the matter. However, the CIR denied reconsideration of the assessment and reiterated
their demand upon Yuseco for payment. Another demand followed. Yuseco once again requested for a reinvestigation of
the case. Such was once again denied. Nothing was heard of the matter for almost three years.
Later, the CIR issued a revised assessment notice which reduced the original assessment to P2,447.30 for the year
1946. A year later, the CIR issued a warrant of distraint and levy upon Yusecos properties which, however, was not
executed. Yuseco sought the withdrawal and/or reconsideration of said warrant. The CIR wrote to Yuseco, demanding
that the latter pay the P2,447.30 and P134.15. Subsequently, the CIR did not take any further action to collect the
assessment.
The CIR issued a second warrant of distraint and levy on the properties of Yuseco in order to effect collection of
the revised 1946 sum. Yuseco subsequently filed a petition for prohibition with the Court of Tax Appeals (CTA).
The CTA ruled that the warrant of distraint and levy was null and void and of no legal force. The CIR assails the
jurisdiction of the CTA to take cognizance of Yusecos taxpayers petition that seeks to enjoin the CIR from collecting the
income taxes and surcharges due by summary distraint of and levy upon Yusecos real and personal properties. The CIR
claims that Yuseco cannot bring to the CTA an independent special civil action without taking to the CTA an appeal from
the decision of the CIR.
Issues:
1. W/N the CTA has jurisdiction of the case
Held/Ratio:
1. NO.
7 (1) of Republic No. 1125 creating the CTA provides that the CTA shall exercise exclusive appellate
jurisdiction to review by appeal decisions of the CIR in cases involving disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under the
National Internal Revenue Code or other law or part of law administered by the BIR. 11 of the same law
provides that persons, associations or corporations affected by a decision of the CIR, Customs, or provincial or
city Board of Assessment may file an appeal in the CTA.
The law did not vest the CTA with original jurisdiction to issue writs of prohibition and injunction
independently of an appealed case. The power to issue writs exists only in cases appealed to it, as reflected on
the explanatory note of the bill creating the CTA (It is proposed in the attached bill to establish not merely an
administrative body but a regular court vested with exclusive appellate jurisdiction over cases arising under
the NIRC, Customs Law and Assessment Law).
Taxes, being the chief source of revenue for the government, must be paid immediately and without delay. A
taxpayer who feels aggrieved by the decision or ruling handed down by a revenue officer and appeals from his
decision or ruling to the CTA must pay the tax assessed. However, if in the opinion of the Court, the collection
would jeopardize the interest of the government and/or taxpayer, it could suspend the collection and require the

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taxpayer either to deposit the amount claimed or to file a surety bond for not more than double the amount of the
tax assessed.

07 - Chavez v. Ongpin (1990) (Memory Aid - maximum of 5 words only)

Doctrines:

The general revision of assessments is a constitutional and continuing process. It does not involve the imposition
of new or increased taxes.

Facts:
Chavez, a taxpayer and real estate owner, assails the constitutionality of E.O. 73, which directs that the collection
of real property taxes should be based on the assessed 1984 real property values instead of the 1979 values. The Realty
Owners Association of the Philippines (ROAP) intervened. Aside from E.O. 73, they also assail the constitutionality of
P.D. 464, which imposes an additional 1% tax on all property owners. By virtue of P.D. 464, Pres. Aquino ordered the
General Revision of Assessments for real property values in 1985. However, the implementation revised assessed values
were deferred until 1988. E.O. 73 changes the date of effectivity to 1987. Chavez alleges that this will unconscionably
raise the taxes and amount to a confiscation of the owners properties.
Issues:
1. W/N E.O. 73 is unconstitutional
Held/Ratio:
1. NO, E.O. 73 merely changed the date of effectivity of the implementation of the revised assessed values for real
property tax. It does not impose new or additional taxes so it doesnt involve the governments power to tax. The
general revision of assessments is a continuing process, and if a property owner has any complaint about how his
property was assessed, he can appeal to the Local Board of Assessors. If he is still not satisfied with the Local
Boards decision, he can then appeal to the Central Board of Assessors.
The Court said that if anything should be assailed as unconstitutional, it should be P.D. 464. However, Chavez did
not do so. ROAPs intervention cannot stand because its not an independent charge.

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SCOPE AND LIMITATIONS

08 - Sison v. Ancheta acting CIR (1984) (Scope and Limitation)
Doctrines:

The power to tax is an attribute of sovereignty. It is the strongest of all the powers of government. It is, of
course, to be admitted that for all its plenitude, the power to tax is not unconfined. There are restrictions. The
Constitution sets forth such limits.

The Constitution as the fundamental law overrides any legislative or executive, act that runs counter to it. In any
case therefore where it can be demonstrated that the challenged statutory provision ... fails to abide by its
command, then this Court must so declare and adjudge it null.

It is undoubted that the due process clause may be invoked where a taxing statute is so arbitrary that it finds no
support in the Constitution. An obvious example is where it can be shown to amount to the confiscation of
property. That would be a clear abuse of power. It then becomes the duty of this Court to say that such an
arbitrary act amounted to the exercise of an authority not conferred. That properly calls for the application of the
Holmes dictum. It has also been held that where the assailed tax measure is beyond the jurisdiction of the state, or
is not for a public purpose, or, in case of a retroactive statute is so harsh and unreasonable, it is subject to attack
on due process grounds.

Facts:
A suit for declaratory relief or prohibition on the validity of Sec 1 of BP No. 135 was filed by petitioner claiming
that the said section as arbitrary amounting to class legislation, oppressive and capricious in character. Petitioner thus
claims that there is a transgression of both the equal protection and due process clauses of the Constitution as well as the
rule on uniformity in taxation.
The said section amends further Sec 21 of the NIRC (1977) for rates of tax on citizens or residents on:
a. taxable compensation income,
b. taxable net income,
c. royalties, prizes, and other winnings,
d. interest from bank deposits and yield or any other monetary benefit from deposit substitutes and from
trust fund and similar arrangements,
e. dividends and share of individual partner in the net profits of taxable partnership,
f.

adjusted gross income.

SISON then claims that he would be unduly discriminated against by the imposition of higher rates of tax upon
his income arising from the exercise of his profession vis-a-vis those which are imposed upon fixed income or salaried
individual taxpayers.
Issues:
1. W/N the Courts can rule on the Constitutionality of Sec 1 BP 135?
2. W/N the imposition of a higher tax rate on taxable net income derived from business or profession than on
compensation is constitutionally infirm?
Held/Ratio:
1. YES, in any case where it can be demonstrated that the challenged statutory provision fails to abide by its
command, then the SC must so declare and adjudge as null and void.

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The power to tax as discussed by Justice Malcolm, is an attribute of sovereignty. It is the strongest of all the
powers of government. It is, of course, to be admitted that for all its plenitude the power to tax is not
unconfined. There are restrictions. The Constitution sets forth such limits. Adversely affecting as it does
properly rights, both the due process and equal protection clauses may properly be invoked, as the petitioner does,
to invalidate in appropriate cases a revenue measure. Otherwise, it would be as CJ Marshall stated the power of
tax involves the power to destroy as against Justice Holmes, The power to tax is not the power to destroy
while this Court sits.
2. NO, the mere allegation of the petitioner does not suffice, absent showing of proof to the contrary.
DUE PROCESS CLAUSE
This may be invoked where a taxing statute is so arbitrary that it finds no support in the Constitution. It has also
been held that where the assailed tax measure is beyond the jurisdiction of the state, or is not for a public purpose,
or, in case of a retroactive statute is so harsh and unreasonable, it is subject to attack on due process grounds.
EQUAL PROTECTION CLAUSE
This is invoked when the enactment of the law was prompted by the spirit of hostility, or at the very least,
discrimination that finds no support in reason. It suffices then that the laws operate equally and uniformly on all
persons under similar circumstances or that all persons must be treated in the same manner, the conditions not
being different, both in the privileges conferred and the liabilities imposed.
UNIFORMITY
According to the constitution, The rule of taxation shall be uniform and equitable. This requirement is met
according to Justice Laurel when the tax operates with the same force and effect in every place where the subject
may be found but provides that the rule of uniformity does not call for perfect uniformity or perfect equality,
because this is hardly attainable.

What misled the petitioner was his failure to consider the distinction between tax rate and tax base. There is no
legal objection to a broader tax base or taxable income by eliminating all deductible items and at the same time
reducing the applicable tax rate. Taxpayers may be classified into different categories. It is enough that the
classification must rest upon substantial distinctions that make real differences.
In the case of the gross income taxation embodied in Batas Pambansa Blg. 135, the, discernible basis of
classification is the susceptibility of the income to the application of generalized rules removing all
deductible items for all taxpayers within the class and fixing a set of reduced tax rates to be applied to all of
them.
There is ample justification for the Batasang Pambansa to adopt the gross system of income taxation to
compensation income (no overhead costs), while continuing the system of net income taxation as regards
professional and business income (with operating/overhead costs).

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09 - CIR v. Placer Dome (2007) (0% rate VAT for Marinduque Marcopper Mining disaster cleanup)
Doctrines:

The scope of the word services in Section 102(b)(2) of the [1986 NIRC] is broad; it is not susceptible of narrow
interpretation.

Facts:
[This Marinduque Marcopper Mining disaster is famous, even at the global level.2]
To contain the damage and prevent the further spread of the tailing leak, Placer Dome, Inc. (PDI), the
owner of 39.9% of Marcopper, undertook to perform the clean-up and rehabilitation of the Makalupnit and Boac
Rivers, through a subsidiary. To accomplish this, PDI engaged Placer Dome Technical Services Limited (PDTSL), a nonresident foreign corporation with office in Canada, to carry out the project. In turn, PDTSL engaged the services of
Placer Dome Technical Services (Philippines), Inc. (respondent), a domestic corporation and registered ValueAdded Tax (VAT) entity, to implement the project in the Philippines.
Then on 11 September 1998, respondent filed an administrative claim for the refund of its reported total
input VAT payments in relation to the project it had contracted from PDTSL, amounting to P43,015,461.98. In
support of this claim for refund, respondent argued that the revenues it derived from services rendered to PDTSL,
pursuant to the Agreement, qualified as zero-rated sales under Section 102(b)(2) of the then Tax Code, since it was paid in
foreign currency inwardly remitted to the Philippines. Section 102(b) of the 1986 NIRC reads:
Section 102. Value-Added Tax on Sale of Services and Use or Lease of Properties.
...
(b) Transactions Subject to Zero Percent (0%) Rate. The following services performed in the
Philippines by VAT-registered persons shall be subject to zero percent (0%) rate:
(1) Processing, manufacturing or repacking goods for other persons doing business
outside the Philippines which goods are subsequently exported, where the services are
paid for in acceptable foreign currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP);
(2) Services other than those mentioned in the preceding subparagraph, the consideration
for which is paid for in acceptable foreign currency and accounted for in accordance with
the rules and regulations of the [BSP].
This provision was interpreted by the Bureau of Internal Revenue through Revenue Regulation No. 5-96, Section
4.102-2(b)(2).3

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2.

Wikipedia: On 24 March 1996, the Marcopper Mine on Marinduque made global news due to a Mining accident at their Marinduque mine. The
incident involved the Marcopper Mining Corporation which has been carrying out open-pit copper mining since the 1970s. When the company
finished one of its operations in Marinduque, it plugged up the old pit with a concrete fixture to allow the pit to act as a disposal lake for mining
waste. In August 1995, a significant leak was discovered in the pits drainage tunnel. This subsequently fractured. The accident discharged
tailings [toxic residue after extracting, with the use of chemicals, the mineral from the ore] into the Makulapnit-Boac (Boac) river system. The
disaster resulted in the release of over 1.6 million cubic meters of tailings along 27 km of the river and the coastal areas. The impact on the river
and the people who depend on it for their livelihoods was massive. The rush of tailings displaced river water which inundated low-lying areas,
destroying crops and vegetable gardens and clogging irrigation channels to rice fields. The release left the Boac River virtually dead. The effects
of the incident were so devastating that a UN assessment mission declared the accident to be a major environmental disaster.

3.

Section 4.102(b)(2)- Services other than processing, manufacturing or repacking for other persons doing business outside the Philippines for
goods which are subsequently exported, as well as services by a resident to a non-resident foreign client such as project studies, information
services, engineering and architectural designs and other similar services, the consideration for which is paid for in acceptable foreign currency
and accounted for in accordance with the rules and regulations of the BSP.

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A VAT ruling is rendered by the BIR commissioner upon request of a taxpayer to clarify certain provisions of the
VAT law. VAT Ruling No. 040-984 interpreted the same provision in the 1997 Tax Code.
When the Commissioner of Internal Revenue (CIR) did not act on this claim, respondent duly filed a Petition
for Review with the Court of Tax Appeals (CTA). The CTA ruled in favor of Placer Dome as to the amount of
P17,178,373.12 which qualified for 0% rate VAT and thus could be refunded the respondent. The rulings of the CTA
were elevated by the CIR to the Court of Appeals on Petition for Review. The appellate court affirmed the CTA
rulings. As a consequence, the present petition is now before the Supreme Court.
CIR heavily relies on the interpretation of the BIR in the form of Revenue Regulation No. 5-96 and VAT
Ruling 040-98. CIR argues that, following Section 4.102-2(b)(2) of Revenue Regulation No. 5-96, there are only two
categories of services that are subject to zero percent VAT, namely: services other than processing, manufacturing
or repacking for other persons doing business outside the Philippines for goods which are subsequently exported;
and services by a resident to a non-resident foreign client, such as project studies, information services, engineering
and architectural designs and other similar services. Petitioner explains that the services rendered by respondent were
not for goods which were subsequently exported. Likewise, it is argued that the services rendered by respondent were not
similar to project studies, information services, engineering and architectural designs which were destined to be
consumed abroad by non-resident foreign clients. These views, petitioner points out, were reiterated in VAT Ruling No.
040-98 - that the location or destination where the services were destined for consumption was determinative of
whether the zero-rating availed when such services were sold by a resident of the Philippines to a non-resident
foreign client.
Issues:
1. W/N the services of Placer Dome is subject to 0% rate VAT
Held/Ratio:
1. YES. The services of Placer Dome is subject to 0% rate VAT (as to the amount of P17,178,373 as ruled by the
CTA).
Two years ago, the Court in Commissioner of Internal Revenue v. American Express International, Inc.
(Philippine Branch) definitively ruled that under the National Internal Revenue Code of 1986, as amended,
services performed by VAT-registered persons in the Philippines (other than the processing, manufacturing or
repacking of goods for persons doing business outside the Philippines), when paid in acceptable foreign currency
and accounted for in accordance with the rules and regulations of the BSP, are zero-rated. The grant of the
present petition by the CIR entails the extreme step of rejecting American Express as precedent, a recourse
which the Court is unwilling to take.
First, although the regulatory provision contains an enumeration of particular or specific words, followed by the
general phrase and other similar services, such words do not constitute a readily discernible class and are
patently not of the same kind. Ejusdem generis does not apply. Project studies involve investments or marketing;
information services focus on data technology; engineering and architectural designs require creativity. Aside
from calling for the exercise or use of mental faculties or perhaps producing written technical outputs, no
common denominator to the exclusion of all others characterizes these three services. Nothing sets them apart

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4.

The sales of services subject to zero percent (0%) VAT under Section 108(B)(2), of the Tax Code of 1997, are limited to such sales which are
destined for consumption outside of the Philippines in that such services are tacked-in as part of the cost of goods exported. The zero-rating also
extends to project studies, information services, engineering and architectural designs and other similar services sold by a resident of the
Philippines to a non-resident foreign client because these services are likewise destined to be consumed abroad. The phrase project studies,
information services, engineering and architectural designs and other similar services does not include services rendered by travel agents to
foreign tourists in the Philippines following the doctrine of ejusdem generis, since such services by travel agents are not of the same class or of
the same nature as those enumerated under the aforesaid section.
Considering that the services by your client to foreign tourists are basically and substantially rendered within the Philippines, it follows that the
onus of taxation of the revenue arising therefrom, for VAT purposes, is also within the Philippines. For this reason, it is our considered opinion
that the tour package services of your client to foreign tourists in the Philippines cannot legally qualify for zero-rated (0%) VAT but rather
subject to the regular VAT rate of 10%.

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from other and similar general services that may involve advertising, computers, consultancy, health care,
management, messengerial work to name only a few.
Second, there is the regulatory intent to give the general phrase and other similar services a broader meaning.
Clearly, the preceding phrase as well as is not meant to limit the effect of and other similar services.
Third, and most important, the statutory provision upon which this regulation is based is by itself not restrictive.
The scope of the word services in Section 102(b)(2) of the [1986 NIRC] is broad; it is not susceptible of
narrow interpretation. VAT Ruling No. 040-98 relied upon by petitioner is a less general interpretation at the
administrative level, rendered by the BIR commissioner upon request of a taxpayer to clarify certain provisions of
the VAT law. As correctly held by the CA, when this ruling states that the service must be destined for
consumption outside of the Philippines in order to qualify for zero rating, it contravenes both the law and the
regulations issued pursuant to it. This portion of VAT Ruling No. 040-98 is clearly ultra vires and invalid.
Finally, interpellations on the subject in the halls of the Senate also reveal a clear intent on the part of the
legislators NOT to impose the condition of being consumed abroad in order for services performed in the
Philippines by a VAT-registered person to be zero-rated.5

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5.

Senator Maceda: I am referring to the second paragraph, in the same Section 102. The first paragraph is when one manufactures or packages
something here and he sends it abroad and they pay him, that is covered. That is clear to me. The second paragraph says Services other than
those mentioned in the preceding subparagraph, the consideration of which is paid for in acceptable foreign currency ... .
One example I could immediately think of I do not know why this comes to my mind tonight is for tourism or escort services. For
example, the services of the tour operator or tour escortjust a good name for all kinds of activities is made here at the Midtown Ramada
Hotel or at the Philippine Plaza, but the payment is made from outside and remitted into the country.
Senator Herrera: What is important here is that these services are paid in acceptable foreign currency remitted inwardly to the Philippines.

[Irrelevant note: Notice the first thing that came to Senator Macedas mind. !]

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10 - ABAKADA GURO Party List v. Executive Secretary Ermita (2005) (10% VAT)
Doctrines:

VAT is, by its nature, regressive.

The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are regressive.
What it simply provides is that Congress shall evolve a progressive system of taxation. The constitutional
provision has been interpreted to mean simply that direct taxes are to be preferred and as much as possible
indirect taxes should be minimized. However, resort to indirect taxes should not avoided entirely because it is
difficult, if not impossible, to avoid them by imposing such taxes according to the taxpayers ability to pay.

Uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the
same rate. Different articles may be taxed at different amounts provided that the rate is uniform on the same class
everywhere with all people at all times.

Facts:
On July 1, 2005, RA 9337 (a consolidation of three legislative bills namely, House Bill Nos. 3555 and 3705 and
Senate Bill No. 1950) took effect. The law increased the VAT on sale of goods and properties, importation of goods and
sale of services and use or lease of properties to 10%. It also introduced a 70% limitation on creditable input tax, a 60month amortization on the purchase or importation of capital goods exceeding P1,000,000 and a 5% final withholding tax
by government agencies. Several petitions for prohibition and certiorari (ABAKADA GURO, Senator Aquilino Pimentel
et. Al., Association of Pilipinas Shell Dealers, Inc., Rep. Francis Escudero, et. al., Governor Enrique Garcia) were filed
and the Court issued a temporary restraining order enjoining the government from implementing the law.
Issues:
Substantive:
1. W/N Sections 4, 5 and 6 of RA 9337 violate the following provisions of the Constitution:
a. Article VI, Section 28(1)
b. Article VI, Section 28(2)
2. W/N Section 8 of RA 9337 violates the following provisions of the Constitution:
a. Article III, Section 1
b. Article VI, Section 28(1)
Procedural:
3. W/N RA No. 9337 violates Sections 24 and 26, Article VI of the Constitution
Held/Ratio:
1. Section 4 imposes a 10% VAT on sale of goods and properties, Section 5 imposes a 10% VAT on importation of
goods, and Section 6 imposes a 10% VAT on sale of services and use or lease of properties. These questioned
provisions contain a uniform proviso authorizing the President, upon recommendation of the Secretary of
Finance, to raise the VAT rate to 12%, effective January 1, 2006, after any of the following conditions have been
satisfied, to wit:
That the President, upon the recommendation of the Secretary of Finance, shall, effective
January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the
following conditions has been satisfied:
i. Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the
previous year exceeds two and four-fifth percent (2 4/5 %); or
ii. National government deficit as a percentage of GDP of the previous year exceeds one and

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one-half percent (1 %).

a. NO.
Article VI, Section 28. (1) The rule of taxation shall be uniform and equitable. The Congress shall
evolve a progressive system of taxation.
The condition set for increasing the VAT rate to 12% have economic or fiscal meaning. That the first
condition amounts to an incentive to the President to increase the VAT collection does not render it
inequitable and therefore unconstitutional so long as there is a public purpose for which the law
was passed, which in this case, is mainly to raise revenue. The dire need for revenue cannot be ignored
and fiscal policy matters are not for the Courts to decide.
b. NO.
Article VI, Section 28. (2) The Congress may, by law, authorize the President to fix within specified
limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export
quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national
development program of the Government.
There is no delegation of legislative power. The law is complete in itself and it fixes a standard. It is
simply a delegation of ascertainment of facts upon which enforcement and administration of the increase
rate under the law is contingent. The legislature has made the operation of the 12% rate effective January
1, 2006, contingent upon a specified fact or condition. It leaves the entire operation or non-operation of
the 12% rate upon factual matters outside of the control of the executive. No discretion would be
exercised by the President.
2.
a. NO.
Article III, Section I No person shall be deprived of life, liberty, or property without due process
of law, nor shall any person be denied the equal protection of laws.
Section 8 of RA 9337 imposes a limitation on the amount of input tax that may be credited against
the output tax. (Input Tax is the tax paid by a person, passed on to him by the seller when he buys goods.
Output Tax is the tax due to a person when he sells goods.) Petitioners argue that with the limitation
imposed, input tax may not be wholly credited, which amounts to deprivation of property without due
process this is not absolute. The limitation is only applicable when the input tax exceeds 70% of
the output tax. If the input tax does not exceed 70%, then it may still be wholly credited from the output
tax. More importantly, the input tax in excess of 70% of the output tax, if any, is retained in the
books and may be credited in succeeding quarters. This is explicitly allowed by the law in Section
110. Therefore, there is no undue taking by the government. Crediting of the excess input tax is
merely delayed.
b. NO.
Article VI, Section 28. (1) The rule of taxation shall be uniform and equitable. The Congress shall
evolve a progressive system of taxation.
Uniformity in taxation means that all taxable articles or kinds of property of the same class shall be
taxed at the same rate. Different articles may be taxed at different amounts provided that the rate is
uniform on the same class everywhere with all people at all times. In this case, the tax law is uniform
as it provides a standard rate of 0% or 10% (or 12%) on all goods and services. Sections 4, 5 and 6 of
R.A. No. 9337 provide for a rate of 10% (or 12%) on sale of goods and properties, importation of goods,
and sale of services and use or lease of properties. These same sections also provide for a 0% rate on
certain sales and transaction. Neither does the law make any distinction as to the type of industry or trade
that will bear the 70% limitation on the creditable input tax.

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R.A. No. 9337 is equitable because it is equipped with a threshold margin. The VAT rate of 0% or 10%
(or 12%) does not apply to sales of goods or services with gross annual sales or receipts not exceeding
P1,500,000 and certain agricultural products are exempted to ensure that prices at the grassroots level will
remain accessible. The disputed sales tax is also equitable. It is imposed only on sales of goods or
services by persons engaged in business with an aggregate gross annual sales exceeding P200,000. Small
corner sari-sari stores, farm and marine products are consequently exempt from its application.
Moreover, Congress provided mitigating measures to cushion the impact of the imposition of the tax on
those previously exempt.
It is true that VAT by its very nature is regressive. The principle of progressive taxation has no relation
with the VAT system inasmuch as the VAT paid by the consumer or business for every goods bought
or services enjoyed is the same regardless of income. In other words, the VAT paid eats the same
portion of an income, whether big or small. The disparity lies in the income earned by a person or profit
margin marked by a business, such that the higher the income or profit margin, the smaller the portion of
the income or profit that is eaten by VAT. On the other hand, the lower the income or profit margin, the
bigger the part that the VAT eats away. At the end of the day, it is really the lower income group or
businesses with low-profit margins that is always hardest hit.
Nevertheless, the Constitution does not really prohibit the imposition of indirect taxes, like the
VAT. What it simply provides is that Congress shall evolve a progressive system of taxation. The
constitutional provision has been interpreted to mean simply that direct taxes are to be preferred
and as much as possible, indirect taxes should be minimized.
3.
a. NO
Section 24. All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of
local application, and private bills, shall originate exclusively in the House of Representatives, but the
Senate may propose or concur with amendments.
Although RA 9337 is a consolidation of a senate bill and 2 house bills, what the Constitution simply
means is that the initiative for filing revenue, tariff or tax bills, bills authorizing an increase of the
public debt, private bills and bills of local application must come from the House of Representatives on
the premise that the members of the House are expected to be more sensitive to local needs and problems.
The Senate is not precluded from introducing amendments to tax bills originating from the House of
Representatives.
b. NO.
Section 26 (1) Every bill passed by the Congress shall embrace only one subject which shall be expressed
in the title thereof. (2) No bill passed by either House shall become a law unless it has passed three
readings on separate days, and printed copies thereof in its final form have been distributed to its
Members three days before its passage, except when the President certifies to the necessity of its
immediate enactment to meet a public calamity or emergency. Upon the last reading of a bill, no
amendment thereto shall be allowed, and the vote thereon shall be taken immediately thereafter, and the
yeas and nays entered in the Journal.
Art. VI. 26 (2) must be construed as referring only to bills introduced for the first time in either house of
Congress, not to the conference committee. The no-amendment rule refers only to the procedure to
be followed by each house of Congress with regard to bills initiated in each of said respective
houses, before said bill is transmitted to the other house for its concurrence or amendment. Verily,
to construe said provision in a way as to proscribe any further changes to a bill after one house has voted
on it would lead to absurdity as this would mean that the other house of Congress would be deprived of
its constitutional power to amend or introduce changes to said bill. Thus, Art. VI, Sec. 26 (2) of the
Constitution cannot be taken to mean that the introduction by the Bicameral Conference Committee of

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amendments and modifications to disagreeing provisions in bills that have been acted upon by both
houses of Congress is prohibited.

11 - Pascual v. Sec. of Public Works (1960)

Doctrine:

As regards the legal feasibility of appropriating public funds for a public purpose:
It is a general rule that the legislature is without power to appropriate public revenue for anything
but a public purpose . It is essential that the character of the direct object of the expenditure
which must determine its validity as justifying a tax, and not the magnitude of interest to be
affected nor the degree of public welfare, may be ultimately benefitted by their promotion.
Taxing power must be exercised for public purposes only . Money raised by taxation can be
expended only for public purposes and not for the advantage of private individuals.

Facts:
Wenceslao Pascual (then Provincial Governor of Rizal) instituted this action for declaratory relief with a prayer
for injunction on the ground that RA 920 (an act appropriating funds for public works). This is because Pascual alleges
that one item wrongfully allots P85,000 for the construction, repair, and improvement of Pasig feeder road terminals and
subdivisions. This is because the roads to be improved were still the private property of then Senator Zulueta, albeit to be
donated on the condition that the roads in question be used for street purposes only. Zulueta is the owner of several
parcels of land in Pasig, Rizal, known as the Antonio Subdivision, certain portions of which had been reserved for the
projected feeder roads, which were private property when RA 290 was enacted by Congress.
Pascual also prays that the donation be declared void ab initio for being violative of the Constitutional prohibition
on members of Congress from being directly or indirectly interested financially in any contract with the government. He
also alleges that the construction of the roads using public funds would relieve him [Sen. Zulueta] from the burden of
constructing his subdivision streets or roads at his own expense.
Respondents moved to dismiss on the ground that petitioner had no capacity to sue (also mentioned in the motion
to dismiss is movant is not aware of any law which makes illegal the appropriation of public funds for the improvement
of what we, in the meantime, may assume as private property. The lower court acted in favor of the respondents,
upholding the validity of the appropriation on the ground that petitioner Pascual, not being directly affected, had no
capacity to question the donation made by Sen. Zulueta.
Issue:
1. W/N Pascual had the capacity to institute the said action
Held/Ratio:
1. Yes, there are many decisions nullifying, at the instance of tax payers, laws providing for the disbursement of
public funds, upon the theory that the expenditure of public funds by an officer of the State for the purpose of
administering an unconstitutional act constitutes a misapplication of funds, which may be enjoined at the request
of a tax payer.
[The case was remanded and the injunction maintained]

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12 - Lutz v. Araneta (1955) (Legality of the taxes imposed by the Sugar Adjustment Act CA no. 567)
Doctrines:

It cannot be said that the devotion of tax money to experimental stations to seek increase of efficiency in sugar
production, without any part of such money being channeled directly to private persons, constitutes expenditure of
tax money for private purposes

Facts:
CA no. 567: increase of the existing tax on the manufacture of sugar and owners or persons in control of land
devoted to the cultivation of sugar cane. All collections made shall accrue to the Sugar Adjustment and Stabilization
Fund.
Walter Lutz, as Judicial Administrator of the intestate estate of Ledesma, sought to recover the sum of P14,666.40
paid by the estate as taxes, alleging that such tax is unconstitutional as it is levied for the aid and support of the sugar
industry exclusively which is in his opinion not a public purpose.
Issues:
1. W/N the tax is valid
Held/Ratio:
1. YES, the tax is valid. The court ruled that CA no. 567 is not a pure exercise of the taxing purpose. The tax is
levied with a regulatory purpose which is to rehabilitate and stabilize the sugar industry. In other words, the act is
primarily an exercise of the police power.
Moreover, according to Johnson v. State ex rel. Marey: The protection of a large industry constituting one of the
great sources of the states wealth and therefore directly or indirectly affecting the welfare of so great a portion of
the population of the State is affected to such an extent by public interests as to be within the police power of the
sovereign. Because of this, it follows that the Legislature may determine within reasonable bounds what is
necessary for its protection and expedient for its promotion.
Even from the standpoint that the Act is a pure tax measure, it cannot be said that the devotion of tax money to
experimental stations to seek increase of efficiency in sugar production, utilization of by-products and solution of
allied problems, as well as to the improvements of living and working conditions in sugar mills or plantations,
without any part of such money being channeled directly to private persons, constitutes expenditure of tax money
for private purposes.

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13 - Valentin Tio v. VRB (Videogram Regulatory Board) (1987) (Inherent limitations, 30% tax, Videogram, 6
grounds)
Doctrines:

The public purpose of a tax may legally exist even if the motive which impelled the legislature to impose the tax
was to favor one industry over another

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

The power to impose taxes is one so unlimited in force and so searching in extent, that the courts scarcely
venture to declare that it is subject to any restrictions whatever, except such as rest in the discretion of the
authority which exercises it.

Facts:
Valentin Tio, petitioner, is doing business under the name of Omi Enterprises. Petitioner filed this case on his own
behalf and purportedly on behalf of other videogram operators adversely affected.
It assails the constitutionality of Presidential Decree No. 1987 entitled An Act Creating the Videogram
Regulatory Board with broad powers to regulate and supervise the videogram industry. The rationale behind the
enactment of the decree, is set out in its preambular clauses (Check case)
A month after the promulgation of P.D. 1987 (The Decree), Presidential Decree No. 1994 amended the National
Internal Revenue Code providing, inter alia:
SEC. 134. Video Tapes. There shall be collected on each processed video-tape cassette,
ready for playback, regardless of length, an annual tax of five pesos; Provided, That locally
manufactured or imported blank video tapes shall be subject to sales tax
Petitioner submits that the 30% tax imposed is harsh and oppressive, confiscatory, and in restraint of trade.
Petitioners provided 6 grounds to attack the constitutionality of P.D. 1987 (For this subject, we focus on #2)
Issues:
1. W/N P.D. is unconstitutional and void (different grounds)
a. Section 10 thereof, which imposes a tax of 30% on the gross receipts payable to the local government is a
RIDER and the same is not germane to the subject matter thereof;
b. W/N the tax imposed is harsh, confiscatory, oppressive and/or in unlawful restraint of trade in
violation of the due process clause of the Constitution (30% tax imposed is harsh and oppressive,
confiscatory, and in restraint of trade?);
c. There is no factual nor legal basis for the exercise by the President of the vast powers conferred upon him
by Amendment No. 6;
d. There is undue delegation of power and authority;
e. The Decree is an ex-post facto law; and
f.

There is over regulation of the video industry as if it were a nuisance, which it is not.

Held/Ratio:
1. NO. It is constitutional and valid.
a. NO. The title of the P.D. 1987 is comprehensive enough to include the purposes expressed in its Preamble
and reasonably covers all its provisions. It is unnecessary to express all those objectives in the title or that
the latter be an index to the body of the decree.

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b. NO. The tax remains a valid imposition. The rate of tax is a matter better addressed to the taxing
legislature.
It is beyond serious question that a tax does not cease to be valid merely because it regulates, discourages,
or even definitely deters the activities taxed. The power to impose taxes is one so unlimited in force and
so searching in extent, that the courts scarcely venture to declare that it is subject to any restrictions
whatever, except such as rest in the discretion of the authority which exercises it.
In imposing a tax, the legislature acts upon its constituents. This is, in general, a sufficient security against
erroneous and oppressive taxation.
The tax imposed by P.D. 1987 is not only a regulatory but also a revenue measure prompted by the
realization that earnings of videogram establishments of around P600M per annum have not been
subjected to tax, thereby depriving the Government of an additional source of revenue. It is an end-user
tax, imposed on retailers for every videogram they make available for public viewing. The tax burden is
actually shifted on the buying or the viewing public (like amusement tax). It is a tax that is imposed
uniformly on all videogram operators.
The levy of the 30% tax is for a public purpose. It was imposed primarily to answer the need for
regulating the video industry, particularly because of the rampant film piracy, the flagrant violation of
intellectual property rights, and the proliferation of pornographic video tapes. And while it was also an
objective of the P.D. 1987 to protect the movie industry, the tax remains a valid imposition.
"

The public purpose of a tax may legally exist even if the motive which impelled the legislature to
impose the tax was to favor one industry over another.

"

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

c. NO. In refutation, the Intervenors and the Solicitor Generals Office aver that the 8th whereas clause
sufficiently summarizes the justification in that grave emergencies corroding the moral values of the
people and betraying the national economic recovery program necessitated bold emergency measures to
be adopted with dispatch.
d. NO. The grant in Section 11 of the DECREE of authority to the BOARD to solicit the direct assistance
of other agencies and units of the government and deputize, for a fixed and limited period, the heads or
personnel of such agencies and units to perform enforcement functions for the Board is not a delegation
of the power to legislate but merely a conferment of authority or discretion as to its execution,
enforcement, and implementation.
e. NOT violative of the ex post facto principle. An ex post facto law is, among other categories, one which
alters the legal rules of evidence, and authorizes conviction upon less or different testimony than the law
required at the time of the commission of the offense.there is a rational connection between the fact
proved, which is non-registration, and the ultimate fact presumed which is violation of the DECREE,
besides the fact that the prima facie presumption of violation of the DECREE attaches only after a fortyfive-day period counted from its effectivity and is, therefore, neither retrospective in character.
f.

NO. We do not share petitioners fears that the video industry is being over-regulated and being eased out
of existence as if it were a nuisance. Being a relatively new industry, the need for its regulation was
apparent. The enactment of the Decree since April 10, 1986 has not brought about the demise of the
video industry. On the contrary, video establishments are seen to have proliferated in many places
notwithstanding the 30% tax imposed.

NOTE: The case is discussed in p. 6 of Vitug Book. This case is under Inherent Limitations in the Course Outline. We focus on
Ground #2. If asked, Intervenors are the Greater Manila Theaters Association, Integrated Movie Producers, Importers and Distributors
Association of the Philippines, and Philippine Motion Pictures Producers Association

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14 - Luzon Stevedoring v. CTA (1988) (Tugboats)

Doctrines:

Taxation is an inherent power of sovereignty(from book, it was phrased differently in the case)

The power of taxation is a high prerogative of sovereignty, the relinquishment is never presumed and any
reduction or diminution thereof with respect to its mode or its rate, must be strictly construed, and the same must
be coached in clear and unmistakable terms in order that it may be applied. The general rule is that any claim for
exemption from the tax statute should be strictly construed against the taxpayer.

Facts:
Petitioner appellant Luzon Stevedoring Corp., for the repair and maintenance of its tugboats, imported various
engine parts and other equipment paid compensating tax, under protest. Luzon claimed for a tax refund in the
CIR(commission of internal revenue) but was denied, and later claimed refund of the amount of P33,442.13, in the Court
of Tax Appeals, which was also denied, hence this petition.
Issue:
1. W/N petitioners tugboats can be interpreted to be included in the term cargo vessels for purposes of the tax
exemption provided for in Section 190 of the National Internal Revenue Code, as amended by Republic Act No.
3176?
Held/Ratio:
1. No, although the petitioner Corp. argues that in legal contemplation, the tugboat and a barge loaded with cargoes
with the former towing the latter for loading and unloading of a vessel in part, constitute a single vessel. and
accordingly it concludes that the engines, spare parts and equipment imported by it and used in the repair and
maintenance of its tugboats are exempt from compensating tax.
The power of taxation is a high prerogative of sovereignty, the relinquishment is never presumed and any
reduction or diminution thereof with respect to its mode or its rate, must be strictly construed, and the same must
be coached in clear and unmistakable terms in order that it may be applied. More specifically stated, the general
rule is that any claim for exemption from the tax statute should be strictly construed against the taxpayer.
Section 190 of the National Internal Revenue Code, as amended by Republic Act No. 3176, states that, ..That the
tax imposed in this section shall not apply.. to articles to be used by the importer himself as passenger and/or
cargo vessel, whether coastwise or oceangoing, including engines and spare parts of said vessel. The
amendatory provisions of Republic Act No. 3176 limit tax exemption from the compensating tax to imported
items to be used by the importer himself as operator of passenger and/or cargo vessel. In order that the
importations in question may be declared exempt from the compensating tax based on the cited provision, it is
indispensable that the requirements of the amendatory law be complied with, namely: (1) the engines and spare
parts must be used by the importer himself as a passenger and/or cargo, vessel; and (2) the said passenger
and/or cargo vessel must be used in coastwise or oceangoing navigation.
A tugboat is defined as a strongly built, powerful steam or power vessel, used for towing and, now, also used for
attendance on vessel, or a diesel or steam power vessel designed primarily for moving large ships to and from
piers for towing barges and lighters in harbors, rivers and canal,. A tug is a steam vessel built for towing,
synonymous with tugboat, based on the following definition petitioners tugboats clearly do not fall under the
categories of passenger and/or cargo vessels., It is a cardinal principle of statutory construction that where a
provision of law speaks categorically, the need for interpretation is obviated.
And, even if construction and interpretation of the law is insisted upon, it is a fundamental rule that statutes are to
be construed in the light of purposes to be achieved and the evils sought to be remedied, it will be noted, that the
purpose of amending the provision, was to provide incentives and inducements to bolster the shipping industry
and not the business of stevedoring.

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The Court of Tax Appeals found that , petitioner-appellants own evidence shows that it is engaged as a
stevedore, that is, the work of unloading and loading of a vessel in port; and towing of barges containing cargoes
is a part of petitioners undertaking as a stevedore. In fact, even its trade name is indicative that its sole and
principal business is stevedoring and lighterage, taxed under Section 191 of the National Internal Revenue Code
as a contractor, and not an entity which transports passengers or freight for hire which is taxed under Section 192
of the same Code as a common carrier by water.
As a matter of principle, this Court will not set aside the conclusion reached by an agency such as the Court of
Tax Appeals, which has necessarily developed an expertise on the subject unless there has been an abuse or
improvident exercise of authority.
Based on the forgoing, the tug boats cannot be considered a cargo vessel, therefore not exempted from tax.

15 - NPC v. Albay (1990) (power to recommend only)

Doctrines:

The power to impose taxes or revoke existing ones is a legislative prerogative.

Facts:
On March 14 and 15, 1989, respondents published a notice of auction sale involving the properties of NAPOCOR
and the Philippine Geothermal Inc. at Tiwi, Albay. The amounts were to be applied for the tax delinquencies claimed. The
back taxes of NAPOCOR being P214,845,184.76.
NAPOCOR opposed the sale interposing that under Resolution No. 17-87 of the Fiscal Incentives Review Board
(FIRB) and under a Memorandum issued by Executive Secretary Catalino Macaraig, NAPOCORs tax and duty
exemption privilege was restored.
On March 10, 1989, the Court resolved to issue a temporary restraining order directing the Albay government to
CEASE and DESIST from selling and disposing of the NAPOCOR properties. But the same failed to reach the
respondents on time hence, the properties were then sold to the Province of Albay which was the highest bidder.
The records of the case show that under NAPOCORs charter, the latter was granted exemption from all taxes,
duties, fees, imposts, and other charges. Thereafter, on June 11, 1984, PD 1931 was promulgated which withdrew all
exemptions from payment of duties, taxes, fees, imposts and other charges granted in favor of government-owned or
controlled corporations.
On the other hand, the Fiscal Incentives Review Board (FIRB), created on August 24, 1975, was tasked to
determine what subsidies and tax exemptions should be modified, withdrawn, revoked or suspended. The latter may
recommend to the President of the Philippines the withdrawal, modification, revocation, or suspension of the
enforceability of any of the statutory subsidies or tax exemption grants, except those granted by the Constitution. The
FIRB issued three Resolutions which restored the tax exemption privilege of NAPOCOR, the first being Resolution No.
10-85 which granted exemption for the period of June 11, 1984 to June 30, 1985; the second, Resolution No. 1-86 which
was from July 1, 1985 to indefinitely thereafter; the third being Resolution No. 17-87 which granted said privileges until
March 10, 1987.
Now, on December 17, 1986, EO 93 was promulgated which withdrew all tax and duty incentives granted to
government and private entities. The same EO also granted the FIRB powers to restore tax and duty exemptions, revise
their scope, impose conditions, and prescribe their periods.
On October 5, 1987, the Office of the President issued the Memorandum confirming NAPOCORs tax exemption.
The provincial government is now defending the auction sale in question saying that the various FIRB issuances
constitute undue delegation of taxing Power and hence, null and void. Also contended was that insofar as EO 93
authorizes the FIRB to grant tax exemptions, the same is of no force and effect because of the constitutional provision
allowing the legislature alone to accord tax exemption privileges.

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Issues:
1. W/N the various tax exemptions granted by virtue of FIRB Resolutions Nos. 10-85, 1-86, and 17-87 are valid and
constitutional
Held/Ratio:
1. No, the FIRB, under its charter, was empowered only to recommend tax exemptions or restore tax liability. The
fact that under Executive Order No. 93, the FIRB has been given the prerogative to restore tax and/or duty
exemptions withdrawn hereunder in whole or in part, and impose conditions for ... tax and/or duty exemption
is of no moment. These provisions are prospective in character and can not affect the Boards past acts.
The issue of whether EO 93 constitutes an unlawful delegation of power was not touched upon in this case since
respondent admits to the validity of the restoration of the tax exemption of NAPOCOR by virtue of the
Memorandum issued. What it questions is NAPOCORs liability in the interregnum between June 11, 1984, the
date its tax privileges were withdrawn, and March 10, 1987, the date they were purportedly restored. To be sure, it
objects to Executive Order No. 93 as allegedly a delegation of legislative power, but only insofar as its
(NAPOCORs) June 11, 1984 to March 10, 1987 tax accumulation is concerned.

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16 - Pepsi v. City of Butuan (1968) (substantial distinction)

Doctrines:

In taxation, if classification is to be made, it must conform to the following conditions: (1) it is based upon
substantial distinctions which make real differences; (2) these are germane to the purpose of the legislation or
ordinance; (3) the classification applies, not only to present conditions, but, also, to future conditions substantially
identical to those of the present; and (4) the classification applies equally all those who belong to the same class

Facts:
Pepsi seeks to recover the sums it paid to the City of Butuan pursuant to Municipal Ordinance No. 110, as
amended by MO no. 122.
The Ordinances impose a tax on any person, association, etc., of P0.10 per case of 24 bottles of Pepsi-Cola. Pepsi
operates within Butuan and it paid under protest the total amount of P14,177.03 (this is the amount Pepsi seeks to
recover). It assails the constitutionality of the Ordinance because the tax (1) partakes the nature of an import tax, (2) is
excessive, oppressive and confiscatory, and (3) is highly unjust and discriminatory.
Issues:
1. W/N the ordinance is valid
Held/Ratio:
1. NO, the ordinance is not valid
The second objection is untenable because the tax of P0.10 per case of 24 bottles is manifestly too small to be
excessive, oppressive, or confiscatory
The first and third objections are meritorious. MO110 originally taxed dealers engaged in selling soft drinks or
carbonated drinks. When amended by MO122, it imposed tax only upon any agent and/or consignee of any
person, association, etc. engaged in selling soft drinks and carbonated drinks. AS a consequence, merchants
engaged in the selling of soft drinks are not subject to the tax.
The classification made, to be valid must be: (1) it is based upon substantial distinctions which make real
differences; (2) these are germane to the purpose of the legislation or ordinance; (3) the classification applies, not
only to present conditions, but, also, to future conditions substantially identical to those of the present; and (4) the
classification applies equally all those who belong to the same class. However, the conditions were not fully met
by the ordinance in question, therefore the MOs should be annulled, and the city must refund to Pepsi.

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17 - Vegetable Oil Corp. vs Wenceslao Trinidad (1924) (Vegetable or Coconut Oil)

Doctrines:

A consignment tax is a privilege tax on the business of consigning commodities abroad from the Philippines. The
definition of the word merchant as a person who is engaged in the sale, barter or exchange of personal property
is merely descriptive of the persons who are required to pay the tax and does not mean that, in order to exact from
them the payment of the consignment tax, the government must also be in a position to impose taxes on their
sales, barter or exchange.

If it were sales tax, then surely the said sale should be consummated in the Philippines in order to be taxable here.
But when the foreign merchant, as defined in our statutes, comes to our shores and enters into transactions upon
which a tax is laid, the government places him on an equality with domestic merchants and requires him to pay
the same privilege taxes.

Facts:
Vegetable Oil Corp (VOC) is a foreign corporation duly licensed to transact business in the Philippine Islands and
has a principal place of business in Manila. Trinidad is the duly appointed and acting CIR of the Philippines. VOC is
engaged in the purchase of copra in the Philippines and the shipment of such copra to its mills in the US for manufacture
into vegetable oil. VOC is engaged in no other business in the Philippines. The coconut oil it manufactures is sold as well
in the US.
In three instances, VOC purchased in the Philippines and shipped to its mills in the US, copra. The shipping
documents were signed; copra was shipped and was eventually converted into vegetable oil and sold in the US. In such
instances, Trinidad under the alleged authority of Sec1459 of Act 27116 demanded from VOC a tax of 1% of the value of
the shipments of copra. VOC to avoid penalties and forfeitures for non-payment, paid to defendant such taxes, under
written protest, which protest Trinidad overruled.
Value of Copra bought

1% Tax

256,797

2,567.97

1,402,169

14,021.69

399,004

3,390.04

VOC filed a case for the full recovery of such taxes. It claims that it was a consignor and argued that it is NOT
engaged in the sale, barter, or exchanged of personal property in the Philippine Islands, it is not a merchant within the
statutory definition of the term and therefore cannot be required to pay the consignment tax. Lower court ruled in VOCs
favor, Trinidad appealed to the SC.
Issues:
1. W/N Vegetable Oil Corp is entitled to full recovery of the amount of tax it paid
Held/Ratio:
1. NO. The tax was lawfully collected by the defendant. SC indicates that the statute itself does not provided that the
sale, barter or exchange must take place in the Philippine Islands in order to make a person engaged in such
business a merchant.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
6.

Sec 1459 of Act 2711: All merchants not herein specifically exempted shall pay a tax of one per centum on the gross value in money of the
commodities, goods, wares, and merchandise sold, bartered, exchanged, or consigned abroad by them, such tax to be based on the actual selling
price or value of the things in question at the time they are disposed of or consigned, whether consisting of raw material or of manufactured or
partially manufactured products, and whether of domestic or foreign origin. The tax upon things consigned abroad shall be refunded upon
satisfactory proof of the return thereof to the Philippine Islands unsold.

