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Evangelista vs CIR Although the project of partition was approved by the Court, no attempt was made to

- KW: Partnership/Corporation liable for income tax and residence tax for divide the properties and they remained under the management of Oa who used said
corporations properties in business by leasing or selling them and investing the income derived
therefrom and the proceeds from the sales thereof in real properties and securities. As
Facts: Petitioners borrowed money from their father and purchased several lands. For a result, petitioners properties and investments gradually increased. Petitioners
several years, these lands were leased to tenants by the petitioners. In 1954, returned for income tax purposes their shares in the net income but they did not
respondent Collector of Internal Revenue demanded from petitioners the payment of actually receive their shares because this left with Oa who invested them.
income tax on corporations, real estate dealer's fixed tax and corporation residence
tax for the years 1945-1949. A letter of demand and corresponding assessments were Based on these facts, CIR decided that petitioners formed an unregistered partnership
delivered to petitioners. Petitioners claim that they should be absolved from paying and therefore, subject to the corporate income tax, particularly for years 1955 and
said taxes since they are not a corporation. 1956. Petitioners asked for reconsideration, which was denied hence this petition for
review from CTAs decision.
Issue: Whether petitioners are subject to the tax on corporations provided for in
section 24 of Commonwealth Act. No. 466, otherwise known as the National Internal Issue:
Revenue Code, as well as to the residence tax for corporations and the real estate
dealers fixed tax. W/N there was a co-ownership or an unregistered partnership

Held: Yes. Petitioners are subject to the income tax and residence tax for corporation. W/N the petitioners are liable for the deficiency corporate income tax

As defined in section 84 (b) of the Internal Revenue Code, "the term corporation Held:
includes partnerships, no matter how created or organized." This qualifying expression
clearly indicates that a joint venture need not be undertaken in any of the standard Unregistered partnership. The Tax Court found that instead of actually distributing the
forms, or in conformity with the usual requirements of the law on partnerships, in order estate of the deceased among themselves pursuant to the project of partition, the
that one could be deemed constituted for purposes of the tax on corporations. heirs allowed their properties to remain under the management of Oa and let him use
Partnership, as has been defined in the civil code refers to two or more persons who their shares as part of the common fund for their ventures, even as they paid
bind themselves to contribute money, properly, or industry to a common fund, with the corresponding income taxes on their respective shares.
intention of dividing the profits among themselves. Thus, petitioners, being engaged in
the real estate transactions for monetary gain and dividing the same among Yes. For tax purposes, the co-ownership of inherited properties is automatically
themselves constitute a partnership so far as the Code is concerned and are subject converted into an unregistered partnership the moment the said common properties
to income tax for corporation. and/or the incomes derived therefrom are used as a common fund with intent to
produce profits for the heirs in proportion to their respective shares in the inheritance
Since Sec 2 of the Code in defining corporations also includes joint-stock company, as determined in a project partition either duly executed in an extrajudicial settlement
partnership, joint account, association or insurance company, no matter how created or approved by the court in the corresponding testate or intestate proceeding. The
or organized, it follows that petitioners, regardless of how their partnership was reason is simple. From the moment of such partition, the heirs are entitled already to
created is also subject to the residence tax for corporations. their respective definite shares of the estate and the incomes thereof, for each of them
to manage and dispose of as exclusively his own without the intervention of the other
Oa vs CIR heirs, and, accordingly, he becomes liable individually for all taxes in connection
- KW: Co-ownership automatically converted to unregistered partnership = liable therewith. If after such partition, he allows his share to be held in common with his co-
for corporate income tax heirs under a single management to be used with the intent of making profit thereby in
proportion to his share, there can be no doubt that, even if no document or instrument
Facts: were executed, for the purpose, for tax purposes, at least, an unregistered partnership
is formed.
Julia Buales died leaving as heirs her surviving spouse, Lorenzo Oa and her five
children. A civil case was instituted for the settlement of her state, in which Oa was For purposes of the tax on corporations, our National Internal Revenue Code includes
appointed administrator and later on the guardian of the three heirs who were still these partnerships
minors when the project for partition was approved. This shows that the heirs have
undivided interest in 10 parcels of land, 6 houses and money from the War Damage The term partnership includes a syndicate, group, pool, joint venture or other
Commission. unincorporated organization, through or by means of which any business, financial
operation, or venture is carried on (8 Mertens Law of Federal Income Taxation, p.
