1 Gen principles of taxation FACTS: The BIR filed on July 29, 1969 a motion for allowance of claim and
TS: The BIR filed on July 29, 1969 a motion for allowance of claim and for payment of
1 Concept nature underlying basis and purpose of taxation
Commissioner vs Pineda
FACTS: Atanasio Pineda died, survived by his wife, Felicisima Bagtas, and 15 children, the
eldest of whom is Atty. Manuel Pineda. Estate proceedings were had in Court so that the
estate was divided among and awarded to the heirs. Atty Pineda's share amounted to about
P2,500.00. After the estate proceedings were closed, the BIR investigated the income tax
liability of the estate for the years 1945, 1946, 1947 and 1948 and it found that the
corresponding income tax returns were not filed. Thereupon, the representative of the
Collector of Internal Revenue filed said returns for the estate issued an assessment and
charged the full amount to the inheritance due to Atty. Pineda who argued that he is liable
only to extent of his proportional share in the inheritance.
ISSUE: Can BIR collect the full amount of estate taxes from an heir's inheritance.
HELD: Yes. The Government can require Atty. Pineda to pay the full amount of the taxes
assessed.
The reason is that the Government has a lien on the P2,500.00 received by him from the
estate as his share in the inheritance, for unpaid income taxes for which said estate is liable.
By virtue of such lien, the Government has the right to subject the property in Pineda's
possession to satisfy the income tax assessment. 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.
All told, the Government has two ways of collecting the tax in question. One, by going after
all the heirs and collecting from each one of them the amount of the tax proportionate to
the inheritance received; and second, is by subjecting said property of the estate which is in
the hands of an heir or transferee to the payment of the tax due. This second remedy is the
very avenue the Government took in this case to collect the tax. The Bureau of Internal
Revenue should be given, in instances like the case at bar, 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.
Vera vs Fernandez
taxes representing the estate's tax deficiencies in 1963 to 1964 in the intestate proceedings
of Luis Tongoy. The administrator opposed arguing that the claim was already barred by the
statute of limitation, Section 2 and Section 5 of Rule 86 of the Rules of Court which provides
that all claims for money against the decedent, arising from contracts, express or implied,
whether the same be due, not due, or contingent, all claims for funeral expenses and
expenses for the last sickness of the decedent, and judgment for money against the
decedent, must be filed within the time limited in the notice; otherwise they are barred
forever.
ISSUE: Does the statute of non-claims of the Rules of Court bar the claim of the government
for unpaid taxes?
HELD: No. The reason for the more liberal treatment of claims for taxes against a decedent's
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. (CIR vs. Pineda, 21 SCRA 105). Upon taxation depends the Government
ability to serve the people for whose benefit taxes are collected. To safeguard such interest,
neglect or omission of government officials entrusted with the collection of taxes should not
be allowed to bring harm or detriment to the people, in the same manner as private persons
may be made to suffer individually on account of his own negligence, the presumption being
that they take good care of their personal affairs. This should not hold true to government
officials with respect to matters not of their own personal concern. This is the philosophy
behind the government's exception, as a general rule, from the operation of the principle of
estoppel.
Commissioner vs Algue (BIR is wrong)
Facts: The Philippine Sugar Estate Development Company had earlier appointed Algue Inc.,
as its agent, authorizing it to sell its land, factories and oil manufacturing process.As
such,the corporation worked for the formation of the Vegetable Oil Investment Corporation,
until they were able to purchased the PSEDC properties. For this sale, Algue Inc., received as
agent a commission of P126, 000.00, and it was from this commission that the P75, 000.00
promotional fees were paid to Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith,
O'Farell, and Pablo Sanchez.
Commissioner of Internal Revenue contends that the claimed deduction is not allowed
because it was not an ordinary reasonable or necessary business expense. The Court of Tax
Appeals had seen it differently. Agreeing with Algue Inc., it held that the said amount had
been legitimately paid by the private respondent for actual services rendered. The payment
was in the form of promotional fees.
Issue: Whether or not the Collector of Internal Revenue correctly disallowed the P75, 000.00
deduction claimed by private respondent Algue Inc., as legitimate business expenses in its
income tax returns.
Ruling: No, The Supreme Court agrees with the respondent court that the amount of the
promotional fees was not excessive. The P75,000.00 was 60% of the total commission. This
was a reasonable proportion, considering that it was the payees who did practically
everything, from the formation of the Vegetable Oil Investment Corporation to the actual
purchase by it of the Sugar Estate properties.
The claimed deduction by the private respondent was permitted under the Internal
Revenue Code and should therefore not have been disallowed by the petitioner.