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The decision explained the difference between tax on consignment and tax on sales. The tax on consignments is
a privilege tax pure and simple; it is a tax on the business of consigning commodities abroad from these Islands.
The definition of the word merchant as a person who is engaged in the sale, barter, or exchanged of personal
property is merely descriptive of the persons who are required to pay the tax and does not mean that, in order to
exact from them the payment of the consignment tax, the Government must also be in position to impose taxes on
their sales, barter, or exchange.
If the tax were one on sales, in order to be taxable in the Philippine Islands, must be consummated there; the
Philippine Government cannot, of course, collect privilege taxes on sales taking place in foreign countries no
matter whether the vendor is a Philippine merchant or whether he is a foreign one. The congress has imposed the
tax on local transactions; it does not seek to tax transactions carried out abroad. But when a foreign merchant, as
the word merchant is defined in our statutes, comes to our shores and enters into transactions upon which a tax
is laid, the Government can, and does, place him on an equality with domestic merchants and requires him to pay
the same privilege taxes.
The law defines the word merchant as a person who is engaged in the sale, barter, or exchange of personal
property, but does not say that he must be so engaged in the Philippine Islands in order to be considered a
merchant. As may be gathered from the language of the statute, he may do his selling, bartering or exchanging
wherever he pleases, but if he consigns merchandise abroad from the Philippine Islands he must pay the tax on his
consignments. Had it been the intention of the Legislature to require only the local merchant to pay the tax, the
definition of the word merchant in section 1459 would have read: Merchant as here used means a person
engaged in the sale, barter or exchange of personal property of whatever character in the Philippine Islands. But
it does not so read.
Also, the SC indicated that to hold that only persons who engage in sales, barter or exchange in the Philippine
Islands are to pay the tax on consignments would place the local merchants at a serious disadvantage in
competition with the foreign merchants, and would defeat the very evident purpose of the tax. The language of the
statute is perfectly clear and places the burden of the tax on all merchants alike.

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18 Wells Fargo Bank v. Collector (1940)

Facts:
[I got this case digest from the file Loi sent, since there was a mix-up with the person assigned.]
Birdie Lillian Eye died on 16 September 1932, at Los Angeles, California, the place of her alleged last residence
and domicile. Among the properties she left was her 1/2 conjugal shares of stock in the Benguet Consolidated Mining Co.,
an anonymous partnership (sociedad anonima), organized under the laws of the Philippines. She left a will duly admitted
to probate in California where her estate was administered and settled. Wells Fargo bank and Union Trust Co. was duly
appointed trustee of the trust by the said will. The Federal and California States inheritance taxes due thereon have been
duly paid. The Collector of Internal Revenue in the Philippines, however, sought to subject the shares of stock to
inheritance tax, to which Wells Fargo objected.
Issue:
1.

Whether the shares of stock are subject to Philippine inheritance tax considering that the decedent was domiciled
in California.

Held:
1.

YES. Originally, the settled law in the United States is that intangibles have only one situs for the purpose of
inheritance tax, and such situs is in the domicile of the decedent at the time of his or her death. But the rule has
been relaxed. The maxim mobila sequuntur personam, upon which the rule rests, has been decried as a mere
fiction of law having its origin in considerations of general convenience and public policy, and cannot be applied
to limit or control the right of the State to tax property within its jurisdiction and must yield to established fact
of legal ownership, actual presence and control elsewhere, and cannot be applied if to do so would result in
inescapable and patent injustice. The relaxation of the original rule rests on either of two fundamental
considerations: (1) upon the recognition of the inherent power of each government to tax persons, properties, and
rights within its jurisdiction and enjoying, thus, the protection of its laws; and (2) upon the principle that as to
intangibles, a single location in space is hardly possible, considering the multiple, distinct relationships which
may be entered into with respect thereto.
Herein, the actual situs of the shares of stock is in the Philippines, the corporation being domiciled therein. The
certificates of stock remained in the Philippines up to the time when the deceased died in California, and they
were in possession of one Syrena McKee, secretary of the corporation, to whom they have been delivered and
indorsed in blank. McKee had the legal title to the certificates of stock held in trust for the true owner thereof. The
owner residing in California has extended here her activities with respect to her intangibles so as to avail herself
of the protection and benefit of Philippine laws. Accordingly, the jurisdiction of the Philippine Government to tax
must be upheld.

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19 Meralco v. Yatco (1939)

Doctrine:

Where the insured, the risks insured against, and the contracts are within or are to be attended to in the
Philippines, the Philippines has the power to impose the tax upon the insured, regardless of whether the contract
was executed in a foreign country and with a foreign corporation.

Facts:
In 1935, Meralco insured certain real and personal properties situated in the Philippines with New York Insurance
Company and United States Guaranty Company. These insurance companies are foreign corporations not licensed to do
business in the Philippines and have no agents here. The policies contained provisions for the settlement and payment of
losses upon the occurrence of any risk insured against.
These insurance policies were entered into by a Meralco broker based in New York. This broker paid insurance
premiums to the companies worth P91,696. Yatco, the Collector of Internal Revenue in the Philippines, assessed and
levied a tax of 1% on the premiums, using as basis sec. 192 of Act No. 2427, as amended. Meralco paid under protest. The
protest was overruled, so Meralco instituted this action to recover the tax.
Issue:
1. W/N the tax assessed and levied by Yatco was improper, the contract being beyond the jurisdiction of the
Philippines
Held/Ratio:
1. NO, the tax was proper. The insured properties, the risks insured against, and certain incidents of the contract
(such as payment of dividends, sending of an unjuster, or making proof of loss) are within the territorial
jurisdiction of the Philippines. Thus, they are taxable by the Philippine government, regardless of whether the
contract was executed in a foreign country and with a foreign corporation. Substantial elements of the contract
may be said to be so situated in the Philippines so as to give its government the power to tax.
Even if it is assumed that the tax imposed upon Meralco will ultimately be passed on to the insurers, thus
constituting an indirect tax upon a foreign corporation, it would still be valid because the foreign corporations, by
the stipulations of the contract, have subjected themselves to the taxing jurisdiction of the Philippines. After all,
the Philippines, by protecting the properties insured, benefits the insurance corporations, and it is but reasonable
that the insurers should pay a just contribution therefor. It would certainly be a discrimination against domestic
corporations to hold the tax valid when the policy is given by them and invalid when issued by foreign
corporations.

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20 - Phil. Match Co., Ltd., v. Cebu (matches sold v. matches stored)

Doctrines:

The fact that the matches were delivered to customers, whose places of business were outside of the city,
would not place those sales beyond the citys taxing power. Those sales formed part of the merchandising
business being assigned on by the company in the city. In essence, they are the same as sales of matches fully
consummated in the city.

Facts:
Phil. Match had a storage facility in Cebu City where it kept matches to be sold and delivered outside the City and
throughout the other provinces. Cebu City then enacted Ordinance No. 279 which imposed a 1% tax on the gross sales of
various commodities sold, bartered, or manufactured in the city in excess of P2,000 a quarter. Sec. 9 of the ordinance
states that all deliveries of goods or commodities stored in the City of Cebu, or if not stored are sold in that city,
shall be considered as sales in the city and shall be taxable. Under this ordinance, Phil. Match was taxed P12,844.61. It
paid under protest, and wrote a letter to the city treasurer to ask for a refund. The company alleges that they were taxed
improperly for transactions that were done outside the city:
1. Sales of matches booked and paid for in Cebu City but were directly delivered to customers outside the city
(sales invoice was issued)
2. Transfer of matches to newsmen assigned in different agencies outside the city (no sales invoice)
3. Shipments of matches to provincial customers, outside the city, pursuant to salesmens instructions (the
salesmen take the orders and issue the invoice, outside the city)
The city treasurer denied the refund, stating that all these transactions are taxable under the ordinance. Phil. Match
then brought a suit to the RTC. The Court ruled that the transfer of matches to newsmen and the shipments to customers
pursuant to the salesmens instructions do not fall within Sec. 9 of the ordinance. They should only fall under storage
taxes and not sales taxes, because they are not considered sold in the city.
However, the Court upheld the taxes levied on the matches booked and paid for in Cebu City because they were
considered consummated in the citythe delivery to the carrier in the city considered as delivery to the customers. Phil.
Match was refunded P8,923.55, but they seek to declare that the sales of matches booked and paid for in Cebu City but
delivered outside the city also be declared beyond the scope of the ordinance. They also seek an award for damages
against the city treasurer.
Issues:
1. W/N Cebu City has the jurisdiction to tax matches paid for within the city but delieverd to customers outside the
city
2. W/N the city treasurer of Cebu City is liable for damages
Held/Ratio:
1. YES, they fall within the taxable property in Sec. 9 of Ordinance No. 279. Phil. Match uses the case of Shell
Company v. Municipality of Sipocot to support its case. However in that case, the price of the oil sold was paid
outside Sipocot. Thus, it cannot apply in this case. Here, the sales took place in the city and the matches were
stored in the city. Moreover, the sellers place of business is within the city. Thus, the city has the jurisdiction and
the power to tax the sales of those matches. This instance clearly falls within the citys power to impose taxes on
any person engaged in business in the city.
The court also upheld the RTCs ruling that delivery to the carrier is considered delivery to the customers. To
hold otherwise would defeat the tax ordinance in question and encourage tax evasion by merely arranging
deliveries within the city.
2. NO. The city treasurer operated on the honest belief that all three transactions fell within Sec. 9 of the ordinance.
No bad faith can be imputed on her mistake. Also, she was merely doing her duties to collect the taxes and had no

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choice but to perform her functions. Sec. 257 of the Revised Manual of Instruction to a Treasurer, a tax ordinance
must be enforced according to its provisions unless voided by a competent court or otherwise revoked.!

21 - CIR v. British Overseas Airways Corporation and CTA (1987)

Doctrine:

The source of an income is the property, activity or service that produced the income. For it to be considered as
coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines.

as used in our income tax law, income means flow of wealth.

There is no specific criterion as to what constitutes doing or engaging in or transacting business. Each case
must be judged in the light of its peculiar circumstances. In order that a foreign corporation may be regarded as
doing business within a State, there must be continuity of conduct and intention to establish a continuous
business, such as the appointment of a local agent, and not one of a temporary character.

Facts:
BOAC is a 100% owned British Government-owned corporation engaged in international airline business. Being
a member of the Interline Air Transport association, it operates air transportation services and sells transportation tickets
over the routes of the other airline members.
From 1959-1972, they had no landing rights for traffic purposes in the Philippines and thus, did not carry
passengers and/or cargo to ad from the Philippines. However, it maintained a general sales agent in the Philippines
(Warner Barnes & Co. Ltd. and subsequently Qantas Airways, which were responsible for selling BOAC tickets covering
passengers and cargoes). The CIR assessed deficiency income taxes against BOAC.
This involved 2 prior cases but the only difference between them is the years for which assessment was made.
The Court of Tax Appeals, in rendering a decision in favor BOAC, held that the proceeds of ticket sales in the Philippines
do not constitute BOAC income from Philippine sources since no service of carriage of passengers was performed by
BOAC within the Philippines. The CTAs position is that income from transportation is income from services so that the
place where services are rendered determines the source.
Issues:
1. W/N the proceeds derived by BOAC from the sales, while having no landing rights here, constitute taxable
income
2. W/N it is a resident foreign corporation doing business in the Philippines or has a place of business in the
Philippines
3. W/N in the alternative that it is a non resident foreign corporation. Is it then liable to Philippine income tax at the
rate of 35% of its gross income received from all sources within the Philippines
Held/Ratio:
1. Yes. The Tax Code defines gross income thus:
Includes gains, profits, and income derived from salaries, wages, or compensation for personal
service of whatever kind and in whatever form paid, or from profession, vocations, trades,
business, commerce, sales, or dealings in property; also from interests, rents, dividends,
securities, or the transactions of any business carried on for gain or profile, or gains, profits, and
income derived from any source whatever.
The Court ruled that this definition is broad and comprehensive enough to include proceeds from sales of
transport documents. And also, as used in our income tax law, income means flow of wealth.
The source of an income is the property, activity or service that produced the income. For it to be considered as
coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. In this

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case, the sale of tickets in the Philippines produced the income. The flow of wealth proceeded from, and occurred
within, Philippine territory enjoying the protection accorded by Philippine government.
2. Yes. The Court opined that BOAC is a resident foreign corporation. There is no specific criterion as to what
constitutes doing or engaging in or transacting business. Each case must be judged in the light of its
peculiar circumstances. In order that a foreign corporation may be regarded as doing business within a State, there
must be continuity of conduct and intention to establish a continuous business, such as the appointment of a local
agent, and not one of a temporary character. In this case, BOAC had a general sales agent in the Philippines from
1959-1971 that sold and issued tickets and allocated to the different airlines the corresponding proceeds.
3. No need to answer.
[This is subject to the dissent by Justice Feliciano, voting to uphold the decision of the CTA. The gist of which dissent it
that the source of income relates to the property, activity or service which produced the income and not the physical
sourcing of a flow of money or the physical situs of payment.]
Additional Info for Gross Income:
The case covers only tax assessments prior to Nov. 24 1972 or the date of promulgation of PD no. 69. The new
tax provision now provides for a specific tax on foreign carriers:
Provided, however, That international carriers shall pay a tax of 2- per cent on their gross
Philippine billings. (Sec. 24[b] [21, Tax Code).
The 2- % tax on gross Philippine billings is an income tax. It ensures that international carriers are taxed on
their incomes derived from the Philippines. Thereafter, Presidential Decree No. 1355, promulgated on 21 April,
1978, provided a statutory definition of the term Gross Philippine billings, thus:
Gross Philippine billings includes gross revenue realized from uplifts anywhere in the world by
any international carrier doing business in the Philippines of passage documents sold therein,
whether for passenger, excess baggage or mail provided the cargo or mail originates from the
Philippines

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CONSTITUTIONAL LIMITATIONS
22 - Manila Gas Corporation v. CIR (1936) (foreign corporation, local sources)
Doctrines:

No state may tax anything not within its jurisdiction without violating the due process clause of the constitution.
The taxing power of the state does not extend beyond its territorial limits, but within such it may tax persons,
property, income or business.

Facts:
Manila Gas is a corporation that operates a gas plant in Manila and furnishes gas service to the people of the
metropolis and surrounding municipalities. Islands Gas and Electric Company, a company based in New York, and
General Finance Company, domiciled in Switzerland, are stockholders of Manila Gas. Manila Gas religiously paid the
dividends and interest on bonds it owed to Islands Gas and Electric Company. The CIR required Manila Gas to deduct and
withhold P56,757.37 from the various sums it paid to foreign corporations as dividends and interest on bonds and other
indebtedness. Manila Gas paid this under protest.
Issues:
1. W/N the dividends paid by Manila Gas to its stockholders were subject to income tax
2. W/N the Manila Gas is entitled to recover the tax it paid
Held/Ratio:
1. YES.
Manila Gas claims that the dividends paid by it to stockholders were not subject to tax because to impose a tax
would be to do so on Manila gas, in violation of the terms of its franchise (Manila Gas were to pay 2 % of
gross receipts. Said payments shall be in lieu of all taxes...) Manila Gas contends that it would be oppressive and
inequitable. This argument is predicated on the constitutional provision that no law impairing the obligation of
contracts shall be enacted.
However, the SC held that a corporation has a personality distinct from that of its stockholders enabling the taxing
power to reach the latter when they receive dividends from the corporation. Dividends of a domestic corporation,
which are paid and delivered in cash to foreign corporations as stockholders, are subject to the payment in the
income tax.
2. NO. Manila Gas operates within the Philippines. Hence, its earnings come from local sources.
Manila Gas claims that since Island Gas and Electric Company and General Finance Company are domiciled in
the US and Switzerland, and as the interest on the bonds and other indebtedness earned by the mentioned
corporations has been paid in their respective domiciles, this is not income from Philippine sources within the
meaning of the Philippine Income Tax Law (interest paid to non-resident individuals or corporations is not
income from Philippine sources, and hence not subject to the Philippine Income Tax).
The SC held that no state may tax anything not within its jurisdiction without violating the due process
clause of the constitution. The taxing power of the state does not extend beyond its territorial limits, but
within such it may tax persons, property, income or business. If an interest in property is taxed, the situs of
either the property or interest must be found within the state. If an income is taxed, the recipient thereof must have
a domicile within the state or the property or business out of which the income issues must be situated within the
state so that the income may be said to have a situs therein. Personal property may be separated from its owner,
and he may be taxed on its account at the place where the property is although it is not the place of his own
domicile and even though he is not a citizen or resident of the state which imposes the tax.
Since Manila gas gets its earning from local sources, the place of material delivery of the interest to the foreign
corporations paid out of the revenue of the domestic corporation is of no particular moment. The place of

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payment even if outside the country cannot alter the fact that the income was derived from the Philippines.
The CIR was justified in withholding income taxes on interest on bonds and other indebtedness paid to nonresident corporation.

Sison v. Ancheta (See digest #8)

23 - Tiu, Montelibano and Jungco v. The Honorable Court of Appeals (1999)
Doctrine:
[Under the syllabus, due process dapat siya. Pero EPC talaga ang topic ng case.]

The Constitution does not require absolute equality among residents. It is enough that all persons under like
circumstances or conditions are given the same privileges and required to follow the same obligations. In
short, a classification based on valid and reasonable standards does not violate the equal protection clause.

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

Facts:
In 1992, the Congress enacted RA 7227 or the Bases Conversion and Development Act of 1992. According to
its title and whereas clauses, the law seeks to convert abandoned Military Bases into other productive uses. The law
aims to entice foreign investments to boost the economic situation and to create employment opportunities. Section 12 of
said law provides for the creation of the Subic Special Economic and Free-port Zone (SSEZ), consisting of certain
parts of the Municipality of Subic and Olongapo, Zambales, and the lands occupied by the former Subic Naval
Base; the President shall delineate the exact metes and bounds of the SSEZ. Among other incentives, investors within
the SSEZ shall enjoy tax-free privileges on the importation of raw materials, capital and equipment. However,
exportation of goods from the SSEZ shall be subject to tax.
Pursuant to RA 7227, the President issued EO 97-A delineating the area wherein the tax exemption applies.
According to the EO, the Secured Area, consisting only of the Subic Naval Base, shall be the only tax-free area in the
SSEZ.
Petitioners contend that the delineation made by EO 97-A is violative of their right to equal protection of the
laws. Citing Section 12 of RA 7227, petitioners contend that the SSEZ encompasses (1) the City of Olongapo, (2) the
Municipality of Subic in Zambales, and (3) the area formerly occupied by the Subic Naval Base. However, EO 97-A,
according to them, narrowed down the area within which the special privileges granted to the entire zone would
apply to the Subic Naval Base only. It has thereby excluded the residents of the first two components of the zone from
enjoying the benefits granted by the law.
Issue:
1. W/N EO 97-A, insofar as it exempts only the Secured Area from the payment of tax, is unconstitutional.
Held/Ratio:
1. NO. Firstly, Sec. 12 of RA7227 provides that the President has the power to delineate the metes and bounds of the
SSEZ. Secondly, the SC found substantial and reasonable distinctions between the Secured Area and those
outside. The classification made by the President fulfills the 4 requisites for a valid classification:
a. Germane to the purpose of the Law: In its declaration of policies, it can be seen that RA7227 aims to
convert the lands formerly occupied by the US military bases into economic or industrial areas. It is
this specific area which the government intends to transform and develop into a self-sustaining
industrial and commercial zone, particularly for big foreign and local investors to use as operational
bases for their businesses and industries.
b. Substantial Distinctions: Those being lured into the Secured Area are big investors who are capable of
pouring in money to attain the purpose of conversion. Their investments would affect the national

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economy. It is for this reason that the exemptions apply only to those within the Secured Area. Those
outside the area are merely small investors and local business operators. Their contributions would
affect merely the locality. As long as there are actual and material differences between territories,
there is no violation of the constitutional clause. Moreover, if they want to avail of the exceptions, what
they should do is merely to transfer their resources/businesses within the Secured Area.
c. Not limited to existing conditions only: The objective of RA7227 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.
d. Applies equally to all members of the same class: The classification applies equally to everyone within
the Secured Area. They are treated the same both in privileges and obligations granted by law.

24 - Shell Co. v. Vano (1954) (installation manager)

Doctrines:

Equal protection is not violated if a law/ordinance imposes tax on a named occupation, so long as it is not limited
to a certain person or a certain group only.

Facts:
The Municipal Council of Cordova, Cebu adopted the following ordinances:
1. Ordinance No. 10, which imposes annual tax of P150 on the occupation or exercise of the privilege
of an installation manager
2. Ordinance No. 9, which imposes an annual tax of P40 for local deposits in drums of combustible and
inflammable materials, and
3. Ordinance No. 11, which imposes an annual tax of P150 on tin can factories having an output of
30,000 tin cans annually.
The Shell Co., a foreign corporation, filed a suit for the refund of the taxes paid by it, on the ground that imposing
such taxes are ultra vires and violative of the equal protection clause.
Issues:
1. W/N the Municipal Ordinance No. 10 is valid (Issue on Equal Protection)
2. W/N the Municipal Ordinances No. 9 and 11 are valid
Held/Ratio:
1. Yes
Although it was claimed that the ordinance be hostile and discriminatory because no other person in the locality
occupied such position is of no merit. This is because the ordinance will also apply to any person or firm who
will exercise such calling or occupation named or designated as installation manager.
2. Yes
Ordinance No. 9 was enacted pursuant to the provisions of the Commonwealth Act No. 472, which authorizes
municipal councils and district councils to impose license taxes upon persons engaged in any occupation or
business, or exercise of privileges in a municipality by, requiring them to secure licenses at rates fixed by the
council which shall be just and uniform but no percentages taxes.
Ordinance No. 11 was also enacted pursuant to the provisions of the Comm. Act No 472 and it is not a percentage
tax because it is tax on business and the maximum annual output capacity is not a percentage, because it is not a
share or a tax based on the amount of the proceeds realized out of the sale of the tin cans manufactured therein but
on the business of manufacturing tin cans having a maximum annual output capacity of 30,000 tin cans.

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25 - City of Baguio v. de Leon (1968) (uniformity)

Doctrines:

A tax is considered uniform when it operates with the same force and effect in every place where the subject may
be found

Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be
taxed at the same rate.

Facts:
An ordinance of the City of Baguio imposed a license fee on any person, firm, entity or corporation doing
business in the City of Baguio. De Leon was held liable as a real estate dealer with a property therein worth more than
P10,000, but not in excess of P50,000, and was therefore obligated to pay P50 under such ordinance as an annual fee. The
lower court held that the ordinance is amended, valid and subsisting, and held defendant-appellant liable for the fees
therein prescribed as a real estate dealer. Its validity on constitutional grounds is challenged because of the allegation that
it imposed double taxation, which is repugnant to the due process clause, and that it violated the requirement of
uniformity.
Issues:
1. W/N the ordinance is valid (Does it violate the rule of uniformity by the Constitution?)
Held/Ratio:
1. Yes, the ordinance is valid. According to the challenged ordinance, a real estate dealer who leases property worth
P50,000 or above must pay an annual fee of P100. If the property is worth P10,000 but not over P50,000, then he
pays P50 and P24 if the value is less than P10,000. On its face, therefore, the above ordinance cannot be assailed
as violative of the constitutional requirement of uniformity. In Philippine Trust Company v. Yatco, Justice Laurel,
speaking for the Court, stated: A tax is considered uniform when it operates with the same force and effect in
every place where the subject may be found.
There was no occasion in that case to consider the possible effect on such a constitutional requirement
where there is a classification. The opportunity came in Eastern Theatrical Co. v. Alfonso. Thus: Equality and
uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at
the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of
taxation
To satisfy this requirement then, all that is needed is that the statute or ordinance in question applies
equally to all persons, firms and corporations placed in similar situation. This Court is on record as accepting the
view in a leading American case that inequalities which result from a singling out of one particular class for
taxation or exemption infringe no constitutional limitation.

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26 - Eastern Theatrical v. Alfonso (19xx) (cinematographs, theaters, exhibitions, etc.; equality and uniformity in tax)
Doctrines:

Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be
taxed at the same rate

The taxing power has the authority to make reasonable and natural classification for purposes of taxation

Facts:
Twelve corporations engaged in motion picture business challenge the validity of ordinance 2958 of the City of
Manila which imposes a fee on tickets sold by cinematographs, theaters and exhibitions. They impugn the provisions
for being against the constitution, more particularly the provisions regarding the uniformity and equality of taxation and
the equal protection of the law. The Municipal Board in its affirmative defense alleges that the gradual tax required by
said ordinance applies to all cinematographs, theaters and exhibitions situated as a class and without exceptions. The
defendant also alleges that ever since the ordinance took effect the plaintiffs have been charging the patrons of the theater
increased prices for admission parallel to the gradual tax imposed by the ordinance.
Issues:
1. W/N the ordinance is valid
Held/Ratio:
1. YES.
The fact that some places of amusements are not taxed while others, as in this case, cinematographs, theaters,
exhibitions and other kinds, is no argument against the equality and uniformity of the tax imposition. Equality
and uniformity in taxations means that all taxable articles of kinds of property of the same class shall be
taxed at the same rate. The taxing power has the authority to make reasonable and natural classification for
purposes of taxation; and the plaintiffs cannot point out what places of amusement taxed by the ordinance do not
constitute a class by themselves which can be confused with those not included in the ordinance.

Sison v. Ancheta (See digest #8)

Pepsi Cola v. Butuan (See digest #16)

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27 - Ormoc Sugar Company, Inc. v. Treasurer (1968) (tax ordinance on Ormoc Sugar Company only)
Doctrines:

Rate of tax shall be uniform.

A classification is reasonable where (1) it is based on substantial distinctions which make real differences; (2)
these are germane to the purpose of the law; (3) the classification applies not only to present conditions but also to
future conditions which are substantially identical to those of the present; (4) the classification applies only to
those who belong to the same class.

Facts:
The Municipal Board of Ormoc City passed an ordinance, imposing on any and all productions of centrifugal
sugar milled at the Ormoc Sugar Company, Inc., in Ormoc City a municipal tax equivalent to one per centum (1%) per
export sale to the United States of America and other foreign countries. The Ormoc Sugar Company paid a total of
P12,087.50 (March: P7,087.50; April: P5,000) under protest.
Ormoc Sugar Company filed a complaint against the City of Ormoc, Treasurer, Municipal Board and Mayor
before the CFI of Leyte. It assailed the constitutionality of the ordinance as it violates the equal protection clause (Sec.
1[1], Art. III, Constitution) and rule of uniformity of taxation (Sec. 22[1]), Art. VI, Constitution). It further alleged that
the tax imposed is an export tax forbidden under Section 2287 of the Revised Administrative Code; that the tax is neither
a production nor a license tax Ormoc City is authorized to impose and that the tax amounts to customs duty, fee or charge
in violation of paragraph 1 of Section 2 of Republic Act 2264 because the tax is on both the sale and export of sugar.
In their Answer, respondents claimed that the tax ordinance was within the citys power under the Local
Autonomy Act and that it did not violate the Constitution. The CFI upheld the constitutionality of the ordinance and
broadened the taxing power of the city to include all other forms of taxes, licenses or fees not excluded in its charter.
Ormoc Sugar Company appealed.
Issues:
1. W/N constitutional limits on the power of taxation, specifically the equal protection clause and rule of uniformity
of taxation, were infringed.
Held/Ratio:
1. YES.
Art. 3, Sec. 1 provides: ... nor shall any person be denied the equal protection of the laws. The equal protection
clause applies only to persons or things identically situated. It does not bar a reasonable classification of the
subject of legislation. A classification is reasonable where (1) it is based on substantial distinctions which make
real differences; (2) these are germane to the purpose of the law; (3) the classification applies not only to present
conditions but also to future conditions which are substantially identical to those of the present; (4) the
classification applies only to those who belong to the same class.
The ordinance does not satisfy the requirements of a reasonable classification. It taxes only centrifugal sugar
produced and exported by the Ormoc Sugar Company. Ormoc Sugar Company was the only sugar central in
the Ormoc city at the time the taxing ordinance was enacted. However, a reasonable classification requires
that it be made applicable to future conditions as well. Even if another sugar company is set-up, it cannot be
subject to tax because the ordinance expressly points only to Ormoc Sugar Company.
The taxes were not arbitrarily collected because at the times of the collection, the ordinance provided means to
preclude arbitrariness.

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28 - Cagayan Electric Power and Light Co. v. CIR (1985) (Franchise Tax v. Income Tax)
Doctrine:

A franchise is granted by the legislature. It can be repealed or amended by the same Congress when the public
interest so requires.

Facts:
Cagayan Electric Power and Light Co. or CEPALCO is Cagayan de Oros version of our Meralco. This case
involves three laws: RA 3247, RA 5431, and RA 6200.
RA 3247

RA 5431

RA 6200

Enacted 1961

Enacted 1968

Enacted August 4, 1969

The law that granted

CEPALCO the franchise to
distribute power in the Cagayan
de Oro area.

Effective January 1, 1969,

franchise companies (like
CEPALCO) would be subject to
income tax in addition to the
franchise tax they are already
paying.

The law that amended RA 3247,

enlarging the territory covered
by CEPALCO to include new
towns in the Misamis Oriental
province.

It imposed a 3% franchise tax

on the gross income of
CEPALCO, but in exchange,
the law gave it an exemption
from any other tax to be levied
against it

More importantly, the law REENACTED / REITERATED

the income tax exemption to
CEPALCO originally stipulated
in RA 3247.
Thus, RA 6200 impliedly
repealed RA 5431 insofar as
CEPALCO is concerned.
So between January 1, 1969 and August 4, 1969, there were seven
months for which CEPALCO did not have an income tax
exemption.

The CIR wants to collect an income tax from CEPALCO for Jan 1969 to Aug 1969. CEPALCO is refusing to pay
based on its contention that its legislative franchise (RA 3247) cannot be impaired.
Issue:
1. W/N CIR can collect the income tax from CEPALCO.
Held/Ratio:
1. YES.
a. Congress could impair CEPALCOs legislative franchise by making it liable for income tax from which it
was originally exempted.
b. A legislative franchise is subject to amendment, alteration, repeal by Congress when the public interest so
requires.
c. Even PLDT, a larger franchise company, paid its income taxes on top of the franchise taxes.

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29 - CIR v. Lingayen Gulf (1988) (from 5% to 2%)

Doctrines:

The Legislature has the inherent power not only to select the subjects of taxation but also to grant exemptions.
Tax exemptions have never been deemed violative of the equal protection clause. Whenever the legislature makes
tax laws and exceptions the courts, in the absence of violations of substantive rights, cannot inquire into the
wisdom of such decisions.

Facts:
Lingayen Gulf Electric Power operates an electric power plant serving the adjoining municipalities of Lingayen
and Binmaley (Pangasinan) pursuant to the municipal franchises, which imposes upon it the payment of not more than 2%
franchise tax. After some time, the President approved its franchise. Thereafter, the BIR demanded from it the payment of
deficiency taxes applying franchise tax rates of 5% on gross receipts, instead of the lower rates provided for by the
municipal franchises. Lingayen refused and motioned for a reinvestigation, alleging that it made overpayment. Pending
the cases, RA 3843 was approved which granted Lingayen legislative franchises for the operation of the electric light,
which imposed upon it the payment of only 2% franchise tax, effective from the date the original municipal franchise was
granted. Thus, the CTA absolved Lingayen from all its liabilities. The BIR, unfazed, countered that RA 3843 in so far as it
grants Lingayen the payment of only 2% franchise tax is discriminatory and hence, violative of the rule on equality and
uniformity of taxation as others are subject to 5% franchise tax.
Issue:
1. W/N the Supreme Court may determine the validity of RA 3843 as to its imposition of a 2% franchise tax in favor
of Lingayen.
Held/Ratio:
1. NO. The SC does not have the authority to inquire into the wisdom of such act. Furthermore, the 5% franchise tax
rate provided in Section 259 of the Tax Code was never intended to have a universal application; it even expressly
allows the payment of taxes at rates lower than 5% when the charter granting the franchise of a grantee precludes
the imposition of a higher tax. RA 3843 did not only fix and specify a franchise tax of 2% on its gross receipts,
but made it in lieu of any and all taxes, all laws to the contrary notwithstanding, thus, leaving no room for doubt
regarding the legislative intent. Charters or special laws granted and enacted by the Legislature are in the nature of
private contracts. They are usually adopted after careful consideration of the private rights in relation with
resultant benefits to the State. In passing a special charter, the attention of the legislature is directed to the facts
and circumstances which the act or charter is intended to meet, the legislature considers and makes provision for
all the circumstances of a particular case. Obviously in this case, the legislature found it wise to impose a lower
tax rate on Lingayen, and the Court cannot inquire into the wisdom of such finding.

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30 - Province of Misamis Oriental v. Cagayan Electric Power and Light Co. (1990) (franchise with tax
exemption)
Doctrines:

The rule is that a special and local statute applicable to a particular case is not repealed by a later statute which is
general in its terms, provisions and application even if the terms of the general act are broad enough to include the
cases in the special law unless there is manifest intent to repeal or alter the special law.

This case is listed under the item non-impairment of contracts. Just note that by virtue of the franchise given to
Cagayan Electric by law, a contract exists between the company and the government.

Facts:
Under Republic Act No. 3247, Cagayan Electric Power and Light Company (CEPALCO) was granted a franchise
to install, operate and maintain an electric light, heat, and power system in the city of Cagayan de Oro and its suburbs. RA
3570 and RA 6020 were subsequently passed, adding 4 municipalities to CEPALCOs sphere of operation.
R.A. Nos. 3247, 3570 and 6020 uniformly provide that:
Sec. 3. In consideration of the franchise and rights hereby granted, the grantee shall pay a
franchise tax equal to three per centum of the gross earnings for electric current sold under this
franchise, of which two per centum goes into the National Treasury and one per centum goes into
the treasury of the Municipalities of Tagoloan, Opol, Villanueva and Jasaan and Cagayan de Oro
City, as the case may be: Provided, That the said franchise tax of three per centum of the gross
earnings shall be in lieu of all taxes and assessments of whatever authority upon privileges
earnings, income, franchise, and poles, wires, transformers, and insulators of the grantee
from which taxes and assessments the grantee is hereby expressly exempted.
On June 28, 1973, the Local Tax Code (P.D. No. 231) was promulgated, Section 9 of which provides:
Sec. 9. Franchise Tax. Any provision of special laws to the contrary notwithstanding, the
province may impose a tax on businesses enjoying franchise, based on the gross receipts realized
within its territorial jurisdiction, at the rate of not exceeding one-half of one per cent of the gross
annual receipts for the preceding calendar year.
Pursuant thereto, the Province of Misamis Oriental enacted Provincial Revenue Ordinance No. 19, whose Section
12 reads:
Sec. 12. Franchise Tax. There shall be levied, collected and paid on businesses enjoying
franchise tax of one-half of one per cent of their gross annual receipts for the preceding calendar
year realized within the territorial jurisdiction of the province of Misamis Oriental.
The provincial treasurer of Misamis Oriental demanded payment from CEPALCO. At first, CEPALCO refused to
pay, on the basis of the exemption granted by RA 3247, RA 3570, and RA 6020, and asked for the provincial fiscals
opinion. The provincial fiscal upheld Provincial Revenue Ordinance No. 19. CEPALCO paid P 4, 276.28 under protest
and appealed the fiscals ruling to the Secretary of Justice, who subsequently reversed the fiscal.
The Province filed a complaint for declaratory relief at the CFI of Misamis Oriental. The complaint was dismissed
and the Province was ordered to reimburse CEPALCO.
Hence, this petition.
Issues:
1. W/N CEPALCO is exempt from paying a provincial franchise tax.
Held/Ratio:

1. YES, PD 231 did not repeal the laws granting exemption to CEPALCO in any way, shape, or form. There is no
conflict between the subject pieces of legislation. Republic Acts Nos. 3247, 3570 and 6020 are special laws

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applicable only to CEPALCO, while P.D. No. 231 is a general tax law. While the general tax law is the general
rule, the special laws are the exceptions.
Note: This case is also listed under contractual tax exemptions so please note that the court said:
Such exemption is part of the inducement for the acceptance of the franchise and the rendition of
public service by the grantee. As the charter is in the nature of a private contract, the impostion of
another franchise tax on the corporation by the local authority would constitute an impairment of
the contract between the government and the corporation
[Compare with the doctrine in Cagayan Electric Co v. Commissioner where it was said that tax exemptions under
franchises are not to be confused with contractual tax exemptions within the purview of the non-impairment clause.]

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31 - City of San Pablo v. Reyes (1999)

Doctrines:

The Local Government Code has revoked the tax exemptions given by franchise.

Facts:
Act No. 3648 granted the Escudero Electric Service Company a legislative franchise to maintain and operate an
electric light and power system in the City of San Pablo and nearby municipalities. Its franchise stated that a tax of two
percent of gross earnings will be imposed in lieu of any and all taxes of any kind nature or description levied, established
or collected by any authority whatsoever, municipal, provincial or insular. Escuderos franchise was transferred to the
plaintiff (herein respondent) MERALCO under Republic Act No. 2340.
Republic Act No. 7160, or Local Government Code of 1991 took effect. It authorizes the province/city to impose a
tax on business enjoying a franchise at a rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual
receipts for the preceding calendar year realized within its jurisdiction.
The City of San Pablo then passed an Ordinance, demanding 50% of 1% of the gross annual receipts from Meralco
(among others).
Issues:
1. W/N the City of San Pablo may impose a local franchise tax pursuant to the LGC upon the Manila Electric
Company which pays a tax equal to two percent of its gross receipts in lieu of all taxes and assessments of
whatever nature imposed by any national or local authority on savings or income.
Held/Ratio:
1. Yes. A general law cannot be construed to have repealed a special law by mere implication unless the intent to
repeal or alter is manifest. . The explicit language of Section 1377 which authorizes the province to impose
franchise tax notwithstanding any exemption granted by any law or other special law is all-encompassing
and clear. The franchise tax is imposable despite any exemption enjoyed under special laws.
Reading together Sections 137 and 1938 of the LGC, we conclude that under the LGC the local government unit
may now impose a local tax at a rate not exceeding 50% of 1% of the gross annual receipts for the preceding
calendar year based on the incoming receipts realized within its territorial jurisdiction. The LGC provided for an
express, albeit general, withdrawal of such exemptions or privileges. No more unequivocal language could have
been used.
Private respondents invocation of the non-impairment clause of the Constitution is accordingly unavailing. The
LGC was enacted in pursuance of the constitutional policy to ensure autonomy to local governments and to enable
them to attain fullest development as self-reliant communities.
The power to tax is primarily vested in Congress. However, in our jurisdiction, it may be exercised by local
legislative bodies, no longer merely by virtue of a valid delegation as before, but pursuant to direct authority
conferred by Section 5, Article X of the Constitution.
Also, a franchise is granted upon the condition that it shall be subject to amendment, or repeal by the Congress

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7.

Sec. 137 Franchise Tax Notwithstanding any exemption granted by any law or other special law, the province may impose a tax on
business enjoying a franchise, at a rate not exceeding fifty percent 50% of one percent 1% of the gross annual receipts for the preceding
calendar year based on the incoming receipts, or realized, within its territorial jurisdiction.

8.

Sec. 193 Withdrawal of Tax Exemption Privileges Unless otherwise provided in this Code, tax exemptions or incentives granted to, or
presently enjoyed by all persons, whether natural or juridical, including government-owned or controlled corporations, except local water
districts, cooperatives duly registered under R.A. 6938, non- stock and non-profit hospitals and educational institutions, are hereby withdrawn
upon the effectivity of this Code.

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32 - MERALCO v. Province of Laguna (1999) (Franchise Tax)

Doctrines:

Contractual 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 governmental immunity. Tax exemptions
of this kind may not be revoked without impairing the obligations of contracts.

A franchise partakes the nature of a grant which is beyond the purview of the non-impairment clause of the
Constitution. 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.

Facts:
Certain municipalities of Laguna (Binan, Sta. Rosa, San Pedra, Luisiana, Calauan and Cabuyao) issued
resolutions through their respective municipal councils granting MERALCO the franchise to supply electric light, heat
and power within their respective areas. Subsequently, MERALCO was also granted a franchise by the National
Electrification Administration to operate an electric light and power service in Calamba, Laguna.
Pursuant to the Local Government Code of 1991 which encouraged LGUs to create their own sources of
revenue, the Province of Laguna enacted Ordinance No. 01-92, imposing a tax on businesses enjoying a franchise.9
MERALCO fell under the coverage of this imposition and was made to pay. Thus, MERALCO paid the tax amounting to
over P19M under protest. Thereafter, MERALCO demanded the provincial Treasurer of Laguna for a refund, claiming the
Province of Laguna effectively compelled it to pay a second franchise tax violating Sec. 1 of P.D. 551 as follows:
Any provision of law or local ordinance to the contrary notwithstanding, the franchise tax payable by all
grantees of franchises to generate, distribute and sell electric current for light, heat and power shall
be two per cent (2%) of their gross receipts received from the sale of electric current and from
transactions incident to the generation, distribution and sale of electric current.
Such franchise tax shall be payable to the Commissioner of Internal Revenue or his duly authorized
representative on or before the twentieth day of the month following the end of each calendar quarter or
month, as may be provided in the respective franchise or pertinent municipal regulation and shall, any
provision of the Local Tax Code or any other law to the contrary notwithstanding, be in lieu of all taxes
and assessments of whatever nature imposed by any national or local authority on earnings,
receipts, income and privilege of generation, distribution and sale of electric current.
The Governor denied the claim for refund, basing his decision on the fact that the Local Government Code (LGC)
is a more recent law that had the effect of superseding PD 551 which was passed in 1974. The RTC of Sta. Cruz, Laguna
also denied MERALCOs claim, holding that the questioned ordinance was valid and binding. Hence, this petition.
Issue:
1. W/N the imposition of a franchise tax under the questioned ordinance, in so far as MERALCO is
concerned, violates of the non-impairment clause of the Constitution and of Section 1 of PD 551

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9.

Sec. 2.09. Franchise Tax. There is hereby imposed a tax on businesses enjoying a franchise, at a rate of fifty percent (50%) of one
percent (1%) of the gross annual receipts, which shall include both cash sales and sales on account realized during the preceding calendar
year within this province, including the territorial limits on any city located in the province.

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Held/Ratio:
1. NO.
NON-IMPAIRMENT CLAUSE:
There is no violation of the non-impairment clause. It cannot be said that the exemption is a contractual one,
and therefore cannot be withdrawn unilaterally. When the law speaks of contractual tax exemptions, it must be
understood as those agreed to by the taxing authority in actual contracts, in its private capacity. These exemptions
are not to be confused with tax exemptions granted under franchises, such as the one subject of the controversy. A
franchise is a grant which is beyond the scope of the non-impairment clause.
LEGISLATIVE INTENT:
To bolster its position MERALCO cited cases where the phrase shall be in lieu of all taxes found in PD 551
exempted corporations from paying locally imposed franchise taxes. However, in the recent case of City
Government of San Pablo v. Reyes, the SC ruled that this phrase in PD 551 must give way to the LGC which
precisely withdraws such exemptions and privileges. Thus, it must be noted that upon effectivity of the LGC,
all standing exemptions, except only those provided therein, can no longer be invoked by MERALCO to
avoid paying the local franchise tax. Moreover, the LGC contains a repealing clause that effectively repeals all
other laws inconsistent with its provisions.
*In case Atty. Gonzales asks about the nature of the power to tax in relation to LGUs:
The Court emphasized that 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 by statute. According to the Court, the rule under the
prevailing Constitution is that the tax power must be deemed to exist, where there is neither a grant nor a prohibition by
statute. The rationale for this rule is the need to secure the self-sufficiency of LGUs by granting them general and
broad tax powers. However, Congress must still see to it that such power is exercised within certain limitations.10

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10. (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 not be unduly disturbed; and (d) local taxation will be fair,
uniform, and just.

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33 - Herrera v. Quezon City Board of Assessment Appeals (1961)

Doctrine:

Operations which are considered merely incidental to the main purpose of the property shall not affect its
worthiness of exemption as the case may be.

Facts:
St. Catherine Hospital was initially granted exemption to the payment of real property tax. However, roughly 3
years later, the QC Assessor re-classified the properties to taxable due to several reasons:
1. Receipt of profits from pay-patients
2. Operation of a Midwifery School (part of the building is used for this)
The petitioners instituted an appeal. The CTA decided that the land, building and other improvements were not
exempted from paying the said tax. Stating that the building was not used exclusively for charitable and educational
purposes stating the abovementioned reasons and in addition, it said that the building had dual purposes where the portion
dedicated to education and charitable purposes cannot be identified from those destined to other uses; and the building
itself is an indivisible property, therefore, not tax exemption is due.
Issue:
1. W/N the lot, building and other improvements of St. Catherin Hospital are exempt from Real Property Tax.
Held/Ratio:
1. YES. The court deemed that St. Catherine hospital is still a charitable institution worthy of the said exemption.
The profits received from pay-patients were devoted exclusively to benevolent purposes where such is used for
the improvement of the charity wards. In addition, the existence of the Midwifery school does not affect the
exemption grated since there stands in the Constitution that all lands, building, and improvements used
exclusively for religious, charitable or educational purposes shall be exempt from taxation.
The existence of tuition fees and other fees paid by the enrollees are deemed immaterial. However, the Congress
may, if it deems fit to do so, impose taxes upon profits, but these said lands, buildings and improvements are
beyond the legislatives taxing power.
Similarly, the garage in the building above referred to which was obviously essential to the operation of the
school of midwifery, for the students therein enrolled practiced, not only in St. Catherines Hospital, but, also, in
St. Marys Hospital, and were entitled to transportation thereto for Mrs. Herrera received no compensation as
directress of St. Catherines Hospital were incidental to the operation of the latter and of said school, and,
accordingly, did not affect the charitable character of said hospital and the educational nature of said school.

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34 - Abra Valley College, Inc. v. Aquino (1988) (2nd floor directors residence, 1st floor commercial space)
Doctrines:

The exemption in favor of property used exclusively for charitable or educational purposes is not limited to
property actually indispensable therefor, but extends to facilities which are incidental to and reasonably
necessary for the accomplishment of said purposes, such as in the case of hospitals, a school for training nurses,
a nurses home, property use to provide housing facilities for interns, resident doctors, superintendents, and other
members of the hospital staff, and recreational facilities for student nurses, interns, and residents, such as
Athletic fields including a firm used for the inmates of the institution. (CIR v. Bishop of the Missionary
District)

Facts:
Abra Valley College is an educational corporation of higher learning and offers primary, secondary and college
courses. The school was assessed with realty taxes, and because of failure to pay, being auctioned. It filed a complaint
asking the court to declare void a notice of seizure and notice of sale of its lot and building located at Bangued, Abra
for non-payment of real estate taxes and penalties. The trial court said that 5the property in question was not used
exclusively for educational purposes because the 2nd floor is being used by the director of the school as a residence.
Issues:
1. W/N the lot and building in question is used exclusively for educational purposes
Held/Ratio:
1. While the court allows a more liberal and non-restrictive interpretation of the phrase exclusively used for
educational purposes, as provided by the Constitution at the time, reasonable emphasis has always been made
that the exemption extends to facilities which are incidental to and reasonably necessary for the accomplishment
of the main purpose.
The use of the 2nd floor as residence finds justification under the concept of incidental use, but the lease of the 1st
floor to Northern Marketing Corp., cannot be considered as incidental to the purpose of education. But since only
a portion is used for the purposes of commerce, it is only fair that half of the assessed tax be returned to the school
involved. (ASSESSED TAX: P5,140.31)
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35 - CN Hodges v. Municipal Board of Iloilo City (1967)

Doctrines:
Facts:
The municipal board of the City of Iloilo enacted Ordinance 31 (An Ordinance Imposing Municipal Tax On The
Sale of Real Property Situated In The City of Iloilo), invoking RA 2264 (Local Autonomy Code). The said ordinance
requires any person, firm, association or corporation who shall sell real property located in the city to pay a real
property sales tax of one-half of one percent (1%) of the contract price and/or consideration before such sale could be
registered and the ownership thereof transferred in the Office of the Register of Deeds of Iloilo.
The petitioner C. N. Hodges, who was engaged in the business of buying and selling real estate in the city and the
Province of Iloilo, stood to be subjected to the tax thus imposed. Contending that the ordinance was beyond the corporate
powers of the respondent City, he filed an action for declaratory relief to test the validity thereof. Meanwhile after the
ordinance became effective, the petitioner paid taxes imposed under the authority thereof upon sales of real estate made
by him.
On the contrary, the respondents justified the enactment of the ordinance not only under the city charter but also
upon the authority vested in the respondent City by section 2 of the Local Autonomy Act.
Issues:
1. PROCEDURAL ISSUE: W/N the Court did not acquire jurisdiction over the case because the appellee failed to
exhaust administrative remedies
2. TAXATION ISSUE: W/N the questioned ordinance is ultra vires views vis--vis the corporate powers of the
appellant City.
Held/Ratio:
1. NO.
The appellants argue that the court a quo acquired no jurisdiction over the case because the appellee failed to
exhaust administrative remedies, more particularly the last paragraph of section 2 of the Local Autonomy Act, to
wit:
In such event the municipal board or city council in the case of cities and the municipal council or
municipal district council in the case of municipalities and municipal districts may appeal the
decision of the Secretary of Finance to the court during the pendency of which case the tax levied
shall be considered as paid under protest.
Nothing in the foregoing quotation even remotely applies to the situation at hand. The authority vested in the
Secretary of Finance to suspend the effectivity of a tax ordinance is limited to cases wherein the tax or fee thereby
levied is unjust, excessive, oppressive or confiscatory.
It is also necessary to correct the impression of the appellants that failure to exhaust administrative remedies goes
into the jurisdiction of the trial court. The fact of the matter is that such discrepancy, if any, merely implies
absence of a cause of action. This point specially acquires pertinence when it is noted that while the appellants set
up in their answer the defense of want of a cause of action, the same was based upon the alleged inexistence of a
justiciable controversy. The absence of a cause of action upon the ground of non-exhaustion of administrative
remedies does not appear to have been posed in issue below. It is thus likewise too late to invoke it at this stage.
Hence, the result stands the same.
2. PARTLY YES, PARTLY NO. The court ruled for the validity of the Ordinance in that the it is within the
corporate powers of the said City to adopt, but with the exception of the portion thereof which prescribes
payment of the tax therein levied as a requirement for the transfer of ownership and the registration of the
sale in the office of the Register of Deeds.