562 Note 63; emphasis ours.)
with the exception only of duly registered general copartnerships within the purview The PEACe Bonds, according to the SC, requires further information for proper
of the term corporation. It is, therefore, clear to our mind that petitioners herein determination of whether these bonds are within the purview of deposit substitutes.
constitute a partnership, insofar as said Code is concerned, and are subject to the The Court noted that it may seem that the lender is only CODE-NGO through RCBC.
income tax for corporations. Judgment affirmed. However, the underwriting agreement reveals that the entire 35billion worth of zero-
coupon bonds were sourced directly from the undisclosed number of investors. These
BDO vs. Republic are the same investors to whom RCBC Capital distributed the PEACe Bonds all at the
- KW: Peace Bonds; Deposit Substitutes time of the origination or issuance. Hence, until there is information as to whether the
- Exempt from 20% FWT PEACe Bonds are found within the coverage of deposit substitutes, the proper
- Peace Bonds = X deposit substitutes since there is only 1 lender RCBC on procedure for the BIR is to collect the unpaid final withholding tax directly from RCBC
behld of CODE-NGO to whom the bond were issued Capital/ CODE-NGO, or any lender if such be the case.
- However, the subsequent sale and distribution of the PEACe bonds to 20 or more The court also noted that according to the NIRC, Section 24, interest income received
lenders or investors would oblige RCBC Capital and CODE-NGO to withhold by individuals from long term deposits or investments with a holding period of not less
20% final tax than five years is exempt from final tax.

The decision provided the definition of deposit substitute 1997 National


Facts: Internal Revenue Code which placed the 20-lender rule. In particular, Section 22 (Y)
This case involves P35 billion worth of 10-year zero-coupon treasury bonds issued by states that a debt instrument shall mean an alternative form of obtaining funds from
the Bureau of Treasury (BTr) denominated as the Poverty Eradication and the public (the term 'public' means borrowing from twenty (20) or more individual or
Alleviation Certificates or the PEACe Bonds. These PEACe Bonds would initially corporate lenders at any one time) other than deposits, through the issuance,
be purchased by a special purpose vehicle on behalf of Caucus of Development NGO endorsement, or acceptance of debt instruments for the borrowers own account.
Networks (CODE-NGO), repackaged and sold at a premium to investors. The net The determination as to whether a deposit substitute will be imposed with 20% final
proceeds from the sale will be used to endow a permanent fund to finance meritorious withholding tax rests on the number of lenders.
activities and projects of accredited non-government organizations (NGOs) throughout
the country. In relation to this, CODE-NGO wrote a letter to the Bureau of Internal In construing the phrase at any one time provided for in the definition of
Revenue (BIR) to inquire as to whether the PEACe Bonds will be subject to public, the Supreme Court made an analysis of how financial market works.
withholding tax of 20%. The BIR issued several rulings beginning with BIR Ruling According to the Court, in the financial market whether this refers to capital markets
No.020-2001 (issued on May 31, 2001) and was subsequently reiterated its points in securities or money market securities, transactions happen in two venues: the Primary
BIR Ruling No. 035-200119 dated August 16, 2001 and BIR Ruling No. DA-175-0120. and the Secondary Market. The primary market transactions happen between issuers
The rulings basically say that in determining whether financial assets such as a debt and investors where issuance of new securities is facilitated. The secondary market is
instrument are deposit substitute, the 20 or more individual or corporate lenders rule where the trading occurs among investors. This goes to show that for one security,
should apply. Likewise, the at any one time stated in the rules should be construed there are different and separate transactions happening depending on the flow of the
as at the time of the original issuance. transaction. In the exact words of the Supreme Court, an agglomeration of financial
With this BTr made a public offering of the PEACe Bonds to the Government transactions in securities performed by market participants that works to transfer the
Securities Eligible Dealers (GSED) wherby RCBC won as the highest bidder for funds from the surplus units (or investors/lenders) to those who need them (deficit
approximately 10.17 billion, resulting in a discount of approximately 24.83 billion. units or borrowers).