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The grant of the power to tax to chartered cities under section 2 of the Local Autonomy Act is sufficiently plenary
to cover everything, excepting those which are mention therein, subject only to the limitation that the tax so
levied is for public purposes, just and uniform. Since its public purpose, justness and uniformity of application
are not disputed, the tax so levied must be sustained as valid.
Nor is this without precedent. On all fours to the case at bar is C.N. Hodges v. The Municipal Board of the City of
Iloilo, et al., G.R. L- 18129, January 31, 1963, which, significantly enough, not only involved the same parties but
as well concerned another ordinance of the appellant City, ordinance 33, series of 1960, enacted barely six days
after the enactment of the ordinance now under scrutiny, that is, on June 13, 1960. Ordinance 33, similar to the
one now in controversy, levied as sales tax of one-half of one percent (1%) of the selling price of any motor
vehicle sold in the City of Iloilo. The Court upheld the validity thereof and affirmed the corporate power of the
appellant City to enact the same.
However, the questioned ordinance does not merely levy a tax. It commands that The payment of this
municipal tax shall be a requirement for the registration ... of said sale in the Office of the Register of Deeds or
the Office of the City Treasurer of the City of Iloilo and, for purposes of which, demands that the tax receipt
shall be made a part of the documents to be presented for registration (section 3). Challenging this requirement,
the appellee contended and the trial court agreed that, in effect, it imposes a condition to the registration of the
deed of conveyance not otherwise called for by the general statutory law on the matter and, to that extent,
amounts to amending or modifying the applicable statute, which, it is argued, is not within the competence of the
appellant municipal board of Iloilo City to do.
After carefully re-examining the ruling thus enunciated, the SC ruled that while:
We find no cause to doubt the validity there of as a general principle, the same cannot by
any means be regarded as a hard- and-fast rule. Applied to specific cases, the broad sweep
thereof must be limited or qualified depending upon the particular attendant circumstances.
The general rule should be that the appellant municipal board may resort to all means reasonably necessary
and proper to give effect to the powers expressly conferred upon it, provided, however, that said means are
not otherwise contrary to any statutory or other more authoritative provision on the subject.
It should be taken in consideration that the registration with the registry of deeds of voluntary conveyances of real
property under the Torrens system is, in this jurisdiction, mainly controlled by the Land Registration Act, Act
496, as amended.
In this posture, to sanction the condition to registration imposed by the ordinance under examination would
virtually allow the appellant municipal board to add new requirements for registration not otherwise
provided by applicable statutory law on the matter. In effect, it gives power to the said appellant to amend or
modify the law a power which, definitely, is not vested in it. We therefore conclude that the condition thus
imposed by the ordinance in question is ultra vires. Considering that this portion is severable from the rest of the
provisions thereof without affecting the integrity of the remaining portions as a complete set of provisions on the
matter standing by themselves, the same may properly be nullified while the rest of the ordinance not otherwise
infirm may be sustained.

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36 - Phil. Lung Center v. Quezon City (2004)

Doctrine:

If real property is used for one or more commercial purposes, it is not exclusively used for the exempted purposes
but is subject to taxation.

Facts:
The Lung Center of the Philippines is a non-stock and non-profit entity established by virtue of Presidential
Decree No. 1823. A big space at the ground floor is being leased to private parties, for canteen and small store spaces, and
to medical or professional practitioners who use the same as their private clinics for their patients whom they charge for
their professional services. Almost one-half of the entire area on the left side of the building along Quezon Avenue is
vacant and idle, while a big portion on the right side, at the corner of Quezon Avenue and Elliptical Road, is being leased
for commercial purposes to Elliptical Orchids and Garden Center. The center accepts paying and non-paying patients. It
also renders medical services to out-patients, both paying and non-paying. Aside from its income from paying patients,
the petitioner receives annual subsidies from the government.
Both the land and the hospital building of the petitioner were assessed for real property taxes by the City Assessor
of Quezon City. The petitioner alleged that under the 1987 Constitution, the property is exempt from real property taxes.
It averred that a minimum of 60% of its hospital beds are exclusively used for charity patients and that the major thrust of
its hospital operation is to serve charity patients. The petitioner contends that it is a charitable institution and, as such, is
exempt from real property taxes.
Issue:
1. W/N the real properties of the lung center are exempt from real property taxes.
Held/Ratio:
1. NO. What is meant by actual, direct and exclusive use of the property for charitable purposes is the direct and
immediate and actual application of the property itself to the purposes for which the charitable institution is
organized. It is not the use of the income from the real property that is determinative of whether the property is
used for tax-exempt purposes.
The petitioner failed to discharge its burden to prove that the entirety of its real property is actually, directly and
exclusively used for charitable purposes. While portions of the hospital are used for the treatment of patients and
the dispensation of medical services to them, whether paying or non-paying, other portions thereof are being
leased to private individuals for their clinics and a canteen. Further, a portion of the land is being leased to a
private individual for her business enterprise under the business name Elliptical Orchids and Garden Center.

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ASPECTS OF TAXATION
38 - Republic v. Ricarte (1985) (pay-as-you-file system, 5-year prescriptive period)
Facts:
On March 1959, Ricarte filed his income tax return for 1958. On April 1959, the office of the Collector of
Internal Revenue made the corresponding assessment and fixed at P222 Ricartes income tax liability pursuant to the
NIRC. He paid his income tax in 2 equal installments- May and August 1959.
On June 20, 1959, RA 2343 took effect which amended the NIRC. It provides the pay-as-you-file system
wherein the taxpayer assesses himself, files his return and pays the tax as shown in his return upon filing of the income
tax. In 1961, the BIR after investigation, found that the defendant had a deficiency of P1,136.87 in his income for
1958.
On Jan 1959, an assessment notice for the said amount was issued together with a demand letter to Ricarte.
But then, he failed to pay so a complaint for collection of unpaid taxes was filed before the City Court of Cebu.
The City Court of Cebu dismissed the case on the ground of prescription of action (the assessment was made
on April 1959 but the case was filed on January 1966, which went beyond the 5-year prescriptive period stated in
the NIRC). On appeal in the Court of First Instance of Cebu, the court dismissed the appeal on the ground that the BIR
sought to collect from Ricarte an assessment which was made under the new law (RA2343), which was not yet in effect at
the time of the filing of Ricartes income tax return for 1958. It also held that the action has prescribed.
Issue:
1. W/N the Republic can still collect the alleged deficiency income tax liability of Ricarte
Held/Ratio:
1. NO. Though the SC held that the CFI made an error on its decision by saying that the subsequent
assessment made was based on the amendatory act, the SC agrees that the action has prescribed.
Before the amendment, the taxpayer files his ITR and the Collector or Internal Revenue assesses the tax due and
notifies the taxpayer. But, under the amendatory act, the taxpayer assesses himself, files his ITR and is required to
pay the tax as shown in his return upon filing. Simply put, under the old law the CIR was required to assess
the tax due, while under RA2343, the taxpayer himself computes the tax based on the figures in his ITR.
After paying his ITR, the BIR reviewed it and found a deficiency in the assessment it previously made and the
income tax paid by Ricarte. A subsequent assessment made by the BIR was based merely on the ITR filed by
Ricarte. The amount of tax due was previously computed by BIR. Finding that it made an error, it reassessed
the ITR but such was made pursuant to the old law and not under the amendatory act. [NOTE: Akala kasi
ng CFI, based sa RA2343 yung subsequent assessment na ginawa ng BIR pero yung old law talaga yung sinunod
ng BIR. So yung issue ng walang legal basis yung BIR sa subsequent assessment nila, mali yon. Kasi yung
applicable law pa nun yung old law. !]
Although a subsequent notice of assessment was allegedly made and sent to Ricarte on January 19, 1961, both the
City Court and CFI found no evidence that Ricarte actually received a copy of that assessment notice
regarding the alleged deficiency tax. Thus, the prescriptive period provided for in Section 332(c) of the tax code
should be counted from April 6, 1959, the date when the BIR assessed the ITR of Ricarte. From said date until
the filing of this case on January 14, 1966, 6 years and 9 months had elapsed which was beyond the 5-year
prescriptive period.

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39 - Tupaz v. Ulep (1999)

Doctrine:
An assessment contains not only a computation of tax liabilities, but also a demand for payment within a
prescribed period.
Facts:
On January 10, 1991, State Prosecutor (SP) Molon filed with the Regional Trial Court, Quezon City, two (2)
informations, docketed as Criminal Case Nos. Q-91-17321(Case 1) and Q-91-17322(Case 2), against the spouses
Petronilla Tupaz and Jose Tupaz, as corporate officers of El Oro Engravers Corporation, for an alleged nonpayment of
deficiency corporate income tax for the year 1979, amounting around 2M. Case 1 was under Judge Ulep; Case 2 was
under Judge Solano. Both cases have identical infomations.
September 20, 1994, accused Petronila C. Tupaz, for Case 1, was arraigned and she pleaded not guilty.
Later, Judge Ulep issued an order directing the prosecution to withdraw the information in Case 2, after
discovering that said information was identical to the one filed with him. On April 16, 1996, SP Agcaoili filed with the
trial court a motion to withdraw information in Case 1. The Prosecutor thought that accused was charged in Case 1, for
nonpayment of deficiency contractors tax, but found that accused was exempted from paying said tax.
Later, Prosecutor Agcaoili filed a motion to consolidate the two cases. The court granted the motion for
consolidation.
Then, Judge Ulep, granted the motion for withdrawal of the information in Case 1 and dismissed the case, as
prayed for by the prosecution.
Later, Prosecutor Agcaoili filed, a motion to reinstate Case 1, because he thought case was a similar to a different
case. Over the objections of accused, On August 6, 1996, Judge Ulep, granted the motion and ordered the information in
Case 1 reinstated. Tupazs motion for reconsideration was denied. Hence, this petition.
Issues:
1. W/N the offense has prescribed?
2. W/N there is double jeopardy?
Held/Ratio:
1. No. It must be stressed that internal revenue taxes are self-assessing and no further assessment by the
government is required to create the tax liability. An assessment, however, is not altogether inconsequential; it is
relevant in the proper pursuit of judicial and extra judicial remedies to enforce taxpayer liabilities. An assessment
contains not only a computation of tax liabilities, but also a demand for payment within a prescribed period.
Assessments made beyond the prescribed period would not be binding on the taxpayer.
Tupaz was charged with nonpayment of deficiency corporate income tax for the year 1979, which tax return was
filed in April 1980. On July 16, 1984, the Bureau of Internal Revenue (BIR) issued a notice of assessment. Tupaz
alleged that the period of assessment has prescribed, applying the three (3) year period provided under Batas
Pambansa No. 700.
The shortened period of three (3) years prescribed under B.P. Blg. 700 is not applicable to Tupaz. B.P. Blg. 700,
specifically states that the shortened period of three years shall apply to assessments and collections of internal
revenue taxes beginning taxable year 1984. Assessments made on or after April 5, 1984 are governed by the fiveyear period if the taxes assessed cover taxable years prior to January 1, 1984. The deficiency income tax under
consideration is for taxable year 1979. Thus, the period of assessment is still five (5) years. The income tax return
was filed in April 1980. Hence, the July 16, 1984 tax assessment was issued within the prescribed period.
Article 22 of the Revised Penal Code (retroactive application of laws) has no application because provisions on
the period of assessment can not be considered as penal in nature.

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Tupaz also invokes Section 340 of the Tax Code which provides that violations of any provision of the Code
prescribe in five (5) years. Tupaz asserts that in this case, it began to run in 1979, when she failed to pay the
correct corporate tax due during that taxable year. Hence, when the BIR instituted criminal proceedings on June 8,
1989, by filing a complaint for violation of the Tax Code it was beyond the prescriptive period of 5 years.
The offense has not prescribed. The offense can only be committed only after the finality of the assessment
coupled with taxpayers willful refusal to pay the taxes within the allotted period. In this case, when the notice of
assessment was issued on July 16, 1984, the taxpayer still had thirty (30) days from receipt thereof to protest. As
he did not protest, the assessment became final and unappealable on August 16, 1984. Consequently, when the
complaint for preliminary investigation was filed with the DOJ on June 8, 1989, the criminal action was instituted
within the five 5 year prescriptive period.
2. Yes, there is double jeopardy. An accused is placed in double jeopardy if he is again tried for an offense which the
indictment against him was dismissed without his consent. In the instant case, there was a valid complaint filed
against Tupaz. The court dismissed the case at the instance of the prosecution, without the consent of Tupaz. This
consent cannot be implied or presumed, therefore the dismissal of Case 1 is final.

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CLASSIFICATION OF TAXES
40 - Calalang v. Lorenzo (1955)
Doctrines:

For not the name but the object of the charge determines whether it is a tax or a fee. Generally speaking, taxes are
for revenue, whereas fees are exactions for purposes of regulation and inspection and are for that reason limited in
amount to what is necessary to cover the cost of the services rendered in that connection.

Facts:
Calalang wants to compel the Secretary of Public Works and Communications and the Chief of the Motor
Vehicles Office to authorize payment of petitioners motor vehicle registration fees for the year 1953 with a backpay
certificate of indebtedness. The defendants contended that fees are not taxes and, therefore, not authorized to be paid with
such certificate.
Issues:
1. W/N motor vehicle registration fees come within the purview of the above provision of the Backpay Law on the
theory that they are taxes.
Held/Ratio:
1. Yes. For not the name but the object of the charge determines whether it is a tax or a fee. Generally speaking,
taxes are for revenue, whereas fees are exactions for purposes of regulation and inspection and are for that reason
limited in amount to what is necessary to cover the cost of the services rendered in that connection.
Where the charge has no relation to the value of the services performed and where the amount collected
eventually finds its way into the treasury of the branch of the government whose officer or officers collected the
charge, is not a fee but a tax.
From the data submitted in the court below, it appears that the expenditures of the Motor Vehicle Office are but a
small portion about 5% of the total collections from motor vehicle registration fees. And as proof that the
money collected is not intended for the expenditures of that office, the law itself provides that all such money
shall accrue to the funds for the construction and maintenance of public roads, streets and bridges. It is thus
obvious that the fees are not collected for regulatory purposes, that is to say, as an incident to the enforcement of
regulations governing the operation of motor vehicles on public highways, for their express object is to provide
revenue with which the Government is to discharge one of its principal functions the construction and
maintenance of public highways for everybodys use. They are veritable taxes, not merely fees.

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41 - PAL v. Edu (1988) (motor vehicle registration fee = tax)

Doctrines:

Fees may be properly regarded as taxes even though they also serve as an instrument of regulation. If the purpose
is primarily revenue, or if revenue is at least one of the real and substantial purposes, then the exaction is properly
called a tax.

Facts:
PAL is a corporation organized and existing under the laws of the Philippines and engaged in the air
transportation business under a legislative franchise. Under its franchise, PAL is exempt from the payment of taxes. PAL
has not paid any motor vehicle registration fees since 1956.
In 1971, Commissioner Romeo Edu issued a regulation requiring all tax exempt entities to pay motor vehicle
registration fees. This includes PAL. Edu refused to register PALs motor vehicles unless PAL paid the proper fees
(P19,529.75). PAL paid under protest.
After paying the fees, PAL wrote a letter demanding a refund claiming that (1) motor vehicle registration fees are
taxes; and (2) PAL is exempted from paying taxes under its legislative franchise. Edu denied the request on the ground
that motor vehicle registration fees are regulatory exceptional, not revenue measures and do not come within the
exemption granted to PAL. PAL filed a complaint before the CFI of Rizal. Edu filed a motion to dismiss on the ground
that the complaint had no cause of action. PAL appealed to the CA.
Issues:
1. W/N motor vehicle registration fees are taxes.
2. W/N Commissioner Edu may be required to refund the amounts.
Held/Ratio:
1. YES.
The registration fee is a tax. Therefore, PAL is exempted. The purpose of the Land Transportation and Traffic
Code in requiring owners of vehicles to pay for their registration is mainly to raise funds for the construction and
maintenance of highways and to pay for the operating expense of the administrative agency. Fees may be properly
regarded as taxes even though they also serve as an instrument of regulation. If the purpose is primarily revenue,
or if revenue is at least one of the real and substantial purposes, then the exaction is properly called a tax. Such is
the case of motor vehicle registration fees. These are for the registration or operation of any motor vehicle. The
intent to impose a tax is apparent.
2. NO.
Section 24 of R.A. 5448 dated June 27, 1968, repealed all earlier tax exemptions of corporate taxpayers found in
legislative franchises. The country needs increased revenues. A listing of entities entitled to tax exemption is
available and PAL is not included. Any registration fees collected between June 27, 1968 to April 9, 1979 were
correctly imposed because the tax exemption in the franchise of PAL was repealed during the period.!

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42 - Esso Standard Eastern Inc. v. The Commissioner of Internal Revenue (1989) (dry hole, police power)
Doctrines:

Margin levy on foreign exchange was held to be a police power measure to strengthen the countrys international
reserve rather than a tax.

Facts:
Petitioner ESSO deducted from its gross income for 1959, as part of its ordinary and necessary business expenses,
the amount it had spent for drilling and exploration of its petroleum concessions. This claim was disallowed by the
Commissioner of Internal Revenue on the ground that the expenses should be capitalized and might be written off as a
loss only when a dry hole should result. ESSO then filed an amended return where it asked for the refund of P323,279
by reason of its abandonment of dry holes of several of its oil wells. Also claimed as ordinary and necessary expenses in
the same return was the amount of P340,822.04, representing margin fees it had paid to the Central Bank on its profit
remittances to its New York head office. The CIR granted a tax credit of P221,033 only, disallowing the claimed
deduction for the margin fees paid.
ESSO appealed to the CTA and sought the refund, contending that the margin fees were deductible from gross
income either as a tax or as an ordinary and necessary business expense.
Issues:
1. W/N margin fees could be considered deductible business expenses.
Held/Ratio:
1. NO.
They are neither taxes nor necessary expenses.
Margin fees are NOT taxes because they are NOT imposed as a revenue measure but as a police measure whose
proceeds are applied to strengthen the countrys international reserves.
Neither are they necessary and ordinary business expenses. ESSO has not shown that the remittance to the head
office of part of its profits was made in furtherance of its own trade or business. The petitioner merely presumed
that all corporate expenses are necessary and appropriate in the absence of a showing that they are illegal or ultra
vires.
The public respondent is correct when it asserts that the paramount rule is that claims for deductions are a matter
of legislative grace and do not turn on mere equitable considerations. The taxpayer in every instance has the
burden of justifying the allowance of any deduction claimed.

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43 - Lozano v. ERB (1990) (Oil Price Hike)

Doctrines:

Courts should give way to the wisdom of the political leadership which determines the policy and the proper
purpose of the fund raised, unless it is otherwise arbitrary, since such questions are best judged by such
authorities.

Facts:
On September 1990, gas conglomerates Petron, Shell, and Caltex each applied to the Energy Regulatory for the
increase of the prices of petroleum products at ranging from P2 to P3 respectively. The ERB issued an joint order
authorized them to a provisional increase of P1.42. Senator Ernesto Maceda and Oliver Lozano then submitted that the
above joint order had been issued with grave abuse of discretion, tantamount to lack of jurisdiction and due process.
Senator Maceda and Lozano claims that the ERB issued without notice and hearing the said Order and saying that
such created a new source for the Oil Price Stabilization Fund, which in a way levied a tax, which as we all know, is a
power vested in the legislature.
In addition, the Trade Union of the Philippines and Allied Services argues that no increase can be made since the
old stock of oil which was purchase for a lower price had not been depleted yet.
Issue:
1. W/N the price increase would comprise a tax.
2. W/N the ERB committed grave abuse of discretion and violation of due process.
Held/Ratio:
1. NO. The ERB in authorizing the increase did not commit an act of taxation since it is completely allowed to
increase the prices, provided that the proceeds be deposited in the Oil Price Stabilization Fund (OPSF). EO 137
(c) provides that any additional amount to be imposed on petroleum products to augment the resources of the
Fund through an appropriate Order by the ERB can be issued. Evidently, authorities were unable to raise enough
taxes needed to replenish the OPSF, therefore, a price hike is the only alternative.
2. NO. EO 172 provides that the ERB may temporarily authorize the adjustment of price levels of petroleum
products if there is a shortage or when the public interest so requires. This of course will require the proper
application, even without prior hearing, and the support of proper evidence. However, a special hearing must be
held 30 days after notification and publication to all affected parties.
What is the OPSF?
The OPSF was established precisely to protect the consuming public from the erratic movement of oil prices and to
preclude oil companies from taking advantage of fluctuations occurring every so often. As a buffer mechanism, it
stabilizes domestic prices by bringing about a uniform rate rather than leaving pricing to the caprices of the market.

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44 - City of Ozamiz v. Lumapas (1975)

Doctrine:

License Fee: The city may impose a fee sufficient in amount to include the expense of issuing the license and the
cost of necessary inspection or police surveillance connected with the business or calling licensed.

Toll: The word toll when used in connection with highways has been defined as a duty imposed on goods and
passengers travelling public roads. The toll for use of a toll road is for its use in travelling thereon, not for its use
as a parking place for vehicles.

Facts:
Lumapas is an operator of transportation buses for passengers and cargoes, under the name of Romar Line, with
Ozamiz City and Pagadian, Zamboanga del Sur, as terminal points, by a certificate of public convenience issued to him by
the Public Service Commission.
The Municipal Board of Ozamiz City enacted the Ordinance No. 466, imposing parking ffes for every motor
vehicle parked on any portion of the existing parking space in the City of Ozamiz. The City began collecting the parking
fees and collected from Lumapas, who had paid under protest, the parking fees at One Peso (P1) for each of his buses,
from October 1964 to January 1967.
The TPU buses of Lumapas stopped on the extended portion of Zulueta Street beside the public market,and that as
soon as the buses were loaded, they proceeded to the station, about one hundred (100) feet away from the parking area,
where a toll clerk of the City collected the Parking fee of P1 per bus once a day, before said buses were allowed to
proceed to their destination.
4 years later, Lumapas filed a complaint against the city for recovery of parking fees, alleging, among others, that
said Ordinance No. 466 is ulta vires, and praying that the ordinance would be nullified.
Issue:
1. W/N Ordinance No. 466 can be enacted by the City.
2. W/N said ordinance considered parking fees as road tolls under Republic Act No. 4136
Held/Ratio:
1. Yes. Municipal corporations, being mere creatures of the law, have only such powers as are expressly granted to
them and those which are necessarily implied or incidental to the exercise, and the power to tax is inherent upon
the State and it can only be exercised by Congress, unless delegated or conferred by it to a municipal corporation.
Under the Ozamiz City Charter (Rep. Act No. 321), the municipal board has the power to regulate the use of
streets avenues and the authority to enact all ordinances it may deem necessary and proper for the sanitation and
safety. It is, therefore, patent that the City of Ozamiz has been clothed with full power to control and regulate its
streets for the purpose of promoting the public health, safety and welfare.
2. NO. The term parking ordinarily implies something more than a mere temporary and momentary stoppage at a
curb for the purpose of loading or unloading passengers or merchandize; it involves the idea of using a portion of
the street as storage space for an automobile. Section 3 of Ordinance No. 466 defines the word parking to
mean the stoppage of a motor vehicle of whatever kind on any portion of the existing parking areas for the
purpose of loading and unloading passengers or cargoes.
It is not pretended, however, that the public utility vehicles are subject to the payment, if they pass without
stopping thru the aforesaid sections of Zulueta Street. Considering that the public utility vehicles are only charged
the fee when said vehicles stop on any portion of the existing parking areas for the purpose of loading or
unloading passengers or cargoes, the fees collected are actually in the nature of parking fees and not toll fees for
the use of Zulueta Street.

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This is clear from the Stipulation of Facts which shows that fees were not exacted for mere passage thru the street
but for stopping in the designated parking areas therein to unload or load passengers or cargoes. It was not,
therefore a toll fee for the use of public roads, within the context of Section 59[b] of Republic Act No. 4136,
which requires the authorization of the President of the Philippines.

45 - Mayor Antonio G. Villegas v. Hiu Chiong Tsai Pao Ho (1978) (tax disguised as fees)
Doctrine:

While it is true that the first part which requires that the alien shall secure an employment permit from the Mayor
involves the exercise of discretion and judgment in the processing and approval or disapproval of applications for
employment permits and therefore is regulatory in character the second part which requires the payment of P50 as
employees fee is not regulatory but a revenue measure. There is no logic or justification in exacting P50 from
aliens who have been cleared for employment. It is obvious that the purpose of the ordinance is to raise money
under the guise of regulation

Facts:
Ordinance No. 6357 was issued by the City of Manila on February 1968. Among others it prohibits aliens to
engage or participate in any position or occupation or business enumerated therein, temporary or casual, without first
applying for an employment permit from the Mayor and paying P50, except for those employed in their own households
and in consular missions. The ordinance also penalizes violators with 3 to 6 months imprisonment and a fine of P100 to
P200. Respondent assails the ordinance on the ground that it violates equal protection, that it is oppressive and unjust, and
violates the rule on uniformity of taxation.
Issues:
1. W/N Ordinance No 6357 is regulatory, not taxation in nature.
2. W/N Ordinance No 5357 is constitutional.
Held/Ratio:
1. NO.
While it is true that the first part which requires that the alien shall secure an employment permit from the Mayor
involves the exercise of discretion and judgment in the processing and approval or disapproval of applications for
employment permits and therefore is regulatory in character the second part which requires the payment of P50 as
employees fee is not regulatory but a revenue measure.
2. NO.
The fee prescribed by the ordinance is not only excessive but also fails to take into consideration substantial
distinctions among individual aliens who are required to pay it. It violated the equal protection clause this way.
Also, the ordinance does not lay out sufficient standards for the mayor to follow in enforcing it. The ordinance
confers upon the mayor arbitrary and unrestricted power to decide whether a certain applicant would be granted
the permit or not.

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46 - Progressive Development Corp v. Quezon City (1989) (privately owned public market)
Doctrine:

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

Facts:
The City Council of QC adopted Ordinance No. 7997, known as the Market Code, section 3 of which provides
that privately owned and operated public markets shall pay a 10% tax on all gross receipts from stall rentals as
supervision fee. The Market Code was amended by Ordinance 9236 which says that a 5% tax on gross receipts of stall
rentals shall be paid privately owned public markets in Quezon City.
Progressive Development Corp, owner of the public market known as Farmers Market & Shopping Center filed
a petition for prohibition with preliminary injunction against the CFI of Rizal on the ground that said license fee/
supervision fee is really a tax on income which respondent cannot impose as it was expressly prohibited by RA 2264.
Petitioner insist that the supervision fee collected from rentals, being a return from capital invested in the construction
of the Farmers Market, practically operates as a tax on income, one of those expressly excepted from respondents taxing
authority, and thus beyond the latters competence.
Issue:
1. W/N the tax imposed by respondent on gross receipts of stall rentals is properly characterized as partaking of the
nature of an income tax
Held/Ratio:
1. NO. The tax imposed is in the nature of a license fee.
The Revised Charted of Quezon City confers upon the city council the grant of authority not only to regulate and
fix the license fee but also to tax. Both the Local Autonomy Act and the Charter of respondent clearly show that
respondent is authorized to fix the license fee collectible from and regulate the business of petitioner as operator
of a privately-owned public market. When an activity, occupation or profession is of such a character that
inspection or supervision by public officials is reasonably necessary for the safeguarding and furtherance of
public health, morals and safety, or the general welfare, the legislature may provide that such inspection or
supervision or other form of regulation shall be carried out at the expense of the persons engaged in such
occupation or performing such activity, and that no one shall engage in the occupation or carry out the activity
until a fee or charge sufficient to cover the cost of the inspection or supervision has been paid. Accordingly, a
charge of a fixed sum which bears no relation at all to the cost of inspection and regulation may be held to be a
tax rather than an exercise of the police power.
In the case at bar, the Farmers Market & Shopping Center was built by virtue of Resolution No. 7350 which
imposed upon petitioner, as a condition for continuous operation, the obligation to abide by and comply with the
ordinances, rules and regulations prescribed for the establishment, operation and maintenance of markets in
Quezon City.
The Farmers Market and Shopping Center being a public market in the sense of a market open to and inviting
the patronage of the general public, even though privately owned, petitioners operation thereof required a license
issued by the respondent City, the issuance of which, applying the standards set forth above, was done principally
in the exercise of the respondents police power.
It is held that hold that the five percent (5%) tax imposed in Ordinance No. 9236 constitutes, not a tax on
income, not a city income tax but rather a license tax or fee for the regulation of the business in which the
petitioner is engaged. Local governments are allowed wide discretion in determining the rates of imposable
license fees even in cases of purely police power measures, in the absence of proof as to particular municipal

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conditions and the nature of the business being taxed as well as other detailed factors relevant to the issue of
arbitrariness or unreasonableness of the questioned rates.
Petitioner has not shown that the rate of the gross receipts tax is so unreasonably large and excessive and so
grossly disproportionate to the costs of the regulatory service being performed by the respondent as to compel the
Court to characterize the imposition as a revenue measure exclusively.
As a general rule, there must be a statutory grant for a local government unit to impose lawfully a gross receipts
tax, that unit not having the inherent power of taxation. The rule, however, finds no application in the instant case
where what is involved is an exercise of, principally, the regulatory power of the respondent City and where that
regulatory power is expressly accompanied by the taxing power.

47 - Apostolic Prefect of the Mountain Province v. Treasurer of Baguio (1941) (corporation sole, Spanish
case)
DISCLAIMER: the entire case is in Spanish so I just looked for digests and tried to understand it based on the little
English in the case. The basic facts are taken from Michael Mendiolas digest
Doctrines:

A general tax is different from a special assessment

Facts:
The Apostolic Prefect is a corporation sole organized under Philippine Laws. It has its residence in Baguio. The
City imposed a special assessment against properties within its territorial jurisdiction for the benefit of the citys drainage
and sewerage system. The City Assessor furnished a list of the properties to be levied, called the Special Assessment
List to the City Treasurer. Included are the Apostolic Prefects property. Under the special assessment, each owner or
possessor must pay 1% of the total value of the property to the City Treasurer. The Apostolic Prefect contends that its
properties are exempt from taxation, since it is a religious entity
Issues:
1. W/N the Apostolic Prefect is exempt from paying the special assessment
Held/Ratio:
1. NO. Tax, in its broad meaning, includes both general taxes and special assessments. Though they appear similar,
there is a recognized distinction between them. A special assessment is confined to local impositions upon
property for the payment of the cost of public improvements in its immediate vicinity and is levied with
reference to special benefits to the property assessed. Strictly speaking, it is not a tax. A special assessment 1)
can only be levied on land; 2) cannot be made a personal liability of the person assessed (at least in most states);
3) is based wholly on benefits; and 4) is exceptional both as to time and locality. On the other hand, a tax is the
imposition of a charge on all real and personal property in a prescribed area, even if the purpose is for a local
improvement. A charge imposed only on property owners benefited is a special assessment not a tax even if it is
called a tax.
Thus, Constitutional exemptions cannot apply to a special assessment. Assuming arguendo that it applies, still, the
Apostolic Prefect was not able to prove that the property in question is exclusively used for religious purposes.
Thus, the Apostolic Prefect is required to pay the special assessment.!

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48 - Victoria Milling Co. (VMC) v. Office of the Presidential Assistant for Legal Affairs and PPA (1987)
Doctrines:

Debt or ordinary obligation

Facts:
The case is a petition for review on certiorari brought about by petitioner-VMC [Infairness, ito talaga abbreviation
ng company na ito !] after the case was dismissed on the sole ground that it was filed beyond the reglementary period.
Respondent-PPA wrote VMC requiring its tugboats and barges, undergo harbor formalities and pay
entrance/clearance fees as well as berthing fees. Furthermore, PPA required VMC to secure a permit for cargo handling
operations at its Da-an Banua wharf and remit 10% of its gross income for said operations as the government share.
In response, VMC maintained that it is exempt from paying PPA any fee or charge basically because the
government never spent anything for the companys use of the wharf, which it owns.
Since PPA Iloilo did not accept VMCs defense, the latter appealed the case to the CTA, who then dismissed the
case on the ground of its lack of jurisdiction. A petition for review before the SC was also denied. Lastly, VMC filed an
appeal with the Office of the President but was denied on the sole ground that it was filed beyond the reglementary period.
Issues:
1. NON-TAX ISSUE: W/N the 30-day period for appeal under PPA Admin Order was tolled by the pendency of the
petitions filed first with the CTA and then with the SC
2. TAX ISSUE: W/N the petitioners defense (PPA has no basis to collect since it does not incur any expense in the
operation of the wharf) is tenable?
Held/Ratio:
1. NO, PPA enacted the Admin Order precisely to govern appeals from PPAs decision. It is settled that rules and
regulations issued in accordance with the law, like the admin order, have the force and effect of law.
2. NO, the fees and charges PPA collects are not for the use of the wharf that petitioner owns but for the
privilege of navigating public waters, of entering and leaving public harbors and berthing on public
streams of waters.
Jurisprudence provides that berthing charges against a vessel are collectible regardless of the fact that mooring or
berthing is made from a private pier or wharf. This is because the government maintains bodies of water in
navigable condition and it is to support its operations in this regard that dues and charges are imposed for the use
of piers and wharves regardless of their ownership.
As to the requirement to remit 10% of the handling charges, the PPA is authorized to levy dues, rates, or charges
for the use of the premises, works, appliances, facilities, or for services provided by or belonging to the Authority,
or any organization concerned with port operations. This 10% government share of earnings of arrastre and
stevedoring operators is in the nature of contractual compensation to which a person desiring to operate
arrastre service must agree as a condition to the grant of the permit to operate.

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49 - Caltex v. CA (1992)
Doctrine:

The Oil Price Stabilization Fund was created under Section 8 of Presidential Decree No. 1956 to be used to
reimburse the oil companies for cost increases on crude oil and imported petroleum products resulting from
exchange rate adjustment and/or increase in world market prices in the desire to stabilize the prices of petroleum
products for a longer period despite exchange rate adjustments or world market price changes.

It is settled that a taxpayer may not offset taxes due from the claims that he may have against the government as
taxes do not arise from contracts or depend upon the will of the taxpayer, but are imposed by law.

Facts:
1989, COA sent a letter to Caltex directing it to remit to OPSF its collection of the additional tax on petroleum
authorized under PD 1956 and pending such remittance, all of its claims from the OPSF shall be held in abeyance. In their
reply, Caltex submitted to the COA a proposal for the payment of the collections and the recovery of claims, since the
outright payment of the sum of P1.287 billion to the OEA as a prerequisite for the processing of said claims against the
OPSF will cause a very serious impairment of its cash position. Caltex suggested that they will deliver to Office of Energy
Affairs (OEA) P1.287 billion as payment to OPSF, similarly OEA will deliver to Caltex the same amount in cash
reimbursement from OPSF. The COA denied such request.
Issue:
1. W/N Caltex can avail of the right to offset the amount that it may be required to remit to the OPSF fund against
any amount that it may receive by way of reimbursement.
Held/Ratio:
1. No.
It is settled that a taxpayer may not offset taxes due from the claims that he may have against the
government. There can be no offsetting of taxes against the claims that a taxpayer may have against the
government, as taxes do not arise from contracts or depend upon the will of the taxpayer, but are imposed
by law. Taxes cannot be the subject of compensation because the government and taxpayer are not mutually
creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or judgment
as is allowed to be set-off. Technically, in respect to the taxes for the OPSF, the oil companies merely act as
agents for the Government in the latters collection since the taxes are, in reality, passed unto the end-users
the consuming public. In that capacity, Caltex, as one of such companies, has the primary obligation to account
for and remit the taxes collected to the administrator of the OPSF. This duty stems from the fiduciary relationship
between the two; petitioner certainly cannot be considered merely as a debtor. Money due the government, either
in the form of taxes or other dues, is its lifeblood and should be collected without hindrance

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50 - Republic v. Ericta and Sampaguita Pictures (1989) (legal compensation; Sampaguita)

Doctrine:

Taxes, unlike normal debts, cannot be subject to legal compensation or set-off.

Facts:
In relation to producing motion pictures, Sampaguita Pictures incurred an obligation for taxes in the amount of
P10K in favor of the Republic. In satisfaction thereof, Sampaguita tendered and delivered to the Treasurer of Bocaue,
Bulacan sixteen back pay negotiable certificates of indebtedness in the aggregate sum of P16K, which had earlier been
negotiated to them by the original holders thereof. (Think Nego.)
Almost two weeks later, the BIR wrote Sampaguita, saying that such certificates cannot be accepted as payment
for taxes; BIR demanded payment in cash. However, Sampaguita did not budge, which prompted the BIR to write another
letter, this time giving a moratorium. Sampaguita, again, did not give a fuck. Surprisingly, it took eight long years before
the government decided to sue Sampaguita over the tax obligations. The Republics claim alleged that Sampaguitas
payment was void since under the law, only original holders of back pay certificates are allowed to use the same in
payment of their own taxes, citing the 1963 Borja case. On the other hand, Sampaguitas counter-claim primarily averred
that the cause of action had already prescribed, and that since (in 1958) it and the Republic became mutual creditors and
debtors of each other, legal compensation had taken place.
The trial court rendered a decision essentially saying that under the Borja case, Sampaguita cannot apply the
certificates to its obligation to the Republic for taxes. However, what Sampaguita can do is demand from the government
payment for the certificates (again, think Nego).
Issues:
1. Minor Issue: W/N tender of the certificate of indebtedness constitutes payment of taxes.
2. W/N the Republics claim is offset by Sampaguitas counter-claim.
Held/Ratio:
1. NO. Under the 1963 case of Borja v. Gella, tender of the certificates of indebtedness does not constitute payment;
hence, Sampaguita ought to be properly sentenced to pay the taxes sought to be collected by the Republic. Under
the said case, even if such certificates are indeed negotiable, only original holders are allowed to apply them as
payment for taxes.
2. NO. Legal compensation cannot take place against the Republic with respect to taxes, fees, duties and similar
forced contributions due to it. Legal compensation as a mode of extinguishing an obligation to pay taxes is
unavailing against the government, conformably with Borja v. Gella. In this sense, taxes are different from
normal debts. While normal obligations are subject to compensation, taxes are not.
Note: I have omitted the issue on redeemability here because it was just a simple case of the Solicitor Generals eyes
needing a little cleaning. Basically, the Solicitor General averred that the certificates redeeming date (when the amounts
represented by such certificates becomes due and demandable) was nowhere to be found when, in fact, it was clearly
stated in the law that the same were redeemable within 10 years after issue. What you need to remember is that the
certificates of indebtedness, at the time Sampaguita tried to pay its taxes with the same, were due and demandable.
This case is eerily similar to the 1963 case of Borja v. Gella. In that case, Borja tried to pay his real property taxes using
the certificates of indebtedness as well. The Supreme Court explained why legal compensation, as enunciated in our Civil
Code, couldnt be availed of to extinguish a persons obligation to pay taxes to the government. Okay, Obligations and
Contracts Review Time!

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For legal compensation to take place between two persons, the following must concur:
1. That both are principal debtors and creditors of each other;
2. That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also
of the same quality if the latter has been stated;
3. That the two debts are due;
4. That the two debts are liquidated and demandable; and
5. That over neither of them there be any retention or controversy, commenced by third persons, and communicated
in due time to the debtor.
The Court said that the scenario that Borja wants does not satisfy the first requisite. In the first place, according to the
Court, the debtor insofar as the certificates of indebtedness are concerned is the Republic of the Philippines, whereas the
real estate taxes owed by Borja are due to the City of Manila and Pasay City, each one of which having a distinct and
separate personality from our Republic. Therefore, it appears, that each one of the obligors concerning the two obligations
is not at the same time the principal creditor of the other. Legal compensation cannot take place. Applying to the Ericta
case, just replace Borja with Sampaguita and City of Manila and Pasay with Bulacan, and there you go!

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51 - Matalin Coconut Co. v. Municipal Council of Malabang (1986) (police inspection fees)
Facts:
The Municipal Council of Malabang, Lanao del Sur enacted a municipal ordinance which made it unlawful for
any person/company to ship out of Malabang cassava starch or flour without paying the municipal treasurer the
corresponding fee fixed. It also imposed a police inspection fee of P0.30 per sack which will be paid by the shipper before
it transported or shipped outside the municipality. Those who violate the ordinance shall be fined not less than P100 but
not more than P1,000 and to pay P1 per sack of flour illegally shipped, or suffer imprisonment for 20 days, or both, in the
discretion of the court.
Matalin Coconut Inc, challenged the validity of the ordinance alleging that the ordinance is ultra vires and
unreasonable, oppressive, and confiscatory. Matalin prayed that the ordinance be declared null and void and that the
municipal treasurer be ordered to refund the amounts paid by Matalin under the ordinance. Meanwhile, Purakan
Plantation intervened alleging that while its cassava flour factory was situated in Balabagan, Lanao del Sur, it had to
transport the starch and flour it produced to the seashore through Malabang. As a result of the ordinance, Purakan had to
refrain from transporting its products through the Malabang in order to ship them by sea to other places.
The trial court declared the ordinance null and void. Municipal treasurer was ordered to refund payments made
under the ordinance and enjoined Malabang from collecting the P0.30 tax per bag.
Issues:
1. Whether the municipal ordinance is valid?
Held/Ratio:
1. NO.
Pursuant to sec 2 of the Local Autonomy Act, Malabang is contending that has the power and authority to
approve the ordinance. Since enactment of the Local Autonomy Act, a liberal rule has been followed by the SC in
construing municipal ordinances enacted pursuant to the taxing power granted under Sec 2 is sufficiently plenary
with the only limitation that the tax levied is for public purposes, just and uniform.
Though the amount collected under the ordinance is called a police inspection fee, it is actually in the nature of
tax since its aim is to raise revenue. The SC corrected the trial court when it said the tax imposed under the
ordinance is not a percentage tax on sales (as this is prohibited under Sec2 of LAA) but a fixed tax of P0.30 per
bag.
HOWEVER, the tax imposed is declared INVALID for other reasons. FIRST, the tax levied by the ordinance is
UNJUST and UNREASONABLE. Only service rendered by Malabang by way of inspection is for policemen to
verify from the truck drivers passing by the checkpoint the number of bags loaded per trip which are to be shipped
based on the trip tickets for computing the total amount of tax to be collected. The contention that the police also
inspect the cassava flour to determine if it is fit for human consumption is baseless as the said purpose was not
stated in the ordinance and the police are not competent enough to determine what is fit for human consumption.
Also, Malabang contends that the reason why the trucks of cassava starch bags of Matalin are escorted by a
policeman from the mill to the bodega is to protect the truck and its cargoes from molestation. But this cannot be
sustained as Matalin did not ask for any police protection because there was never a time that its trucks have been
molested. Therefore, the imposition of a police inspection fee of P.30 per bag is unjust and unreasonable.
SECOND, the P0.30 inspection fee is EXCESSIVE and CONFISCATORY. Matalin is merely getting a marginal
average profit of P0.40/bag. The further imposition of P0.30 tax would force Matalin to close shop as it is
maintaining a big labor force in its operation including a security guard force to guard its properties. The
ordinance has an adverse effect on the economic growth of Malabang and of the nation and is contrary to
economic policy of the government.

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52 - LTO v. Butuan (2000) (LTO Tricycles Registration Requirement)

Doctrines:

Although certain functions of the DOTC were transferred to the LGUs, the powers of LTO under R.A. No. 4136
requiring the registration of motor vehicles are not affected by the Local Government Code. Thus, the authority to
requirethe registration of motor vehicles is a power still vested with the LTO and not LGUs.

Facts:
The Sangguniang Panglungsod (SP) of Butuan, passed SP Ordinance No. 916-92.The ordinance provided for,
among other things, the payment of franchise fees for the grant of the franchise of tricycles-for-hire, fees for the
registration of the vehicle, and fees for the issuance of a permit for the driving thereof. LTO however disallowed this
saying the authority of LTO to register all motor vehicles and to issue to qualified persons of licenses to drive such
vehicles has not been transferred to the LGUs.
To settle the issue, the City of Butuan, represented by its City Mayor Democrito D. Plaza, filed with the trial court
a petition for prohibition, mandamus, injunction with a prayer for preliminary restraining order ex-parte seeking the
declaration of the validity of SP Ordinance No. 962-93 and the prohibition of the registration of tricycles-for-hire and the
issuance of licenses for the driving thereof by the LTO. In both motion for reconsideration and appeal, petitioners cases
were dismissed.
Issues:
1. W/N the part of Ordinance No. 962-93 requiring the due registration of tricycles and a license for the driving
thereof is valid.
Held/Ratio:
1. No it is not valid. Although under the Local Government Code, certain functions of the DOTC were transferred to
the LGUs, clearly unaffected by the Local Government Code are the powers of LTO under R.A. No. 4136
requiring the registration of all kinds of motor vehicles used or operated on or upon any public highway in the
country.
The Court shares the apprehension of the Solicitor General saying: If the tricycle registration function of
respondent LTO is decentralized, the incidence of theft of tricycles will most certainly go up, and stolen tricycles
registered in one local government could be registered in another with ease and that fake drivers licenses will
likewise proliferate.
TAX RELATED: The reliance made by respondents on the broad taxing power of local government units, specifically
under Section 133 of the Local Government Code, is tangential. To construe the tax provisions of Section 133(1)
indistinctively would result in the repeal to that extent of LTOs regulatory power which evidently has not been intended.
If it were otherwise, the law could have just said so in Section 447 and 458 of Book III of the Local Government Code in
the same manner that the specific devolution of LTFRBs power on franchising of tricycles has been provided. Repeal by
implication is not favored.

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INTERPRETATION AND CONSTRUCTION OF TAX STATUTES

53 - Comm v. CTA (1991) (franchise, exemption)
Doctrines:

A legislative franchise partakes of the nature of a contract.

Facts:
Eastern Extension Australasia and China Telegraph Co., Ltd, is a foreign corporation existing under the laws of
Great Britain. By a Royal Decree of the Spanish Government dated 1898, Eastern Extension was given a concession for
the construction, operation, and maintenance of submarine telegraph cable from HK to Manila. In 1952, when the
concession expired, RA 808 was approved granting a legislative franchise to the Eastern Extension to land, construct,
maintain and operate at Manila a submarine telegraph cable connecting Manila with HK. The law granted to Eastern
Extension a tax exemption from the payment of taxes whether municipal, provincial or national, except a franchise tax of
5% on the gross earnings and tax on its real property. Later, the law was amended by RA 5002, enlarging the scope of the
franchise.
The CIR assessed a P7,122,571.61 income tax deficiency. The CIR made such assessment based on its belief that
Eastern Extension franchise is inoperative for failure to conform with the constitutional requirement that it be organized
under Philippine laws with 60% of its capital owned by Filipinos. The CIR contends that since Eastern Extension is 100%
British owned, it is illegally operating its business in the Philippines.
Eastern Extension filed with the CTA a petition for review, contesting the legality of the assessment. During the
pendency of the case, then President Marcos promulgated PD 489, authorizing Eastern Extension to transfer its franchise
to Eastern Telecommunications, a duly organized corporation existing under the laws of the Philippines with at least 60%
of its capital owned by Filipinos. The CTA, while holding the franchise as unconstitutional, cancelled the CIRs
assessment.
Issues:
1. W/N the provision in the franchise requiring the payment of only 5% of gross receipts (considering that the
franchise is inoperative for failure to comply with the Constitution) is unenforceable?
Held/Ratio:
1. NO.
RA 808, enacted in 1952, and RA 5002, enacted in 1957, conferred the franchise to Eastern Extension during the
effectivity of the 1935 Constitution. This is a persuasive indication that Congress excluded the operation of
international telecommunication from the coverage of the constitutional prohibition.
A legislative franchise partakes of the nature of a contract. Franchises spring from contracts between the
sovereign power and private citizens made upon valuable considerations, for purposes of individual advantages as
well as public bereft. It is generally considered that the obligation resting upon the grantee to comply with the
terms and conditions of the grant constitutes a sufficient consideration. It can also be said that the benefit to the
community may constitute the sole consideration for the grant of a franchise by the state. Such being the case,
the franchise is the law between the parties and they are bound by the terms thereof.
The CIR, being a government agency, is also bound by the terms of the franchise. Hence, it cannot declare the
franchise as ineffective and unenforceable. To allow the CIRs claim would be to defy and ignore the superiority
of a legislative franchise granted by a special enactment.
Regarding the constitutional requirement, the franchise of Eastern Extension expressly prohibits it from leasing,
transferring, selling or assigning the franchise granted to it, without the approval of the Congress. Hence, Eastern
Extension cannot be faulted in not restructuring its equity to conform with the constitutional requirement of 60%
Filipino ownership.!

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54 - Cagayan Electric v. CIR (1985)

Facts:
Cagayan Electric Power & Light Co., Inc. is the holder of a legislative franchise, RA No. 3247, under which its
payment of 3% tax on its gross earnings from the sale of electric current is in lieu of all taxes and assessments of
whatever authority upon privileges, earnings, income, franchise, and poles, wires, transformers, and insulators of the
grantee, from which taxes and assessments the grantee is hereby expressly exempted.
RA No. 5431 amended section 24 of the Tax Code by making liable for income tax all corporate taxpayers not
specifically exempt under paragraph (c) (1) of said section and section 27 of the Tax Code notwithstanding the
provisions of existing special or general laws to the contrary. Thus, franchise companies were subjected to income tax
in addition to franchise tax.
However, its franchise was amended by RA No. 6020, by authorizing the Cagayan Electric to furnish electricity
to the municipalities in Misamis Oriental as well as Cagayan de Oro. The amendment reenacted the tax exemption in its
original charter or neutralized the modification made by Republic Act No. 5431, more than a year before.
The Commissioner of Internal Revenue in a demand letter required the Cagayan Electric to pay deficiency income
taxes for 1968-to 1971 in addition to franchise tax.
Issue:
1. W/N the Cagayan Electric is liable for income taxes, in addition to the franchise taxes that it was already paying.
Held/Ratio:
1. NO. RA No. 5431 had the effect of withdrawing Cagayan Electrics exemption from income tax. But the
exemption was restored by the subsequent enactment of RA No. 6020 which reenacted the said tax exemption.
Hence, the Cagayan is liable only for the income tax for the period from January 1 to August 3, 1969 when its tax
exemption was modified by RA No. 5431.
Franchise companies, like the Philippine Long Distance Telephone Company, have been paying income tax in
addition to the franchise tax. However, it cannot be denied that the said 1969 assessment appears to be highly
controversial. The Commissioner at the outset was not certain as to Cagayan Electrics income tax liability. It had
reason not to pay income tax because of the tax exemption in its franchise. For this reason, it should be liable only
for tax proper and should not be held liable for the surcharge and interest.

Misamis Oriental v. Cagayan Electric (see Digest #30)

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55 - Ernesto M. Maceda v. Hon. Catalino Macaraig Jr. (1991) (NAPOCOR tax exemption)
Doctrines:

The rule on strict interpretation does not apply in the case of tax exemptions in favor of the government, political
subdivision or instrumentality. The practical effect of exemption is merely to reduce the amount of money that
has been handled by the government in the course of its operations.

Facts:
The Commonwealth Act 120 created the National Power Corporation (NAPOCOR) was created as a public
corporation to undertake the development of hydraulic power and the production of power from other sources. RA 358
(1949) granted NAPOCOR tax and duty exemption privileges or exemption from all taxes. RA 6395 (1971) revised the
charter of the NAPOCOR, tasking it to carry out the national electrification, and provided in detail NAPOCORs tax
exceptions. PD 380 (1974) specified that NPC was exempt from all taxes imposed directly or indirectly. PD 938
integrated all the tax exemptions in favor of GOCCs including their subsidiaries. However, PD 1931 withdrew all tax
exemption privileges of NPC.
The President and/or the Minister of Finance, upon the recommendation of the Fiscal Incentives Review Board
(FIRB), could restore the exemption. FIRB Resolution No. 10-85 (1985) restored the tax exemption privileges. EO 93
(1987) withdrew the exemption privileges. FIRB Resolution No. 17-87 (1987) restored the tax exemptions again.
Since 1976 (Before PD 1931), oil firms never paid excise or specific and ad valorem taxes for petroleum products
sold and delivered to NAPOCOR. Oil companies started to pay specific and ad valorem taxes on their sales of oil products
to NAPOCOR only in 1984.NAPOCOR now claims refunds of taxes and duties originally paid by Caltex, Petrophil and
Shell for specific and ad valorem taxes to BIR (P468.58 million). Only portion thereof, corresponding to Caltex (P58
million), was approved and released by way of a tax credit memo. This nonpayment of taxes spanned 8 years. Other
claims for refund P410.58 million was denied. NAPOCOR moved for reconsideration, starting that all deliveries of
petroleum products to NAPOCOR are tax exempt, regardless of the period of delivery. When the FIRB Resolution
restored the tax exemptions, NAPOCOR applied for a refund of such taxes paid.
The BIR held that the scope of the tax exemption covers only taxes for which it is directly liable and not on taxes
which are only shifted to it. The BIR, however, refunded the P58million paid by Caltex. NPC now wants more refund.
The BIR again ruled that NAPOCOR only enjoys special privilege for taxes for which it is directly liable.
Maceda argues that the NAPOCOR cannot be exempt from indirect taxes. He cites the principle that the exception
must be strictly construed against the one claiming the exemption. Maceda claims that the FIRb only restored the direct
tax exemption privileges and cannot be interpreted to cover indirect taxes. He claims that the P58M refund was illegal
Issues:
1. W/N the NPC enjoy indirect tax and duty exemption
Held/Ratio:
1. YES. NPC is a non-profit public corporation created for the general good and welfare and wholly owned by the
government of the RP. From its creation, the NAPOCOR enjoyed preferential tax treatment. All the laws
promulgated show that it was meant to be exempt from tax. PD 380 said it was exempt from both direct and
indirect tax. The court defined direct and indirect tax as:
a. Direct Tax the where the person supposed to pay the tax really pays it. WITHOUT transferring the
burden to someone else (Ex: Individual income tax, corporate income tax, transfer taxes, residence tax,
immigration tax).
b. Indirect Tax that where the tax is imposed upon goods BEFORE reaching the consumer who
ultimately pays for it, not as a tax, but as a part of the purchase price (Ex: the internal revenue indirect
taxes , specific tax, percentage taxes, (VAT) and the tariff and customs indirect taxesimport duties,
special import tax and other dues)

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PD 938 then amended the tax exemption and said that it was exempt from all forms of taxes. The use of the
phrase all forms of taxes demonstrate the intention of the law to give NAPOCOR all the tax exemptions it has
been enjoying since the beginning. Also, PD 938s preamble states that the non-profit character of the NPC has
not been fully utilized because of the restrictive interpretations of the taxing agencies of the government.
It is a recognized principle that the rule on strict interpretation does not apply in the case of exemptions in favor of
a government political subdivision or instrumentality. The reason is that the practical effect of an exemption is
merely to reduce the amount of money that has to be handled by the government in the course of its operations. If
NAPOCOR should accept liability on the tax and duty components on the oil products, such amount will go into
its fuel cost and be passed onto its consumers through corresponding increase in rates. This tax exemption is
intended not only to insure that the NAPOCOR shall continue to generate electricity for the country but more
importantly, to assure cheaper rates to be paid by the consumers.
Cruzs dissent: Issues on the legislative validity of some of the PDs (promulgated by Marcos). Also mentioned
that the tax credits are tremendous since they involve amounts of about 1.58 billion, which could go a long way in
improving the national economy and the well-being of the Filipino people.

City of San Pablo v. Reyes (see Digest #31)

MERALCO v. Province of Laguna (see Digest #32)

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DOCTRINES IN TAXATION
56 - Hydro Resources Contractors Corp. v. CTA (1990)
Doctrine:

Taxes may be imposed retroactively but unless expressed by law, taxes must only be imposed prospectively.

Facts:
In 1978, The National Irrigation Administration (NIA) entered into an agreement with Hydro Resources
Contractors Corporation (HYDRO) for the construction of the Magat River Multipurpose Project in Ramon, Isabela.
Under the contract, HYDRO was to procure new construction equipment abroad for the project. The cost of which
as well as all taxes, duties, and fees incidental to the importation of the equipment shall be shouldered by NIA. Payments
advanced by the NIA shall be repaid by HYDRO through deductions from progress payments due to them. Also,
ownership of the equipment shall be transferred to Hydro once payment is completed.
However, NIA failed to comply with its tax obligations. In the meantime, HYDRO had fully repaid the value of
the construction equipment so much so that NIA executed deeds of sale covering the same, and transferred the ownership
thereof in favor of HYDRO.
Upon the transfer of the ownership of the said equipment, HYDRO was assessed by the Bureau of Customs (BoC)
for customs duty and compensating tax (P2,303,378.63) which was subsequently paid by HYDRO. In addition, HYDRO
was assessed additional 3% ad valorem duty in the amount of P281,591 prescribed in Executive Order 860. HYDRO also
paid this amount but this time under protest.
The Collector of Customs acted favorably on petitioners protest and ruled that the imposition of the 3% ad
valorem tax was unfair considering that EO No. 860 took effect only on December 21, 1982 when the sale of the
equipment took place in 1978. The Acting Customs Commissioner also ruled in favor of HYDRO however their findings
were reversed by the Deputy Minister of Finance. The CTA also denied the appeal of HYDRO.
Hence this petition.
Issue:
1. W/N the imposition of the 3% ad valorem tax on importations made prior to its issuance is violative of the
Constitution
Held/Ratio:
1. YES. It is a cardinal rule that laws shall have no retroactive effect, unless the contrary is provided. (Art. 4, Civil
Code) Executive Order No. 860 does not provide for its retroactivity. Moreover, the Deputy Minister of
Finance in his 1st Indorsement to the Central Bank clarified that letters of credit opened prior to the effectivity
of E.O. 860 are not subject to the provisions thereof. Consequently, the importations in question which arrived
in 1977 and 1978 are not subject to the 3% additional ad valorem duty, the same being imposed only on those
whose letter of credit were opened after the promulgation of Executive Order 860.
The CTA contends that since HYDRO failed to show that the sale and transfer of such equipment were made
before Dec. 21, 1982, they should not be entitled for a refund. This conclusion is erroneous. The subsequent
executions of the Deeds of Sale on December 1982 and March 1983 are immaterial in the application of EO 860.
The contract was a perfected contract of sale subject to a suspensive condition, the full payment by HYDRO of
the purchase price is the operative act to compel NIA to effect the transfer of ownership to HYDRO. Thus, the
implementation of the contract executed on August 1978 should be reckoned and construed as the actual date of
sale.

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57 - Hilado v. Collector of Internal Revenue (1956) (War-time losses)

Doctrines:

A law once established continues until changed by some competent legislative power. It is not changed merely by
change of sovereignty.

Internal revenue laws are not political in nature and as such were continued in force during the period of enemy
occupation.

Facts:
[The original case was not nicely written. I had a hard time deducing what each paragraph meant. Overall, this covers
the prospectivity of our Tax laws.]
Emilio Hilado was claiming a deduction worth P12,837.50, representing war damage on properties, from his gross
income in his 1951 Income Tax Return (ITR) pursuant to Circular No. V-123. Later, it was found that this circular was
wrong and was revoked. Meanwhile, in 1952, Circular No. V-139 was issued which revoked the provisions and declared
that losses of property from war damage shall only be deductible at the year of actual loss. Therefore, the deduction he
was claiming was not granted. After his motion for reconsideration was denied, he then filed a petition for review with the
Court of Tax Appeals which also denied his petition. He then appealed to the Supreme Court.
Hilado alleges that he treated this deduction as a business asset since it represents collectibles from the
government. In addition he avers that as consequence of enemy occupation, there was no taxable year to consider, therefor
it is in 1951 that he decided to put such deduction into his ITR.
Issues:
1. W/N Hilado is entitled to the said deduction.
2. W/N that the Internal Revenue code and its regulations are inactive during times of war.
Held/Ratio:
1. NO. Circular V-123 was issued on a wrong construction of the law, therefore cannot give rise to a vested right
that can be invoked by a taxpayer. The amount cannot be considered as a business asset which can be deducted
as a loss in contemplation of law because its collection is not enforceable as a matter of right, but is dependent
merely upon the generosity of the U. S. government. Therefore, Circular V-123 was declared void for having the
wrong interpretation for the law which then necessitated the issuance of Circular V-139 to properly lay down
the rules.
2. YES. Our internal revenue laws are not political in nature therefore they are continued in force during the period
of enemy occupation and effected by the territorial government.!As a matter of fact, income tax returns were filed
during that period and income tax payment were effected and considered valid and legal. Such tax laws are
deemed to be the laws of the occupied territory and not of the occupying enemy.
It is a legal maxim, that excepting that of a political nature, Law once established continues until changed by
some competent legislative power. It is not changed merely by change of sovereignty. Joseph H. Beale (Cited
in the case)

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58 - Pablo Lorenzo v. Juan Posadas, Jr. (1937)

Doctrines:

It is well-settled that inheritance taxation is governed by the statute in force at the time of the death of the
decedent.

Legislative intent that a tax statute should operate retroactively should be perfectly clear.

A statute should be considered as prospective in its operation, whether it enacts, amends, or repeals an
inheritance tax, unless the language of the statute clearly demands or expresses that it shall have a retroactive
effect ... .

Facts:
On May 27, 1922, Thomas Hanley died, leaving a will and a considerable amount of real and personal properties.
In his will, he directed that his money and his real estate property will be given to his nephew, Matthew Hanley; the real
estate to be given to his nephew ten years after his death. The CFI then appointed Moore to be the trustee to administer
the real properties of the estate. Moore took his oath on March 10, 1924, and resigned on Feb. 29, 1932. Pablo Lorenzo
was appointed as a replacement.
Juan Posadas, the Collector of Internal Revenue, assessed inheritance tax against the estate amounting to
P2,057.74. He filed a motion with the CFI which was subsequently granted. Lorenzo then paid under protest. He claimed
that the inheritance tax should have been assessed after ten years (the point where the properties are to be transferred to
the decedents nephew).
Lorenzo then asked for a refund. This was refused by Posadas. In addition, the latter filed a counterclaim for an
additional amount of P1,191.27 representing interests due which was not included in the original assessment. The CFI
dismissed the claims of both parties. Both parties appealed.
(Important: In arriving with the amount, Posadas used section 1544 of the Revised Administrative Code, as amended by
section 3 of Act. No. 3036. But the said act went into effect on January 1, 1930, which was not the law in force when
the testator died on May 27, 1922. The law at that time was the same section 1544 of the RAC, as amended by Act. No.
3031, which took effect on March 9, 1922.)
Issues:
1. W/N there has been a delinquency in the payment of inheritance taxes.
2. Which law should be applicable? (TAX ISSUE IN THE OUTLINE: PROSPECTIVITY)
Held/Ratio:
1. YES. Sec. 1544 (b) of the Revised Administrative Code states that payment of the inheritance tax shall be made
before delivering to each beneficiary his share. This payment should have been made before March 10, 1924, the
date when Moore formally assumed the function of trustee.
Although the property was only to be given after 10 years from the death of Hanley, the court considered that
delivery to the trustee is delivery to cestui que trust, the beneficiary within the meaning of Sec. 1544 (b).
(WOOT! AGENCY!)
2. Act. No. 3031. Inheritance taxation is governed by the statute in force at the time of the death of the decedent.
And though a tax statute may be made retroactive in its operation, there must exist a clear legislative intent to
deem it as such.
Posadas contended, however, that certain provisions of Act 3036 are more favorable to the taxpayer than those of
Act 3031. (Under Act 3036, the surcharge of 25% is based on tax only, as opposed to both tax and interest in Act
3031, also under Act 3036, the taxpayer is allowed 20 days from notice and demand by the Collector of Internal
Revenue to pay instead of the 10 days in Act 3031.) He further states that the said provisions, being penal in

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nature, should operate retroactively in conformity with the provisions of Article 22 of the RPC (retroactive
application of penal laws insofar as they are in favor of the guilty person).
The SC held that revenue laws, generally, which impose taxes collected by the means ordinarily resorted to for
the collection of taxes are not classed as penal laws. And that Art.22 of the RPC is not applicable to the case at
bar; therefore, Act No. 3036 cannot be given retroactive effect.
(Basically under Act 3031 mas mahal yung babayaran. SC rule Act 3031 applies but since P1,191.27 lang yung
hinihingi ni Posadas, yun lang din yung nacharge in the end.)

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59 - CIR v. Ayala Securities Corp. (1980)

Doctrines:

Section 331 of the NIRC: internal revenue taxes shall be assessed within 5 years after the return was filed

Section 332: in the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax
may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any
time within 10 years after the discovery of the falsity, fraud or omission

Section 20: A corporation having practically no activities except holding property, and collecting the income
therefrom or investing therein, shall be considered a holding company within the meaning of Section 25

Section 25: Additional tax on corporations improperly accumulating profits or surplus xxx
b) Prima facie evidence. The fact that any corporation is a mere holding company shall be prima facie
evidence of a purpose to avoid the tax upon its shareholders or members. Similar presumption will lie in the
case of an investment company where at any time during the taxable year, more than 50% in value of its
outstanding stock is owned, directly or indirectly by one person.

Facts:
In 1961, CIR made an assessment against Ayala Securities Corp. (ASC) in the sum of P758,687.04 which is the
surplus (25%) of the 1955 tax paid by the corporation. ASC is now contending that the assessment made fell under the
five-year prescriptive period provided in Section 331 of the National Internal Revenue and Code and therefore has no
binding force and effect. CIR contends that the surtax imposed is not a tax. Accumulated surplus are never returned for
tax purposes, as there is no law requiring that such surplus be reported.
Issues:
1. W/N Ayala Securities Corporation is a holding company of the Ayala and Company (important issue to determine
w/n the company can be taxed under Section 25)
2. W/N the assessment of the surtax prescribes
Held/Ratio:
1. YES. The testimonies of Mr. Cabral and Mr. Lorayes (accountant and secretary of ASC) would prove that ASC is
a mere holding company. First, out of the 175,000 outstanding stocks of the corporation, the Ayala & Co. owned
174,996. Second, all the employees of ASC are also employees of Ayala & Co. And lastly, the Ayala & Co. is
that one which assigns to ASC its projects. This shows that ASC has practically no activities except as a holding
company of Ayala & Co.
2. NO. Since there is no express statutory provision limiting such right or providing for its prescription, the 25% tax
on unreasonably accumulated surplus is imprescriptible. The purpose of the additional tax is to avoid the situation
where a corporation unduly retains its surplus instead of declaring the dividends to its shareholders who would
have to pay the income tax due on such dividends received by them.
Also, as held in the earlier case of Unite Equipment & Supply Co. v. CIR, the provisions of Sections 331 and 332
of the NIRC for prescriptive periods of 4 and 10 years after the filing of the return do not apply on the taxpayers
unreasonably accumulated surplus under Section 25 of the Tax Code since no return is required to be filed by law
or by regulation on such unduly accumulated surplus on earnings.
(So ang point lang, di nagpre-prescribe dahil dun sa earlier ruling at sa new contentions ng CIR na wala naman
talagang statutory provisions regarding the prescription of surtaxes. Bow)

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61 - Villanueva v. City of Iloilo (1968) (tenement houses; double taxation)

Doctrine:

In order to constitute double taxation in the objectionable or prohibited sense the same property must be taxed
twice when it should be taxed but once; both taxes must be imposed on the same property or subject-matter, for
the same purpose, by the same State, Government, or taxing authority, within the same jurisdiction or taxing
district, during the same taxing period, and they must be the same kind or character of tax.

At all events, there is no constitutional prohibition against double taxation in the Philippines. It is something not
favored, but is permissible, provided some other constitutional requirement is not thereby violated, such as the
requirement that taxes must be uniform.

Facts:
In 1946, Iloilo City enacted an ordinance imposing license tax fees as follows: (1) tenement house (P25); (2)
tenement houses in the streets of Basa, Iznart and Aldeguer (P24); (3) tenement house in any other streets (P12). The
spouses Eusebio and Remedios Villanueva, owners of four tenement houses containing 34 apartments, challenged the
validity of this ordinance. Ultimately in 1959, the Supreme Court, declared the ordinance to be ultra vires. A year after,
however, the municipal board, believing that it acquired authority to enact an ordinance of the same nature
pursuant to the Local Autonomy Act, enacted another ordinance with essentially the same effect. There came the
spouses to assail the new ordinance; they maintain that the new ordinance is in violation of the rule on uniformity in
taxation and double taxation, as (1) tenement houses in other areas are not taxed; and (2) they are already paying real
estate taxes to the national government.
Issue:
1. W/N the ordinance is illegal for violation of the rule on uniformity of taxation.
2. W/N the ordinance is illegal for double taxation.
Held/Ratio:
1. NO. Tenement houses constitute a distinct class of property. Taxes are uniform and equal when imposed upon all
property of the same class or character within the taxing authority. The fact that the owners of the other classes
of buildings in Iloilo are not imposed upon by the ordinance, or that tenement taxes are imposed in other
cities do not make the ordinance violative of the rule of equality and uniformity. The rule does not require
that taxes for the same purpose should be imposed in different territorial subdivisions at the same time. So long as
the burden of tax falls equally and impartially on all owners or operators of tenement houses similarly
classified or situated, equality and uniformity is accomplished.
2. NO. While it is true that the spouses are taxable under the Revenue Code as real estate dealers, and taxable under
the new ordinance, double taxation may not be invoked. This is because the same tax may be imposed by the
national government as well as by the local government. A license tax may be levied upon a business or
occupation although the land or property used in connection therewith is subject to property tax. In order to
constitute double taxation, both taxes must be the same kind or character. Real estate taxes and tenement taxes are
not of the same character. The former is a tax on the property; the latter is a tax on the activity in which the
property is used.

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62 - Commissioner v. Lednicky (2011) (American citizens residing in Philippines, income from Philippine sources,
paying US and Phil. taxes)
Doctrines:

Double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same
governmental entity

Facts:
Spouses VE and Maria Valero Lednicky are American citizens residing in the Philippines, and have derived all their
income from Philippine sources since 1947. In 1955, the spouses filed with the US Internal Revenue agent in Manila their
Federal income tax return for 1947, 1951 to 1954 on income from Philippine sources. From 1956 to 1958, they filed their
domesic income tax returns in compliance with local laws. They amended their tax returns in 1959 to include their taxes
paid to the US Federal Government, interests, and exchange and bank charges. They filed their claims for refund.
Issues:
1. W/N income tax paid to foreign governments can be deducted from the gross income or as a tax
Held/Ratio:
1. No.
Much stress is laid on the thesis that if the Spouses are not allowed to deduct the income taxes they are required to
pay to the government of the United States in their return for Philippine income tax, they would be subjected to
double taxation. What they fail to observe is that double taxation becomes obnoxious only where the taxpayer
is taxed twice for the benefit of the same governmental entity. In the present case, while the taxpayers would
have to pay two taxes on the same income, the Philippine government only receives the proceeds of one tax. As
between the Philippines, where the income was earned and where the taxpayer is domiciled, and the United
States, where that income was not earned and where the taxpayer did not reside, it is indisputable that justice and
equity demand that the tax on the income should accrue to the benefit of the Philippines. Any relief from the
alleged double taxation should come from the United States, and not from the Philippines, since the formers right
to burden the taxpayer is solely predicated on his citizenship, without contributing to the production of the wealth
that is being taxed.
The laws intent is that the right to deduct income taxes paid to foreign government from the taxpayers gross
income is given only as an alternative or substitute to his right to claim a tax credit for such foreign income taxes;
so that unless the alien resident has a right to claim such tax credit if he so chooses, he is precluded from
deducting the foreign income taxes from his gross income. The purpose of the law is to prevent the taxpayer from
claiming twice the benefits of his payment of foreign taxes, by deduction from gross income and by tax credit. To
allow an alien resident to deduct from his gross income whatever taxes he pays to his own government amounts to
confer on the latter power to reduce the tax income of the Philippine Government. Such result is incompatible
with the status of the Philippines as an independent and sovereign state. Any relief from the alleged double
taxation should come from the United States, since its right to burden the taxpayer is solely predicated on the
taxpayers citizenship, without contributing to the production of the wealth that is being taxed

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63 - Pepsi-Cola Bottling Company of the Philippines, Inc. v. Municipality of Tanauan, Leyte (1976)
Doctrine:

Double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same
government entity or the same jurisdiction for the same purpose, but not in a case where one tax is imposed by the
State and the other by the city or municipality.

Facts:
Pepsi-Cola is assailing the constitutionality of the Local Autonomy Act, Ordinance 23 and Ordinance 27.
Ordinance 23 levies and collects from soft drinks producers and manufacturers a tax of 1/16 of a centavo for every bottle
of soft drink. Ordinance 27 levies and collects on soft drinks produced or manufactured within the territorial jurisdiction
of this municipality a tax of one centavo on each gallon of volume capacity. Both ordinances require producers and
manufacturers to submit monthly reports regarding the total number of bottles/ gallons produced in a month. The taxes
imposed are known as municipal production tax.
The CFI of Leyte dismissed the case and required Pepsi-Cola to pay the proper taxes. Pepsi-Cola appealed to the
CA and the CA elevated the case to the SC.
Issues:
1. W/N the Local Autonomy Act is an undue delegation of power, confiscatory and oppressive.
2. W/N Ordinances 23 and 27 constitute double taxation and impose percentages or specific taxes.
3. W/N Ordinances 23 and 27 are unjust and unfair.
Held/Ratio:
1. NO. The power to tax is an inherent power of governments. It is purely legislative in nature. It may be delegated
to local governments to create their own sources of revenue and to levy taxes. Municipalities may tax subjects
provided that (1) it is for a public purpose; (2) the rule of uniformity is followed; (3) the person or property taxes
is within the jurisdiction of the government levying the tax; and (4) notice and opportunity for hearing are
provided.
The Local Autonomy Act may not be declared unconstitutional on the theory of double taxation. Double taxation
becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same government entity or the
same jurisdiction for the same purpose. It is permissible where one tax is imposed by the State and the other is
imposed by the city or municipality.
2. NO. The two ordinances do not cover the same subject matter. Ordinance 23 refers to the number of bottles
corked and not to the volume contents of the bottles (1/16 of a centavo of every bottle corked). Ordinance 27
levies tax on the volume of the soft drinks (one centavo on each gallon of volume capacity). Clearly, the
difference lies in the tax rate of the soft drinks produced. Further, the Municipal Council of Tanauan intended
Ordinance 27 to repeal Ordinance 23.
Ordinance 27 does not impose percentages nor specific taxes. The volume capacity is considered in determining
the tax rate on the products. It is not a set ratio between the volume of sales and the amount of tax.
It is not a specific tax. Specific taxes are those imposed among specific articles such as wines, tobacco and cigars.
Soft drink is not included.
3. NO. The constitution provides the widest possible autonomy to local governments with respect to taxation.
Municipal corporations are allowed to determine the rates of taxes, levy and impose taxes as long as they are for a
public purpose and are just and uniform.

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64 - McCulloch v. Maryland (1819) (power to tax power to destroy)

[Note: This case is really old and the English used here is like the Shakespeare kind # I will try to make it as simple as
possible !]
Doctrines:

If a corporation is a mere instrumentality of the individual stockholder; the latter must individually answer for
the corporate obligations

Facts:
The Congress of the USA provided for the incorporation to the Second Bank of the US. The Bank first went into
operation in Pennsylvania. Subsequently, it opened a branch in Maryland. Both sides of the litigation admitted that the
President, directors, and company of the Bank had no authority to establish the Baltimore branch, or office of discount
and deposit, other than the fact that Maryland had adopted the Constitution of the United States.
Maryland enacted a statute imposing a tax on all banks operating in Maryland NOT chartered by the State.
All such banks were prohibited from issuing bank notes EXCEPT upon stamped paper issued by the State. The statute
provided fees to be paid for the paper and established penalties for violations.
McCulloch (defendant) is the cashier of the Second Bank of the United States which again is NOT chartered
under Maryland. McCulloch issued bank-notes and discounted promissory notes. He did this WITHOUT complying
with the Maryland law (e.g. did not use the stamped paper, did not pay taxes). The court also mentioned that though the
law, by its language, was generally applicable to all banks not chartered in Maryland, the Second Bank of the United
States was the only out-of-state bank then existing in Maryland, and the law was recognized in the courts opinion as
having specifically targeted the U.S. Bank.
Maryland sued McCulloch for failing to pay the taxes due under the Maryland statute and McCulloch contested
the constitutionality of that act. It was Marylands contention that because the Constitution did not specifically state that
the federal government was authorized to charter a bank, the Bank of the United States was unconstitutional.
Issues:
1. W/N the state of Maryland can tax the branch of the Second Bank of the United States without violating the
Constitution?
Held/Ratio:
1. NO
The federal government is supreme to the state governments. When a state taxes an institution of the federal
government, it is invading the rights of people of other state on whom it has no right to exert its power.
That the power to tax involves the power to destroy; that the power to destroy may defeat and render
useless the power to create; that there is a plain repugnance, in conferring on one government a power to control
the constitutional measures of another, which other, with respect to those very measures, is declared to be
supreme over that which exerts control, are propositions not to be denied. (hmmmm)
Explanation: This law of Maryland acts directly on the operations of the bank, and may destroy it. There is no
limit or check in this respect, but in the discretion of the state legislature. If one national institution may be
destroyed in this manner, all may be destroyed in the same manner.
The court says that they have a duty to check whether the power of taxation is abusive and destructive. The
existence of any national institution ought not to depend upon states. This is a tax laid for a political purpose;
for the purpose of destroying a great institution of the national government. A power to impose a tax upon
the notes of the bank, is a power to repeal the law, by which the bank was created. The bank cannot be useful, it
cannot act at all, unless it issues notes. It imposes a stamp duty upon the notes of the bank, and thus stops the
very source of its circulation and life.

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If the states may tax one instrument, employed by the government in the execution of its powers, they may
tax any and every other instrument. They may tax the mail; they may tax the mint; they may tax patent-rights;
they may tax the papers of the custom-house; they may tax judicial process; they may tax all the means employed
by the government, to an excess which would defeat all the ends of government. This was not intended by the
American people. They did not design to make their government dependent on the states.

65 - Panhandle Oil Co. v. State of Mississippi (1928)

[US Case]
Doctrines:

Dissenting opinion of Justice Holmes: The power to tax is not the power to destroy while this Court sits. The
power to fix rates is the power to destroy if unlimited, but this Court while it endeavors to prevent confiscation
does not prevent the fixing of rates.

Facts:
Mississippi imposed an excise tax upon any person who shall engage in the business of being a distributor of
gasoline, or retail dealer in gasoline, except that sold in intestate commerce or purchased outside the state and brought by
a consumer for his own use, in the following rates:
Year

Law

Tax per gallon upon

the sale of gasoline

1922

Laws on Mississippi of 1922, Chapter 116

1 cent

1924

Laws on Mississippi of 1925, Chapter 115

3 cents

1926

Laws on Mississippi of 1926, Chapter 119

4 cents

Panhandle has been engaged in that business since 1925.

The Company was sued for the recovery of taxes on account of sales it made to the US Government for the use of
the Coast Guard fleet and the Veterans Hospital.
Panhandle now claims that the above statutes are repugnant to the Federal Constitution in that it was sales on tax.
The Company therefore claims that it should not be taxed for upholding the Constitution.
Issues:
1. W/N the tax was valid?
2. The doctrine is in the dissent.
Held/Ratio:
1. NO, the States may not burden or interfere with the exertion of national power or make it a source of
revenue or take funds or tax means used for the performance of federal functions.
Mississippi may impose charges upon Panhandle for the privilege of carrying on trade that is subject to the power
of State, it might not however, lay any tax upon transactions by which the US secures things desired for its
governmental purposes.
2. Dissenting - Mr. Justice Holmes: [Brandeis and Stone agree with this opinion]
He opinioned that the Government should not be treated any differently as any other purchaser, since in a sense it
avails of the services of the State.
Furthermore, he believes that the decision was due to the Courts failure to recognize that distinctions of law are
in relation to degree. Through CJ Marshalls often quoted dicta that, the power to tax is the power to destroy,

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this Court applies the power to tax in absolutes. However, Holmes opinions that the Court may defeat an
attempt to impose a discriminatory tax, without altogether invalidating the imposition, by perhaps changing the
rates. After all, the power to tax is not the power to destroy while this Court sits.
Dissenting - Mr. Justice Reynolds
He does not believe that every person who sells gasoline to the US Government then becomes a federal
instrumentality, with the privilege of claiming freedom from taxation of the State.
Moreover, the states and the national government must co-exist. Neither may destroy the other. Thus, the federal
Constitution must receive a practical construction Its limitations and its implied prohibitions must not be extended
so far as to destroy the necessary powers of the States, or prevent their efficient exercise.

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66 - CIR v. Rufino (1987)

Doctrine:

The merger in question involved a pooling of resources aimed at the continuation and expansion of business and
so came under the letter and intendment of the National Internal Revenue Code, as amended, exempting from the
capital gains tax exchanges of property effected under lawful corporate combinations.

Facts:
The Rufinos were the majority stockholders of Eastern Theatrical Co. Inc. organized in 1934 for a period of 25
years, until termination on 1959. The said corporation was engaged in the business of operating theaters, opera houses,
places of amusement and other related business enterprises, more particularly the Lyric and Capitol Theaters in Manila.
(Well call this corporation as the Old Corp.)
In a special meeting of the stockholders of the Old Corp. in December 17, 1958, a resolution was passed to
authorize the merger of the Old Corp. with the Eastern Theatrical Co Inc. (New Corp.), which was organized on
December 8, 1958, for a term of 50 years. This corporation is engaged in the same kind of business as the Old
Corporation. (The Rufinos were also the majority stockholder of the New Corp.) Pursuant to the said resolution, the Old
Corporation and the New Corporation signed on January 9, 1959, a Deed of Assignment providing for transfer of all the
business, property, assets and goodwill, and obligations and liabilities of the Old Corporation to the New Corporation in
exchange for the latters shares of stock to be distributed among the Old Corps shareholders on the basis of one stock for
each stock held in the said Old Corporation. This agreement was made retroactive to January 1, 1959.
The resolution of the Old Corporation of December 17, 1958, and the Deed of Assignment of January 9, 1959,
were approved in a resolution by the stockholders of the New Corporation in their special meeting on January 12, 1959. In
the same meeting, the increased capitalization of the New Corporation, and the said increase was registered on March 5,
1959, with the Securities and Exchange Commission, which approved the same on August 20,1959.
This merger was examined by the BIR where they assessed the Rufinos for deficiency capital gains tax on the
shares received by the Rufinos on the said merger declaring that the merger of the aforesaid corporations was not
undertaken for a bona fide business purpose but merely to avoid liability for the capital gains tax on the exchange of the
old for the new shares of stock.
The pertinent provision of the NIRC, as amended by RA No. 1921 affected is Sec. 35 (c) (2) in relation to (c) (5),
which provides that no gain or loss shall be recognized in a merger or consolidation where one
corporation/shareholder/security holder exchanges property/stocks/securities, respectively, solely for stocks of another
corporation. Merger or consolidation was defined as:
(1) The ordinary merger or consolidation, or (2) the acquisition by one corporation of all or
substantially all the properties of another corporation solely for stock; Provided, That for a
transaction to be regarded as a merger or consolidation within the purview of this section, it
must be undertaken for a bona fide business purpose and not solely for the purpose of
escaping the burden of taxation; Provided further, That in determining whether a bona fide
business purpose exists, each and every step of the transaction shall be considered and the whole
transaction or series of transactions shall be treated as a single unit
The BIR contends that the said merger was not for a bona fide business purpose but for purpose of escaping
taxation only. To support its contention, the BIR points to the fact that the New Corporation did not actually issue stocks
in exchange for the properties of the Old Corporation at the time of the supposed merger on January 9, 1959 because the
increase in capital stock was registered only at a later date thus no shares must have been issued by the New Corp at the
time of merger.
Issue:
1. W/N the BIR was correct in interpreting the provision of NIRC.

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Held/Ratio:
1. No. The Court ruled that there was a valid merger although the actual transfer of the properties subject of the
Deed of Assignment was not made on the date of the merger as the said transfer was not possible to happen in one
time but through a series of transactions. The Court further opined that the merger was for a bona fide business
purpose because the intent of the merger was to continue the business of the Old Corp, whose corporate life was
about to expire. In the old Corp Code, the corporate term cannot be extended by amending the articles of
incorporation. This is the main reason, the Court observed, of the merger between the Old and New corporation,
to continue the business of the Old corporation upon its expiration. Consequently, the said merger may not be
seen as a purpose of escaping taxation.
The Court looked into the purpose of the legislature in adopting the provision of law in question. The Explanatory
Note of HB No. 7233, later enacted as RA No. 1921, provides that:
The exemption from the tax of the gain derived from exchanges of stock solely for stock of
another corporation resulting from corporate mergers or consolidations under the above
provisions, as amended, was intended to encourage corporations in pooling, combining or
expanding their resources conducive to the economic development of the country.
67 - Delpher Trades Corp. v. IAC (1988) (TAX AVOIDANCE)
Doctrine:

The legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or altogether avoid
them, by means which the law permits, cannot be doubted.

Facts:
Delfin and Pelagia Pacheco owned a parcel of land in Polo (now known as Valenzuela, Bulacan). In 1974, they
leased this land to Construction Components International (CCI) which also provides a right of first refusal in favor of
CCI. A few months later, CCI assigned its rights under a lease in favor of Hydro Pipes. In 1976, the lessor Pacheco
siblings executed a deed of exchange in favor of Delpher Trades whereby the property was conveyed to Delpher together
with a parcel of land for 2,500 shares of stock of Delpher Trades having the total value of P1.5M.
Issue:
1. W/N the deed of exchange was in effect a sale that prejudiced the right of first refusal and a case of tax evasion.
Held/Ratio:
1. NO. Delpher Trades is considered as a business conduit of the Pachecos since they own 55% of the capital. What
happened was there was only a change of the nature of ownership from unincorporated to incorporated by way of
Delpher Trades Corp. that will take control of the properties. This way, the contention of Hydro Pipes that there
was a violation of the right of first refusal was of no merit. There was no transfer of ownership since such
remained in the hands of the Pachecos.
This is a case of a legal way to escape from payment of taxes through tax avoidance since the Pachecos did
all these to avoid the payment of inheritance taxes. This is an estate planning scheme resorted to by the
Pachecos.
The legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or altogether avoid
them, by means which the law permits, cannot be doubted.

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THE NATIONAL INTERNAL REVENUE CODE

BUREAU OF INTERNAL REVENUE
01 - CIR v. Pascor Realty and Development Corp (1999) [assessment v. affidavit-complaint]
Doctrines:

An assessment contains not only a computation of tax liabilities, but also a demand for payment within a
prescribed period.

An affidavit, which was executed by revenue officers stating the tax liabilities of a taxpayer and attached to a
criminal complaint for tax evasion, cannot be deemed an assessment that can be questioned before the Court of
Tax Appeals.

Facts:
A Letter of Assessment (LOA) was issued by BIR Commission Jose Ong which authorized certain revenue
officers to examine the books of accounts and other accounting records of Pascor Realty and Development Corp (PRDC)
for the years 1986, 1987 and 1988. The examination resulted in a recommendation for the issuance of an assessment in the
amounts of 1986 P7,498,434.65 and 1987 P3,015,236.35.
Filing of complaint with DOJ
Thereafter, the CIR filed a criminal complaint before the DOJ against PRDC, its President (Rogelio Dio) and its
Treasurer (Virginia Dio) alleging evasion of taxes in the total amount of P10,513,671. Private respondents filed an urgent
request for reconsideration/reinvestigation disputing the assessment and tax liability.
Notwithstanding the request, a subpoena was issued by the DOJ in connection with the criminal complaint against
Rogelio and Virginia. Furthermore, the CIR denied the request on the ground that no formal assessment has as yet been
issued.
Court of Tax Appeals
As such, Rogelio and Virginia elevated the decision of the CIR to the CTA. The CIR filed a motion to dismiss on
the ground that the CTA has no jurisdiction over the subject matter of the petition, as there was no formal
assessment issued against the petitioners. The CTA denied the CIRs motion.
Court of Appeals
CIR appealed to the CA, alleging the CTAs grave abuse of discretion and without jurisdiction in considering the
affidavit/report of the revenue officer and the indorsement of said report to the secretary of justice an assessment which
may be appealed to the CTA. The CA sustained the CTAs decision
The CIR thus filed this petition for review on certiorari before the SC, praying for the nullification of the CAs
decision affirming the CTA decision.
Issues:
1. W/N criminal complaint for tax evasion can be construed as an assessment
2. W/N an assessment is necessary before criminal charges for tax evasion may be instituted
Held/Ratio:
1. NO, the SC sided with the petitioners that the filing of the criminal complaint with the DOJ cannot in any
way be construed as a formal assessment of private respondents tax liabilities.
Importance of an assessment reason why it is necessary to clarify if a document is an assessment
An assessment must be sent to and received by a taxpayer, and must demand payment of the taxes described
therein within a specific period. Failure in payment within the deadline provided in the notice would result to

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25% penalty and interest at the rate of 20% per annum. The issuance of an assessment is thus vital in determining
the period of limitation regarding the proper issuance and the period within which to protest it. The NIRC
specifically provides the taxes may be assessed within 3 years from the last date within which to file the return
[with fraud 10 years]. As to protesting an assessment, the NIRC provides that it may be protested only within
30 days from receipt thereof.
When is a document an assessment
The National Internal Revenue Code (NIRC) and the revenue regulations governing protests of assessments do
not provide a specific definition or form of an assessment. The NIRC does define specific functions and effects of
an assessment.
To consider the affidavit attached to the Complaint as a proper assessment is to subvert the nature of an
assessment and to set a bad precedent that will prejudice innocent taxpayers. On the case on hand, the affidavit
merely contained a computation of respondents tax liabilities. It did not contain a demand or a period for
payment and was addressed to the justice secretary rather that the taxpayer.
The purpose of the affidavit was merely to support and substantiate the Criminal Complaint for tax evasion.
Clearly, it was not meant to be a notice of the tax due and a demand to the private respondents for payment
thereof.
2. NO, an assessment is not necessary before filing of criminal complaint
Sec 222 of the NIRC state that in cases where a false or fraudulent return is submitted or in cases of failure to file
a return such as this case, proceedings in court may be commenced without an assessment. Furthermore,
Section 205 of the same Code clearly mandates that the civil and criminal aspects of the case may be pursued
simultaneously.
Sec 222 is the general rule, and Rogelio and Virginia failed to show that they are entitled to an exception.
Issuance of assessment v. Filing of complaint
Issuance of assessment

Filing of complaint

Sending of Pre-assessment Notice (PAN)

Submit position papers and documents
prove that assessment is unwarranted

NONE

Assessment proper
Demand payment of taxes

Penalize taxpayer for violation of the Tax

Code

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02 - Ferdinand Marcos II v. Court of Appeals (1997) (Estate of Marcos, Probate proceedings)

Doctrines:

The proceedings in a probate court is not a shield to delay or hide the properties from being assessed by the taxing
authorities for estate tax

Section 229, NIRC. Protesting of assessment states that if one fails to file a request for reconsideration or
reinvestigation within 30 days from the receipt of the decision, the decision shall become final and unappealable.

The burden of proof on the validity of the collection and assessment of taxes rests upon the taxpayer

Facts:
When former President Marcos died in Hawaii in 1989, a Special Tax Audit Team was created to conduct
investigations on the tax liabilities of the Marcos family. It was said in its investigations that they failed to file a written
notice of the death of the late president, estate tax returns and several income tax returns covering years 1982 to 1986, all
in violation of the NIRC. When criminal charges have been filed against Imelda Marcos in the RTC of Quezon City, the
Commissioner of Internal Revenue thereby caused the filing of the said tax returns.
When the tax returns were filed, the BIR saw certain deficiencies. BIR issued one Deficiency estate tax
assessment(for the late presidents estate) and two Deficiency income tax assessments(for the income earned by the
Spouses Marcos and their son Cong. Bongbong Marcos). The deficiency estate and income assessments were all
constructively and personally served to Imelda Marcos in her last known address and through the office of Cong.
Bongbong in the Congress. There was no answer or protest received from Imelda Marcos.
The BIR Commissioner issued 22 notices of levy on real property against the property of the Marcoses to satisfy
the alleged tax and income deficiency taxes. But still no answer from the Marcoses. A public auction took place. There
being no bidder, the lost were declared to be forfeited to the government.
Now, Bongbong files a Temporary Restraining Order with a Writ of Preliminary Injunction on the said forfeiture
alleging that the assessments made by the BIR are null and void on the following grounds:
1. There was still a probate hearing for the estate of the late president. Thus, the assessment could not be made
without the consent of the probate court regarding the disputed properties.
2. There were still numerous pending cases regarding the true ownership of the subject properties.
3. That they were never notified, much less served Notices of Levy, violating their right of Due Process
Bongbong assailed these grounds of a petition for review on certiorari.
Issues:
1. W/N the probate court must first clear the properties in order to be assessed by the BIR
2. W/N Bongbong was denied due process of law
Held/Ratio:
1. No. It Bongbong says that the probate court can deny the government imposing an immediate payment of taxes
when the properties being assessed is still in its jurisdiction. This is untenable. The assessment of an
estate/inheritance tax does not include administration of the estate. Thus, the BIR could validly file the
assessment against the estate of Marcos even when it is pending in the probate court. The approval of the
probate court is thus not a mandatory requirement in the collection of estate taxes.
2. No
Being denied his petition for review on certiorari is not a denial of his right to due process. The issue on the
validity on the BIRs decision to assess the estate taxes, this should have been pursued through proper
administrative and judicial avenues provided by law. Section 229 of the NIRC tells us that when proper taxes
should be assessed, notice of the findings should be given to the taxpayer. In case, he fails to respond to such

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notice, the Commissioner shall issue an assessment based on his findings. Such assessment may be protested
administratively by filing a request for reconsideration or reinvestigation within 30 days from the receipt of
the assessment; otherwise, the decision shall become final and unappealable.
The Marcoses never lifted a finger when assessments were sent to them. Thus they are denied now the
opportunity to contest them because the BIRs assessment has already become final.
Now it is Bongbong Marcoss job to prove that the BIR in fact has done inconsistencies and taxed them with
grave abuse of discretion. In case, it was true that they really did not receive the said assessments thus violating
their rights.

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03 - Meralco Securities Corporation v. Savellano (1982)

Doctrine:

Mandamus only lies to enforce the performance of a ministerial act or duty and not to control the performance of a
discretionary power. Purely administrative and discretionary functions may not be interfered with by the courts.
Mandamus may not be resorted to so as to interfere with the manner in which the discretion shall be exercised or
to influence or coerce a particular determination, to do so would be tantamount to a usurpation of executive
functions.