RCBC Capital Capital entered into an underwriting agreement with CODE-NGO, When there are 20 or more lenders/investors in a transaction for a specific
whereby RCBC Capital was appointed as the Issue Manager and Lead Underwriter for bond issue, the seller is required to withhold the 20% final income tax on the imputed
the offering of the PEACe Bonds. interest income from the bonds. The Supreme Court cited Sections 24(B) (1), 27(D)
In October 7, 2011, BIR issued BIR RULING NO. 370-2011 in response to the query of (1), and 28(A)(7) of the 1997 National Internal Revenue Code. These provisions state
the Secretary of Finance as to the proper tax treatment of the discounts and interest the imposition of a final tax rate of 20% upon the amount of interest from any currency
derived from Government Bonds. It cited three other rulings issued in 2004 and 2005. bank deposit and yield or any other monetary benefit from deposit substitutes. On the
The above ruling states that the all treasury bonds (including PEACe Bonds), other hand, for instruments not considered as deposit substitutes, these will be
regardless of the number of purchasers/lenders at the time of origination/issuance are subjected to regular income tax. The prevailing provision is Section 32(A). Hence,
considered deposit substitutes. In the case of zero-coupon bonds, the discount (i.e. should the deposit substitute involves less than 20 lenders in a transaction, the
difference between face value and purchase price/discounted value of the bond) is income is considered as income derived from whatever source.
treated as interest income of the purchaser/holder. The income is a gain from sale and should not be confused with interest provided
for in Sections 24, 27 and 28. The Supreme Court noted that the gain referred to in
Section 32 (A) pertains to that realized from the trading of bonds at maturity rate
Ruling: (difference between selling price in the secondary market and that upon purchase) or
the gain realized by the last holder of the bonds when redeemed at maturity (the No! The point of view of the CIR is that the Income Tax Law, as the name implies,
difference between proceeds from retirement of bonds and the price upon acquisition taxes upon income and not upon capital and property.
of the last holder). In the case of discounted instruments, like the zero-coupon bonds, The essential difference between capital and income is that capital is a fund; income
the trading gain shall be the excess of the selling price over the book value or is a flow. A fund of property existing at an instant of time is called capital. A flow of
accreted value (original issue price plus accumulated discount from the time of services rendered by that capital by the payment of money from it or any other benefit
purchase up to the time of sale) of the instruments. rendered by a fund of capital in relation to such fund through a period of time is called
The Supreme Court finds that the BIR Rulings issued in 2001 and the income. Capital is wealth, while income is the service of wealth.
assailed BIR Rulings are defective taking into consideration the above discussions on As Paterno has no estate and income, actually and legally vested in her and entirely
deposit substitutes and its tax treatment. As for the BIR Rulings issued in 2001, the distinct from her husbands property, the income cannot properly be considered the
SC finds that the interpretation of the phrase at any one time, is to mean at the separate income of the wife for the purposes of the additional tax.
point of origination alone is unduly restrictive. On the other hand, the 2011 BIR To recapitulate, Vicente wants to half his declared income in computing for his tax
Ruling which relied on the 2004 and 2005 BIR Rulings is void for creating a distinction since he is arguing that he has a conjugal partnership with his wife. However, the court
between government bonds and those issued by private corporations, when there is ruled that the one that should be taxed is the income which is the flow of the capital,
none in the law. Further, it completely disregarding the 20-lender rule under the NIRC thus it should not be divided into 2.
since it says, all treasury bonds . . . regardless of the number of purchasers/lenders
at the time of origination/issuance are considered deposit substitutes CIR vs St. Lukes Medical Center
- St. Lukes, as a proprietary non-profit hospital, is entitled to the preferential tax
Madrigal vs Rafferty rate of 10% on its net income from its for-profit activities.
- Difference between Capital and Income

The essential difference between capital and income is that capital is a fund; income is Facts:
a flow. A fund of property existing at an instant of time is called capital. A flow of St. Lukes Medical Center, Inc. (St. Lukes) is a hospital organized as a non-stock and
services rendered by that capital by the payment of money from it or any other benefit non-profit corporation. St. Lukes accepts both paying and non-paying patients. The
rendered by a fund of capital in relation to such fund through a period of time is called BIR assessed St. Lukes deficiency taxes for 1998 comprised of deficiency income tax,
income. Capital is wealth, while income is the service of wealth. value-added tax, and withholding tax. The BIR claimed that St. Lukes should be liable
for income tax at a preferential rate of 10% as provided for by Section 27(B). Further,
FACTS: the BIR claimed that St. Lukes was actually operating for profit in 1998 because only
Vicente Madrigal and Susana Paterno were legally married prior to Januray 1, 1914. 13% of its revenues came from charitable purposes. Moreover, the hospitals board
The marriage was contracted under the provisions of law concerning conjugal of trustees, officers and employees directly benefit from its profits and assets.