Facts:
The late Juan G. Maniago (substituted by his wife and children) submitted to the CIR confidential denunciation
against the Meralco Securities Corporation (MSC) for tax evasion for the years 1962-1966 having paid income tax only
on 25 % of the dividends it received from the Manila Electric Co., equivalent to allegedly the shortchanging of the
government of income tax due from 75% of the dividends.
The CIR investigated and found that no deficiency corporate income tax was due from the MSC on the dividends
it received from the Manila Electric Co., since under the then Sec. 24[a] of the NIRC that in the case of dividends
received by a domestic or foreign resident corporation liable to (corporate income) tax under this Chapter . . . .only 25%
shall be returnable for the purposes of the tax imposed. The Commissioner also accordingly rejected Maniagos
contention that the MSC is not a domestic corporation liable to tax under this Chapter. The CIR denied Maniagos claim
for informers reward on a non-existent deficiency which was sustained by the Secretary of Finance.
Maniago filed a petition for mandamus in the CFI of Manila against the CIR and the MSC to compel the
Commissioner to impose the alleged deficiency tax assessment on the MSC and to award to him the corresponding
informers reward under the provisions of R.A. 2338.
The Commissioner argued he is clothed under the NIRC and existing rules and regulations in matters of issuance
and non-issuance of assessments with discretionary power and he cannot be compelled to impose the alleged tax
deficiency assessment against the MSC. He further argued that it would be tantamount to a usurpation of executive
powers, since the Office of the CIR is under the control of the executive department. The Judge Savellano ruled in favor
of Maniago ordering the CIR to collect and assess from MSC.
Issue:
1. W/N the judge has jurisdiction to take cognizance of the case.
Held/Ratio:
1. NO. Judge Savellano has no jurisdiction over the case because the subject matter clearly falls within the scope of
cases now exclusively within the jurisdiction of the Court of Tax Appeals. Sec. 7 of RA No. 1125 granted to the
CTA the exclusive appellate jurisdiction to review by appeal decisions of the CIR in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation to the NIRC or
other law or part of law administered by the Bureau of Internal Revenue. The issue of whether or not to impose a
deficiency tax assessment on MSC comes within the purview of the words disputed assessments or of other
matters arising under the National Internal Revenue Code .
Even assuming that the right granted the taxpayers affected to question and appeal disputed assessments may be
availed of by strangers or informers, the most that he could have done was to appeal to the CTA the ruling of CIR
within 30 days from receipt. Since he failed to take such an appeal to the tax court, the ruling is clearly final and
no longer subject to review by the courts.
Informers reward is contingent upon the payment and collection of unpaid or deficiency taxes. Considering then
that respondent judge may not order by mandamus the Commissioner to issue the assessment against MSC when
no such assessment has been found to be due, no deficiency taxes may therefore be assessed and collected against
the said corporation. Since no taxes are to be collected, no informers reward is due to Maniago as the informers
heirs.

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04 - Republic v. CTA (2001) (forfeiture of goods)

Doctrines:

The requisites for the forfeiture of goods under Section 2530(f), in relation to (1) (3-5), of the Tariff and Customs
Code are: (a) the wrongful making by the owner, importer, exporter or consignee of any declaration or affidavit,
or the wrongful making or delivery by the same person of any invoice, letter or paper - all touching on the
importation or exportation of merchandise; (b) the falsity of such declaration, affidavit, invoice, letter or paper;
and (c) an intention on the part of the importer/consignee to evade the payment of the duties due.

Facts:
A shipment of bales of textile cloth, under a Bill of Lading, arrived at Manila International Container Port (MICP)
and were consigned to GQ Garments, Inc. The Clean Report of Findings (CRF) issued by the Societe Generale de
Surveilance (SGS), however, mentioned Agfha, Inc., to be the consignee of the shipment. So the shipping agent, Fil-Japan
requested for an amendment of the Inward Foreign Manifest as to change the name of the consignee. The amended Inward
Foreign Manifest was submitted to the MICP Law Division which indorsed it to the Customs Intelligence Services (CIIS).
The CIIS placed the subject shipment under Hold Order on the ground that GQ could not be located and was thus
suspected to be a fictitious firm. Forfeiture proceedings under Section 2530(f) and (l) (3-5) of the Tariff and Customs
Code were initiated.
Agfha, through its president Wilson Kho, filed a motion for intervention contending that Agfha is the lawful
owner and actual consignee of the subject shipment. The motion for intervention was granted. Following a hearing, the
Collector of Customs came up with a draft decision ordering the lifting of the warrant of seizure and detention. The draft
decision was submitted to the Deputy Commissioner for clearance and approval, who, in turn, transmitted it to the CIIS
for comment. The CIIS opposed the draft decision, insisting that GQ was a fictitious corporation and that even if it did
exist, its president, John Barlin, had no authority to waive the right over the subject shipment in favor of Agfha. The
Deputy Commissioner, relying on the comment of the CIIS, rejected the draft decision of the Collector of Customs.
GQ and Agfha filed a joint MR. The Office of the Commissioner of Customs, however, disapproved the new draft
decision and denied the release of the goods. So the District Collector of Customs ordered the forfeiture of the shipment.
Agfha filed a petition for review with the Court of Tax Appeals questioning the forfeiture of the bales of textile cloth.
Finding merit in the plea, CTA granted the petition and ordered the release of the goods to Agfha.
The Commissioner of Customs then challenged before CA the decision of CTA. CA dismissed the appeal for lack
of merit.
Issues:
1. W/N the forfeiture was proper
Held/Ratio:
1. NO. The requisites for the forfeiture of goods under Section 2530(f), in relation to (1) (3-5), of the Tariff and
Customs Code are: (a) the wrongful making by the owner, importer, exporter or consignee of any declaration or
affidavit, or the wrongful making or delivery by the same person of any invoice, letter or paper - all touching on
the importation or exportation of merchandise; (b) the falsity of such declaration, affidavit, invoice, letter or
paper; and (c) an intention on the part of the importer/consignee to evade the payment of the duties due.
The Commissioner of Customs asserts that all of these requisites are present in this case. It contends that it did not
presume fraud, rather the events positively point to the existence of fraud. Agfha, on the other hand, maintains
that there has only been an inadvertent error and not an intentional wrongful declaration by the shipper to evade
payment of any tax due.
SC held that the fraud must be proved to justify forfeiture. It must be actual, amounting to intentional wrongdoing with the clear purpose of avoiding the tax. Forfeiture is not favored in law nor in equity. Mere negligence is
not equivalent to the fraud contemplated by law. What is involved in this case is an honest mistake, not even
directly attributable to private respondent, which will not deprive the government of its right to collect the proper

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tax. The conclusion of CA and CTA, being consistent with the evidence on record and not contrary to law and
jurisprudence, hardly can be overturned by SC.

05 - Aznar v. CTA (1974) (CIR also made a mistake)

Doctrines:

Fraudulent intent cannot be deduced from the mistakes, though how frequent it may be. The fraud contemplated
by law is one that is actual and not constructive; it must be intentional and deliberately done in order to impose
the 50% fraud penalty/surcharge.

Facts:
Petitioner Jose Aznar , the estate administrator of one Matias Aznar, seeks a review and nullification of the CTA
decision that imposes the petitioner to pay P227, 691 representing deficiency income taxes for the years 1946 to 1951
(this amount is quite substantial to highlight the point of the case).
The case roots from the time when the CIR had doubts regarding the tax returns of Matias Aznar, a person known
to be wealthy. An investigation was conducted. It was found that Matias did not declare correctly the income reported in
his tax returns in the said years. Therefore, the CIR now wants to collect an additional 50% on the reported income and
even had the properties placed under distraint and levy to secure the payment of such deficiency income tax which totaled
to P723, 032. The lower court granted the CIRs motions.
Issue:
1. W/N the imposition of the 50% surcharge is proper.
Held/Ratio:
1. NO. The lower court based its decision on the presumption that there was fraud in the reporting of the petitioners
income since they did appear to be substantially lower that what must be reported ( the difference is ranging from
95% to 946%yes, 946%). With such disparity, the lower court found that the 50% fraud penalty is fitting.
The Supreme Court found this wrong. An investigation was conducted and resulted to quite an amazement. It was
seen that the petitioner and the CIR incurred errors in their assessment and reporting of the net income and tax
due. On the petitioners part, there were erroneous entries on the books. On the CIR, there was an error of the
accounting method used to determine the tax liability.
In addition, it is a well established doctrine that fraud cannot be presumed since it must be proven. Fraudulent
intent cannot be deduced from the mistakes, though how frequent it may be. It was seen that the petitioner did not
have the intention to report fraudulent returns and they were even very cooperative during the BIR investigations.
The fraud contemplated by law is one that is actual and not constructive; it must be intentional and deliberately
done.
The court held that the 50% surcharge shall not be imposed and that the recalculated tax must still be paid which
now amounted to only P151, 762. This shall be paid within 30 days of the decision, otherwise a 5% surcharge
plus a 12% interest per annum shall be added to the balance from the date of delinquency.

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06 - CIR v. Benigno Toda (2004) (Cibeles property, meaning of fraud)

Facts:
In 1989, Cibeles Insurance Corporation (CIC) authorized its then president, Benigno Toda, who also owned
99.991% of its outstanding capital stock, to sell the Cibeles building and two parcels of land. On 30 August 1989, Toda
sold them to Altonaga for P100M. On the same day, Altonaga sold the same to Royal Match, Inc. (RMI) for P200M.
These are evidenced by two Deeds of Sale notarized on the same day by the same notary public. Altonaga paid 5% capital
gains tax, or P10M. In 1990, CIC filed an income tax return which declared its net taxable income as P75M (from the sale
of the property). That same year, Toda sold his CIC shares to Choa, as evidenced by a Deed of Sale of Shares of Stock.
The Deed indicated that Toda assumed personal liability for all the tax liabilities of CIC and Altonaga/RMI for the sale of
the property and for the years 1987-1989. Thereafter, he died in 1994. That same year, the BIR sent CIC a notice of
unpaid tax liabilities, alleging that Todas sale to Altonaga was a mere ploy in order to evade paying taxes, and that the
real buyer of the properties were RMI in the first place. According to the BIR, Toda sold the properties to Altonaga so that
CIC wouldnt have to pay P79M as corporate gains tax. (so dahil si Altonaga yung nagbenta, nag-change yung income
nature ng property from corporate to individual-owned, so instead of the 35% corporate gains tax, 5% capital gains tax
lang yung binayaran)
The CTA denied the petition, stating that the CIR failed to prove that CIC committed fraud to deprive the
government of taxes due to it. According to the CTA, it was mere tax avoidance and not tax evasion. Thus, there being no
fraud, the time period within which the BIR could assess CIC had already expired in 1993, which is three years after CIC
filed its income tax return. The CA ratified the CTAs decision.
The CIR alleges that there was indeed fraud as proven by the ff: 1) the two sales were done simultaneously on 30
Aug 1989; 2) the Deed of Sale between Altonaga and RMI was notarized ahead of the Deed of Sale between CIC and
Altonaga; 3) as early as May 1949, CIC received P40M from RMI for the property; and 4) that P40M was debited by RMI
as an investment in the Cibeles building. Now, CIR wants to hold Todas estate liable for the deficiency in income tax.
Issues:
1. W/N there was fraud in the sale among CIC, Altonaga, and RMI
2. W/N Todas estate should be held liable for the deficient income tax
Held/Ratio:
1. YES, all the three factors which point to tax evasion are present in this case. First, the end goal of the transaction
was to lessen or to pay less taxes to the government than what is due. Second, this was done or motivated by bad
faith and willful intent. And third, it was done through an unlawful course of action. The court held that the
scheme to show multiple sales from CIC to Altonaga, then from Altonaga to RMI cannot be held as tax planning
because it is tainted with fraud. Fraud in its general sense, is deemed to comprise anything calculated to deceive,
including all acts, omissions, and concealment involving a breach of legal or equitable duty, trust or confidence
justly reposed, resulting in the damage to another, or by which an undue and unconscionable advantage is taken of
another.
In this case, Altonaga was a mere conduit, and his sole purpose was to be a tax shelter. Altonaga never controlled
the property and did not enjoy the normal benefits and burdens of ownership. The sale to him was merely a tax
ploy, a sham, and without business purpose and economic substance. To allow CIC to lessen its tax liability by
using Altonaga as a tax shelter would circumvent our tax laws. Generally, a sale or exchange of assets will only
be taxed when the contract is consummated. The incidence of taxation depends on the nature of the transaction.
To permit the true nature of the transaction to be disguised by mere formalisms, which exist solely to alter tax
liabilities, would impair the effective administration of tax policies.
Because there is fraud, the BIR assessed CIC within the reglementary period, which is within 10 years from the
discovery of the fraudulent act or transaction. In this case, the fraudulent act was discovered in 1991 and the BIR
assessment was served in 1994, well within that period.

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2. YES. It is clear from the Deed of Sales of Shares of Stock that Toda held himself personally liable for all of CICs
income tax liabilities for the fiscal years of 1987-1989.!

07 - Sy Po v. CTA (1988)
Doctrine:

The rule on the best evidence obtainable applies when a tax report required by law for the purpose of
assessment is not available or when the tax report is incomplete or fraudulent.

Facts:
Mrs. Sy Po is the widow of Mr. Po Bien Sing, the sole proprietor of Silver Cup for the taxable years 1964-1972,
which was engaged in the manufacture and sale of compounded liquors, using alcohol and other ingredients as raw
materials.
The BIR-NBI team, constituted under Finance Department Order No. 13-70, conducted an investigation on the
alleged tax evasion of Silver Cup. Consequently, a letter and a subpoena duces tecum were issued by the team against
Silver Cup requesting for a copy of its accounting records and other related documents for examination. Mr. Po Bien Sing
did not produce his books of accounts as requested. This prompted the team with the assistance of the PC Company, to
enter the factory bodega of Silver Cup and seized different brands. On the basis of the teams report of investigation, the
Commissioner of Internal Revenue (CIR) assessed Mr. Po Bien Sing deficiency income tax for 1966 to 1970 in the
amount of P7,154,685 and for deficiency specific tax for January 2,1964 to January 19, 1972 in the amount of P5,595,004.
Mrs. Sy Po protested the deficiency assessments through letters, which protests were referred for reinvestigation.
The corresponding report recommended the reiteration of the assessments in view of the taxpayers persistent failure to
present the books of accounts for examination, compelling the CIR to issue warrants of distraint and levy. Mrs. Sy Po
received the said warrants, which she deemed denial of her protest, hence the appeal with the CTA. The CTA affirmed the
assessments made by the CIR. Mrs. Sy Po appealed the decision with the SC.
Issue:
1. Whether the CIRs assessments have valid and legal bases
Held/Ratio:
1. Yes. Based on Sec. 16(b) of the 1977 NIRC:
When a report required by law as a basis for the assessment of an national internal revenue
tax shall not be forthcoming within the time fixed by law or regulation or when there is
reason to believe that any such report is false, incomplete, or erroneous, the Commissioner of
Internal Revenue shall assess the proper tax on the best evidence obtainable.
Because of Mr.and Mrs. Pos persistent failure to present their books of accounts for examination for the said
taxable years, the CIR was left with no other option but to obtain the best evidence obtainable.
Also, the SC affirmed the CTAs ruling of fraud in the operations of Silver Cup, as substantiated by the
testimonies of Silver Cups former employees. One employee testified that once the revenue inspector and the
storekeeper were not around, Mr. Po Bien Sing would start his operations and the untaxed alcohols to be used as
raw materials would then be brought in the factory for processing. Another employee testified that false entries
were entered in the official register book.

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08 - CIRv. Hantex Trading, Co. (2005) (photocopies, eaten by termites)

Doctrine:

The law allows the BIR access to all relevant or material records and data in the person of the taxpayer. It places
no limit or condition on the type or form of the medium by which the record subject to the order of the BIR is
kept. The purpose of the law is to enable the BIR to get at the taxpayers records in whatever form they may be
kept.

The best evidence envisaged in Section 16 of the 1977 NIRC, as amended, includes the corporate and
accounting records of the taxpayer who is the subject of the assessment process, the accounting records of other
taxpayers engaged in the same line of business, including their gross profit and net profit sales.

That where the accuracy of a taxpayers return is being checked, the government is entitled to use the original
records rather than be forced to accept purported copies which present the risk of error or tampering.

All presumptions are in favor of the correctness of a tax assessment. It is to be presumed, however, that such
assessment was based on sufficient evidence.

Facts:
Respondent Hantex Trading is engaged in the importation of synthetic resin and other chemicals used in the
manufacture of its products. For its importation purposes, it is required by law to file an Import Entry and Internal
Revenue Declaration (Consumption Entry) with the Bureau of Customs pursuant to Sec 1301 of the Tariffs and Customs
Code. Sometime in 1989 Lt. Vincent Amoto of the Counter-Intelligence Division of the now defunct EIIB received
information regarding respondents resin importation for 1987. The importation allegedly amounted to P 115, 599, 018
but respondent declared only P 45, 538, 694. The Commissioner of the EIIB acted on Amotos report and required
respondent via subpoena duces tecum and ad testificandum to present pertinent records for 1987. However, the EIIB
failed to secure certified copies of respondents 1987 Consumption Entries from the Bureau of Customs since they
were eaten by termites. (lol.)
Acting Chief of Collections Division of the Bureau of Customs Augusto S. Danganan provided photocopies of the
Consumption Entries but could not authenticate them against the originals, since, well, they were eaten by termites. So,
based on the documents on hand (a.k.a the photox), the EIIB concluded that for 1987 respondent had unreported sales
amounting to P 63, 032, 989 with corresponding income tax liability amounting to P 41, 916, 937. The records were then
transferred from the EIIB to the BIR. The BIR concluded that there was a prima facie case of fraud against respondent.
After an exchange of letters, the CIR sent a letter to respondent demanding payment of deficiency income tax worth P 13,
414, 226 and deficiency sales tax worth P 14, 752, 903. Respondent refused to pay, alleging the assessment was patently
illegal. The CTA decided in favor of petitioner CIR and ordered respondent to pay. The CA reversed, saying that the
assessment was illegal for having been made upon insufficient and unauthenticated evidence.
Issue:
1. W/N the BIRs assessment for the deficiency sales tax and deficiency income tax based on the photocopies of
records from mere informants of the EIIB was proper.
Held/Ratio:
1. NO. The Supreme Court concluded that the assessment was illegal. Under the best evidence rule, the
Commissioner of the BIR is empowered by the NIRC to have access to all relevant or material records and data in
the person of the taxpayer. It places no limit or condition on the type or form of the medium by which the record
subject to the order of the BIR is kept. The purpose of the law is to enable the BIR to get at the taxpayers records
in whatever form they may be kept. The existence of unreported income may be shown by any practicable proof
that is available in the circumstances of the particular situation. That where the records of the taxpayer are
manifestly inaccurate and incomplete, the Commissioner may look to other sources of information to establish
income made by the taxpayer during the years in question. On this note, the SC agreed that the evidence may even
be hearsay; and that as an administrative agency, the BIR is not bound by the strict rules on evidence.

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BUT, the Court also went on to say:

However, the best evidence obtainable under Section 16 of the 1977 NIRC, as amended,
does not include mere photocopies of records/documents. The petitioner, in making a
preliminary and final tax deficiency assessment against a taxpayer, cannot anchor the
said assessment on mere machine copies of records/documents. Mere photocopies of the
Consumption Entries have no probative weight if offered as proof of the contents thereof. The
reason for this is that such copies are mere scraps of paper and are of no probative value as
basis for any deficiency income or business taxes against a taxpayer.
The assessment must be based on actual facts. The rule assumes more importance in this
case since the xerox copies of the Consumption Entries furnished by the informer of the EIIB
were furnished by yet another informer. While the EIIB tried to secure certified copies of the
said entries from the Bureau of Customs, it was unable to do so because the said entries were
allegedly eaten by termites. The Court can only surmise why the EIIB or the BIR, for that
matter, failed to secure certified copies of the said entries from the Tariff and Customs
Commission or from the National Statistics Office which also had copies thereof.
The SC could not believe that neither the EIIB nor the BIR could get hands on other eligible copies of the
respondents Consumption Entries because the law requires such document to be filed in six copies with the
Bureau of Customs, the Tariff and Customs Commission, the Importer, the Terminal Operator and the BIR itself.

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09 - Bache & Co. v Ruiz (1971) (search warrant, more than one offense charged)
Doctrine:

Documents illegally seized are inadmissible as evidence

Facts:
Vera, the Commissioner of Internal Revenue at that time, wrote a letter to the respondent Judge Ruiz, requesting
that a search warrant be issued against Bache & Co. for violation of the following provisions of the NIRC:
1. Sec 46(a) requires the filing of income tax returns by corporations;
2. Sec 53 requires the withholding of income taxes at source;
3. Sec 72 imposes surcharges for failure to render income tax returns or rendering false returns;
4. Sec 73 provides penalty for failure to pay the income tax, to make a return or to supply info required under the
Tax Code;
5. Sec 208 (unlawful pursuit of business or occupation);
6. Sec 209 (failure to make a return of receipts, sales, business or gross value of output actually removed or to pay
the tax thereon);
The private respondents (those who served as witnesses applying for the search warrant-De Leon and Logronio)
gave their depositions to the Clerk of Court, transcribed by the stenographer. This was because Judge Ruiz was busy
hearing another case. Judge Ruiz participation in the issuance of the warrant was limited to a) listening to the
stenographer recite her notes on the depositions given, and b) warning the 2 that they may be charged of perjury
had they given false statements, and c) administering the oath to the complainant and his witness (De Leon and
Logronio).
Days after its issuance, BIR agents served the search warrant and searched the offices of the petitioner corporation
Bache & Co. the search yielded 6 boxes of documents.
Bache & Co prayed that the search warrant be quashed, that injunctions be issued, and the warrant be declared
null and void but Judge Ruiz denied their petitions. It is worth noting that a month and a half after the seizure, the BIR
assessed Bache & Cos tax liabilities at roughly around P 2.6M. Bache & Co alleges that this assessment was based
entirely, or in part, on the documents seized by virtue of the contested warrant.
Issue:
1. W/N the warrant is invalid for not having been issued after personal examination by Judge Ruiz
2. W/N the warrant is invalid for being issued for more than one offense
3. W/N the warrant is invalid for not particularly describing the things seized
4. [although explicitly mentioned in the case as an issue, feeling ko ang tax related lang ay] W/N the assessments by
the BIR can be enforced
Held:
1. YES. It was not issued after personal examination by Judge Ruiz since the latter failed to ask any probing
questions which could have aided in ascertaining the validity of the grounds to issue to said warrant.
2. YES. It was issued for more than one offense because the above enumerated violations alleged in the application
for the search warrant constitute at least four distinct offenses under the Tax Code. The first is the violation of Sec
46(a), which is interrelated with Sections 72 and 73. Second is the violation of Sec 53 (withholding income taxes
at source). The third is a violation of Sec 208 (unlawful pursuit of business or occupation) and the fourth is the
violation of Sec 209 (failure to make a return of receipts, sales, business or gross value of output actually removed
or to pay taxes thereon).

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3. YES. It described the papers and effect sought to be seized as unregistered and private books; receipts of
payments; certificates of stock; contracts, promissory notes and deeds of sale; telex and coded messages; business
communications, accounting records covering the years 1966-1970. The Court ruled that such description
failed to meet the tests of constitutionality such as: being as specific as circumstances would normally allow, and
bearing a direct relation to the offense for which the warrant was issued.
4. NO. In ruling that the warrant was void, the Court also ordered the BIR permanently enjoined from enforcing the
assessments made against Bache & Co. the Court ruled that the fact that the assessments were issued a month and
a half after the seizure strongly indicated that the assessments were based on the documents seized on the
strength of the void warrant, thus cannot be enforced.
[Separate Concurring Opinion by Barredo, J. just added disapproval to the actions of the internal revenue authorities in
using the documents secured during the search in making assessments while the legality of the seizure of the said
documents was still pending resolution in court]

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BIR RULES AND REGULATIONS

10 - CIR v. CA, ROH Auto Products Philippines, Inc. and CTA (1995)
Doctrine:

The authority of the Minister of Finance (now the Secretary of Finance), in conjunction with the Commissioner of
Internal Revenue, to promulgate all needful rules and regulations for the effective enforcement of internal revenue
laws cannot be controverted. Neither can it be disputed that such rules and regulations, as well as administrative
opinions and rulings, ordinarily should deserve weight and respect by the courts. However, is that all such
issuances must not override, but must remain consistent and in harmony with, the law they seek to apply and
implement.

Facts:
On August 22, 1986, during the period when the President still wielded legislative powers, EO No. 41 was
promulgated declaring a one-time tax amnesty on unpaid income taxes, later amended to include estate and donors taxes
and taxes on business, for the taxable years 1981 to 1985. Availing itself of the amnesty, R.O.H. Auto Products
Philippines, Inc. (ROH Auto) filed its Tax Amnesty Returns and paid the corresponding amnesty taxes due.
Prior to this, the CIR had already assessed ROH Autos deficiency income and business taxes for its fiscal years
1981 and1982 in an aggregate amount of P1,410,157.71. ROH Auto wrote that since it had been able to avail itself of the
tax amnesty, the deficiency tax notice should be cancelled and withdrawn. This was denied by the CIR because Revenue
Memorandum Order No. 4-87, implementing EO No. 41, had construed the amnesty coverage to include only assessments
issued by the Bureau of Internal Revenue after the promulgation of the EO and not to assessments made prior.
ROH Auto appealed the CIRs denial to the Court of Tax Appeals who ruled in favor of the taxpayer.
Issue:
1. W/N the position taken by the CIR coincides with the meaning and intent of executive Order No. 41.
Held/Ratio:
1. NO. Administrative rules and regulations are intended to carry out the law. Executive Order No. 41 is quite
explicit and requires hardly anything beyond a simple application of its provisions.
If EO No. 41 had not been intended to include 1981-1985 tax liabilities already assessed (administratively) prior
to August 22, the law could have simply so provided in its exclusionary clauses. It did not. The conclusion is
unavoidable, and it is that the executive order has been designed to be in the nature of a general grant of tax
amnesty subject only to the cases specifically excepted by it.
The taxable periods covered by the amnesty include the years immediately preceding the 1986 revolution. It
should be understandable then that those who ultimately took over the reigns of government following the
successful revolution would promptly provide for abroad, and not a confined, tax amnesty.
Also, Sec. 6 of EO No. 41 itself states that upon full compliance with the conditions of the tax amnesty and the
rules and regulations issued pursuant to this Executive order, the taxpayer shall be relieved of any income tax
liability on any untaxed income from January 1, 1981 to December 31, 1985, including increments and penalties
on account of the non-payment of the tax. Civil, criminal or administrative liabilities arising from such acts are
likewise deemed extinguished. There is no pretension that the tax amnesty returns and due payments made by the
taxpayer did not conform with the conditions expressed in the amnesty order.

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11 - Commissioner of Internal Revenue v. CA, CTA and Fortune Tobacco Corp. (1996) (Hope, More, and
Champion cigarettes)
Doctrines:

In accordance with RA 6713, a public employee, generally, is prohibited from the practice of his profession
during his incumbency in the service.

By virtue of Canon 6, the Code of Professional Responsibility applies to government lawyers.

Facts:
In 1987, certificates of trademark of registration were issued by the Philippine Patent Office to Fortune Tobacco
for Hope, More, and Champion cigarettes. Initially, these were to be classified as foreign brands for taxation purposes
because these were listed in the World Tobacco Directory as belonging to foreign companies. However, Fortune Tobacco
changed the names to Hope Luxury and Premium More. The corporation argued that Champion was an original local
brand. Accordingly, ad valorem taxes were imposed on these products with varying rates based on their classification as
local brands.
On June 14, 1993, RA 7654 was enacted. The law amended Section 142(c)(1) of the National Internal Revenue
Code (NIRC) by taxing machine packed cigarettes based on the current tax rate imposed on a particular brand (55% or
45%) with the constructive or actual manufacturers wholesale price as the base. This came into effect on July 3, 1993.
On July 1, 1993, BIR issued Revenue Memorandum Circular (RMC) No. 37-93. At this point, the amendment
introduced by RA 7654 had not come into effect. The provision that applied to Fortune Tobacco was Section 142(c)(1) of
the NIRC as amended by RA 6956, which provides that a 55% tax was to be imposed on locally manufactured cigarettes
bearing a foreign brand. The test of whether a cigarette bears a foreign brand was the listing in the World Tobacco
Directory. RMC 37-93 classified Hope, More, and Champion as locally manufactured cigarettes bearing foreign brands
and thereby subject to a 55% ad valorem tax because Hope, More, and Champion were listed as being manufactured by
different companies based on different countries.
To clarify, after the amendment introduced by RA 7654 came into effect, reference to the amendment made by
RA 6956 was still necessary for purposes of assessing the ad valorem tax due on certain products. In other words, it
became important to determine whether the cigarette brand fell within the 55% or 45% rate under RA 6956 to identify the
proper tax to be imposed as provided by RA 7654.
Pursuant to RMC 37-93, Fortune Tobacco was assessed for ad valorem tax deficiency in the amount of P
9,598,334. Fortune Tobacco appealed the ruling to the CTA, which held that RMC 37-93 was defective, invalid, and
unenforceable. The CA subsequently affirmed this ruling.
Issues:
1. W/N RMC 37-93 was valid.
Held/Ratio:
1. NO. Firstly, RMC 37-93 violated Section 28, Article 6 of the Constitution, which mandates uniformity of
taxation. The subject resolution only covers Hope, More and Champion to the exclusion of other cigarettes
bearing foreign brands.
Secondly, inasmuch as it is argued by the Commissioner of Internal Revenue that RMC 37-93 was merely an
interpretative ruling, the administrative issuance was, in fact, a legislative rule, which must be struck down, as it
did not comply with the requirements of notice, hearing and publication. It was observed by the Court that the
CIR did not merely construe the law, as it would have us believe. By virtue of its resolution, the CIR reclassified
Hope, More, and Champion from locally manufactured cigarettes not bearing foreign brands to locally
manufactured cigarettes bearing foreign brands, and consequently removed it from the 45% ad valorem tax group
and placed it under the 55 % ad valorem bracket.

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J. Hermosisima dissenting:
As to the constitutionality of the RMC 37-93, subject issuance is not discriminatory at it does not say that only Hope,
More, and Champion will be placed under the group subject to 55% ad valorem tax. All other locally manufactured
cigarettes bearing foreign brands will also be subject to the proper tax.
As to its nature, the resolution is merely interpretative as it only applied the law when it referred to the World Tobacco
Directory, which reference led to the reclassification of subject cigarette brands. It is well within the power vested by the
law, Section 245 of the NIRC at that time, in the Commissioner of Internal Revenue to make rulings or opinions in
connection with the implementation of the provisions of internal revenue laws, including rulings on the classification of
articles for sales tax and similar purposes.

12 - CIR v. Burroughs Ltd. (1986) (Non-retroactivity of rulings)

Doctrine:

Any modification or revocation of any rules/regulations shall not be given retroactive application if such will be
prejudicial to the taxpayer EXCEPT:
o

Where the taxpayer deliberately misstates his return/documents

Where the facts gathered by the BIR are different from that on which the ruling is based.

Where the taxpayer acted in bad faith.

Facts:
Burroughs Ltd. is a foreign corporation conducting business in the Philippines. In 1979, Burroughs Ltd. applied
with the Central Bank for authority to remit to its parent company abroad, thus paying the 15% branch profit remittance
tax based on the amount APPLIED for remittance (this was a larger amount), therefore paying a large amount of tax
instead of the amount ACTUALLY remitted (a lesser amount) which couldve yielded lesser tax to pay.
Burroughs filed for a petition for review to the CTA citing the 1977 Tax Code which provides that the lower tax
must be imposed, thus it was granted. The CTA ordered the BIR to grant Burroughs a tax credit equal to the difference
between the tax he paid and what he shouldve have paid (the lesser amount). The CIR appealed citing BIR rulings issued
in 1982 which stated that such taxes must be based on the amount APPLIED for remittance.
Issue:
1. W/N a tax credit is properly due to Burroughs
Held/Ratio:
1. YES. Obviously, the rulings were promulgated after the filing of Burroughs Tax Returns. The NIRC (Sec. 327)
states that any modification or revocation of BIR rulings shall not be given retroactive application if such is
prejudicial to the taxpayer (exceptions found in the doctrine).
It is clear that Burroughs Ltd. does not fall under any of these exceptions that could deprive him of his much
deserved tax credit.
What was Burroughs basis?
Section 24 (b) (2) of the 1977 Tax Code: The 15% branch profit tax shall be imposed on the branch profits actually
remitted abroad and not on the total branch profits out of which the remittance is to be made.

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13 - PBComm v. CIR (1999)

Facts:
Petitioner, Philippine Bank of Communications (PBCom), a commercial banking corporation duly organized
under Philippine laws, filed its quarterly income tax returns for the first and second quarters of 1985, reported profits, and
paid the total income tax of P5,016,954 by applying PBComs tax credit memos for P3,401,701 and P1,615,253,
respectively. Subsequently, however, PBCom suffered net loss of P25,317,228, thereby showing no income tax liability in
its Annual Income Tax Returns for the year-ended December 31, 1985. For the succeeding year, ending December 31,
1986, the petitioner likewise reported a net loss of P14,129,602, and thus declared no tax payable for the year.
But during these two years, PBCom earned rental income from leased properties. The lessees withheld and
remitted to the BIR withholding creditable taxes of P282,795.50 in 1985 and P234,077.69 in 1986. On August 7, 1987,
petitioner requested the Commissioner of Internal Revenue, among others, for a tax credit of P5,016,954 representing the
overpayment of taxes in the first and second quarters of 1985.
Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable taxes withheld by their lessees from
property rentals in 1985 for P282,795.50 and in 1986 for P234,077.69.
Pending the investigation of the respondent Commissioner of Internal Revenue, petitioner instituted a Petition for
Review on November 18, 1988 before the Court of Tax Appeals (CTA). The petition was docketed as CTA Case No.
4309 entitled: Philippine Bank of Communications v. Commissioner of Internal Revenue.
The CTA decided in favor of the BIR on the ground that the Petition was filed out of time as the same was filed
beyond the two-year reglementary period. A motion for Reconsideration was denied and the appeal to Court of Appeals
was likewise denied. Thus, this appeal to Supreme Court.
Issues:
1. W/N Revenue Regulations No. 7-85 which alters the reglementary period from two (2) years to ten (10) years is
valid.
2. W/N the petition for tax refund had already prescribed.
Held/Ratio:
1. YES, RR 7-85 altering the 2-year prescriptive period imposed by law to 10-year prescriptive period is invalid.
Administrative issuances are merely interpretations and not expansions of the provisions of law, thus, in case of
inconsistency, the law prevails over them. Administrative agencies have no legislative power.
When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive period of two
years to ten years on claims of excess quarterly income tax payments, such circular created a clear inconsistency
with the provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply interpret the law; rather it
legislated guidelines contrary to the statute passed by Congress.
It bears repeating that 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 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. Thus, courts will not countenance
administrative issuances that override, instead of remaining consistent and in harmony with, the law they seek to
apply and implement.
Further, fundamental is the rule that the State cannot be put in estoppel by the mistakes or errors of its officials or
agents. As pointed out by the respondent courts, the nullification of RMC No. 7-85 issued by the Acting
Commissioner of Internal Revenue is an administrative interpretation which is not in harmony with Sec. 230 of
1977 NIRC, for being contrary to the express provision of a statute. Hence, his interpretation could not be given
weight for to do so would, in effect, amend the statute.

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2. YES, By implication of the above, claim for refund had already prescribed.
Since the petition had been filed beyond the prescriptive period, the same has already prescribed. The fact that the
final adjusted return show an excess tax credit does not automatically entitle taxpayer claim for refund without
any express intent.
WHEREFORE, the petition is hereby DENIED. The decision of the Court of Appeals appealed from is
AFFIRMED, with COSTS against the petitioner.

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14 - ABS-CBN v. CTA & CIR (1981)

Facts:
Petitioner corporation was engaged in the business of telecasting local as well as foreign films acquired from
foreign corporations not engaged in trade or business within the Philippines. The petitioner paid rentals after withholding
income tax of 30%of one-half of the film rentals.
Petitioner dutifully withheld and turned over to the Bureau of Internal Revenue the amount of 30% of one-half of
the film rentals paid by it to foreign corporations not engaged in trade or business within the Philippines pursuant to the
provisions of the NIRC at that time.
June 27, 1968, Republic Act No. 5431 amended Section 24 (b) of the Tax Code increasing the tax rate from 30 %
to 35 % and revising the tax basis from such amount referring to rents, etc. to gross income
Commissioner of Internal Revenue issued Revenue Memorandum Circular No. 4-71, revoking General Circular
No. V-334, and holding that the latter was erroneous for lack of legal basis, because the tax therein prescribed should
be based on gross income without deduction whatever.
CIR assesses ABS-CBN of tax deficiencies for film rentals dated 1965 to 1968. CTA upholds.
Issue:
1. Whether or not respondent can apply General Circular No. 4-71 retroactively and issue a deficiency assessment
against petitioner in the amount of P 525,897.06 as deficiency withholding income tax for the years 1965, 1966,
1967 and 1968.
Held/Ratio:
1. NO. Rulings or circulars promulgated by the Commissioner of Internal Revenue have no retroactive application
where to so apply them would be prejudicial to taxpayers. Memorandum Circular No. 4-71 was issued only in
1971, or three years after 1968, the last year that petitioner had withheld taxes under General Circular No. V-334.
The assessment and demand on petitioner to pay deficiency withholding income tax was also made three years
after 1968 for a period of time commencing in 1965. Petitioner was no longer in a position to withhold taxes due
from foreign corporations because it had already remitted all film rentals and no longer had any control over them
when the new Circular was issued. And in so far as the enumerated exceptions are concerned, admittedly,
petitioner does not fall under any of them.
Respondent claims, however, that the provision on non-retroactivity is inapplicable in the present case in that
General Circular No. V-334 is a nullity because in effect, it changed the law on the matter.
It should be noted, however, that said Section was not too plain and simple to understand. The fact that the
issuance of the General Circular in question was rendered necessary leads to no other conclusion than that it was
not easy of comprehension and could be subjected to different interpretations.
It was only on June 27, 1968 under Republic Act No. 5431, supra, which became the basis of Revenue
Memorandum Circular No. 4-71, that Sec. 24 (b) was amended to refer specifically to 35% of the gross income.
This Court is not unaware of the well-entrenched principle that the Government is never estopped from collecting
taxes because of mistakes or errors on the part of its agents. In fact, utmost caution should be taken in this regard.
But, like other principles of law, this also admits of exceptions in the interest of justice and fairplay.
Petitioner relied in good faith and religiously complied with no less than a Circular issued to all internal revenue
officials by the highest official of the Bureau of Internal Revenue and approved by the then Secretary of Finance.

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15 - CIR v. Benguet Corporation (2005)

Facts:
In January of 1988, respondent applied for and was granted by the BIR zero-rated status on its sale of gold to
Central Bank.9 On 28 August 1988, Deputy Commissioner of Internal Revenue Eufracio D. Santos issued VAT Ruling
No. 3788-88, which declared that [t]he sale of gold to Central Bank is considered as export sale subject to zero-rate
pursuant to Section 100[10] of the Tax Code, as amended by Executive Order No. 273.
Respondent sold gold to the Central Bank during the period of 1 August 1989 to 31 July 1991 and entered into
transactions that resulted in input VAT incurred in relation to the subject sales of gold. It then filed applications for tax
refunds/credits corresponding to input VAT
Respondents applications were either unacted upon or expressly disallowed by petitioner. In addition, petitioner
issued a deficiency assessment against respondent when, after applying respondents creditable input VAT costs against
the retroactive 10% VAT levy, there resulted a balance of excess output VAT. This is based on a BIR ruling-BIR VAT
Ruling No. 008-92 dated 23 January 1992-that was issued subsequent to the consummation of the subject sales of gold to
the Central Bank which provides that sales of gold to the Central Bank shall not be considered as export sales and thus,
shall be subject to 10% VAT. In addition, BIR VAT Ruling No. 008-92 withdrew, modified, and superseded all
inconsistent BIR issuances.
Respondent contends that the rulings should not have been applied retroactively. CIR counters that there was no
prejudice to the respondent.
Issue:
1. W/N VAT Ruling No. 008-92 which revoked previous rulings of the petitioner which respondent heavily relied
upon . . . may be legally applied retroactively to respondent.
Held/Ratio:
1. VAT is an indirect tax, which may be shifted to the buyer, transferee, or lessee of the goods, properties, or
services. However, the party directly liable for the payment of the tax is the seller.
Taxpayer has the option not to carry any VAT cost because in the zero-rated transaction, the taxpayer is allowed
to recover input tax from the BIR without need to pay output tax, while in 10% rated VAT, the taxpayer is
allowed to pass on both input and output VAT to the buyer.
There appears to be no upfront economic difference in changing the sale of gold to the Central Bank from a 0% to
10% VAT rate provided that respondent would be allowed the choice to pass on its VAT costs to the Central
Bank. In the instant case, the retroactive application of VAT Ruling No. 008-92 unilaterally forfeited or withdrew
this option of respondent. The adverse effect is that respondent became the unexpected and unwilling debtor to
the BIR of the amount equivalent to the total VAT cost of its product, a liability it previously could have
recovered from the BIR in a zero-rated scenario or at least passed on to the Central Bank had it known it would
have been taxed at a 10% rate. Thus, it is clear that respondent suffered economic prejudice when its
consummated sales of gold to the Central Bank were taken out of the zero-rated category.
CIR contends that it can still be offset by sales subject to 10% VAT as well as other deductions. However, there
are few items which it may be offset against. The prejudice then experienced by respondent lies in the fact that the
tax refunds/credits that it expected to receive had effectively disappeared by virtue of its newfound output VAT
liability against which petitioner had offset the expected refund/credit.
Respondent should not be faulted for relying on the BIRs interpretation of the said laws and regulations. While it
is true, as petitioner alleges, that government is not estopped from collecting taxes which remain unpaid on
account of the errors or mistakes of its agents and/or officials and there could be no vested right arising from an
erroneous interpretation of law, these principles must give way to exceptions based on and in keeping with the
interest of justice and fairplay, as has been done in the instant matter.

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16 - CIR v. Bursmeiters & Wain Scandinavian (2007)

Facts:
A foreign consortium composed of Burmeister and Wain Scandinavian Contractor A/S (BWSC-Denmark), Mitsui
Engineering and Shipbuilding, Ltd., and Mitsui and Co., Ltd. entered into a contract with the National Power Corporation
(NAPOCOR) for the operation and maintenance of [NAPOCORs] two power barges.
BWSC-Denmark established [respondent] which subcontracted the actual operation and maintenance of
NAPOCORs two power barges as well as the performance of other duties and acts which necessarily have to be done in
the Philippines.
In order to ascertain the tax implications of the above transactions, [respondent] sought a ruling from the BIR
which responded with BIR Ruling No. 023-95 dated February 14, 1995, declaring therein that if [respondent] chooses to
register as a VAT person and the consideration for its services is paid for in acceptable foreign currency and accounted for
in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas, the aforesaid services shall be subject to
VAT at zero-rate. [Respondent] chose to register as a VAT taxpayer.
On December 29, 1997, [respondent] availed of the Voluntary Assessment Program (VAP) of the BIR. It
allegedly misinterpreted Revenue Regulations No. 5-96 dated February 20, 1996 to be applicable to its case. [Respondent]
was made to pay additional 10% VAT.
On January 7,1999, [respondent] was able to secure VAT Ruling No. 003-99 from the VAT Review Committee
which reconfirmed BIR Ruling No. 023-95 insofar as it held that the services being rendered by BWSCMI is subject to
VAT at zero percent (0%). Thus, on April 22,1999, filed a claim for the issuance of a tax credit certificate with.
[Respondent] believed that it erroneously paid the output VAT for 1996 due to its availment of the Voluntary Assessment
Program (VAP) of the BIR.
Issue:
1. Whether respondent is entitled to the refund of P6,994,659.67 as erroneously paid output VAT for the year 1996
Held/Ratio:
1. YES. The denial of the instant petition is not on the ground that respondents services are subject to 0% VAT.
Rather, it is based on the non-retroactivity of the prejudicial revocation of BIR Ruling No. 023-95 and VAT
Ruling No. 003-99, which held that respondents services are subject to 0% VAT and which respondent invoked
in applying for refund of the output VAT.
In insisting that its services should be zero-rated, respondent claims that it complied with the requirements of the
Tax Code for zero rating under the second paragraph of Section 102(b).11 Respondent is mistaken.
Another essential condition for qualification to zero-rating under Section 102(b)(2) is that the recipient of such
services is doing business outside the Philippines. While this requirement is not expressly stated in the second
paragraph of Section 102(b), this is clearly provided in the first paragraph of Section 102(b) where the listed
services must be for other persons doing business outside the Philippines. The phrase for other persons doing
business outside the Philippines not only refers to the services enumerated in the first paragraph of Section
102(b), but also pertains to the general term services appearing in the second paragraph of Section 102(b).
If the provider and recipient of the other services are both doing business in the Philippines, the payment of
foreign currency is irrelevant. Otherwise, those subject to the regular VAT under Section 102(a) can avoid paying
the VAT by simply stipulating payment in foreign currency inwardly remitted by the recipient of services.
In this case, the payer-recipient of respondents services is the Consortium which is a joint-venture doing business
in the Philippines. While the Consortiums principal members are non-resident foreign corporations, the
Consortium itself is doing business in the Philippines. The recipient of the services is the Consortium, which is

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
11 . (2) Services other than those mentioned in the preceding sub-paragraph, the consideration for which is paid for in acceptable foreign currency
and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);

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doing business not outside, but within the Philippines because it has a 15-year contract to operate and maintain
NAPOCORs two 100-megawatt power barges in Mindanao.
Nevertheless, in seeking a refund of its excess output tax, respondent relied on VAT Ruling No. 003-99, which
reconfirmed BIR Ruling No. 023-95 insofar as it held that the services being rendered by BWSCMI is subject to
VAT at zero percent (0%). Respondents reliance on these BIR rulings binds petitioner.
Such revocation cannot be given retroactive effect since it will prejudice respondent. Changing respondents
status will deprive respondent of a refund of a substantial amount representing excess output tax. Section 246 of
the Tax Code provides that any revocation of a ruling by the Commissioner of Internal Revenue shall not be given
retroactive application if the revocation will prejudice the taxpayer. Further, there is no showing of the existence
of any of the exceptions enumerated in Section 246 of the Tax Code for the retroactive application of such
revocation.
NOTE:
Sec. 338-A. Non-retroactivity of rulings. Any revocation, modification, or reversal of and of the rules and regulations
promulgated in accordance with the preceding section or any of the rulings or circulars promulgated by the Commissioner
of Internal Revenue shall not be given retroactive application if the relocation, modification, or reversal will be prejudicial
to the taxpayers, except in the following cases: (a) where the taxpayer deliberately misstates or omits material facts from
his return or any document required of him by the Bureau of Internal Revenue: (b) where the facts subsequently gathered
by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or (c) where the
taxpayer acted in bad faith

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CONCEPT OF INCOME
17 - Filipinas Synthetic Fiber Corp. v. CA, CTA, and the CIR (1999)
Doctrine:

Accrual Method of Accounting recognize income/expense when earned/incurred not when received/paid

Facts:
Filipinas Synthetic received a letter of demand from the CIR assessing it for deficiency tax. The bulk of this,
however, consisted of interest and compromise penalties due to late payments of withholding taxes. The CIR contends
that income tax withheld at source from payments due to foreign corporations shall be demandable at the time of accrual
and not at the time of payment.
Issue:
1. W/N the CIR was correct in his contention
Held/Ratio:
1. YES. There was a clear certainty that the foreign corp. was going to earn income in an ascertained amount. In
fact, Filipinas Synthetic already recognized the appropriate business expenses attached to this.which in effect
already lessened the amount of tax to be paid. Therefore, reaping the benefits of the deduction and by adopting the
accrual method of accounting, Filipinas Synthetic is estopped from claiming that he is not yet liable to pay the
taxes at the time of accrual.

18 - CIR v. Visayan Electric Co. (1968)

Facts:
Visayan Electric established a pension fund benefiting its employees. This fund was then re-invested in San
Miguel where dividends are received. However, these dividends were not declared for tax purposes. Subsequently, the
Provincial Auditor allowed the dividends to be considered as income for franchise tax, therefore its exempted. The
examiner thinks otherwise and collects corporate income tax for these dividends.
Issue:
1. W/N these dividends from the trust fund (or the trust fund itself) is/are tax exempt
Held/Ratio:
1. NO. The dividends are not tax exempt. Although these generated dividends do not go directly to Visayan Electric.
The income produced by these dividends accrues to the pension fund for the sole benefit of the employees.
However, exemptions are never presumed and are strictly construed against the taxpayer. To qualify as exemption
Visayan Electric should prove to the court that it is a trust (pension) fund as contemplated by law to be exempted.
Visayan Electric failed to prove this since it only had as evidence the minutes of the meeting for the creation of
this pension fund and it seems that there is no record that such fund was actuarially sound.

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19 - CIR v. CA, CTA, GCL Retirement Plan (1992)

Facts:
The GCL Retirement Plan is maintained by GCL Inc. to provide retirement, pension, etc. to its employees. It was
submitted to be tax exempt. It claimed for refund alleging that the 15% withholding tax imposed by the investment
company and a bank was not due, since GCL Inc. is tax exempt.
Issue:
1. W/N the trust fund is exempted
Held/Ratio:
1. Yes. GCL Plan was qualified as exempt from income tax. The tax-exemption privilege of employees trusts, as
distinguished from any other kind of property held in trust, springs from Section 56(b) (now 53[b] of the Tax
Code): The tax imposed by this Title shall not apply to employees trust which forms part of a pension, stock
bonus, or profit-sharing plan of an employer for the benefit of some or all of his employees ... . This plan was
established for the employees exclusive benefit.
It is evident that tax-exemption is likewise to be enjoyed by the income of the pension trust. Otherwise, taxation
of those earnings would result in a diminution accumulated income and reduce whatever the trust beneficiaries
would receive out of the trust fund. This would run afoul of the very intendment of the law.
If an employees trust like the GCL enjoys a tax-exempt status from income, the court sees no logic in
withholding a certain percentage of that income which it is not supposed to pay in the first place.

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20 - Obillos v. CIR (1985)

Doctrine:

Co-Ownership who own properties which produce income should not automatically be considered partners of an
unregistered partnership, or a corporation, within the purview of the income tax law. To hold otherwise, would be
to subject the income of all co-ownerships of inherited properties to the tax on corporations, inasmuch as if a
property does not produce an income at all, it is not subject to any kind of income tax, whether the income tax on
individuals or the income tax on corporation.

Article 1769(3) of the Civil Code provides that the sharing of gross returns does not of itself establish a
partnership, whether or not the persons sharing them have a joint or common right or interest in any property from
which the returns are derived. There must be an unmistakable intention to form a partnership or joint venture.

Facts:
Jose Obillos, Sr. bought 2 lots from Ortigas & Co., Ltd. The next day he transferred his rights to his four children
to enable them to build their residences. Presumably, the Torrens titles issued to them would show that they were coowners of the two lots.
After having held the two lots for more than a year, the Obillos children resold them to the Walled City Securities
Corporation and Olga Cruz Canda. They derived from the sale a total profit of P134,341.88 or P33,584 for each of them.
They treated the profit as a capital gain and paid an income tax on one-half thereof or of P16,792.
One day before the expiration of the five-year prescriptive period, the CIR required them to pay corporate income
tax on the total profit in addition to individual income tax on their shares. He believed that they had formed an
unregistered partnership or joint venture within the meaning of sections 24(a) and 84(b) of the Tax Code. He assessed
P37,018 as corporate income tax, P18,509 as 50% fraud surcharge and P15,547.56 as 42% accumulated interest, or a total
of P71,074.56. He also considered the share of the profits of each petitioner in the sum of P33,584 as a taxable in full
(not a mere capital gain of which is taxable) and required them to pay deficiency income taxes aggregating P56,707.20
including the 50% fraud surcharge and the accumulated interest.
In sum, the petitioners are being held liable for deficiency income taxes and penalties totalling P127,781.76 on
their profit of P134,336, in addition to the tax on capital gains already paid.
Issue:
1. W/N the Obillos children formed an unregistered partnership.
Held/Ratio:
1. NO. It is error to consider the petitioners as having formed a partnership under article 1767 of the Civil Code
simply because they allegedly contributed P178,708 to buy the two lots, resold the same and divided the profit
among themselves.
As testified by Obillos, Jr., they had no such intention. They were co-owners pure and simple. Their original
purpose was to divide the lots for residential purposes. If later on they found it not feasible to build their
residences on the lots because of the high cost of construction, then they had no choice but to resell the same to
dissolve the co-ownership. The division of the profit was merely incidental to the dissolution of the co-ownership
which was in the nature of things a temporary state. It had to be terminated sooner or later.
What the Commissioner should have investigated was whether the father donated the two lots and whether he
paid the donors tax, however, this might have already prescribed.
Note:
Distinguished from other cases: The intention of the Obillos children was not to engage in a joint venture for profit.
Oa v. Comissioner of Internal Revenue - the co-heirs used the inheritance or the incomes derived as a common fund to
produce profits for themselves, it was held that they were taxable as an unregistered partnership.

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Evangelista v. Collector of Internal Revenue - The Evangelista sisters bought 4 pieces of real property which they leased
to various tenants and derived rentals therefrom.

21 - Marubeni v. CIR (1989) (Japanese Corporation)

Doctrine:

Only profits remitted abroad by a branch office to its head office which are effectively connected with its trade or
business in the Philippines are subject to the 15% profit remittance tax.

Facts:
Petitioner, Marubeni Corporation is a foreign corporation duly organized and existing under the laws of Japan and
duly licensed to engage in business under Philippine laws. It has equity investments in AG&P of Manila. For the first
quarter of 1981, AG&P declared and paid cash dividends to petitioner in the amount of P849,720 and withheld the
corresponding 10% final dividend tax thereon. Similarly, for the third quarter of 1981, AG&P declared and paid P849,720
as cash dividends to petitioner and withheld the corresponding 10% final dividend tax thereon. AG&P directly remitted
the cash dividends to petitioners head office in Tokyo, Japan, net not only of the 10% final dividend tax in the
amounts of P764,748 for the first and third quarters of 1981, but also of the withheld 15% profit remittance tax based on
the remittable amount after deducting the final withholding tax of 10%. Thus, for the first and third quarters of 1981,
AG&P as withholding agent paid 15% branch profit remittance on cash dividends declared and remitted to petitioner at its
head office in Tokyo in the total amount of P229,424.40.
Petitioner, through the accounting firm Sycip, Gorres, Velayo and Company, sought a ruling from the Bureau of
Internal Revenue on whether or not the dividends petitioner received from AG&P are effectively connected with its
conduct or business in the Philippines as to be considered branch profits subject to the 15% profit remittance tax imposed
under Section 24 (b) (2) of the National Internal Revenue Code as amended by Presidential Decrees Nos. 1705 and 1773.
Issues:
1. W/N the dividends received are to be considered branch profits subject to 15% profit remittance tax imposed
under Section 24(b)(2) of the NIRC. (kahit ito lang basahin nyo)
2. W/N Marubeni is entitled to a refund or issuance of a tax credit.
Held/Ratio:
1. NO. Pursuant to Section 24 (b) (2) of the Tax Code, as amended, only profits remitted abroad by a branch office
to its head office which are effectively connected with its trade or business in the Philippines are subject to the
15% profit remittance tax. The dividends in question are income taxable to the Marubeni Corporation of Tokyo,
Japan. The said dividends were distributions made by the Atlantic, Gulf and Pacific Company of Manila to its
shareholder out of its profits on the investments of the Marubeni Corporation of Japan. The investments in the
Atlantic Gulf & Pacific Company of the Marubeni Corporation of Japan were directly made by it and the
dividends on the investments were likewise directly remitted to and received by the Marubeni Corporation of
Japan. Petitioner Marubeni Corporation Philippine Branch has no participation or intervention, directly or
indirectly, in the investments and in the receipt of the dividends. And it appears that the funds invested in
the Atlantic Gulf & Pacific Company did not come out of the funds infused by the Marubeni Corporation
of Japan to the Marubeni Corporation Philippine Branch.
2. YES. Respondents grossly erred in holding that no refund was forthcoming to the petitioner because the taxes
thus withheld totalled the 25 % rate imposed by the Philippine-Japan Tax Convention pursuant to Article 10 (2)
(b). To simply add the two taxes to arrive at the 25 % tax rate is to disregard a basic rule in taxation that each tax
has a different tax basis. While the tax on dividends is directly levied on the dividends received, the tax base
upon which the 15 % branch profit remittance tax is imposed is the profit actually remitted abroad.
Public respondents likewise erred in automatically imposing the 25 % rate under Article 10 (2) (b) of the Tax
Treaty as if this were a flat rate. A closer look at the Treaty reveals that the tax rates fixed by Article 10 are the

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maximum rates as reflected in the phrase shall not exceed. By reason of our bilateral negotiations with Japan,
we have agreed to have our right to tax limited to a certain extent to attain the goals set forth in the Treaty.
Petitioner, being a non-resident foreign corporation with respect to the transaction in question, the applicable
provision of the Tax Code is Section 24 (b) (1) (iii) in conjunction with the Philippine-Japan Treaty of 1980.
Proceeding to apply the above section to the case at bar, petitioner, being a non-resident foreign corporation, as a
general rule, is taxed 35 % of its gross income from all sources within the Philippines. However, a discounted rate
of 15% is given to petitioner on dividends received from a domestic corporation (AG&P) on the condition that its
domicile state (Japan) extends in favor of petitioner, a tax credit of not less than 20 % of the dividends received.
This 20 % represents the difference between the regular tax of 35 % on non-resident foreign corporations which
petitioner would have ordinarily paid, and the 15 % special rate on dividends received from a domestic
corporation. Consequently, petitioner is entitled to a refund on the transaction in question to be computed as
follows:
Total cash dividend paid

1,699,440

less 15% under Sec. 24 (b) (1) (iii)

254,916

Cash dividend net of 15 % tax due petitioner

1,444,524

less net amount actually remitted

1,300,071.60

Amount to be refunded to petitioner representing overpayment of taxes on

dividends remitted

P144 452.40

It is readily apparent that the 15 % tax rate imposed on the dividends received by a foreign non-resident
stockholder from a domestic corporation under Section 24 (b) (1) (iii) is easily within the maximum ceiling of 25
% of the gross amount of the dividends as decreed in Article 10 (2) (b) of the Tax Treaty.

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22 - CIR v. Proctor and Gamble Philippine Manufacturing Corporation (1991)

Doctrines:

The NIRC, thru its tax exemptions and tax deductions, is deemed as a tool to encourage foreign corporations to
invest and reinvest in the country.

Sec 24(b)(1) states that in order for a domestic company to be entitled to reduced tax rate of 15% against the
regular implemented tax on non-resident foreign corporations, which is 35%, it must comply with the following:
o

The non-foreign corporation must receive its income(in this case, dividends) from a foreign
corporation doing business in another country.

The tax laws of the foreign government in which the non-resident foreign corporation is domiciled,
allows a tax credit in favor of the non-resident foreign corporation on dividends received from an
investment in a corporation domiciled in another country.

The amount of the waived 20% by the Philippine government is at least equal to the allowable tax
credit subject to the laws of the non-resident foreign corporation.

Facts:
In 1977, Proctor & Gamble Philippines (P&G-PHIL) declared dividends payable to its parent company and sole
stockholder, Proctor & Gamble USA (P&G-USA), which was based in USA. The total amount was reduced by 35%
withholding tax. Now, P&G-PHIL seeks to refund such paid withheld tax. They claim that under Sec 24(b)(1), the tax
that should be applied is 15% and not 35%. The provision reads: (I broke the provision down so that it could be
understood better)
b) Tax on Foreign Corporations
1) Non-resident Corporation A foreign corporation not engaged in trade and business in the
Philippines shall pay a tax of 35% of the gross income received from sources within the
Philippines (including dividends).

Provided, that dividends received from a domestic corporation, the tax shall be 15% of
the dividends

This is subject to the condition that the country in which the non-resident foreign
corporation is domiciled, shall allow a credit against the tax due from the non-resident
foreign corporation
This tax credit incentive of the foreign government must equal the amount of the
20% (the difference of the supposed 35% and the applied deduction of 15%) given
by the Philippine government.

Basically what this means is that the 15% tax rate shall only be applicable if the non-resident foreign corporation
received its dividends from a domestic corporation and when the tax laws of the said foreign corporation allows a tax
credit which is equal to amount of 20% that the Philippine government has deemed waived.
CONSIDER: A Non-Resident Foreign Corporation is not here in the Philippines and do not do business here
directly. Take note, the income being talked about here are only the dividends received from a domestic corporation in
which it is a stockholder.
Issues:
1. W/N P&G-USA, and not P&G-PHIL, was the proper party to claim the refund
2. W/N the US Tax Code allows a credit against the US Tax due from P%G-USA of taxes derived from the
Philippines, and that it is equivalent to the 20% required by the Philippine government

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Held/Ratio:
1. Yes. P&G-USA is considered in the NIRC as a taxpayer. As such, it may assign an agent, in this case, P&GPHIL, to transact, pay, and claim refunds through it. A taxpayer is defined as referring to any person subject to
tax imposed. It is important to note that under Sec 53(c), the withholding agent(P&G-PHIL) who is required to
deduct and withhold any tax is made personally liable for such tax and indeed is indemnified against any claims
and demands which the stockholder(P&G-USA) might with to make in questioning such amount.
2. Yes. A close examination of Sec. 901 and 902 of the US Tax Code shows that a tax credit is given to income
derived by P&G-USA from P&G-PHIL. This entitles the P&G-PHIL to the 15% withholding tax instead of the
35%, which was imposed. The SC also added that they should be lenient in interpreting the tax laws of other
countries to further encourage foreign corporations to invest in the Philippines.

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23 - Pascual v. CIR (1988)

Doctrine:

The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have a
joint or common right or interest in the property. There must be a clear intent to form a partnership, the existence
of a juridical personality different from the individual partners, and the freedom of each party to transfer or assign
the whole property.

Facts:
Petitioners Mariano Pascual and Renato Dragon entered into two transactions concerning the purchase of parcels
of land. The first was in 1965 for 2 parcels from Santiago Bernardino which they subsequently sold to Marenir
Development Corporation in 1968. Second was in 1966 for 3 parcels from Juan Roque which they subsequently sold to
Erlinda Reyes and Maria Samson. The net profits of Petitioners were:
1968: 165,224.70
1970: 60,000
The capital gains taxes for both transactions were paid by petitioners in 1973 and 1974 by availing the tax
amenities granted for the same years.
In March 1979 however, acting BIR Commissioner Plana informed petitioners that an assessment was made and
that they had a tax deficiency of 107,101.70 for the years 1968 and 1970.
Petitioners argued that they had availed of tax amenities in 1974. Commissioner Plana however argued that in
said years, petitioners as co-owners of the lands subject of the transaction formed and unregistered partnership or joint
venture that was taxable as a corporation under Sec.20 (b) with its income likewise taxable under Sec.24 of the NIRC.
That the unregistered partnership was subject to corporate income tax as distinguished from profits from the
partnership by them which was subject to individual income tax. Plana furthers that the amnesty granted only relieved
petitioners of their income tax liability and DID NOT cover their liability for the unregistered partnership.
The CTA ruled in favour of Commissioner Plana citing the case of Evangelista as basis.
Issue:
1. W/N the co-ownership of petitioners amounted to an unregistered partnership which is subject to taxation.
**For purposes of reference the facts of Evangelista are as follows:
Petitioners barrowed money from their father and together with their own money they purchased several real
estate properties which they leased and rented out for several years and shared the income derived therefrom.
In Evangelista, the BIR collected corporate income tax based on the courts ratiocination that:
Based on Sec, 24 of the NIRC There shall be levied, assessed, collected, and paid annually upon
the total net income received in the preceding taxable year from all sources by every corporation
organized in, or existing under the laws of the Philippines, no matter how created or organized
but not including duly registered general co-partnerships (companies collectives), a tax upon such
income equal to the sum of the following: ...
Sec. 84(b). The term corporation includes partnerships, no matter how created or organized,
joint-stock companies, joint accounts, associations or insurance companies, but does not include
duly registered general co-partnerships.
And under the civil code the requisites of a partnership is as follows: (a) an agreement to contribute money,
property or industry to a common fund; and (b) intent to divide the profits among the contracting parties.
Both this elements were present in the facts of Evangelista.

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Held/Ratio:
1. NO. The court held that there is no evidence that petitioners entered into an agreement to contribute money,
property or industry to a common fund, and that they intended to divide the profits among themselves.
Respondent commissioner and/ or his representative just assumed these conditions to be present on the basis of
the fact that petitioners purchased certain parcels of land and became co-owners thereof.
The transactions were isolated. The character of habituality peculiar to business transactions for the purpose of
gain was not present.
In Evangelista, the properties were leased out to tenants for several years. The business was under the
management of one of the partners. Such condition existed for over fifteen (15) years. None of the circumstances
are present in the case at bar. The co-ownership started only in 1965 and ended in 1970.
The fact that those who agree to form a co- ownership share or do not share any profits made by the use of the
property held in common does not convert their venture into a partnership. Or the sharing of the gross returns
does not of itself establish a partnership whether or not the persons sharing therein have a joint or common right
or interest in the property. This only means that, aside from the circumstance of profit, the presence of other
elements constituting partnership is necessary, such as the clear intent to form a partnership, the existence of a
juridical personality different from that of the individual partners, and the freedom to transfer or assign any
interest in the property by one with the consent of the others
The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have a
joint or common right or interest in the property. There must be a clear intent to form a partnership, the existence
of a juridical personality different from the individual partners, and the freedom of each party to transfer or assign
the whole property.

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25 - Afisco Insurance v. CIR (1999) (lechon, motion to dismiss filed instead of an answer)
Doctrines:

It appearing that the motion to dismiss was filed before the expiration of the period for filing defendants answer
as extended by the court, there was no legal reason for declaring defendants in default.

Interruption of the running of the period CAN REFER TO THE EXTENSION OF TIME TO FILE THE
ANSWER, not just to the original period of 15 days

Facts:
Petitioners are 41 non-life insurance corporations. They entered into a Quota Share Reinsurance Treaty and a
Surplus Reinsurance Treaty with Munich (a non-resident foreign corporation). The treaties required petitioners to
form a pool a.k.a. clearing house. So they formed a machinery pool/clearing house.
The pool of machinery submitted a financial statement and filed a return stating that they were entitled to
exemption from income tax. The CIR however, assessed deficiency corporate tax and withholding taxes. These
assessments were protested by the petitioners.
The CA ruled that the insurance pool was a partnership taxable as a corporation and that the collection
of premiums on behalf of its members was taxable income. The petitioners say that the pool is NOT a partnership because
(1) they did not share the same risk/solidary liability, (2) no common fund, (3) the executive board of the pool did not
exercise control and management (4) pool did not derive income for itself.
Issues:
1. W/N the clearing house, acting as a mere agent, was a partnership or association that is taxable as a corporation
2. W/N remittances to petitioners of their reinsurance premiums were dividends subject to tax
Held/Ratio:
1. YES. Pool taxable as a corporation.
The opinion or ruling of the Commission of Internal Revenue, the agency tasked with the enforcement of tax law,
is accorded much weight and even finality, when there is no showing that it is patently wrong.
(important) The companies entered into a Pool Agreement or an association that would handle all the insurance
businesses covered under their treaties with Munich. There are unmistakable indicators that it is a partnership
or an association covered by the NIRC (Tax on Domestic Corporations). These are:
a. The pool has a common fund, consisting of money and other valuables that are deposited in the name
and credit of the pool.
b. The pool functions through an executive board, which resembles the board of directors of a
corporation, composed of one representative for each of the ceding companies.
c. True, the pool itself is not a reinsurer and does not issue any insurance policy; however, its work is
indispensable, beneficial and economically useful to the business of the ceding companies and Munich,
because without it they would not have received their premiums.
Profit motive or business is, therefore, the primordial reason for the pools formation.
2. YES. Pools remittances are taxable.
The tax exemptions claimed by petitioners cannot be granted, since their entitlement thereto remains unproven
and unsubstantiated. It is axiomatic in the law of taxation that taxes are the lifeblood of the nation. Hence,
exemptions therefrom are highly disfavored in law and he who claims tax exemption must be able to justify his
claim or right.

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GROSS INCOME
28 - Eisner v. Macomber (1920)
Facts:
Macomber owned 2,200 shares in Standard Oil. Standard Oil declared a 50% stock dividend and she received
1,100 additional shares, of which about $20,000 in par value represented earnings accumulated by the company. The
shares represented a surplus for Standard Oil Company. The Revenue Act of 1916, allowed the IRS to treat stock
dividends as income to the sum of its cash value in other words, as though the corporation had distributed money to
her. Macomber sued Eisner, the CIR, for a refund.
Issue:
1. W/N stock dividends can be declared as income and therefore taxable
Held/Ratio:
1. NO. Income may be defined as the gain derived from capital, from labor, or from both combined, including profit
gained through sale or conversion of capital. Mere growth or increment of value in a capital investment is not
income. Income is essentially a gain or profit, in itself, of exchangeable value, proceeding from capital, severed
from it, and derived or received by the taxpayer for his separate use, benefit, and disposal.
A stock dividend, evincing merely a transfer of an accumulated surplus to the capital account of the corporation,
takes nothing from the property of the corporation and adds nothing to that of the shareholder; a tax on such
dividends is a tax an capital increase, and not on income, and, to be valid under the Constitution, such taxes must
be apportioned according to population in the several states.

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29 - Commissioner v. Glenshaw Glass Co. (1955)

Doctrine:

In determining what constitutes gross income as defined in 22 (a), effect must be given to the catchall language
gains or profits and income derived from any source whatever.

Facts:
The Glenshaw Glass Company, a Pennsylvania corporation, manufactures glass bottles and containers. It was
engaged in protracted litigation with the Hartford-Empire Company, which manufactures machinery of a character
used by Glenshaw. Among the claims advanced by Glenshaw were demands for exemplary damages for fraud and treble
damages for injury to its business by reason of Hartfords violation of the federal antitrust laws. The parties settled and
Glenshaw received $800,000. Of that, $324,529.94 represented punitive damages. Glenshaw did not report that
amount as income.
The Commissioner determined a deficiency claiming as taxable the entire sum less only deductible legal
fees. The Tax Court and the Court of Appeals upheld the taxpayer, hence the issue was brought before the Supreme Court.
Issues:
1. W/N money received as exemplary damages for fraud or as punitive damages of an antitrust recovery must
be considered gross income?
Held/Ratio:
1. Glenshaw Glass contends that punitive damages, characterized as windfalls flowing from the culpable
conduct of third parties, are not within the scope of the section. But Congress applied no limitations as to the
source of taxable receipts, nor restrictive labels as to their nature. And the Court has given a liberal construction to
this broad phraseology in recognition of the intention of Congress to tax all gains except those specifically
exempted.
The sweeping scope of the controverted statute is readily apparent:
SEC. 22. GROSS INCOME.
(a) GENERAL DEFINITION. - `Gross income includes gains, profits, and income derived from
salaries, wages, or compensation for personal service . . . of whatever kind and in whatever form
paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in
property, whether real or personal, growing out of the ownership or use of or interest in such
property; also from interest, rent, dividends, securities, or the transaction of any business carried
on for gain or profit, or gains or profits and income derived from any source whatever.
The language was used by Congress to exert in this field the full measure of its taxing power. Here we have
instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete
dominion. The mere fact that the payments were extracted from the wrongdoers as punishment for
unlawful conduct cannot detract from their character as taxable income to the recipients. Glenshaw glass
concedes, as they must, that the recoveries are taxable to the extent that they compensate for damages actually
incurred. It would be an anomaly that could not be justified in the absence of clear congressional intent to
say that a recovery for actual damages is taxable but not the additional amount extracted as punishment
for the same conduct which caused the injury. The Court finds no such evidence of intent to exempt these
payments.

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30 - CIR v. CA, Castaneda (1991)

Doctrines:

Not being part of the gross salary or income of a government official or employee but a retirement benefit,
terminal leave pay is not subject to income tax.

Facts:
Castaneda retired from the government service as Revenue Attache in the Philippine Embassy in London,
England, on 10 December 1982 under the provisions of Section 12 (c) of Commonwealth Act 186, as amended.
Upon retirement, he received, among other benefits, terminal leave pay from which petitioner Commissioner of
Internal Revenue withheld P12,557.13 allegedly representing income tax thereon.
Castaneda contending that the cash equivalent of his terminal leave is exempt from income tax.
CTA decided in favor of Castaneda. CA affirmed.
Issues:
1. Whether terminal leave pay received by a government official or employee on the occasion of his compulsory
retirement from the government service is subject to withholding (income) tax.
Held/Ratio:
1. No, terminal leave pay received by a government official or employee is not subject to withholding (income)
tax.
Commutation of leave credits, more commonly known as terminal leave, is applied for by an officer or employee
who retires, resigns or is separated from the service through no fault of his own. In the exercise of sound
personnel policy, the Government encourages unused leaves to be accumulated. The Government recognizes that
for most public servants, retirement pay is always less than generous if not meager and scrimpy. A modest nest
egg which the senior citizen may look forward to is thus avoided. Terminal leave payments are given not only at
the same time but also for the same policy considerations governing retirement benefits.
In fine, not being part of the gross salary or income of a government official or employee but a retirement benefit,
terminal leave pay is not subject to income tax.

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32 - National Development Company v. CIR (1987) (shipbuilding company)

Doctrines:

Income from sources within the Philippines. (a) Gross income from sources within the Philippines. The
following items of gross income shall be treated as gross income from sources within the Philippines:
(1) Interest. Interest derived from sources within the Philippines, and interest on bonds, notes, or other
interest-bearing obligations of residents, corporate or otherwise;

Facts:
NDC entered into several contracts with Japanese shipuilding companies in Tokyo. The purcvhase price was from
the proceeds of bonds issued by the Central Bank. Initial payments were made and the remaining payments and the
interests thereon were remitted in due time by NDC to Tokyo. The vessels were delivered to the NDC in Tokyo.
NDC remitted USD4,066,580.70 as interest on the balance of the purchase price. No tax was withheld. CIR held
that NDC is liable on such tax for P5,115,234.74. NDC went to the CTA. BIR was sustained by the CTA except for a
slight reduction of the tax deficiency. NDC then appealed to SC via a petition for certiorari
Issues:
1. W/N NDC is liable for the tax
Held/Ratio:
1. YES. The petitioner argues that the Japanese shipbuilders were not subject to tax under Section 37 of the NIRC
because all related activities were done in Tokyo. The law, however, does not speak of activity but of source,
which in this case is the NDC. NDC is a domestic and resident corporation with principal offices in Manila,
therefore it should be taxed for the interest.

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33 - Commissioner v. Lednicky (2011) (American citizens residing in Philippines, income from Philippine sources,
paying US and Phil. taxes)
Doctrines:

Double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same
governmental entity

Facts:
Spouses VE and Maria Valero Lednicky are American citizens residing in the Philippines, and have derived all their
income from Philippine sources since 1947. In 1955, the spouses filed with the US Internal Revenue agent in Manila their
Federal income tax return for 1947, 1951 to 1954 on income from Philippine sources. From 1956 to 1958, they filed their
domesic income tax returns in compliance with local laws. They amended their tax returns in 1959 to include their taxes
paid to the US Federal Government, interests, and exchange and bank charges. They filed their claims for refund.
Issues:
1. Whether income tax paid to foreign governments can be deducted from the gross income or as a tax
Held/Ratio:
1. No. Much stress is laid on the thesis that if the Spouses are not allowed to deduct the income taxes they are
required to pay to the government of the United States in their return for Philippine income tax, they would be
subjected to double taxation. What they fail to observe is that double taxation becomes obnoxious only where
the taxpayer is taxed twice for the benefit of the same governmental entity. In the present case, while the
taxpayers would have to pay two taxes on the same income, the Philippine government only receives the proceeds
of one tax. As between the Philippines, where the income was earned and where the taxpayer is domiciled, and
the United States, where that income was not earned and where the taxpayer did not reside, it is indisputable that
justice and equity demand that the tax on the income should accrue to the benefit of the Philippines. Any relief
from the alleged double taxation should come from the United States, and not from the Philippines, since the
formers right to burden the taxpayer is solely predicated on his citizenship, without contributing to the production
of the wealth that is being taxed.
The laws intent is that the right to deduct income taxes paid to foreign government from the taxpayers gross
income is given only as an alternative or substitute to his right to claim a tax credit for such foreign income taxes;
so that unless the alien resident has a right to claim such tax credit if he so chooses, he is precluded from
deducting the foreign income taxes from his gross income. The purpose of the law is to prevent the taxpayer from
claiming twice the benefits of his payment of foreign taxes, by deduction from gross income and by tax credit. To
allow an alien resident to deduct from his gross income whatever taxes he pays to his own government amounts to
confer on the latter power to reduce the tax income of the Philippine Government. Such result is incompatible
with the status of the Philippines as an independent and sovereign state. Any relief from the alleged double
taxation should come from the United States, since its right to burden the taxpayer is solely predicated on the
taxpayers citizenship, without contributing to the production of the wealth that is being taxed

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34 - Vicente Madrigal and Susan Paterno v. James Rafferty (CIR) and Venancio Concepcion (Dep CIR)
(1918)
Doctrines:

Function of income tax

o

The aim has been to mitigate the evils arising from the inequalities of wealth by a progressive scheme of
taxation, which places the burden on those best able to pay.; income distinguished from capital.

Income as contrasted with capital or property is to be the test. The essential difference between capital
and income is that capital is a fund; income is a flow. Capital is wealth, while income is the service of
wealth. The fact is that property is a tree, income is the fruit; labor is a tree, income the fruit; capital is a
tree, income the fruit.

Madrigal spouses reported income from conjugal partnership separately resulting to lower tax due. SC
said under law at the time they should report jointly. The partnership is not a bus partnership; right of
spouses inchoate.

Facts:
Petitioner-spouses were legally married prior to January 1, 1914, thus it was constructed under the provisions of
law concerning conjugal partnerships (sociedad de gananciales). For the year 1915, Vicente filed a sworn declaration
showing his total net income for the year 1914 to be P296,302.73. Subsequently, he claimed that the said amount did not
represent his income but rather the income of the conjugal partnership existing between himself and his wife. He then
claims that the income he declared should be divided into 2 equal parts, to be considered his income and the other half
of Susanas. The question was submitted to the Attorney-General who opinioned in favor of the spouses, but the
respondent-revenue officers forwarded the decision to the US CIR who reversed the Attorney-Generals opinion.
After paying under protest, this action for recovery of the sum of P3,768.08 alleged to have been wrongfully
collected by the defendants from the plaintiff was initiated before the CFI of Manila. It is the plaintiffs contention that the
total tax due upon them was only P5,842.18 (P2,921.09 each) contrary to the P9,668.21 which was collected from them.
The dispute between the plaintiffs and the defendants concerned the additional tax provided in the Income Tax
Law.
Issues:
1. W/N the additional income tax, should be divided into 2 equal parts, because of the conjugal partnership existing
between them.
Held/Ratio:
1. NO, Susan Paterno cannot make a separate return in order to receive the benefit of the exemption which
would arise by reason of the additional tax. Susan has no estate and income, actually and legally vested in her
entirely distinct from her husbands property, the income cannot be considered the separate income of the wife for
the purposes of the additional tax. Moreover, the Income Tax Law does not look on the spouses as individual
partners in an ordinary partnership. The husband and wife are entitled to the exemption of P8,000 specifically
granted by law. The higher schedules of the additional tax directed at the incomes of the wealthy may not be
partially defeated by reliance on provisions in our Civil Code dealing with the conjugal partnership and
having no application to the Income Tax Law. The aims and purposes of the Income Tax Law must be given
effect.
FUNCTION OF INCOME TAX:
The aim of the Income Tax Law of the US, extended to the Philippine Islands, is to mitigate the evils arising
from inequalities of wealth by a progressive scheme of taxation, which places the burden on those best able to
pay. As such, exemptions should roughly equivalent the minimum amount of subsistence. With theses exceptions,
the income tax is supposed to reach the earnings of the entire non-governmental property of the country.

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INCOME V. CAPITAL
INCOME

CAPITAL

Flow of services rendered by that capital by

the payment of money from it or any other
benefit rendered by a fund of capital in relation
to such fund through a period of time.

Fund of property existing at an instant time.

Service of wealth

Wealth

The FRUIT.

Property/labor/capital is the TREE

A tax on income is not a tax on property.

RIGHT OF SPOUSES, INCHOATE
Prior to the liquidation of the interest of the wife and in case of her death, of her heirs, is an interest inchoate, a
mere expectancy, which constitutes neither a legal nor equitable estate, and does not ripen into title until there
appears that there are assets in the community as a result of the liquidation and settlement. Susana Paterno, only
has an inchoate right in the property of her husband Vicente Madrigal during the life of the conjugal partnership.
She has an interest in the ultimate property rights and in the ultimate ownership of property acquired as
income after such income has become capital. Susana Paterno has no absolute right to one-half the income of
the conjugal partnership.
* According to the then income tax law: The only occasion for a wife making a return is where she has income
from a sole and separate estate in excess of $3,000, but together they have an income in excess of $4,000, in
which the latter event either the husband or wife may make the return but not both.

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35 - Helvering v. Horst (1940) (control test)

Doctrines:

(from syllabus) the power to procure the payment of income and enjoy the benefit thereof determines who is
subject to tax

(from the case) The power to dispose of income is equivalent to ownership of it. The exercise of that power, to
procure the payment of income to another, is the enjoyment and hence, the realization of income by him who
exercises it.

Facts:
Horst owned negotiable bonds with detachable negotiable interest coupons, which were payable to bearer. In
1934-1935, he detached two of those coupons, worth around $25k each, and gave them to his son. The interest coupons
matured a year after, and his son collected the payment. Horst didnt include the income from the interest coupons as part
of his gross income; the IRS disagreed. The Board of Tax Appeals found that Horst, the donor, should pay the income tax
on said interest coupons. The circuit court of appeals reversed the Boards decision, so petitioners brought this as a
certiorari case seeking to make Horst liable for the income tax.
Issues:
1. W/N Horst Sr., as donor, is liable to pay income tax on the interest coupons
Held/Ratio:
1. YES, Horst Sr. owned the bonds. Ownership of bonds entails two things: 1) right to be paid the principal amount,
and 2) right to be paid interest in installments. Even if he didnt receive direct payment from the interest coupons,
it doesnt mean that he didnt realize income from them. He received non-material economic gain when he gave
the interest coupons to his son. It doesnt equal monetary payment, but it still equals economic gain represented
by his right to receive income. Though the interest coupons hadnt matured yet when he donated them,
they were already considered realized income because he exercised his right to transfer the payment to his
son. This power to control where the income would go is equal to the realization of income, making it taxable.
The power to dispose of income is equivalent to ownership of it.
The interest coupons werent considered as gifts that were excludable from income because they were merely
part of the entire negotiable bond, which still belonged to Horst. In effect, they derived income from the bond
itself, ownership of which remained with Horst.

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38 - Conwi v. CTA (1992)

Doctrines:

Income may be defined as an amount of money coming to a person or corporation within a specified time,
whether as payment for services, interest or profit from investment. Unless otherwise specified, it means cash or
its equivalent. Income can also be thought of as flow of the fruits of ones labor.

Facts:
Petitioners are Filipino citizens and employees of Procter and Gamble, Philippine Manufacturing Corporation.
During the years 1970 and 1971 petitioners were assigned to other subsidiaries of Procter & Gamble, outside of the
Philippines, during which petitioners were paid U.S. dollars as compensation for services in their foreign assignments.
When petitioners filed their income tax returns for the year 1970, they computed the tax due by applying the dollar-topeso conversion on the basis of the floating rate ordained under B.I.R. Ruling No. 70-027.
The petitioners now claims for refunds on the ground that what should have been used for the conversion rate is
the par value of the peso as prescribed in Section 48 of Republic Act No. 265 in relation to several Commonwealth Acts.
However, this was denied by the CTA.
Issues:
1. Whether petitioners dollar earnings are receipts derived from foreign exchange transactions.
2. Whether the basis of the computation of exchange rate should be prevailing free market rate of exchange and not
the par value of the peso
Held/Ratio:
1. The dollar earnings are not derived from foreign exchange transactions.
For the proper resolution of these cases income may be defined as an amount of money coming to a person or
corporation within a specified time, whether as payment for services, interest or profit from investment. Unless
otherwise specified, it means cash or its equivalent. Income can also be thought of as flow of the fruits of ones
labor.
Petitioners are correct as to their claim that their dollar earnings are not receipts derived from foreign exchange
transactions. When petitioners were assigned to the foreign subsidiaries of Procter & Gamble, they were earning
in their assigned nations currency and were ALSO spending in said currency. There was no conversion, from
one currency to another.
2. The prevailing market rate should be used. Petitioners claim that since the dollar earnings do not fall within the
classification of foreign exchange transactions, there occurred no actual inward remittances, and, therefore, they
are not included in the coverage of Central Bank Circular No. 289 which provides for the specific instances when
the par value of the peso shall not be the conversion rate used. They conclude that their earnings should be
converted for income tax purposes using the par value of the Philippine peso.
However, a careful reading of said CB Circular No. 289 shows that the subject matters involved therein are
export products, invisibles, receipts of foreign exchange, foreign exchange payments, new foreign borrowing and
investments nothing by way of income tax payments.
The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of Procter & Gamble. It
was a definite amount of money which came to them within a specified period of time of two years as payment
for their services.
Revenue Memorandum Circular Nos. 7-71 10 and 41-71 11 were issued to prescribed a uniform rate of
exchange from US dollars to Philippine pesos for INTERNAL REVENUE TAX PURPOSES for the years 1970
and 1971, respectively.

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39 - CIR v. Javier (1993) ($1000 to $1 million)

Doctrine:

Fraud, in relation to the filing of the ITR, must be intentional; consisting of deception willfully and deliberately
done or resorted to in order to induce another to give up some legal right.

Facts:
In 1977, Victoria Javier (wife of petitioner Melchor Javier) received from Prudential Bank the amount of
$999,973.70 remitted by her siter. Mellon Bank thereafter filed a case in the CFI of Rizal against Melchor Javier et. al,
praying for the return of $999,000 as they committed a clericalerror and was only supposed to remit $1000. A few months
thereafter, the City Fiscal of Pasay filed a case for estafa against the spouses for allegedly misappropriating the $999,000
they were holding in trust for Mellon Bank. In 1978, Melchor filed his ITR for the previous year and did not declare as
income the money he erroneously received. He, however, inserted a footnote, to wit:
Taxpayer was recipient of some money received from abroad which he presumed to be a gift but
turned out to be an error and is now subject of litigation.
After two years, Melchor received a letter from the CIR Commissioner demanding that he pay a little over P9
million as deficiency assessments, arising from the $1 million deposit he received. Melchors reply to the same stated that
he did not have any undeclared income for 1977, and requested that the corresponding assessment be made to await the
resolution of his pending case. The Acting Commissioner wrote him back, stating that the amount that Mellon Bank
erroneously remitted is definitely taxable and also imposed a 50% fraud penalty therefor. Melchor appealed to the
CTA, which ruled in his favor. CIR elevated the case to the Supreme Court.
Issue:
1. W/N Melchor Javier is liable for the 50% fraud penalty.
Held/Ratio:
1. No. Fraud contemplated by law must be actual and intentional, consisting of deliberate acts done to avoid paying
for the tax. Mere mistake cannot be considered as fraudulent intent. The Court further held that a mere
understatement of a tax is not itself proof of fraud, for the purpose of tax evasion. The imposition of the fraud
penalty is not justified as actual fraud was not proven in this case; records show that Melchor did not conceal the
fact that he had received an amount of money although it was still a subject of pending litigation.

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40 - Limpan Investment Corp. v. CIR (1966) (rentals are still income)

Doctrine:

The payment by a sub-tenant of rentals should also be declared, as it is still income, despite the source.

Facts:
Limpan Investment Corporation (Limpan) is a domestic corporation engaged in the business of leasing real
properties located in Pasay. The properties the company leased were acquired from Isabelo Lim, President and Chairman
of the Board. Limpan duly filed its income tax returns for 1956 and 1957. The returns reported net incomes of P 3, 287.81
and P 11, 098.36. The taxes were P 657 and P 2,200.
Sometime in 1958 and 1959, the examiners of the BIR investigated Limpans tax returns and found that petitioner
under-declared its rental incomes by P 20,199 P 81,690 during those taxable years, and also claimed an excessive
depreciation for its buildings worth P 4,260 and P 16,336. Based on these findings, the CIR issued a letter-assessment and
demand for payment of deficiency income tax and surcharge against Limpan. The deficiencies demanded by the BIR
amounted to P 7,338 and P 30,502.50.
Limpan naturally appealed to the CTA, arguing that for the deficiency income in 1956, the corporation reasoning
out that the previous owners of the leased building had to collect part of the total rentals in 1956 to apply to their payment
of rental in the land in the amount of P21,630. Also for their deficiency for 1957, petitioner tried to explain that it still
expected from its president Isabelo Lim some P 13,500 worth of rentals hed collected personally Lim also turned over
these amounts to the company in 1959 only. This was why the corporation was unable to add the amounts in their tax
returns. As for the depreciation values, petitioner tried to argue that the rates used by the BIR examiners were unfair.
Issues:
1. W/N the BIR correctly assessed deficiency income tax against petitioner.
Held/Ratio:
1. YES. The SC sided with the BIR. When petitioner presented its sole witness Solis, the Secretary-Treasurer, it
admitted to court that it did not in fact declare more than one-half of the true amounts it had received as rentals.
Isabelo Lim was also not presented to properly corroborate the testimony of Solis. The court explained:
The excuse that Isabelo P. Lim and Vicenta Pantangco Vda. de Lim retained ownership of the
lands and only later transferred or disposed of the ownership of the buildings existing thereon to
petitioner corporation, so as to justify the alleged verbal agreement whereby they would turn over
to petitioner corporation six percent (6%) of the value of its properties to be applied to the rentals
of the land and in exchange for whatever rentals they may collect from the tenants who refused to
recognize the new owner or vendee of the buildings, is not only unusual but uncorroborated by
the alleged transferors, or by any document or unbiased evidence. Hence, the first assigned error
is without merit.
As to the second assigned error, petitioners denial and explanation of the non-receipt of the
remaining unreported income for 1957 is not substantiated by satisfactory corroboration. As
above noted, Isabelo P. Lim was not presented as witness to confirm accountant Solis nor was his
1957 personal income tax return submitted in court to establish that the rental income which he
allegedly collected and received in 1957 were reported therein.
The withdrawal in 1958 of the deposits in court pertaining to the 1957 rental income is no
sufficient justification for the non-declaration of said income in 1957, since the deposit was
resorted to due to the refusal of petitioner to accept the same, and was not the fault of its tenants;
hence, petitioner is deemed to have constructively received such rentals in 1957. The payment by
the sub-tenant in 1957 should have been reported as rental income in said year, since it is income
just the same regardless of its source.

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42 - Farmers and Merchants Bank v. CIR (1932) (depositors lien on bank income is tax exempt)
Doctrine:

An equitable lien arises either from a written contract which shows an intention to charge some particular
property with a debt or obligation, or is implied and declared by a court of equity out of general considerations of
right and justice as applied to the relations of the parties and the circumstances of their dealings

Facts:
Farmers and Merchants Bank of Nebraska, after its untimely closure, made an arrangement with their former
depositors. It was in the form of a reorganization scheme where an equitable lien upon subsequent earnings was given in
favor of former depositors wherein the amount of relinquished deposits shall be paid to the depositors, before the
stockholders receive their dividendsthe fund thereof must only come from that declared as dividend. This was with
regards a certain provision under the US Internal Revenue Code that exempted such earning where an equitable lien is
attached thereto. The CIR believes otherwise and assessed them for income taxes.
Issue:
1. W/N the reorganization agreement gave rise to a lien upon subsequent earnings of the reorganized bank, in
favor of the former depositors, within the signification of that term in the exemption provisions of section 3798(b)
of the US Internal Revenue Code.
Held/Ratio:
1. YES. Though there is no precise and all-inclusive definition of an equitable lien is, of course, possible, because of
its inherently flexible and varying nature as a device of equity. Yet the court decided that an equitable lien does
exists in the present case and that evidence did show that there was a clear availability of the bank for the
repayment of old deposit claims since this is of legal and prudent banking practice, with the consent of the proper
govt authority.
The court determined that the agreement indicates such an intention to charge and have the earnings appropriated
to the payment of old deposit claims as would satisfy even a rigid definition of equitable lien. Therefore such are
tax exempt.

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43 - Rayetheon v. CIR (1944) (radio rectifying tube)

Doctrines:

Damages recovered in an antitrust action are not necessarily nontaxable as a return of capital. As in other types of
tort damage suits, recoveries which represent a reimbursement for lost profits are income.

Facts:
Raytheon Production Corp. is actually the current incarnation of previous tax-free reorganizations of the original
Raytheon Company, which was engaged in the business of rectifying tubes for radio so that they may run on alternating
current instead of just batteries. However, the Radio Company of America (RCA) patented a competing tube and
monopolized the market by insisting that radio manufacturers only buy their rectifying tubes. By 1929, Raytheon couldnt
market its tubes at all. So Raytheon entered into a licensing agreement with RCA allowing it to manufacture tubes under
RCAs patent on a royalty basis. The agreement contained Clause 9, which stated that Raytheon releases all its claims
against RCA for the latters illegal acts, but that if RCA paid claims to other companies, then Raytheon can assert
and recover similar claims with RCA.
Raytheon found out that RCA had paid claims to other companies so in 1931, it instituted an anti-trust suit against
RCA for allegedly conspiring to destroy Raytheons good will and business by monopolizing the market. As evidence,
Raytheon presented that in 1926, its good will as at $3M, with around $450k in profits and that through RCAs
actions, it lost its good will in business by 1928. During this time, it was the original Raytheon Company who was dealing
with RCA. However, in the intervening years, the company reorganized into the present Raytheon Production
Corp., which settled the suit with RCA for $410k.
Raytheon declared $60k of the settlement amount as taxable income, saying that it was the maximum cost
of the patent licenses lost. However, respondent CIR believed that the remaining $350k was also taxable income
since there was no clear evidence of what the amount was paid for, so it can also be considered as having been paid for the
patent rights.
Issues:
1. W/N the remaining $350k in the settlement award is income
2. W/N it is taxable
Held/Ratio:
1. NO, it is not a return of lost profits; rather, it is for injury to good will, and thus, represents a return to capital.
This anti-trust suit was about the destruction of Raytheons entire business, and not just a mere loss of its profits.
Raytheons profits during the years 1926-1928 were only presented as evidence to prove the worth of its good
will since the latter is derived by a capitalization of its profits. It is immaterial that the suit was settled, since what
is important was the nature of the claim from which the compromise was realized.
2. NO. While it is true that even if the recovery takes a return of capital, it may still present taxable benefit, this is
not applicable in this case. The taxable benefit can be deduced from the gain realized by converting the property
to cash. However, in this case, assuming that the present Raytheon Production Corp. acquired the original
Raytheon Companys assets through a series of tax-free reorganizations, then petitioners basis for good will is
the same as the original Raytheons. However, theres no evidence as to what Raytheons good will really was
worthonly its allegations were present.
Since the basis of what it recovered as non-taxable capital is wholly speculative, then any gain in excess of
that capital will only be pure conjecture, and therefore, non-taxable.

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44 - Perry v. US (1958)12 (tax benefit rule, returned donation)

Doctrines:

Tax benefit rule: it would be inequitable for the taxpayer to reduce his taxes for prior years on account of the
contributions, and not to pay taxes on them when he got them back

Facts:
Plaintiff William F. Perry in 1944 created a trust for the benefit of the Town of Fitzwilliam, New Hampshire. The
corpus was to be used for the construction of an addition to the Public Library and for no other purpose. The town decided
that it did not desire to build the addition to the library, and the corpus of the trust was returned to the settlor in 1953.
The Commissioner of Internal Revenue required plaintiffs to include in their income tax return for 1953 the
amount returned to them in that year. Plaintiffs say this is improper, because what they received was a return of capital,
and not income. The defendant says it was proper because plaintiffs, in the years they made contributions to the trust,
deducted the amounts contributed from their income, and thus received a tax benefit in those years.
Issues:
1. W/N an income tax may be imposed upon the corpus of a charitable trust that has been returned to the sole settlor
when the donees thereof have refused to comply with the terms of the gift.
Held/Ratio:
1. Partly yes, partly no. There can be no doubt that what the taxpayer received from the town in 1953 was a return
of capital and not income, except for the accumulations of interest and dividends on the corpus. The taxpayer
admits he is required to include these accumulations in his income.
As stated, the return to the taxpayer of the property he had tried to give away cannot possibly be considered as
income he merely got back his own property. It cannot possibly be considered as income, except on the ground
that he had deducted from his income the amount contributed in each year, thus reducing his taxes. In such cases
the courts have heretofore required the inclusion of an item recovered, where a deduction had been taken for
it in a prior year.
The only rational basis for such decisions is that it would be inequitable for the taxpayer to reduce his taxes for
prior years on account of the contributions, and not to pay taxes on them when he got them back. This is the socalled tax benefit rule. It is a rule enunciated by the courts, and not by Congress, and is based altogether on
equitable considerations.
COMPUTATION: In computing income for 1953, the taxpayers should exclude from their income the amount of
the corpus returned to them in that year, but they should add to the tax thus computed on their 1953 income the
amount by which their taxes in prior years had been decreased on account of the deductions made for
contributions to this trust fund. So computed, the Government would recoup the taxes escaped in the prior year
on account of the deduction. It would be inequitable to require plaintiffs to include in their income for 1953 the
aggregate of the deductions claimed in prior years, because of the fact that the rates of taxation vary greatly
from year to year, and because the inclusion in one year of all the deductions taken in several years would
probably put the taxpayer in a higher tax bracket. In computing the gain on the stock sold by the settlor shortly
after it was returned to him, original cost should be used as a basis.
Dissenting (Madden) compared to bad debts and refunds of taxes
The property reconveyed to the plaintiff was taxable income. I think it should be treated as such. The comparable
recoveries, in the cases of bad debts and refunds of taxes, were so treated under the judge-made law which
preceded the enactment of section 22(b) (12) and are so treated under that section. If Congress, in enacting section

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
12. Original Case: http://174.123.24.242/leagle/xmlResult.aspx?xmldoc=1958430160FSupp270_1375.xml&docbase=CSLWAR1-1950-1985

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22(b) (12) had chosen to provide in it for the meticulous recomputation which the courts opinion requires, that
would have been a reason for the courts doing so in this analogous case not covered by the statute. Since
Congress did not regard such a recomputation as necessary to do equity in the numerous cases covered by the
statute, I think the plaintiffs unusual situation should not be accorded a treatment different from that accorded
other taxpayers whose claims to equitable treatment are exactly equivalent to those of the plaintiff.