partnership On the other hand, St. Lukes maintained that it is a non-stock and non-profit
On 1915, Madrigal filed a declaration of his net income for year 1914, the sum of institution for charitable and social welfare purposes exempt from income tax under
P296,302.73 Section 30(E) and (G) of the NIRC. It argued that the making of profit per se does not
Vicente Madrigal was contending that the said declared income does not represent destroy its income tax exemption.
his income for the year 1914 as it was the income of his conjugal partnership with
Paterno. He said that in computing for his additional income tax, the amount declared Issue:
should be divided by 2. The sole issue is whether St. Lukes is liable for deficiency income tax in 1998
The revenue officer was not satisfied with Madrigals explanation and ultimately, the under Section 27(B) of the NIRC, which imposes a preferential tax rate of 10^ on the
United States Commissioner of Internal Revenue decided against the claim of income of proprietary non-profit hospitals.
Madrigal.
Madrigal paid under protest, and the couple decided to recover the sum of P3,786.08 Ruling:
alleged to have been wrongfully and illegally assessed and collected by the CIR. Section 27(B) of the NIRC does not remove the income tax exemption of
proprietary non-profit hospitals under Section 30(E) and (G). Section 27(B) on one
hand, and Section 30(E) and (G) on the other hand, can be construed together
without the removal of such tax exemption.
ISSUE: Whether or not the income reported by Madrigal on 1915 should be divided
into 2 in computing for the additional income tax. Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1)
proprietary non-profit educational institutions and (2) proprietary non-profit hospitals.
The only qualifications for hospitals are that they must be proprietary and non-profit.
HELD: Proprietary means private, following the definition of a proprietary educational
institution as any private school maintained and administered by private
individuals or groups with a government permit. Non-profit means no net income or purposes. Likewise, to be exempt from income taxes, Section 30(G) of the NIRC
asset accrues to or benefits any member or specific person, with all the net income or requires that the institution be operated exclusively for social welfare.
asset devoted to the institutions purposes and all its activities conducted not for profit.
However, the last paragraph of Section 30 of the NIRC qualifies the words organized
Non-profit does not necessarily mean charitable. In Collector of Internal Revenue v. and operated exclusively by providing that:
Club Filipino Inc. de Cebu, this Court considered as non-profit a sports club organized Notwithstanding the provisions in the preceding paragraphs, the income of whatever
for recreation and entertainment of its stockholders and members. The club was kind and character of the foregoing organizations from any of their properties, real or
primarily funded by membership fees and dues. If it had profits, they were used for personal, or from any of their activities conducted for profit regardless of the
overhead expenses and improving its golf course. The club was non-profit because of disposition made of such income, shall be subject to tax imposed under this Code.
its purpose and there was no evidence that it was engaged in a profit-making In short, the last paragraph of Section 30 provides that if a tax exempt charitable
enterprise. institution conducts any activity for profit, such activity is not tax exempt even as
its not-for-profit activities remain tax exempt.
The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not
charitable. The Court defined charity in Lung Center of the Philippines v. Thus, even if the charitable institution must be organized and operated exclusively
Quezon City as a gift, to be applied consistently with existing laws, for the for charitable purposes, it is nevertheless allowed to engage in activities conducted
benefit of an indefinite number of persons, either by bringing their minds and hearts for profit without losing its tax exempt status for its not-for-profit activities. The only
under the influence of education or religion, by assisting them to establish themselves consequence is that the income of whatever kind and character of a charitable
in life or [by] otherwise lessening the burden of government. However, despite its institution from any of its activities conducted for profit, regardless of the
being a tax exempt institution, any income such institution earns from activities disposition made of such income, shall be subject to tax. Prior to the introduction of
conducted for profit is taxable, as expressly provided in the last paragraph of Sec. 30. Section 27(B), the tax rate on such income from for-profit activities was the ordinary
corporate rate under Section 27(A). With the introduction of Section 27(B), the tax
To be a charitable institution, however, an organization must meet the substantive test rate is now 10%.
of charity in Lung Center. The issue in Lung Center concerns exemption from
real property tax and not income tax. However, it provides for the test of charity in our The Court finds that St. Lukes is a corporation that is not operated exclusively for
jurisdiction. Charity is essentially a gift to an indefinite number of persons which charitable or social welfare purposes insofar as its revenues from paying patients are
lessens the burden of government. In other words, charitable institutions provide concerned. This ruling is based not only on a strict interpretation of a provision
for free goods and services to the public which would otherwise fall on the shoulders granting tax exemption, but also on the clear and plain text of Section 30(E) and (G).
of government. Thus, as a matter of efficiency, the government forgoes taxes which Section 30(E) and (G) of the NIRC requires that an institution be operated
should have been spent to address public needs, because certain private exclusively for charitable or social welfare purposes to be completely exempt from
entities already assume a part of the burden. This is the rationale for the tax income tax. An institution under Section 30(E) or (G) does not lose its tax exemption if
exemption of charitable institutions. The loss of taxes by the government is it earns income from its for-profit activities. Such income from for-profit activities,
compensated by its relief from doing public works which would have been funded by under the last paragraph of Section 30, is merely subject to income tax,
appropriations from the Treasury previously at the ordinary corporate rate but now at the preferential 10% rate
pursuant to Section 27(B).