45 - Bradford v. CIR (1986)

Doctrine:

Arithmetic precision was originally and exclusively in the taxpayers hands, and he had a statutory duty to
provide it. Having defaulted, he cannot frustrate the Commissioners reasonable attempts by compelling
investigation and recomputation under every means of income determination.

Fraud is intentional wrongdoing on the part of the taxpayer with the specific intent to avoid a tax known to be
owing. The Commissioner must prove fraud by clear and convincing evidence, but intent can be inferred from
strong circumstantial evidence.

Facts:
Bradford and several other individuals founded the Committee for Freedom of Choice in Cancer Therapy, Inc.
(the Committee) which is involved in a number of activities, including seminars, political action, and the lawsuit which
led to the legalization of laetrile (promoted to be a cancer-curing but is really non-effectual; also contains cyanide). The
Committees records consisted mainly of a series of ledgers, with little supporting documentation of income or expenses.
Bradford formed a partnership with J. Franklin Salaman to smuggle laetrile into the United States and arrange for
its distribution around the country. He and Salaman were convicted on smuggling charges and sentenced to probation and
a fine. After laetrile was legalized in 1977, Bradford and Salaman formed Cyto-Pharma U.S.A. to handle their import
operations, eventually dissolving less than a year later. Almost all of Bradfords and Salamans operations were conducted
on a cash basis.
Although the laetrile smuggling generated a considerable amount of income, Bradfords 1973 tax return showed
only his employment income. He did not file tax returns for the years 1974-1977. The Commissioner ultimately assessed
Bradford for tax deficiencies, fraud and for failure to file estimated taxes, for a total of $2,773,990.
Issue:
1. W/N the Tax Court correct in upholding the deficiency assessment
2. W/N the Tax Courts finding of fraud is clearly erroneous
Held/Ratio:
1. YES. Where the government has introduced evidence linking the taxpayer to the illegal activity, the taxpayer
should not be allowed to avoid paying taxes simply because he keeps incomplete records. The absence of tax
records cannot automatically deprive the Commissioner of a rational foundation for the income determination.
For 1977, the Commissioner determined Bradfords income by extrapolating the total sales of laetrile from a
sample generated by the FDA surveillance of Bradfords activities. Bradford argues that this extrapolation is
inaccurate because it did not take into account the time that he was on trial for laetrile smuggling and, thus,
presumably not then involved in the laetrile operations. This argument is meritless. The figures were derived from
surveillance of shipments that occurred during Bradfords trial on the smuggling charges, and the Commissioner
presented independent evidence in the form of receipts, also contemporaneous with the trial, which support the
income projections.
2. NO. Because fraudulent intent is rarely established by direct evidence, this court has inferred intent from various
kinds of circumstantial evidence. These badges of fraud include: (1) understatement of income; (2) inadequate
records; (3) failure to file tax returns; (4) implausible or inconsistent explanations of behavior; (5) concealing
assets; and (6) failure to cooperate with tax authorities.

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The following facts support a finding of fraud: (1) Bradford engaged in illegal activities; (2) he failed to file
returns for four consecutive years; (3) he failed to report substantial business income, his salary from Stanford,
and the gain on the sale of his residence, all of which he knew constituted taxable income; (4) he dealt in cash to
avoid scrutiny of his finances; (5) he filed false W-4s; (6) he made efforts to conceal his laetrile distribution
activities; (7) he failed to make estimated tax payments; (8) he failed to cooperate with the revenue agent during
the audit examination; and (9) he failed to maintain adequate records.

46 - Collins v. CIR (1993) (off-track betting)

Doctrine:
[These are what the Court used to justify its decision]:

Comm. v. Glenshaw Glass: all gains except those specifically exempted

James v. US: all unlawful gains are taxable; a tax payer has received income when he/she acquires earnings,
lawfully or unlawfully, without the consensual recognition, express or implied, of an obligation to repay and
without restriction as to disposition. This income test includes all forms of enrichment, legal or otherwise, but
explicitly excludes loans. [side note: loans dont constitute income the money that comes in is offset by the
corresponding obligation to repay it]

Facts:
The petitioner Collins was employed as a ticket vendor and computer operator at an Off-Track Betting (OTB)
parlor in New York. He also happened to be a compulsive gambler. The OTB parlor he worked for allows patrons to bet
without actually going to the track. As a policy, it doesnt allow betting on credit but Collins ignored this policy by
occasionally entering bets under his name without actually paying for them. He won some ($42, 157) but lost more. His
unpaid bets amounted to $80, 280. He reported his shortfall to his supervisor and charges were filed against him for
grand larceny- to which he pled guilty.
Collins had regularly filed his income tax returns without any idea that his illegal betting activities had tax
consequences. The Internal Revenue Service sought to tax him for the $38, 136 in gross income from gambling winnings
during the taxable year 1988. The tax court ruled that the $80,280 in unpaid bets placed by Collins constituted theft or
embezzlement income. In arriving at such conclusion, the tax court first examined:
a. Whether Collins realized economic value from the betting tickets he stole (the Realizable Value Test);
and if so,
b. Whether Collins had sufficient control over the stolen property to derive value from it (the Control Test)
The tax court ruled that Collins met both parts of the test because he had the opportunity to derive gratification
and economic gain from using the stolen tickets. The tax court thus concluded that his theft resulted in income on his part.
The tax court computed his unreported taxable income to be that amount which he stole but did not return to his OTB
($38, 105-taxable $9, 359-tax liability). Collins now appeals.
Issue:
1. W/N the tax court erred in treating his illegal betting activities as giving rise to gross income
2. W/N the tax court erred in the computation of his liability
Held/Ratio:
1. No. the tax court was correct in treating his gambling activities as giving rise to income. The Court cited the cases
from which an expansive definition of income was adopted;
a. Comm. v. Glenshaw Glass: all gains except those specifically exempted
b. James v. US: all unlawful gains are taxable; a tax payer has received income when he/she acquires
earnings, lawfully or unlawfully, without the consensual recognition, express or implied, of an obligation
to repay and without restriction as to disposition. This income test includes all forms of enrichment,

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legal or otherwise, but explicitly excludes loans. [side note: loans dont constitute income the money that
comes in is offset by the corresponding obligation to repay it]
Although his betting activities resulted to a loss on his part, the Court still deems it proper to consider such as
income because such loss cannot offset his gain in the form of opportunities to gamble that he obtained by
virtue of his embezzlement.
[Although Collins still has the obligation to repay the OTB for the unpaid bets, that fact alone does not turn
his debt into a consensual loan-which is not income hence, not taxable.]
2. No. the Court also affirms the valuation by the tax court. Income received in any form other than cash is taxed at
its fair market value (the price at which the property would change hands between a willing buyer and a willing
seller, neither being under any compulsion to buy or sell, both having reasonable knowledge of relevant facts). In
this case, $80, 280 was the retail price, thus also the fair market value, of the stolen tickets. This amount was
correctly included in his gross income as gain from theft. From that figure, Collins was entitled to a deduction for
the restitution he made to the OTB (he returned $42, 157 in the form of winning tickets). Thus, the tax court
correctly determined his total taxable theft income at $38, 105 and tax liability of $9, 359.
$80, 280 (total unpaid tickets)
-$42, 157 (winning tickets returned)
_______________________________
=$38, 105 (remaining theft income)
[PS: this case also said you can offset gambling losses from gambling winnings. However this is not applicable to
the instant case because what is sought to be taxed is theft/embezzlement income]

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47 - James v. U.S. (1961) (Union Embezzlement)

Doctrine:

Earnings acquired by a taxpayer, lawfully or unlawfully, without the consensual recognition, express or implied,
of an obligation to repay and without restriction as to their disposition, is taxable income.

Facts:
James is a union official who, embezzled $738,000 from his employer union and from an insurance company with
which the union was doing business. James failed to report these amounts in his gross income. and was charged for
willfully attempting to evade the federal income tax.
Issue:
1. W/N unlawful income is taxable?
Held/Ratio:
1. Yes, it had been a principle, that unlawful, as well as lawful, gains are comprehended within the term gross
income. the Income Tax Act of 1913 provided that the net income of a taxable person shall include gains, profits,
and income . . . from . . . the transaction of any lawful business... When the statute was amended , the word
lawful was omitted. This revealed the intent of Congress to tax income derived from both legal and illegal
sources. (not that important)
When a taxpayer acquires earnings, lawfully or unlawfully, without the consensual recognition, express or
implied, of an obligation to repay and without restriction as to their disposition, he has received income which he
is required to return, even though it may still be claimed that he is not entitled to retain the money, and even
though he may still be adjudged liable to restore its equivalent. In such case, the taxpayer has actual command
over the property taxed - the actual benefit for which the tax is paid. This standard brings wrongful appropriations
within the broad sweep of gross income; it excludes loans. When a law-abiding taxpayer mistakenly receives
income in one year, which receipt is assailed and found to be invalid in a subsequent year, the taxpayer must
nonetheless report the amount as gross income in the year received. Just as the honest taxpayer may deduct any
amount repaid in the year in which the repayment is made, the Government points out that, If, when, and to the
extent that the victim recovers back the misappropriated funds, there is of course a reduction in the embezzlers
income. (It think this means that when a person acquires earning without recognizing an obligation to repay it, it
will be a taxable income therefore embezzlements are taxable, and loans are not taxable because in loans there is a
recognition to repay)
Also the case cited by James was wrongfully decided.
Also the dissent said that, This rule that would allow the Commissioner of Internal Revenue to assert and enforce
a prior federal tax lien against that which rightfully and completely belongs to the victim. ( the majority
decision did not discussed the priority of claims, hence I used the dissent, since this is just a statement of the
effect of the ruling.)

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50 - U.S. v. Gotcher (2007)13

Doctrine:

When indirect economic gain is subordinate to an overall business purpose, the recipient is not taxed.

Facts:
In 1960, Mr. and Mrs. Gotcher took a 12 day expense-paid trip to Germany to tour the Volkswagen facilities
there. His employer, Economy Motors, paid $348.73, and Volkswagen (VW) of Germany and of America paid $1023.53.
Upon returning, Mr. Gotcher bought a 25% interest in Economy Motors, the VW dealership. The Gotchers did not include
any part of the $1372.30 in their 1960 income. The Commissioner determined that the taxpayers had realized income. The
Gotchers paid the tax, and filed for a refund. They won in the district court
Issue:
1. W/N the 12 day trip was taxable income?
Held/Ratio:
1. No for Mr. Gotcher, but yes for Mrs. Gotcher. In determining whether the expense-paid trip was income within
section 61 of the Internal Revenue Code, There must be an economic gain, and this gain must primarily benefit
the taxpayer personally. In some cases, as in the case of an expense-paid trip, there is no direct economic gain, but
there is an indirect economic gain inasmuch as a benefit has been received without a corresponding diminution in
wealth. But even if expense-paid items, as meals and lodging, are received by the taxpayer, the value of these
items will not be gross income, even though the employee receives some incidental benefit, if the meals and
lodging are primarily for the convenience of the employer.
The trip was made in 1959, when VW began to push for its share of the American market, its officials determined
that the best way to remove the apprehension about this foreign product was to take the dealer to Germany. The
dominant purpose of the trip is the critical inquiry and some pleasurable features will not negate the finding of an
overall business purpose. Since the agenda related primarily to business and that Mr. Gotchers attendance was
prompted by business considerations, the so-called sightseeing complained of by the Government is
inconsequential.
Also one does not realize taxable income when he is serving a legitimate business purpose of the party paying the
expenses. The rule is that the economic benefit will be taxable to the recipient only when the payment of expenses
serves no legitimate corporate purpose. The tax consequences are to be determined by looking to the primary
purpose of the expenses and that the first consideration is the intention of the payor. The record convinces us that
the personal benefit to Gotcher was clearly subordinate to the concrete benefits to VW. The purpose of the trip
was to push VW in America and to get the dealers to invest more money and time in their dealerships. Thus,
although Gotcher got some ideas that helped him become a better dealer, there is no evidence that this was the
primary purpose of the trip.
The corporate-executive decisions indicate that some economic gains, may nevertheless escape taxation. They
may be excluded even though the entertainment and travel unquestionably give enjoyment to the taxpayer and
produce indirect economic gains. When this indirect economic gain is subordinate to an overall business purpose,
the recipient is not taxed. We are convinced that the personal benefit to Mr. Gotcher from the trip was merely
incidental to VWs sales campaign.
As for Mrs. Gotcher, the trip was primarily a vacation. She did not make the tours with her husband to see the
local dealers or attend discussions about the VW organization. This being so the primary benefit of the expensepaid trip for the wife went to Mr. Gotcher in that he was relieved of her expenses. He should therefore be taxed on
the expenses attributable to his wife. Nor are the expenses deductible since the wifes presence served no bona
fide business purpose for her husband.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
13. Note: wikipedia has a better & shorter digest see, http://en.wikipedia.org/wiki/United_States_v._Gotcher.

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51 - Commissioner v. Kowalski (1977) (state trooper, cash meal allowance)

Doctrines:

Convenience of employer doctrine does not focus or rest on the employers characterization of the benefit, but
focuses on the business necessity of granting such benefit to the employee

Facts:
Kowalski was a state trooper in New Jersey. As state trooper, he was entitled to receive a cash meal allowance,
which varies with rank. Troopers may use the allowance for whatever they want (theyre not required to use it to pay for
food). The allowance is included in the troopers salary but its separately stated. Also, the meal allowance is separately
accounted for in the States accounting systemits never comingled with salary funds. Kowalski was entitled to
$1,697.54 in cash meal allowances. In 1970, Kowalski reported that he earned $9,006 in wages, which represented his
salary plus $326.45, which represented the cash meal allowance. The remaining $1,371.09 was not reported as income.
According to the Commissioner, this should have been considered as income, and thereby assessed a deficiency against
Kowalski.
Kowalski argues that the cash meal allowance was not compensatory but was furnished for the convenience of the
employer so it couldnt be considered as income. Kowalsku further argues that the allowance could be excluded under 26
U.S.C. 119. The Tax Court ruled that it was income, but the CA reversed.
Issues:
1. W/N cash meal allowance is taxable income
Held/Ratio:
1. YES, the cash meal allowance falls under 61 as gross income derived from compensation for services. Its not
exempt from income tax since, first, the clear wording of 119 exempts meals furnished by the employer, and not
cash reimbursements for meals. This means that while meals given by the employer in kind are not considered as
income or compensation, the same cannot be said if money or cash is given. Second, in the absence of any
specific exemption, theyre considered gross income since theyre an accession to wealth, clearly realized, and
under the complete dominion of the trooper. Finally, the cash meal allowance cant be exempted from income tax
on the basis that it was done for the convenience of the employer.
The business necessity view of the convenience of employer doctrine has persisted through different
interpretations and reenactments of the Internal Revenue Code and is the sole test to be applied whether the
doctrine may apply. The application of the doctrine does not rest on the employers characterization of the cash
payments given. Its the obvious intent of 119 to narrow the circumstances where meals could be excluded from
income taxthereby providing that only meals in kind can be exempted from income tax. To exempt cash meal
allowances would be to defeat the purpose of 119, which was specifically worded and enacted to replace prior
law and end the confusion regarding the convenience of employer doctrine.

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[Note to class: dalawa yung napagawa ko ng digest for Duberstein, so I just put down both. Hopefully two digests would
lead to a better understanding of the case. Sorry.]

52 - Commissioner v. Duberstein (1960)

Doctrines:

To determine if a payment is a gift, there should be detached and disinterested generosity out of affection,
respect, admiration, charity or like impulses.

Facts:
Commissioner v. Duberstein
Berman was president of Mohawk Metal Corporation. Duberstein was president of the Duberstein Iron & Metal
Company. They would often talk on the phone and give each other names of potential customers that the other would not
need. After receiving some particularly helpful information, Berman decided to give Duberstein a gift of a Cadillac.
Although Duberstein said he did not need the car as he already had a Cadillac and an Oldsmobile, he eventually accepted
it. Mohawk Metal Corporation later deducted the value of the car as a business expense, but Duberstein did not include
the value of the Cadillac in his gross income when he filed his tax return, deeming it a gift. He had not intended to be
compensated but admitted that the car would not have been given if not for the information exchanged. The
Commissioner asserted a deficiency for the cars value against Duberstein. The Tax court affirmed.
Stanton v. United States
Stanton, had been for approximately 10 years in the employ of Trinity Church in New York City. He was
comptroller of the Church corporation, and president of a corporation, Trinity Operating Company, the church set up as a
fully owned subsidiary to manage its real estate holdings. He resigned from both positions to go into business for himself.
As a gratuity the corporations directors awarded Stanton $20,000 in appreciation of the services rendered.
While there were testimonies that he was liked by the company, there was also evidence that Stanton was being
forced to resign arising from Watkins (the Operating Companys treasurer) termination.
Commissioner wants to collect income tax.
Issues:
1. Whether the amounts in the above cases can be considered as a gift for tax purposes
Held/Ratio:
1. For Duberstein, YES. For Stanton, not enough proof; needs further proceedings.
Voluntarily executed transfer of his property by one to another, without any consideration or compensation
(though a common law gift) is not necessarily a gift within the meaning of the statute. The mere absence of a
legal or moral obligation to make such a payment does not establish that it is a gift. If the payment proceeds
primarily from the constraining force of any moral or legal duty, or from the incentive of anticipated benefit
of an economic nature, it is not a gift. Conversely, where the payment is in return for services rendered, it is
irrelevant that the donor derives no economic benefit from it.
What controls is the intention with which payment, however voluntary, has been made. There should be
detached and disinterested generosity out of affection, respect, admiration, charity or like impulses. The
conclusion whether a transfer amounts to a gift is one that must be reached on consideration of all the factors.

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52 - Commissioner v. Duberstein (1960) (gift)

Doctrine:

From the outline:

R: gift in Sec. 102 proceeds from a detached and disinterested generosity, out of affection, respect,
admiration, charity, etc.

DONORS INTENT IS KEY.

The value of property acquired by gift is excluded from gross income.

A gift proceeds from a detached and disinterested generosity out of affection, respect, admiration, charity or like
impulses.

It is important to consider the transferors intention.

The classification as a gift depends on the circumstances of the case.

Facts:
This case discusses two different cases: Duberstein and Stanton.
Duberstein
Duberstein, an individual taxpayer, was president of the Duberstein Iron & Metal Company. He did business with
Mohawk Metal Corporation. Duberstein and the Berman, the president of the Mohawk Metal Corporation, generally
transacted business using the telephone. The two knew each other for seven years. Duberstein provided Berman with
potential customers for some Mohawk products in which his company was not interested in.
To express his gratitude for all Dubersteins help, Berman gave him a Cadillac. Duberstein protested because
he had no intention to be compensated for the information he gave Berman. However, he eventually accepted the gift.
Mohawk deducted the value of the Cadillac as a business expense on it corporate income tax return. On the other
hand, Duberstein did not include the value of the Cadillac in gross income, deeming it as a gift.
The Commissioner of Internal Revenue asserted a deficiency and the Tax Court affirmed it. The CA reversed.
Stanton
For approximately 10 years, Stanton worked as the comptroller of the Trinity Church and as the president of the
Trinity Operating Company. The Trinity Operating Company is a fully owned subsidiary set-up by the church to manage
its real estate holdings. By the end of his employment, his salary amounted to $22,500 a year. He resigned from the
positions in order to set-up his own business. Upon his resignation, the Operating Companys directors passed a
resolution granting him a gratuity of $20,000. The gratuity was duly paid. Trinity Church and Trinity Operating
Company shared the expense of the payments.
The Commissioner asserted a deficiency against Stanton for failing to include the payments in his gross income.
The trial judge ruled that the payments were a gift. The CA reversed.
The U.S. government sought review of both cases, requesting clarification of what constitutes a gift.
Issues:
1. W/N the Cadillac given to Dubenstein is a gift for taxation purposes.
2. W/N the gratuity given to Stanton is a gift for taxation purposes.
Held/Ratio:
1. YES. Gift for taxation purposes is different from gift as defined by common law.
A voluntarily executed transfer of his property by one to another, without any compensation or consideration,
though a common law gift, is not necessarily a gift for taxation purposes. With respect to taxation purposes, a gift

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proceeds from a detached and disinterested generosity out of affection, respect, admiration, charity or like
impulses. It is important to consider the transferors intention. Ultimately, the classification as a gift depends
on the circumstances of the case.
2. NO. According to the SC, the facts are insufficient to make a determination. It was not clear whether the gratuity
was given as a gift or as compensation. They vacated the judgment and remanded it for further proceedings.

53 - Wolder v. CIR (1974) (bequest)

Doctrines:

The true test regarding gifts is whether in actuality the gift is a bona fide gift or simply a method for paying
compensation.

Facts:
Wolder was a lawyer. He agreed that he would represent Boyce during the latters lifetime without charging any
fees. In exchange, Boyce agreed to bequeath a substantial sum to Wolder, which was explicitly stated in her will. When
Boyce died, Wolder received 750 shares of stock of Schering Corp. and $15,845.
Wolder argues that the legacy he received under Mrs. Boyces will is specifically excluded form income of
102(a), Int. Rev. Code of 1954, which provides that gross income does not include the value of property acquired by
gift, bequest, devise or inheritance. Wolder relies on US v. Merriam, which allowed recipients under a will to exclude
bequests received in lieu of all compensation or commissions to which they would otherwise be entitled as executors or
trustees.
Issues:
1. W/N the money and stocks Wolder received is specifically excluded from income?
Held/Ratio:
1. NO. The SC said Merriam is inapplicable to this case. There is no disputed that the parties did contract for
services and while the services were limited in nature there was also no question that they were actually
rendered. The provisions of Mrs. Boyces will, for federal tax purposes, went to satisfy her obligation under the
contract. The contract in effect was one for the postponed payment of legal services by a legacy under the
will for services rendered during the decedents life. The SC held that the true test regarding gifts is whether in
actuality the gift is a bona fide gift or simply a method for paying compensation. This question is resolved by an
examination of the intent of the parties, the reasons for the transfer, and the parties performance in accordance
with their intentions. A transfer in the form of a bequest was the method that the parties chose to
compensate Mr. Wolder for his legal services, and that transfer is therefore subject to taxation, whatever
its label whether by federal or local law may be.

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54 - Cesarini v. U.S. (N.D Ohio 1969)

(Note: Yes, its that short.!)
Facts:
The Cesarini spouses purchased a used piano at an auction sale in 1957 for $15.00. In 1964, while cleaning the
piano, they discovered $4,467.00 in old currency in the piano. They reported $4,467 on their 1964 joint income tax return
as ordinary income from other sources. Later on, they filed an amended return, eliminating $4,467.00 from the gross
income computation and requesting a refund of $836.51. The Commissioner of the Internal Revenue rejected the
Cesarinis refund claim, causing them to file suit.
Issue:
1. W/N the found money be included as income
2. Even assuming that that cash was taxable income, it can only be collected in the year (1957) that the piano was
purchased, as such, prescription has attached.
Held/Ratio:
1. YES. The finder of a treasure trove is in receipt of taxable income, for Federal income tax purposes, to the extent
of its value in United States currency, for the taxable year in which it is reduced to undisputed possession. The
fact that you can sever the cash from the piano shows that there is realization in the cash.
2. NO. The $4,467.00 was not reduced to undisputed possession until actual discovery in 1964. Pursuant to Treas.
Reg. Sec. 1.61-14, treasure trove, to the extent of its value in United States currency, constitutes gross income
for the taxable year in which it is reduced to undisputed possession. Therefore the United States is not barred by
the statute of limitations from collecting the $836.51 in tax in 1964.

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DEDUCTIONS AND CREDITS

01 - Hospital De San Juan De Dios Inc. v. CIR (1990)
Doctrines:

The word business in its ordinary and common use means human efforts which have for their end living or
reward; it is not commonly used as descriptive of charitable, religious, educational or social agencies or any
particular occupation or employment habitually engaged in especially for livelihood or gain or activities where
profit is the purpose or livelihood is the motive.

Facts:
Petitioner is engaged in both taxable and non-taxable operations. The income derived from the operations of the
hospital and the nursing school are exempt from income tax while the rest of its income are not exempt. Its rentals,
interests and dividends received from its properties and investments are taxable.
In 1952 to 1955 when petitioner was computing for its taxable income, it allowed all its taxable income to share in
the allocation of administrative expenses. Respondent, CIR disallowed, however, the interests and dividends from sharing
in the allocation of administrative expense because the expenses incurred in the administration or management of
petitioners investments are not allowable business expenses inasmuch as they were not incurred in carrying on any trade
or business within the meaning of Section 30 (a) (1) of the Revenue Code. Consequently, petitioner was assessed
deficiency income taxes for the years in question.
It protested against the assessment and requested the Commissioner to cancel and withdraw it. After reviewing the
assessment, the Commissioner advised petitioner that the deficiency income tax assessment against it was reduced to only
P16,852.41. But petitioner, through its auditors, insisted on the cancellation of the revised assessment but was denied.
Petitioner sought a review of the assessment by The Court of Tax Appeals. The CTA upheld the Commissioner
holding that the expenses incurred by the petitioner for handling its funds or income consisting solely of dividends and
interests, were not expenses incurred in carrying on any trade or business, hence, not deductible as business or
administrative expenses.
Petitioner filed a motion for reconsideration but was denied. Hence this petition.
Issues:
1. W/N the dividends and interests are expenses incurred in carrying on any trade or business, hence, deductible as
business expense under Section 30, A.1 of the NIRC
Held/Ratio:
1. NO. The CTA found that petitioner failed to prove that its receipt of interests and dividends constituted the
carrying on of a trade or business so as to warrant the deductibility of the expenses incurred in their realization.
Petitioner could have easily required any of its responsible officials to testify on this but it didnt do so. Also, the
fact that the interests and dividends here in question are merely incidental income to petitioners main activity,
which is the operation of its hospital and nursing schools, it can be said that petitioners activities never go
beyond that of a passive investor, which under existing jurisprudence do not come within the purview of carrying
on any trade or business.
And, as the principle of allocating expenses is grounded on the premise that the taxable income was derived from
carrying on a trade or business, as distinguished from mere receipt of interests and dividends from ones
investments, the CTA correctly ruled that said income should not share in the allocation of administrative
expenses.
Hospital de San Juan De Dios, Inc., according to its Articles of Incorporation, was established for purposes
which are benevolent, charitable and religious, and not for financial gain. It is not carrying on a trade or business
for the word business in its ordinary and common use means human efforts which have for their end living or

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reward; it is not commonly used as descriptive of charitable, religious, educational or social agencies or any
particular occupation or employment habitually engaged in especially for livelihood or gain or activities where
profit is the purpose or livelihood is the motive.

02 - Commissioner of Internal Revenue v. Groetzinger (1987) (Professional Gambler)

Doctrines:

A professional gambler engages in a trade if involved in the activity with continuity and regularity.

Test:
a. Activity must be continuous and regular
b. Primary purpose is to earn income or profit
i. Even if there is no sale of goods or services.

Facts:
Groetzinger was terminated from his job in February 1978. During the remainder of that year he engaged himself
in parimutuel wagering14 on greyhound races. He spent a substantial amount of time studying racing forms,
programs, and other materials. He devoted 60 to 80 hours each week to these gambling-related endeavors. He gambled
solely for his own account. He had no other profession or type of employment. For the year 1978, he earned gross
winnings of 70,000 USD but he bet 72,032 USD. Thus he suffered a loss of 2,032 USD.
Groetzinger received an income of 6,498 USD from other sources (interests, dividends, capital gains, salary
before termination) also on that year. On his ITR he reported the income from other sources but not his gambling
winnings and losses.
The CIR determined that the $70,000 in gambling winnings should be included in Groetzingers gross
income. A deduction was to be allowed for his gambling losses to the extent of these gambling gains. However he
determined that a portion of the gambling-loss deduction was an item of tax preference and is subject to a minimum tax.
There may be deductions on items of tax preference but these deductions should be attributable to a trade or business
carried on by the taxpayer.
Groetzinger appealed the CIR assessment (amounting to 2,522) and the US Tax Court ruled that none of
Groetzingers losses were items of tax preference because he was engaged in gambling as a trade/business. The CIR
appealed.
Issues:
1. W/N Groetzinger should be considered as engaged in the trade/business of gambling.
Held/Ratio:
1. YES. Jurisprudence has held that what constitutes trade/business should be determined on a case-to-case basis.
However, there may be some helpful indicators. To be engaged in a trade or business, the taxpayer must be
involved in the activity with continuity and regularity and that the taxpayers primary purpose for engaging
in the activity must be for income or profit. A sporadic activity, a hobby, or an amusement diversion does not
qualify. Groetzinger satisfies this definition. Moreover, the fact that no goods or services are being offered by
Groetzinger does not diminish his activity as being under trade/business. While the offering of goods and
services usually would qualify the activity as a trade or business, this factor is not an absolute prerequisite. If
ones gambling activity is pursued full time, in good faith, and with regularity, to the production of income
for a livelihood, and is not a mere hobby, it is a trade or business.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
14. A form of betting in which those backing the first three places divide the losers stakes.

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03 - Atlas Consolidated Mining & Development Corp v. CIR; CIR v. Atlas Consolidated Mining &
Development Corp & CA (1981)
Facts:
The tax case arose from the 1957-1958 deficiency income tax assessment made by the CIR against Atlas, a
corporation engaged in the mining industry. The 1957 deficiency arose because of the alleged non-entitlement of Atlas to
the exemption from income tax under RA 909 (something to do with mining gold). On the other hand, the 1958 deficiency
was due to the CIRs disallowance of items claimed by Atlas as deduction from gross income.
The Secretary of Finance opinioned that the exemption in RA No. 909 apply to Atlas. Hence, that issue was
resolved. As to the deductible items from the gross income, the CTA allowed the claimed deductions, except for
stockholders relation service fee and suit and litigation expenses.
Hence the appeal of both parties of the CTAs decision.
Issues:
1st case
1. Atlas appeal: W/N the CTA erred in disallowing the deduction from the gross income of the so-called
stockholders relation service fee
2nd case CIRs appeal:
2. W/N the CTA erred in allowing the certain deductions.
3. W/N the CIR can raise the fact of lack of proof of payment for the first time on appeal in the CTA
Held/Ratio:
1. NO. The principle is recognized that when a taxpayer claims a deduction, he must point to some specific
provision of the statute in which that deduction is authorized and must be able to prove that he is entitled to the
deduction which the law allows. In this case, the deduction is based on all the ordinary and necessary
expenses paid or incurred during the taxable year in carrying on any trade or business. The statutory test
for deductibility such is as follows:
a. the expense must be ordinary and necessary,
Ordinary payment which is normal in relation to the business of the taxpayer and the surrounding
circumstances; does not require payments to be habitual; payment may be unique or non-recurring
Necessary expenditure is appropriate and helpful in the development of taxpayers business.
b. it must be paid or incurred within the taxable year, and
c. it must be paid or incurred in carrying in a trade or business.
In addition, taxpayer must substantially prove by evidence or records the deductions claimed under the law,
otherwise, the same will be disallowed.
The right to a deduction depends in each case on the particular facts and the relation of the payment to the type of
business in which the taxpayer is engaged. In the case of the questioned expense, the Court ruled that it was
incurred to a favorable image of the corporation in order to gain or maintain the publics and its
stockholders patronage, does not make it deductible as business expense. The Court ruled that it was capital
expenditure instead.

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2. Partly yes.
EXPENSE

CIRs assertion

CTAs assertion

SCs DECISION

Listing
expense

Disallowed for not being

ordinary and necessary and
not incurred in trade or
business, as required under
Section 30 (a) (1) of the
National Internal Revenue
Code

Jurisprudence allowed the

deduction
of
stock
exchange fee in dispute,
which is an annually
recurring cost for the
annual maintenance of the
listing. (Chesapeake v.
CIR)

NO ERROR

Fees
were
therefore
incurred not for the
production of income but
for the acquisition petition
of capital
Suit expenses
Attorneys fees
and litigation
expenses
in
defense of title
of their mining
properties

Litigation
expenses
incurred in defense or
protection of title are
capital in nature and not
deductible.
Expenses
incurred shall be added to
the cost of property
defended

Chesapeake decision is
controlling because fee
paid by the company was
annual and recurring.

WITH ERROR
amount.

as

to

CTAs argument is correct.

3. NO. The Commissioner on appeal cannot be allowed to adopt a theory distinct and different from that he has
previously pursued, as shown by the BIR records and the answer to the amended petition for review.

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04 - Esso Standard Eastern, Inc. v. CIR (1989) (dry hole, police power, ordinary and necessary expenses)
Doctrines:

Margin levy on foreign exchange was held to be a police power measure to strengthen the countrys international
reserve rather than a tax.

Margin fees paid in connection with the profit remittances to the Head Office abroad are not ordinary and
necessary expenses allowed as a deduction for income tax purposes

Facts:
ESSO deducted from its gross income for 1959, as part of its ordinary and necessary business expenses, the
amount it had spent for drilling and exploration of its petroleum concessions. This claim was disallowed by the respondent
Commissioner of Internal Revenue on the ground that the expenses should be capitalized and might be written off as a
loss only when a dry hole should result. Also claimed in the tax returns, as ordinary and necessary expenses, are margin
fees it had paid to the Central Bank on its profit remittances to its New York head office. The CIR disallowed the margin
fees as a deductible expense for income tax purposes.
Issue:
1. W/N the margin fees paid by ESSO in connection with its profit remittance to the NY Home Office are allowed as
deduction for income tax purposes
Held/Ratio:
1. No. The Court ruled that margin fees are not taxes because they are not imposed to generate revenues, but they are
an exercise of the governments police power designed to discourage imports and encourage exports, and
ultimately, to curtail any excessive demand upon the international reserve in order to stabilize the currency.
Moreover, margin fees are not necessary and ordinary business expenses because ESSO has not shown any proof
that the remittance to the head office of part of its profits was made in furtherance of its own trade or business.
The said margin fees are not expenses in connection with the production or earning of ESSOs income in the
Philippines. They were expenses incurred in the disposition of said income (i.e., profit remittance to HO).
Requisites based on the Court ruling: (1) the expense must be ordinary and necessary, (2) it must be paid or
incurred within the taxable year, and (3) it must be paid or incurred in carrying on a trade or business.
[Note: This case was already assigned before, under police power v. power of taxation, dinagdagan ko lang ng konte
relating to allowable deductions. !]

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05 - Zamora v. Collector (1963)(joint medical and business trip abroad)

Doctrines:

Section 30, of the Tax Code, provides that in computing net income, there shall be allowed as deductions all the
ordinary and necessary expenses paid or incurred during the taxable year, in carrying on any trade or business.
Since promotion expenses constitute one of the deductions in conducting a business, same must testify these
requirements.

Facts:
Mariano Zamora owned Bay View Hotel and Farmacia Zamora. Sometime in 1951, his wife, Esperanza Zamora
went to Japan and the United States supposedly to buy a new Tiki-Tiki plant, and look at how modern hotels operated. In
applying for dollar allocation with the Central Bank, she stated that it was a combined medical and business trip. She
was given P5,000 in dollar allocations, but in the income tax return filed during that year, she designated P20,957 as
deductible promotional expenses. The CIR alleged that he made unallowable deductions and ordered him to pay the
deficiency. Zamora appealed to the CTA, but the CTA only allowed P10,478.50 (half of the 20k) to be deducted as a
necessary business expense. Zamora then appealed to the Supreme Court, arguing that the whole 20k should be
deductible as an ordinary and necessary expense in his trade or business (of managing the hotel).
Issues:
1. W/N the whole P20k is deductible from Zamoras income tax
Held/Ratio:
1. NO. Only The CTA is correct that only half of it is deductible. While it is true that ordinary and necessary
expenses incurred in carrying out ones trade or business is deductible, these expenses must be itemized in detail
and proven as such. In this case, the Zamoras were unable to produce receipts that would show that the whole
P20k was used as promotional expenses for their hotel. They admit that Mrs. Zamora went abroad on a combined
medical and business trip, and so, it was inevitable that she would also incur personal expenses during that trip.
Seeing that they are unable to delineate which are business expenses and which are personal ones (due to the lack
of receipts & supporting documents), then the SC deemed it fair that half be considered business expenses and
half be considered personal ones. (given na nga that they didnt have receipts plus di pa nila ma-explain kung
bakit umabot sa 20k yung expenses eh yung binigay lang ng Central Bank is 5k).!

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06 - C.M. Hoskins & Co., Inc. v. Commissioner of Internal Revenue (1969)

Doctrine:

The conditions precedent to the deduction of bonuses to employees are: (1) the payment of the bonuses is in fact
compensation; (2) it must be for personal services actually rendered; and (3) the bonuses, when added to the
salaries, are reasonable when measured by the amount and quality of the services performed with relation to the
business of the particular taxpayer. In determining whether the particular salary or compensation payment is
reasonable, the situation must be considered as whole.

It is a general rule that Bonuses to employees made in good faith and as additional compensation for the services
actually rendered by the employees are deductible, provided such payments, when added to the stipulated salaries,
do not exceed a reasonable compensation for the services rendered.

Facts:
C.M. Hoskins & Co., Inc. (The Company) was founded by C. M. Hoskins in 1937. He owns 996 out of 1000
shares, the other 4 shares being held by the other four officers of the corporation, constituting exactly 99.6% of the total
authorized capital stock. During those 4 years of its existence, Hoskins was the President, and in 1957, was also the
chairman of the Board of Directors and salesman-broker for the company. He received a salary of P3,750 a month, plus a
salary bonus of about P40,000 a year. In addition, Hoskins also received a 50% share of the sales commissions earned by
the company, plus free use of the company car and receipt of other similar allowances and benefits.
As a stockholder and officer of the Paradise Farms, Inc. and Realty Investments, Inc., the company also derived a
large portion of its income in the form of supervision fees and commissions earned on sales of lots. As chairman of the
Board of Directors of the company, Hoskins duties were to act as a salesman as well as a director to preside over
meetings and to get all of the real estate business could for the company by negotiating to finance real estate operations
where that was necessary. He was also well-versed with the contract entered into by the company with Paradise Farms
and Realty Investments arranging contracts for road constructions and providing water.
The company filed its income tax return for its fiscal year on 1957, showing a net income of P92,540 and a tax
liability due thereon of P18,508, which it paid. Upon verification of its return, the CIR disallowed 4 items of deduction in
the tax returns and assessed against it an income tax deficiency in the amount of P28,054 plus interests.
Issue:
1. W/N the disallowed payment to Hoskins was unreasonable, bearing a close relationship to the his dominant
stockholdings and amounted to a distribution of its earnings and profits.
Held/Ratio:
1. YES. If the payment of P99,977 were to be allowed as a deductible item, then Hoskins would receive on these 3
items alone (salary, bonus and supervision fee) a total of P184,977, which would be double the companys
reported net income for the year. If independently, a one-time P100,000 fee to plan and supervise a subdivision
project were to be paid to an experienced realtor such as Hoskins, its fairness and deductibility by the taxpayer
could be conceded.
However, the 50% of the supervision fee of the company was being paid by it to Hoskins every year and for as
long as its contract with the subdivision owner subsisted, regardless of whether Hoskins actually rendered service,
since his services to the company included such planning and supervision and were already handsomely paid for
by the company.
The Companys invoking of its policy of sharing equally sales commissions with its salesmen is equally
untenable. The salesmen get 1/2 of the total commission received by the Company, but not exceeding 5%. In the
case of subdivisions, when the office commission covers general supervision, the 1/2-rule does not apply, the
salesmans share usually being stipulated at 4% in the case of each subdivision. In addition to the Companys
sales commission of 12% of gross sales, the subdivision owners were paying to the Company 8% of gross sales as
supervision fee, and a collection fee of 5% of gross collections, or total fees of 25% of gross sales.

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While it is the right of the employer as against the CIR to fix the compensation of its officers and employees, the
employers right may be conceded, however, the question of the allowance or disallowance as deductible
expenses for income tax purposes is subject to determination by the CIR. For income tax purposes the employer
cannot legally claim such bonuses as deductible expenses unless they are shown to be reasonable. To hold
otherwise would open the gate of rampant tax evasion.

07 - Aguinaldo Industries Corp. v. CIR (1982) (Bogus Bonus)

Doctrines:

In computing net income there shall be allowed as deductions

Expenses:
a. In general. All the Ordinary and necessary expenses paid or incurred during the taxable year in carrying
on any trade or business, including a reasonable allowance for personal services actually rendered.

For purposes of income tax, of certain items for alleged compensation of officers of the taxpayer, two (2)
questions become material, namely:
a. Have personal services been actually rendered by said officers?
b. In the affirmative case, what is the reasonable allowance therefor?

Facts:
Aguinaldo Industries purchased a parcel of land in Muntinglupa for its Fish Nets Division Factory. Subsequently,
a more suitable location was bought and the land previously bought was sold with profit. Aguinaldo Industries maintains
separate books for each of its divisions.
The BIR found out that the Fish Nets Division deducted from its gross income a certain amount which
represented additional remuneration paid to officers and was considered as selling expense (bonus to officers) of the
Muntinglupa lot. BIR claimed for deficiency taxes. The court then imposed a 5% surcharge and 1% monthly interest on
such deficiency assessment.
Issues:
1. W/N the bonus is deductible from income.
2. W/N the company is liable for interest and surcharge
Held/Ratio:
1. NO. The records show that the sale was effected through a broker therefore not showing any actual service
rendered by the companys officers which was the basis of the bonus, and therefore lacks the basis for deduction
since it cannot now be considered as selling expense or a deductible expense.
2. YES.
1% Interest
The imposition of 1% monthly is but a just compensation to the State for the delay in paying the tax and for the
concomitant use by the taxpayer of funds that rightfully should be in the government s hands.
5% surcharge
Strong reasons of policy support a strict observance of this rule. Tax laws imposing penalties for deliquencies are
clearly intended to hasten tax payments or to punish evasion or neglect of duty in respect thereof.

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08 - Welch v. Helvering (1933) (paying off the debts of a bankrupt corporation)

Doctrine:

It is not ORDINARY to cover someone elses debts.

NECESSARY in Section 162 requires that expenses merely be appropriate and helpful in the development of the
taxpayers business.

Facts:
E. L. Welch Company is a company engaged in the grain business. It was adjudged as an involuntary bankrupt.
Welch was the secretary of said company. After the company being adjudged as bankrupt, Welch made a contract with
Kellogg Company to purchase grain on commission.
In order to reestablish his relations with customers whom he had known when acting for the Welch
Company and to solidify his credit and standing, he decided to pay the debts of the Welch business so far as he was
able. Welch did this for 5 years.
Now the CIR ruled that these payments were not deductible from income as ordinary and necessary expenses, but
were rather in the nature of capital expenditures, an outlay for the development of reputation and goodwill. The Board of
Tax Appeals sustained. CA affirmed.
Issue:
1. W/N payments by Welch are allowable deductions in the computation of his income if made to the creditors of a
bankrupt corporation in an endeavor to strengthen his own standing and credit.
Held:
1. NO. Welchs repayments of his discharged debts were not ordinary and necessary business expenses, and
therefore not deductible under Sec. 162 of IRC. The Court held that ordinary expenses always carry a strain of
consistency within them. And that men do at times pay the debts of others without legal obligation or the lighter
obligation imposed by the usages of trade or by neighborly amenities, but they do not do so ordinarily, not even
though the result might be to heighten their reputation for generosity and opulence.
The act of paying the creditors of a bankrupt corporation to satisfy his credit and standing is an unusual
occurrence in the world of business and was not typical enough to qualify as ordinary.

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09 - Gilliam v. Commissioner (1986)

Doctrines:

In order for the expense to be deductible by a taxpayer, it must be an ordinary expense, it must be a necessary
expense, and it must be an expense of carrying on the taxpayers trade or business

Facts:
Gilliam is, and was at all material periods, a noted artist. His works have also been exhibited and sold at the
Fendrick Gallery, Washington, D.C. In addition, Gilliam is, and was at all material periods, a teacher of art. On occasion,
Gilliam lectured and taught art at various institutions.
Gilliam accepted an invitation to lecture and teach for a week at the Memphis Academy of Arts in Memphis,
Tennessee. On Sunday, February 23, 1975, he flew to Memphis to fulfill this business obligation.
About one and one-half hours after the airplane departed Washington National Airport, Gilliam began to act in an
irrational manner. He talked of bizarre events and had difficulty in speaking. According to some witnesses, he appeared to
be airsick and held his head. Gilliam began to feel trapped, anxious, disoriented, and very agitated. Gilliam said that the
plane was going to crash and that he wanted a life raft. Gilliam entered the aisle and, while going from one end of the
airplane to the other, he tried to exit from three different doors. [Basically, he had a nervous breakdown. Then Gilliam
struck Seiji Nakamura, another passenger, several times with a telephone receiver. Nakamura was seated toward the
rear of the airplane, near one of the exits. Gilliam also threatened the navigator and a stewardess, called for help, and
cried. As a result of the attack, Nakamura sustained a one-inch laceration above his left eyebrow which required four
sutures. Nakamura also suffered ecchymosis of the left arm and pains in his left wrist.
On arriving in Memphis, Gilliam was arrested by Federal officials. On March 10, 1975, Gilliam was indicted.
He was brought to trial. Gilliam paid $8,250 and $8,600 for legal fees in 1975 and 1976.
Gilliam contends that he is entitled to deduct the amounts paid in defense of the criminal prosecution and in
settlement of the related civil claim under section 162, as an ordinary expenses of Gilliams trades or businesses.
Issues:
1. Whether the amounts paid in defense of the criminal in settlement of the related civil claim is deductible
Held/Ratio:
1. The Tax Court found that Gilliams expenses were not necessary business expenses. The Court held that In
order for the expense to be deductible by a taxpayer, it must be an ordinary expense, it must be a necessary
expense, and it must be an expense of carrying on the taxpayers trade or business. It distinguished the
Gilliam case from another case where a driver could deduct the costs of dealing with a hit-and-run accident by
noting that accidents are a necessary part of driving, while air rage is not a necessary part of air travel.
It is not ordinary for people in such trade or business to be involved in altercations of the sort here involved in the
course of any such travel. The travel was not itself the conduct of Gilliams trade or business. The expenses here
are not strictly a cost of his transportation. Neither the altercation nor the expenses were undertaken to further
his trade or business. Therefore, where the cost is an adjunct of, and not a direct cost of transporting an individual,
the expense is not allowed as a transportation cost deduction.

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10 - US v. Gilmore (1963) (legal fees for divorce case not deductible)

Doctrine:

The origin or character of the claims, not the potential consequence on the income-producing activity, should be
the basis for determining whether legal fees are business or personal in nature.

Facts:
Mr. Gilmore was a rich businessman who owned controlling ownership over three corporations which were
franchised automobile dealership with General Motors. His gross income composed of his salary ($66.8k annually) as
president of the said corporation and dividends ($83k annually) from the stocks. His wife had sued for divorce, alimony,
and an alleged community of property interest in said stocks. He incurred legal fees in the said case, and eventually he
won. He then included the legal fees as deduction to his gross income under Section 23(a)(2) of the IRC of 1939, as
ordinary and necessary expenses . . . incurred ... for the conservation ... of property held for the production of income.
He contends that if he lost in the divorce case, then he would have lost his sources of income; ergo, he incurred the legal
fees for conservation of his business. The Internal Revenue Service (IRS) denied the deduction.
Issue:
1. W/N the said legal fees are deductible for tax purposes
Held/Ratio:
1. No. The said deduction must relate to a business. The basic test of whether an expense is business or personal
in nature should be based on the origin and character of the claim, and not based on the potential consequences
that might result in a taxpayers income-producing activity. In the case at bar, since the claims of his wife
originated from marital relationship, and not on income-producing activity, the legal fees incurred cannot be
considered as deductible expense for tax purposes under Sec. 23(a)(2) of IRC of 1939.