The Constitution exempts charitable institutions only from real property taxes. In the St. Lukes fails to meet the requirements under Section 30(E) and (G) of the NIRC to
NIRC, Congress decided to extend the exemption to income taxes. However, the way be completely tax exempt from all its income. However, it remains a proprietary non-
Congress crafted Section 30(E) of the NIRC is materially different from Section 28(3), profit hospital under Section 27(B) of the NIRC as long as it does not distribute any of
Article VI of the Constitution. its profits to its members and such profits are reinvested pursuant to its corporate
purposes. St. Lukes, as a proprietary non-profit hospital, is entitled to the
Section 30(E) of the NIRC defines the corporation or association that is exempt from preferential tax rate of 10% on its net income from its for-profit activities.
income tax. On the other hand, Section 28(3), Article VI of the Constitution does not
define a charitable institution, but requires that the institution actually, directly and St. Lukes is therefore liable for deficiency income tax in 1998 under Section 27(B) of
exclusively use the property for a charitable purpose. the NIRC. However, St. Lukes has good reasons to rely on the letter dated 6 June
1990 by the BIR, which opined that St. Lukes is a corporation for purely charitable
To be exempt from real property taxes, Section 28(3), Article VI of the Constitution and social welfare purposes and thus exempt from income tax.
requires that a charitable institution use the property actually, directly and exclusively
for charitable purposes. In Michael J. Lhuillier, Inc. v. Commissioner of Internal Revenue, the Court said that
good faith and honest belief that one is not subject to tax on the basis of previous
To be exempt from income taxes, Section 30(E) of the NIRC requires that a interpretation of government agencies tasked to implement the tax law, are sufficient
charitable institution must be organized and operated exclusively for charitable justification to delete the imposition of surcharges and interest.
WHEREFORE, St. Lukes Medical Center, Inc. is ORDERED TO PAY the the court ruled that leasing a portion of the building or lot for commercial purposes
deficiency income tax in 1998 based on the 10% preferential income tax rate cannot be considered incidental to educational purposes and, therefore, is not
under Section 27(8) of the National Internal Revenue Code. However, it is not liable covered by the tax exemption. Under the Constitution, the revenues and assets of
for surcharges and interest on such deficiency income tax under Sections 248 nonstock, nonprofit educational institutions used actually, directly and exclusively for
and 249 of the National Internal Revenue Code. All other parts of the Decision educational purposes shall be exempt from taxes and duties.
and Resolution of the Court of Tax Appeals are AFFIRMED.
The issue posed for resolution was in determining whether it is actually, directly and
exclusively used for educational purposes, should the test of use refer to the use of
DLSU CASE the asset or to the use of the revenue? As claimed by La Salle, the leasing of the
- even if the assets were used for noneducational purposes but the revenues asset/land or building may not be for educational purposes, however, the utilization of
derived from such use were used for educational purposes, the tax exemption is the revenue generated from leasing is for educational purposes. The rental income
not lost. from the property was used to pay the promissory loans, the proceeds of which were
used in the construction of La Salles educational sports complex.

The second case involves La Salle University (CTA EB No. 622, December 10, The court ruled in favor of tax exemption and ordered the assessment cancelled.
2010), a nonstock, nonprofit educational institution that was assessed by the BIR for Revenues, howsoever generated, are covered by the constitutional provision on tax
deficiency income tax on its rental income from its cafeteria, restaurants and exemption if these are used or earmarked for educational purposes. In short, even if
bookstores. The BIR alleged that La Salles use of its asset for non-educational the assets were used for noneducational purposes but the revenues derived from
purposes (such as canteens and bookstores) immediately removed such assets from such use were used for educational purposes, the tax exemption is not lost.
the tax-exemption coverage granted by the Constitution. The BIR anchored its
assessment on a previous case (Abra Valley) decided by the Supreme Court, where

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