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11 - Commissioner v. Tellier (1966)

Doctrine:

Tax code is not concerned about the origin of tax payers income, only that tax is paid upon it. To disallow the
deduction would be to potentially increase the punishment using the tax code.

Deductions are disallowed only where their allowance would severely and immediately frustrate sharply defined
national or state policies proscribing particular forms of conduct, policies frustrated must be declared by the
government and frustrated must be declared by the government and such frustration must be severe and
immediate.

Facts:
Walter F. Tellier was engaged in the business of underwriting the public sale of stock offerings and
purchasing securities for resale to customers. In 1956, he was brought to trial upon a 36-count indictment that
charged him with violating the fraud section of the Securities Act of 1933, the mail fraud statute, and with conspiring to
violate those statutes. He was found guilty on all counts, and was sentenced to pay an $18,000 fine and to serve four and
a half years in prison. The judgment of conviction was affirmed on appeal. In his unsuccessful defense of this criminal
prosecution, Tellier incurred and paid $22,964.20 in legal expenses. He claimed a deduction based on 162(a) for
that amount on his federal income tax return for that year. The Commissioner disallowed the deduction on the
ground of public policy, and was sustained by the Tax Court. The Court of Appeals reversed in a unanimous en banc
decision
Issue:
1. W/N expenses incurred by a taxpayer in the unsuccessful defense of a criminal prosecution may qualify for
deduction from taxable income.
Held/Ratio:
1. Yes. No such public policy exception to the plain provisions of 162(a) is warranted in the circumstances
presented by this case. Federal income tax is a tax on net income, not a sanction against wrongdoing. The
object of law on taxation is to tax a mans net income - what he has at the end of the year after deducting from his
receipts his expenditures or losses. It is not to reform mens moral characters.
Moreover, payments deducted by the respondent were expenses of his securities business under the decisions of
the Court. The origin and character of the claim with respect to which an expense was incurred, rather than
its potential consequences upon the fortunes of the taxpayer, is the controlling basic test of whether the
expense was business or personal. The criminal charges against the Tellier found their source in his business
activities as a securities dealer. Telliers legal fees, paid in defense against those charges, therefore clearly qualify
as expenses paid or incurred in carrying on any trade or business.
Lastly, deductions of expenses encompassed by 162, in the absence of specific legislation, are disallowed
only where their allowance would severely and immediately frustrate sharply defined national or state
policies proscribing particular forms of conduct, policies frustrated must be declared by the government and
frustrated must be declared by the government and such frustration must be severe and immediate.

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12 - Kuenzle and Streiff v. CIR (1969) (reasonable bonuses)

Doctrines:

Bonuses to employees made in good faith and as additional compensation for the services actually rendered by the
employees are deductible, provided such payments, when added to the stipulated salaries, do not exceed a
reasonable compensation for the services rendered

The condition precedents to the deduction of bonuses to employees are: (1) the payment of the bonuses is in fact
compensation; (2) it must be for personal services actually rendered; and (3) bonuses, when added to the salaries,
are `reasonable ... when measured by the amount and quality of the services performed with relation to the
business of the particular taxpayer

Facts:
Petitioner appealed due to a claim by the CIR of for deficiency income tax for the disallowance as deductibles
some items of bonuses paid by the petitioners to its officers upon the ground that these were not
ordinary/necessary/reasonable expenses. In a way, what was happening was the company pays the officers low salaries
but grants them substantial bonuses at the end of each year.
Issue:
1. W/N the bonuses are in fact reasonable. (other elements were affirmed)
Held/Ratio:
1. NO. Petitioner contends that it has the right to fix the compensation of its officers and employees and such was
exercised when it paid such bonuses. Such right maybe conceded, but for income tax purposes the employer
cannot legally claim such bonuses as deductible expenses unless they are shown to be reasonable. To hold
otherwise would open the gate to rampant tax evasion.
The fact that the question of allowing or disallowing as deductible expenses the amounts paid to corporate officers
by way of bonus is determined by respondent exclusively for income tax purposes. Concededly, he has no
authority to fix the amounts to be paid to corporate officers by way of basic salary, bonus or additional
remuneration a matter that lies more or less exclusively within the sound discretion of the corporation itself.
But this right of the corporation is, of course, not absolute. It cannot exercise it for the purpose of evading
payment of taxes legitimately due to the State.
In addition, amidst experiencing net losses, they still managed to pay these bonuses which lead to the using of the
general reserve instead of the usual surplus profits of the corporation. This is clearly in contravention of the
principle of deductibility of expenses, it was used too far and advantageously.

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13 - West v. Commr (Tax Ct. 1991) (delinquency charge not deductable)

Doctrines:

[Sorry, I couldnt find the case due to insufficient citation, this is just a digest I copied from an old digest
reviewer]

Penalty on delinquent mortgage not deductible because bank assessed late charge to recoup its costs related to
collection of delinquency fees.

Facts:
Petitioners purchased a house financed in part by a loan from Bank of America. The loan was evidenced by a note
which provided for interest (12.25% per year) and a delinquency charge for each installment in default 15 days (4% of
each installment). The petitioner defaulted and so, they paid $997 for such charges. They claimed this as a deduction. CIR
disallowed; reasoning that these were not interest.
Issues:
1. W/N delinquency charges is interest.
Held/Ratio:
1. NO. Delinquency charges not interest. Hence, not deductible. Interest compensation for the use or forbearance
of money. The delinquency charges in this case is not interest because of 3 reasons.
The formula for calculating this charge is different from that of no interest computations. The amount of the
charge here has no correlation with the passage of time and is unrelated to the prevailing market rate for interest.
The charge here remained constant through out the entire term of the loan.
The purpose of the charge is to discourage late payments. To this extent, it is a penalty. And penalties are not
considered as interest under California law.
The ruling adopted by the CIR that late payment charge is for the use of money applies only if there is no
evidence that the specific charge was for a specific service performed. In this case, however, the bank assessed the
charges to recoup its costs. (phone calls, supervisory reviews, field visits, etc) to collect the payment. Since there
is service performed for the charges, the stated CIR Ruling does not apply.

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14 - CIR v. Palanca (1966)

[Link: http://www.lawphil.net/judjuris/juri1966/oct1966/gr_l-16626_1966.html (Original Case)]
Facts:
Carlos Palanca Sr donated his shares of stock in La Tondena, Inc. to his son, Palanca Jr. However, for failure to
file a return on the donation, Palanca Jr. was assessed with gift tax, surcharge, and interest by the CIRwhich he later on
paid.
For that taxable year, Palanca Jr. filed with the BIR his Income Tax Return with a claim of the interest as a
deduction. He later on, claiming for a refund, amended his Income Tax Return to include an additional deduction for the
interest paid on the donees gift tax. However this was denied by the CIR and CTA.
Meanwhile the CIR considered the transfer of shares of stock to be a transfer in contemplation of death. As a
result, the CIR assessed against Palanca Jr., estate and inheritance taxes as well. Consequently, Palanca Jr. once again
amended his Income Tax Return for the same year to include, in addition to the previous deduction, INTEREST on the
estate and inheritance taxes on the transfer shares of stock.
Summary:
Sr donated to Jr shares of stock
Jr paid gift tax, surcharge,and interest
Jr filed his ITR w/ deduction of interest
Meanwhile CIR said that the transfer was in contemplation of death
Thus CIR assessed Jr with estate and inheritance taxes as well
Jr paid estate and inheritance taxes
Jr amended ITR claiming the INTEREST of the estate and inheritance taxes as deductions
Issue:
1. W/N the amount paid for interest on the delinquent estate and inheritance tax is deductible from his gross income
for that year.
Held/Ratio:
1. Yes. According to Section 30 (b) (1) of the tax code, the interest paid within the taxable year on indebtedness
may be allowed as a deduction from gross income. In our jurisdiction, the rule is settled that although taxes
already due have not the same concept as debts, they are, however obligations that may be considered as
such.
Furthermore, the term INDEBTEDNESS as used in the tax code of US has been defined as an unconditional
and legally enforceable obligation for the payment of money. Thus, within the meaning of that definition, it is
apparent that a tax may be considered as indebtedness. Ultimately, it follows that the interest paid by Palanca Jr.
for the late payment of his estate and inheritance tax is deductible from his gross income under Sec. 30.
The interpretation placed upon the said section by the court was predicated on the congressional intent, not on the
nature of the tax for which the interest was paid.

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15 - Commissioner of Internal Revenue v. American Rubber Co. (1966)

Doctrines:

The sales tax is by law imposed directly on the act (sale) of the manufacturer, producer or importer, who is
exclusively made liable for its timely payment. The Government does not care where he got his money to pay
the tax as long as he pays for it.

To make the buyers sue for the refund of the illegal sales tax they paid would violate public policy and morals
since only a little sum is involved per buyer and that if each would sue for recovery there would be multiplicity of
suits.

Municipal Taxes v. Sales Taxes: Municipal tax is imposed upon the thing sold.

Facts:
American Rubber Co. is engaged in producing and selling rubber. They have several products in the market15.
The CIR assessed taxes from 1955-1958, which American Rubber paid under protest. American Rubber contends that
they should be exempt from paying sales taxes because under Sec. 188 of the then Internal Revenue Code agricultural
products are exempt from payment of sales taxes. The CIR on the other hand contends that the above-mentioned
products were not agricultural because they underwent manufacturing processes (adding ammonia, undergoing rolling
process to flatten them into sheets, etc.). The CIR also contends that American Rubber is not the proper party to sue
for refund because the sales taxes had been itemized separately on the invoice and billed to the buyers, therefore,
the buyers should be the one to claim the money because they paid for it. The CTA held that some of the products were
not agricultural products but are actually manufactured products because they underwent manufacturing. They also
ruled, in light of the Medina Case (involving municipal taxes), that only the customers have legal standing to
recover the taxes paid.
Issues:
1. W/N the products were agricultural products and consequently, exempt from sales taxes.
2. (TOPIC) W/N the billing of the sales tax by American Rubber to the buyers would render the former
without legal standing to sue for refund.
Held/Ratio:
1. YES. The exemption was clearly for agricultural products whether in their original form or not. The fact that
ammonia was added or that the rubber underwent rolling does not deprive the product of their agricultural nature
since these processes were made only to preserve the rubber, necessary for the business, as rubber easily spoils.
However, the exemption of agricultural products was suspended from Aug 1956-June 1957 during the
subsistence of a law stating that the exemption should only be for agricultural products in their original form.
Therefore, the tax collected for this period (alone), amounting to P37,075 shall not be refunded.
2. NO. Sales tax is by law imposed directly, not on the thing sold, but on the act (sale) of the manufacturer, producer
or importer, who is exclusively made liable for its timely payment. There is no proof that the tax paid by
American Rubber is the very money paid by its customers. Where the tax money paid by American Rubber
came from is really no concern of the Government, but solely a matter between them and their customers.
Once recovered, American Rubber holds the refund taxes in trust for the individual purchasers who advanced
payment and whose names must appear on the record.
That the taxes where itemized separately in the invoice and billed to the buyer does not render American Rubber
without legal standing because such itemization was actually mandated by the CIR himself in a circular to prevent
double taxation.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
15. In case sir asks: (1) Preserved Latex, (2) Pale Crepe No. 1, (3) Pale Crepe No. 2, (4) Ribbed Smoked Sheets Nos. 1 and 2, (5) Flat Bark Rubber,
(6) 2X Brown Crepe and (7) 3X Brown Crepe

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[Essentially isipin niyo ang receipt tuwing kumakain kayo, diba separate item ung VAT tas binabayaran niyo
siya? Ganun yung sales tax. Ngayon sinasabi nung circular ng CIR na dapat nakaseparate item ung sales tax at
ung original price para mas madaling iassess. Kung papagsamahin kasi sila, tas itatax ng BIR ung total, magiging
taxable ulit ung sales tax na kinolekta mo from the buyer. Take note na pwedeng i-shift ang VAT sa buyer as we
discussed during the first half of the sem.]
It is also absurd to say that only the buyers have the right to claim for refund because the individual customers to
whom the tax is ultimately shifted will ordinarily not care to sue for its recovery, in view of the small amount
paid by each and the high cost of litigation for the reclaiming of an illegal tax. The Medina Doctrine is not
applicable.

16 - Cebu Portland Cement Company v. Collector of Internal Revenue (1968)

Facts:
Cebu Portland Cement Company (CPCC) manufactures and sells APO portland cement. This case is a claim for
refund of P458,241.45 sales tax paid from November 1, 1954 to March, 1955, and P427,552.95 ad valorem tax paid from
April, 1955 to September 30, 1956 from the sale of APO portland cement produced by the petitioner.
Republic Act No. 1299, a law exempting minerals and mineral products from sales tax, took effect on June 16,
1955. CPCC claims that such law is retroactive, the law having clarified the definition of the tax exempt minerals and
mineral products. CPCC now claims a tax refund on the sale tax it paid to the CIR.
In addition, in computing its tax payable, CPCC deducts the cost of the bag and gypsum from the gross selling
price as tax base for the sales tax. CIR contends that computation must be solely based on the gross selling price, and no
deduction is permitted.
Moreover, CPCC claims a refund on the ad valorem taxes it paid. The CIR counters this contention by claiming
that CPCC is not the proper party for the claim. CIR rationalised that although CPCC may be the entity who paid the ad
valorem taxes, it was the purchasers who really paid for the ad valorem tax. CIR also raised the defense of prescription of
action.
Issue:
1. W/N CPCC was tax exempt prior to the effectivity of RA 1299;
2. WN the cost of the bag containers used in the sale, and the gypsum used in the manufacture, of cement should be
deducted;
3. WN the petitioner, and not its customers, is the proper party to seek refund of taxes erroneously paid under
section 186 of the Tax Code;
4. WN the action has prescribed.
Held/Ratio:
1. No, before the effectivity of RA 1299, amending section 246 of the National Internal Revenue Code, cement was
taxable as a manufactured product under section 186. Like other statutes, tax laws operate prospectively, whether
they enact, amend or repeal, unless, as aforesaid, the purpose of the Legislature to give retrospective effect is
expressly declared or may clearly be implied from the language used.10 It thus results that before the enactment
of the amendment to section 246 of the Tax Code, when cement was not yet placed under the category of either
minerals or mineral products it was not exempt from the percentage tax imposed by section 186 of said Code,
and was, therefore, taxable as a manufactured product.
2. Yes, in computing the gross selling price, of the cement as basis for the 7% percentage tax levied in pursuance to
section 186, the cost of the bag containers used in the sale, and the gypsum used in the manufacture, of cement
should be deducted. In the absence of any showing that the petitioner itself manufactured the bag containers, the
inference is that these bags were bought from others from whom taxes had been levied for the original sale

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thereof. The same holds true with the gypsum used in the process of the manufacture of cement, considering that
said component is imported, and subject to compensating tax.
3. Yes, the CPCC, and not its customers, is the proper party to seek refund of taxes erroneously paid under section
186 of the Tax Code. It may indeed be that the economic burden of the tax finally falls on the purchaser; when it
does the tax becomes a part of the price which the purchaser must pay. It does not matter that an additional
amount is billed as tax to the purchaser. The method of listing the price and the tax separately and defining
taxable gross receipts as the amount received less the amount of the tax added, merely avoids payment by the
seller of a tax on the amount of the tax. The effect is still the same, namely, that the purchaser does not pay the
tax. He pays, or may pay the seller more for the goods because of the sellers obligation, but that is all and the
amount added because of the tax is paid to get the goods and for nothing else.
4. No, the action for refund has not prescribed in so far as concerns the sales or percentage taxes paid after January
25, 1953;
Yes, action for refund has prescribed for sales or percentage taxes paid before January 25, 1955, and for all ad
valorem taxes alleged in the amended petition, which were paid more than two years back from October 24, 1959,
when said taxes were sought to be refunded for the first time.

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17 - Marcelo Steel v. CIR (1960) (umasang maka-libre, pero hindi)

Doctrine:

An entrepreneur engaging in a new and necessary industry faces uncertainly and assumes a risk bigger than one
engaging in a venture already known and developed. Usually loss is incurred rather than profit made. It is for
these reasons that the law grants him tax exemption under RA 35to lighten onerous financial burdens
and reduce losses. However these may be, Republic Act No. 35 has confined the privilege of tax exemption
only to new and necessary industries. It did not intend to grant the tax exemption benefit to an entrepreneur
engaged at the same time in a taxable or non-payment industry and a new and necessary industry, by allowing
him to deduct his gains or profits derived from the operation of the first from the losses incurred in the operation
of the second. Unlike a new and necessary industry, a taxable or non-exempt industry is already a going concern,
deriving profits from its operation, and deserving no subsidy from the Government. It is but fair that it be required
to give to the Government a share in its profits in the form of taxes.

Facts:
RA 35 granted a four-year tax exemption from all internal revenue taxes to enterprises, directly payable by
such enterprise or person, which shall engage in new and necessary industries. Petitioner Marcelo Steel was engaged in
the business of manufacturing (1) wire fences, (2) steel nails, and (3) steel bars, rods, and other allied steel products.
The last two were covered by the tax exemption under RA 35.
In the years 1953 and 1954, Marcelo Steel filed its ITR showing a net income of P34M and P58K, respectively,
derived solely from its wire fence manufacturing business (not tax exempt). Marcelo Steel was accordingly assessed
P12,750 in taxes which it paid. Subsequently, Marcelo Steel filed an amended ITR for the same taxable years showing
that it actually incurred a loss of P871K and P104K, respectively. The losses were arrived at by consolidating the gross
income and the gross allowable deductions of its three industries.
Because of the amended ITR, Marcelo Steel filed for a refund of the P12,750 it initially paid in taxes on the
theory that since it is a corporation organized with a single capital to answer for all its financial obligations, the gross
income from both tax-exempt and non-exempt industries and its liability should be based on the difference
between its consolidated gross income and its consolidated allowable deductions. Both the CIR and the Court of Tax
Appeals rejected Marcelo Steels refund claim.
Issue:
1. W/N the petitioner may be allowed to deduct from the profits realized from its taxable business activities, the
losses sustained by its tax except industries.
Held/Ratio:
1. NO. Marcelo Steel cannot consolidate.
The purpose of RA 35 is to encourage the establishment of new and necessary industries for the economic
growth of the country. In effect, it grants a subsidy to entrepreneurs who blaze a trail in a new industry since
there are greater risks involved in the same and an ROI is usually not immediately forthcoming. As such, a tax
exemption granted to an entrepreneur engaged in a tax-exempt industry cannot be extended to benefit nonexempt industries in which the same entrepreneur is concurrently engaged. The justification is simply not there
since such industries are, presumably, already deriving profits from its operations. In this case, Marcelo
Steels wire fence business cannot be indirectly benefited by the tax exemption on the two other businesses.
The argument that all three industries are organized under a single capital has no merit. It is clear that the law
intended that tax exempt and non-exempt industries be treated separately as reflected in EO 341, series of
1950, which was incorporated in RA 901, a later incarnation of the same law.

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18 - Fernandez v. CIR (1969) (worthless stock deductible when issuing corp have ceased operation)
Doctrine:

GEN RULE: Securities becoming worthless shall not be deductible

o

Exception: unless actually sustained,

"

Exception to the exception: Issuing company has ceased operations

Facts:
Fernandez Hermanos, Inc., is a domestic corporation engaged in business as an investment company. Upon
verification of the taxpayers income tax returns, the CIR assessed against the taxpayer deficiency income taxes for the
years 1950-1954.
The pertinent part of the assessments for our discussion was that of the claimed losses in writing off as
worthless securities in it 1950 return, Maiti Lumber Co (MLC) shares.
The CIR contends that the Tax Courts allowance of the write-off as worthless is not proper because the
worthlessness of the stock in the year 1950 has not been clearly established. Notwithstanding the lack of operation of
MLC, it still owned assets of considerable value.
Issue:
1. W/N the Tax Court properly allowed for the deduction of the losses in MLC shares.
Held/Ratio:
1. YES. The SC found that MLC ceased operation in 1949 and that the Manager and owner of the company has
already died. When it stopped its operation, it was completely insolvent. This information reached the taxpayer
only in 1950 in which case it properly claimed the loss as a deduction in the 1950 tax return.
The SC ruled that there was adequate basis for writing off the stock as worthless security.
If ever the Company would somehow later realize some proceeds from MLC, such amounts that might be
received would then be reportable as income in the year received.

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Just in case this table summarizes the items in the assessments for the years 1950-54.
Item
Allowance of losses in
Matti Lumber Co. (1950)
The Corp wrote off as
worthless securities in its
1950 return.
Disallowance of losses in
or bad debts of Palawan
Manganese Mines, Inc.
(1951)
The Corp wrote off as loss
or bad debts the advances
or
loans
made
to
Palawan.

Ruling
Properly allowed.
When the Company ceased to operate, it had no assets, thus became
completely insolvent.

Properly disallowed.
In the memorandum of agreement signed by Palawan and the Corp, it
appears to be very clear that the advances made by the Corp shall be
15% of the net profits of Palawan. As such is the case, if there was no
earnings there was no obligation to repay the advances made by the
Corp.
It has been held that VOLUNTARY ADVANCES MADE WITHOUT
EXPECTATION OF REPAYMENT DO NOT RESULT IN
DEDUCTIBLE LOSSES.
Moreover, the Corps loss of its investment (the advances considered
an investment rather than a loan) could not be claimed as a deduction in
1951 because Palawan was still in operation in 1951-52.

Disallowance of losses in
Balamban Coal Mines
(1950-51)

Properly disallowed.

Allowance of losses in
Hacienda Dalupiri (195054) and Hacienda Samal
(1951-52)

Allowed. (Improperly disallowed)

The losses are deductible in 1952, when the mines were abandoned
and not in 1950-51when they were still operational.
The respondent ruled that the farm was operated by the Corp for
pleasure rather than for business, as evidenced by its continued
operation at a loss.
The Court overruled this and found that the Corp should be allowed to
deduct expenses and losses in connection with the operation of the said
farm because it was operated for business.

Disallowance of excessive
depreciation of buildings
(1950-54)

Properly disallowed

Taxable increase in net

worth (1950-1951)

Not taxable. Tax Court ruling affirmed

Gain realized from sale of

real property (1950)

No additional gain. Tax Court ruling affirmed.

The Court sustained the tax courts finding that the taxpayer did not
submit adequate proof of its claim that depreciable assets or buildings
had a useful life of only 10 years as to justify the 10% depreciation per
annum used by the taxpayer.
The increase resulting from booking error is not an increase in the
taxpayers net worth and should not be taxed.
The CIR assessed that taxpayer insufficiently reported a gain on the sale
of real property in 1950. The Tax Court however found in the Corps
accounting books that such discrepancy was due to the improvements
introduced by the latter to the property, thus increasing the cost.

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19 - Basilan Estates, Inc. v. CIR (1967)

Doctrine:

The income tax law does not authorize the depreciation of an asset beyond its acquisition cost. Hence, a deduction
over and above such cost cannot be claimed and allowed. The reason is that deductions from gross income are
privileges, not matters of right. They are not created by implication but upon a clear expression in the law.

Facts:
Basilan Estates, Inc. claimed deductions for the depreciation of its assets up to 1949 on the basis of their
acquisition cost. As of January 1, 1950 it changed the depreciable value of said assets by increasing it to conform with
the increase in cost for their replacement. Accordingly, from 1950 to 1953 it deducted from gross income the value of
depreciation computed on the reappraised value.
CIR disallowed the deductions claimed by petitioner, consequently assessing the latter of deficiency income
taxes.
Issue:
1. W/N the depreciation shall be determined on the acquisition cost rather than the reappraised value of the assets
Held/Ratio:
1. Yes. The law allows for a depreciation deduction from gross income but limits the recovery only up to the capital
invested in the asset:
a. In general. A reasonable allowance for deterioration of property arising out of its use or
employment in the business or trade, or out of its not being used: Provided, That when the
allowance authorized under this subsection shall equal the capital invested by the taxpayer ... no
further allowance shall be made.
Depreciation is the gradual diminution in the useful value of tangible property resulting from wear and tear and
normal obsolescence. It commences with the acquisition of the property and its owner is not bound to see his
property gradually waste, without making provision out of earnings for its replacement.
The recovery, free of income tax, of an amount more than the invested capital in an asset will transgress
underlying purpose of a depreciation allowance. For then what the taxpayer would recover will be, not only
acquisition cost, but also some profit. Recovery in due time thru depreciation of investment made is
philosophy behind depreciation allowance; the idea of profit on the investment made has never been
underlying reason for the allowance of a deduction for depreciation.

the
the
the
the

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20 - Roxas v. CTA (1968)

Facts:
Roxas spouses transmitted to their grandchildren by hereditary succession the following (1) agricultural lands
with a total area of 19,000 hectares in Batangas, (2) a residential house and lot in Malate, and (3) shares of stocks in
different corporations. To manage the properties, the Roxas children formed a partnership called Roxas y Compania (Cia).
The 3 Roxas brothers agreed to sell the 13,500 hectares of the agricultural estate to the government for
distribution to actual occupants for P2,079,048.47 plus P300,000 for survey and subdivision expenses. But since the
government had no funds to cover the purchase price, a special arrangement was made for the Rehabilitation Finance
Corporation to advance to Roxas y Cia the amount of P1,500,000.00 as loan. Under the arrangement, Roxas y Cia allowed
the farmers to buy the lands for the same price but by installment and contracted with the Rehabilitation Finance
Corporation to pay its loan from the proceeds of the yearly amortizations paid by the farmers.
The brothers lived in the residential house. Later, only Jose Roxas lived there. Jose paid to Roxas y Cia rentals for
the house in the sum of P8,000 a year.
The CIR assessed deficiency income taxes, resulting from the inclusion as income of Roxas y Cia of the
unreported 50% of the net profits of the Batangas farm lands to tenants and the disallowance of deductions from gross
income of various business expenses and contributions claimed by Roxas y Cia and the Roxas brothers, against the Roxas
brothers.
The following deductions were disallowed: tickets for banquet in honor of S. Osmena, gifts of San Miguel beer,
and contributions to (1) Philippine Air Force Chapel, (2) Manila Police Trust Fund, (3) Philippine Heralds fund for
Manilas neediest families, (4) Our Lady of Fatima chapel at FEU, (5) Pasay City Firemen Christmas Fund, (6) Pasay City
Police Department Christmas Fund, (7) Baguio City Police Christmas fund, and (8) Hija de Jesus Retiro de Manresa.
The Roxas brothers contested the assessment.
Issues:
1. Is the gain derived from the sale of the Batangas farm lands an ordinary gain, hence 100% taxable?
2. Are the deductions for business expenses and contributions deductible?
Held/Ratio:
1. NO. The land was allocated to the landless. The lands sold to the farmers are capital assets. Hence the gain
derived thereof is capital gain, taxable only to the extent of 50%
2. Regarding the Osmena and beer deductions: There is no evidence to show such link between the expenses and the
business of Roxas y Cia. The contributions to Christmas funds are not deductible for the reason that the Christmas
funds were not spent for public purposes as gifts to families of the members of the said entities. A contribution to
a government entity is deductible when used exclusively for public purposes. The contribution to the Manila
Police Trust Fund is an allowable deduction since that trust fund belongs to the Manila Police, a government
entity, intended to be used for public functions. The contributions to the Philippines Herald were disallowed on
the ground that the Philippine Herald is not a corporation or association contemplated by the Tax Code. It should
be noted however that the contributions were not made to the Philippines Herald but to a group of civic spirited
citizens organized by the Philippines Herald solely for charitable purposes. There is no question that the members
of this group of citizens do not receive profits, for all the funds they raised were for Manilas neediest families.
Such a group of citizens may be classified as an association organized exclusively for charitable purposes
mentioned in the Tax Code. The contribution to Our Lady of Fatima chapel at FEU was disallowed on the ground
that the said university gives dividends to its stockholders. Located within the premises of the university, the
chapel in question has not been shown to belong to the Catholic Church or any religious organization. For 1955
the brothers are liable to pay deficiency income tax in the sum of P109.00, P91.00 and P49.00, respectively,
computed as follows: *

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21 - Trebilcock v. CIR (1975) (fees paid to ordained minister)

Doctrine:

Compensation paid to an ordained minister for spiritual counseling is personal in nature, thus, not allowed as
deduction for tax purposes.

Facts:
Trebilcock was sole proprietor of Litco Products, engaged in the brokerage of wood products. He employed five
people: his father, his brother, a secretary, a traveling salesman, and the Rev. James Wardrop.
Petitioner met Rev. Wardrop, an ordained minister, in the early 1950s. In 1969 and 1970, petitioner paid
Wardrop $585 per month, or $7,020 per year, primarily to minister spiritually to petitioner and his employees. Wardrop
conducted prayer meetings, and counseled petitioner and individual employees concerning their business and personal
problems. When he offered advice about business problems it was not based upon his knowledge of the brokerage
business for he had no such knowledge. Rather, he would receive a problem, turn to God in prayer, and then propose an
answer resulting from that prayer. Wardrop was not assigned specific secular or nonreligious duties in 1969 and 1970, but
he did perform certain business-related tasks. For example, he visited sawmills with petitioner, ran errands, and mailed
materials for Litco. So, petitioners deducted the amounts paid to Wardrop as ordinary and necessary expenses under Sec.
162(a) of the Tax Code.
Issue:
1. W/N the said payments were deductible for tax purposes
Held/Ratio:
1. No. The Court said that the aid did not sharpen their business skills; instead, it gave them heightened spiritual
awareness. Thus, all benefits derived from such services are inherently personal in nature. Furthermore, the Court
ruled that the said expense was not ordinary since the method used by Wardrop in offering advice is not ordinary
in his type of business. However, the Court allowed $1,000 as an estimated amount of allowable deduction for
Wardrops work for certain business-related tasks.

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22 - Pevsner v. Commissioner (1980)

Doctrine:

The generally accepted rule governing the deductibility of clothing expenses is that the cost of clothing is
deductible as a business expense only if: (1) the clothing is of a type specifically required as a condition of
employment, (2) it is not adaptable to general usage as ordinary clothing, and (3) it is not so worn.

Facts:
Since June 1973, Sandra Pevsner has been employed as the manager of the Sakowitz Yves St. Laurent Rive
Gauche Boutique Dallas, Texas which only sells womens clothes and accessories designed by Yves St. Laurent (YSL).
Although the clothing is ready to wear, it is highly fashionable and expensive.
As manager, Pevsner is expected by her employer to wear YSL clothes while at work and to project the image of
an exclusive lifestyle. In addition to wearing YSL apparel while at the boutique, she wears them while commuting to and
from work, to fashion shows sponsored by the boutique, and to business luncheons at which she represents the boutique.
During 1975, she bought, at an employees discount, YSL clothing in the amount of $1,381. The sum of $240 was also
spent for maintenance of these items.
Even though the clothes were the type used for general purposes by the regular customers of the boutique,
Pevsner is not a normal purchaser of these clothes. She and her husband lead a simple life and their social activities are
very limited and informal. Although her employer has no objection to her wearing the apparel away from work, Pevsner
stated that she did not wear the clothes during off-work hours to make them last longer and because she felt that they were
too expensive for her simple everyday lifestyle. She did admit at trial, however, that a number of the articles were things
she could have worn off the job and in which she would have looked nice.
On her joint federal income tax return for 1975, Pevsner deducted $990 as an ordinary and necessary business
expense with respect to her purchase of the YSL clothing and accessories. However, in the tax court, she claimed a
deduction for the full $1381 cost of the apparel and for the $240 cost of maintaining the apparel. The tax court allowed the
taxpayer to deduct both reasoning that the apparel was not suitable to the private lifestyle maintained by the taxpayer.
The Commissioner appealed.
Issue:
1. W/N she is entitled to deduct as an ordinary and necessary business expense the cost of purchasing and
maintaining the YSL clothes and accessories.
Held/Ratio:
1. NO. The Commissioner maintained that a deduction should be denied because the YSL clothes and accessories
purchased by the taxpayer were adaptable for general usage as ordinary clothing and she was not prohibited from
using them as such. In deciding this case, the court took an objective approach.
Under an OBJECTIVE TEST, no reference is made to the individual taxpayers lifestyle or personal taste.
Instead, adaptability for personal or general use depends upon what is generally accepted for ordinary street wear.
An objective test, although not perfect, provides a practical administrative approach that allows a taxpayer or
revenue agent to look only to objective facts in determining whether clothing required as a condition of
employment is adaptable to general use as ordinary streetwear.
In addition to achieving a practical administrative result, an objective test also tends to promote substantial
fairness among the greatest number of taxpayers. Under a subjective test two similarly situated YSL boutique
managers with identical wardrobes would be subject to disparate tax consequences depending upon the particular
managers lifestyle and socio-economic level. The court wished to avoid such a result.

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23 - Mccabe v. Commissioner (1985) (police officer na ayaw magcommute)

Facts:
Dennis McCabe, a police officer employed by the City of New York, was required to carry his service revolver at
all times while in the City. To reach his place of employment the most direct route from his home in Suffern, New York is
through the State of New Jersey. New Jersey will allow an officer such as petitioner to carry a weapon only by permit.
Stating that he could not expect to obtain a New Jersey permit, appellant carried his service revolver on his person and
used his own automobile as his mode of transportation to and from work. As a result he claimed an employee business
deduction in the amount of $2,950 for automobile expense on his 1976 tax return. The Commissioner of Internal Revenue,
appellee, disallowed the claimed deduction and the Tax Court affirmed that determination.
Issue:
1. W/N such ordinary and necessary business deduction may properly be claimed.
Held/ Ratio:
1. NO. For appellant to prevail he must establish that his expense falls within ordinary and necessary expenses of
carrying on a trade or business. One well-established rule in tax law is that expenses incurred as a result of
commuting from home to work are personal and not deductible. Treasury Regulation provides that commuters
fares are not considered as business expenses and are not deductible. For additional expenses to be deductible the
taxpayer must first establish the necessity of transporting work implements to and from work. The taxpayer
must establish that the additional expenses were appropriate and helpful to the employers legal business and not
personal in nature.
Appellant has argued that he may deduct the additional traveling expense incurred by reason of the use of his
automobile in transporting his police revolver. However, the Tax Court ruled that petitioners additional
commuting expenses were not directly connected with the pursuit of his employers business, but were principally
the result of his decision to reside in a comparatively remote suburb. Accordingly, petitioner is entitled to no
deduction for his expenses, since such expenses were not necessary for the conduct of his employers business.
The location of ones home is personal and did not serve to further the business of the taxpayers employer in this
case.
MESKILL, Circuit Judge (dissenting):
The Internal Revenue Service has construed the exception to allow an ordinary and necessary business expense
deduction for only the portion of the cost of transporting the work implements by the mode of transportation used
which is in excess of cost of commuting by the same mode of transportation without the work implements. The
fact that a taxpayer might have or would have used a less expensive mode of transportation if it had not been
necessary to carrying the work implements is immaterial. Had McCabe driven to work without his firearm, he
could have travelled through New Jersey. As a result of his alleged inability to secure a New Jersey gun permit,
however, McCabe was forced to take a circuitous route. Certainly, these additional costs were caused by his
employers requirement that he carry his firearm at all times while within New York City and can be allocated as
business expenses.
The real issue is whether, given the location of McCabes residence and his selection of a reasonable mode of
travel, he incurred additional ordinary and necessary commuting costs in the pursuit of the business of the
taxpayers employer to the extent that McCabes change in route of travel was necessary to satisfy his employers
requirement. To this issue, the answer is in the affirmative thus, he is entitled to a deduction.
McCabes inability to obtain a permit is critical to his argument that his additional commuting costs are deductible
as ordinary and necessary business expenses. This case should be to the Tax Court for a determination of what
efforts, if any, McCabe made to acquire a permit. If the Tax Court determined that McCabe never applied for a
permit or that he failed to demonstrate the futility of an application, the Court should disallow his deduction for
failure to meet the threshold showing that the added commuting expenses incurred were necessary. If the Court
were satisfied, however, that McCabe could not obtain a permit, it should allow his deduction.

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24 - U.S. v. Correll (1967) (traveling salesman)

Doctrine:

(from the outline): Congress speaks of meals and lodging as a single unit, thus contemplates a deduction for
meals only when travel involved lodging as well.; sleep or rest required rule is valid.

In order for the taxpayer to be allowed to deduct the cost of his meals incurred while on a business trip, the trip
must have required him to stop for sleep or rest.

Facts:
Correll was a travelling salesman for a wholesale grocery company in Tennessee. His usual routine consisted of
leaving home early in the morning, eating breakfast and lunch on the road and returning home in time for dinner. In his
income tax returns for 1960 and 1961, he deducted the cost of his morning and noon meals as traveling expenses
incurred in the pursuit of his business while away from home. However, the Commissioner disallowed the deductions
because Corrells daily trips did not require sleep or rest. His meals should be considered as a personal, living expense
rather than a travel expense. Correll paid his tax, and sued for a refund.
Issues:
1. W/N the cost of meals is deductible as a travel expense.
Held/Ratio:
1. NO. Travel away from home excludes all trips requiring neither sleep nor rest. To promote substantial fairness,
the sleep or rest rule places all one-day travelers on a similar tax footing. In order for the taxpayer to be allowed to
deduct the cost of his meals incurred while on a business trip, the trip must have required him to stop for sleep or
rest.
Congress speaks of meals and lodging as a single unit, thus contemplates a deduction for meals only when travel
involved lodging as well. In this case, Correls work did not require him to stop for sleep or rest. He returned
home in time for dinner.
Dissent: away from home contemplates geography and not time.

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25 - Hantzis v. Commissioner (1981)

Doctrines:

A traveling expense is deductible only if it is: (1) reasonable and necessary, (2) incurred while away from home,
and (3) necessitated by the exigencies of business.

In determining whether or not a deduction should be allowed, the court must assess the reason for the taxpayers
maintenance of two homes. If the reason is perceived to be personal, the taxpayers home will generally be held to
be his place of employment and the deduction will be denied. If the reason is felt to be business exigencies, the
persons home will usually be held to be his residence and the deduction will be allowed.

Facts:
Catharine Hantzis got a summer internship as a legal assistant with a law firm in New York City for 10 weeks.
Her husband remained at Boston at the couples home there. On their joint ITR, the couple reported the earnings from the
summer employment and deducted the cost of transportation between Boston and New York, the rental expense for the
New York apartment, and the cost of her meals in New York. The Commissioner disallowed the deductions on the ground
that the expenses were not incurred while away from home and were not incurred in the pursuit of a trade or
business.16
Issues:
1. W/N the traveling expenses are deductible.
Held/Ratio:
1. NO. The expenses were not incurred while away from home.
According to Flowers v. Commissioner, a traveling expense is deductible only if it is: (1) reasonable and
necessary, (2) incurred while away from home, and (3) necessitated by the exigencies of business.
In determining whether or not a deduction should be allowed, the court must assess the reason for the
taxpayers maintenance of two homes. If the reason is perceived to be personal, the taxpayers home will
generally be held to be his place of employment and the deduction will be denied. If the reason is felt to be
business exigencies, the persons home will usually be held to be his residence and the deduction will be
allowed.
The requirement was not satisfied in this case since Mrs. Hantzis trade or business did not require that she
maintain a home in Boston as well as one in New York. Though she returned to Boston at various times during
the period of her employment in New York, her visits were all for personal reasons. No professional interest was
served by maintenance of the Boston home.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
16. 162. Trade or business expenses
1.

In general. There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in
carrying on any trade or business, including

2.

traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the
circumstances) while away from home in the pursuit of a trade or business ...."

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Hantzis v. Commissioner (1981) (law student)

Doctrine:

Whether a trip may be considered as business or not depends on where the home is

Facts:
Catherine Hantzis was a full-time law student at Harvard and stayed in Boston with her husband, who was a
faculty member of the Northeastern University. During her second year of law school, she sought unsuccessfully to obtain
employment for the summer with a Boston law firm. She did, however, find a job with a law firm in NYC, where she
worked for 10 weeks. On their joint income tax return, the spouses reported earnings from Catherines summer
employment and deducted the cost of transportation between Boston and New York, the cost of a small apartment
rented by her in NY and the cost of her meals in NY as traveling expenses (including amounts expended for meals
and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the
pursuit of a trade or business. Such deductions were disallowed by the CIR but allowed as deductions by the Tax
Court.
Issue:
1. W/N the expenses are deductible as travelling expenses while away from home in the pursuit of a trade or
business
Held/Ratio:
1. No. Although the court did not agree with the Commissioners interpretation of the phrase in pursuit of trade or
business as requiring that a deductible traveling expense be incurred as demanded by an already existing trade
or business, it nevertheless ruled that the expenses sought to be deducted were not incurred while away from
home and thus, not deductible. Catherine Hantzis trade or business did not require that she maintain a home in
Boston as well as one in New York. Though she returned to Boston at various times during the period of her
employment in New York, her visits were all for personal reasons. Her decision to keep two homes must be seen
as a choice dictated by personal considerations and not a business or occupational necessity.
[The case cites the Flowers case wherein the SC interpreted the phrase incurred in the pursuit of a trade or
business to mean that the exigencies of business rather than the personal convenience and necessities of the
travelers must be the motivating factors]
The court also made clear that we do not adopt a rule that home in this section is the equivalent of a taxpayers
place of business. Nor do we mean to imply that a taxpayer has a home for tax purposes only if he is already
engaged in a trade or business at a particular location.
In fine, it ruled that for a taxpayer in Mrs. Catherine Hantzis circumstances to be away from home in the pursuit
of a trade or business, she must establish the existence of some sort of business relation both to the location she
claims as a home and to the location of her temporary employment sufficient to support a finding that her
duplicative expenses are necessitated by business exigencies. This, we believe, is the meaning of the statement in
Flowers that business trips are to be identified in relation to business demands and the travelers business
headquarters.
[The Court ruled that the temporary employment doctrine is inapplicable in this case but if you wanna read about
it, go lang. Its potentially useful]

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26 - Moss v. Commissioner (1985)

Doctrines:

In order for lunch expenses to be deductible, it must be shown that the meal is a business necessity.

Facts:
The members of the firm, where Moss is a partner, met for lunch daily at the Cafe Angelo near their office. At
lunch the lawyers would discuss their cases with the head of the firm, whose approval was required for most
settlements, and they would decide which lawyer would meet which court call that afternoon or the next morning.
Lunchtime was chosen for the daily meeting because the courts were in recess then. The alternatives were to meet at 7:00
a.m. or 6:00 p.m., and these were less convenient times. There is no suggestion that the lawyers dawdled over lunch, or
that the Cafe Angelo is luxurious.
Moss claims a deduction on his expenses on those lunch meetings. CIR denies.
Issues:
1. Whether the expenses for his lunch during their lunch meetings are deductible
Held/Ratio:
1. In order for lunch expenses to be deductible, it must be shown that the meal is a business necessity. This
condition is most easily satisfied when a client or customer or supplier or other outsider to the business is a guest.
It is undeniable that eating together fosters camaraderie and makes business dealings friendlier and easier.
It thus reduces the costs of transacting business. A meeting with a client or customer in an office is therefore
not a perfect substitute for a lunch with him in a restaurant.
The example given is if a client is invited to meet in an expensive restaurant, the seller may have no choice but to
also eat in the expensive restaurant in order to facilitate their transaction. In that case, the expense would be
deductible.
However, it is different when all the participants in the meal are coworkers, as in this case (clients
occasionally were invited to the firm's daily luncheon, but Moss has made no attempt to identify the occasions).
They know each other well already. They don't need the social lubrication that a meal with an outsider provides-at least don't need it daily.
If a large firm had a monthly lunch to allow partners to get to know associates, the expense of the meal might well
be necessary, and would be allowed. Moss's firm, however, never had more than eight lawyers and did not
need a daily lunch to cement relationships among them.
They do not claim to have incurred a greater daily lunch expense than they would have incurred if there had been
no lunch meetings. Although it saved time to combine lunch with work, the meal itself was not an organic part
of the meeting.

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27 - Commissioner v. Soliman (1993)

Doctrines:

Home office considerations:

a. Importance of activities performed
b. Time spent at each place

Facts:
Respondent Nader Soliman is a practicing anesthesiologist in Maryland. During 1983, Soliman spent 30-35 hours
per week with patients, dividing time among 3 hospitals. None of the hospitals provided him with an office.
Soliman lived in a condominium in Virginia. His residence had a spare bedroom which he used exclusively as an
office. Although he did not meet with clients there, he usually spends 2-3 hours per day on a variety of tasks in relation to
his profession.
In his 1983 federal income tax return, Soliman claimed deductions for the portion of condominium fees, utilities
and depreciation attributable to the home office. Upon audit, the Commissioner disallowed these deductions based upon
his determination that the home office was not Solimans principle place of business.
Issue:
1. W/N Soliman can treat the condo fees, utilities and depreciation expense as
Held/Ratio:
1. NO. The taxpayer is not entitled to a deduction for home office expenses.
The IRC (Internal Revenue Code) allows a taxpayer to deduct all the ordinary and necessary expenses paid or
incurred in carrying on any trade or business. This is qualified by expenses incurred with respect to the use of
dwelling, which is used by the taxpayer as residence. Nonetheless, taxpayer may still deduct the expenses to the
business use of their homes, if they qualify for one or more of the statutes exceptions to this disallowance.
The Court stated that there are 2 primary considerations in deciding whether a home office is a taxpayers
principal place of business, namely (1) the relative importance of the activities performed at each business
location and (2) time spent at each place.
Relative importance of the activities performed depend upon an objective description of the business in
question. The Court decided that the point where goods and services are delivered must be given weight in
determining the place where the most important functions are performed. On the other hand, the decision-maker
should also compare the amount of time spent at home with the time spent at other places where business
activities occur. This factor assumes particular significance when the comparison the importance of the
functions performed at various places yields no definite answer (i.e., income-generating tasks at both home
office and some other location).
Applying these doctrines to the case, the actual treatment was the essence of his profession (as an
anesthesiologist), which is performed in a hospital and obviously not in his home office. As with regards to the
time spent, The 10 to 15 hours per week spent in the home office measured against the 30 to 35 hours per week at
the three hospitals are insufficient to render the home office the principal place of business in light of all of
circumstances of this case.

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28 - Woodward v Commissioner (1970)

Facts:
Petitioner taxpayers, majority stockholders of an Iowa corporation, voted for perpetual extension of the
corporate charter, and, under Iowa law, became obliged to purchase at its "real value" the stock of a minority
shareholder who had voted against the extension. (parang minority stockholder exercised appraisal right.) On the
parties' failure to agree on the "real value" of the minority interest, petitioners brought an appraisal action in state
court, and thereafter bought the minority stock at a value fixed by the court. In their federal income tax returns,
petitioners claimed deductions as "ordinary expenses paid for the management, conservation, or maintenance of
property held for the production of income" for attorneys', accountants', and appraisers' fees in connection with
the appraisal litigation. The Commissioner of Internal Revenue disallowed the deductions "because the fees
represent capital expenditures in connection with the acquisition of capital stock of a corporation," a determination
sustained by the Tax Court and the Court of Appeals. Petitioners contend that current deductibility is justified on the
ground that the "primary purpose" of the litigation was not for defense or perfection of title (a nondeductible capital
expenditure) but to determine the stock's value.
Issue:
1. W/N the costs of negotiating purchase price are costs of acquiring a capital asset
Held/Ratio:
1. Yes. The expenses incurred by petitioners must be treated as part of their cost in acquiring the stock,
rather than as ordinary expenses, since the appraisal proceeding was merely the substitute provided by state
law for the process of negotiation to fix the price at which the stock was to be purchased. The appropriate
standard here is the origin of the claim litigated, rather than the taxpayers' "primary purpose" in
incurring the appraisal litigation expenses.
The regulations do not specify other sorts of acquisition costs, but rather provide generally that the cost of
acquisition of property having a useful life substantially beyond the taxable year is a capital expenditure.
We agree with the Tax Court and the Court of Appeals that the "primary purpose" test has no application
here. That uncertain and difficult test may be the best that can be devised to determine the tax treatment of costs
incurred in litigation that may affect a taxpayer's title to property more or less indirectly, and that thus calls for a
judgment whether the taxpayer can fairly be said to be "defending or perfecting title." Such uncertainty is not
called for in applying the regulation that makes the "cost of acquisition" of a capital asset a capital expense. In our
view, application of the latter regulation to litigation expenses involves the simpler inquiry whether the origin of
the claim litigated is in the process of acquisition itself. A test based upon the taxpayer's "purpose" in undertaking
or defending a particular piece of litigation would encourage resort to formalism and artificial distinctions.

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