Victorias Milling vs Mun of Victorias 1968
Facts: Ordinance 1 (1956) was approved by the municipal council of Victorias by way of an
amendment to 2 municipal ordinances separately imposing license taxes on operators of
sugar centrals and sugar refineries. The changes were: (1) with respect to sugar centrals, by
increasing the rates of license taxes; and (2) as to sugar refineries, by increasing the rates of
license taxes as well as the range of graduated schedule of annual output capacity. Victorias
Milling questioned the validity of Ordinance 1 as it, among others, allegedly singled out
Victorias Milling Co. since it is the only operator of a sugar central and a sugar refinery
within the jurisdiction of the municipality
Issue: Whether Ordinance 1 is discriminatory.
Held: The ordinance does not single out Victorias as the only object of the ordinance but is
made to apply to any sugar central or sugar refinery which may happen to operate in the
municipality. The fact that Victorias Milling is actually the sole operator of a sugar central
and a sugar refinery does not make the ordinance discriminatory. The ordinance is unlike
that in Ormoc Sugar Company vs. Municipal Board of Ormoc City, which specifically spelled
out Ormoc Sugar as the subject of the taxation, the name of the company herein was never
mentioned in the ordinance
Morcoin vs City of Manila 1961
Progressive Development Corporation vs. Quezon City, L-36081, April 24, 1989
Facts: The City Council of QC passed an ordinance known as the Market Code of QC, which
imposed a 5% supervision fee on gross receipts on rentals or lease of privately-owned
market spaces in QC.
In case of failure of the owners of the market spaces to pay the tax for three consecutive
months, the City shall revoke the permit of the privately-owned market to operate.
Progressive Development Corp, owner and operator of Farmers Market, filed a petition for
prohibition against QC on the ground that the tax imposed by the Market Code was in
reality a tax on income, which the municipal corporation was prohibited by law to impose.
Issue: Whether or not the supervision fee is an income tax or a license fee.
Held: It is a license fee. A LICENSE FEE is imposed in the exercise of the police power
primarily for purposes of regulation, while TAX is imposed under the taxing power primarily
for purposes of raising revenues.
If the generating of revenue is the primary purpose and regulation is merely incidental, the
imposition is a tax; but if regulation is the primary purpose, the fact that incidentally,
revenue is also obtained does not make the imposition a tax.
To be considered a license fee, the imposition must relate to an occupation or activity that
so engages the public interest in health, morals, safety, and development as to require
regulation for the protection and promotion of such public interest; the imposition must
also bear a reasonable relation to the probable expenses of regulation, taking into account
not only the costs of direct regulation but also its incidental consequences.
In this case, the Farmers Market is a privately-owned market established for the rendition
of service to the general public. It warrants close supervision and control by the City for the
protection of the health of the public by insuring the maintenance of sanitary conditions,
prevention of fraud upon the buying public, etc.
Since the purpose of the ordinance is primarily regulation and not revenue generation, the
tax is a license fee. The use of the gross amount of stall rentals as basis for determining the
collectible amount of license tax does not, by itself, convert the license tax into a prohibited
tax on income.
Such basis actually has a reasonable relationship to the probable costs of regulation and
supervision of Progressives kind of business, since ordinarily, the higher the amount of
rentals, the higher the volume of items sold.
The higher the volume of goods sold, the greater the extent and frequency of supervision
and inspection may be required in the interest of the buying public.
City of Ozamis vs. Lumapas 1975
Short Version: Lumapas, a bus operator, opposed the imposition of a parking fee by Ozamiz
City on his buses that were temporarily parked in Zulueta Street while waiting for
passengers to board. According to him, the charge was not a parking fee but a toll fee in
disguise. The local government cannot impose toll fees without the approval of the
president; and as a result, the ordinance imposing parking fee is null and void. The Court
held that the fee was a parking fee and not a toll fee. It is within the Citys power to enact
such an ordinance by virtue of its police power. The parking fee was ultimately for the
publics safety and convenience. The City may charge a fee to cover expenses of supervision
and control.
Facts:
Lumapas is an operator of transportation buses for passengers and cargoes, with
Ozamiz City and Pagadian, Zamboanga del Sur, as terminal points, by virtue of a certificate
of public convenience issued to him by the Public Service Commission.
The Municipal Board of Ozamiz City enacted Ordinance 466 (An Ordinance Imposing
Parking Fees for Every Motor Vehicle Parked on any Portion of the Existing Parking Space in
the City of Ozamiz).
o Sec. 3 thereof defined parking as: "Parking" as used in this ordinance shall be
construed to mean, when a motor vehicle of whatever kind is stopped on any portion of the
existing parking areas for the purpose of loading and unloading passengers or cargoes.
Lumapas paid P1,259 under protest and filed a complaint against the City of Ozamiz
for recovery of parking fees, alleging that Ordinance 466 was ultra vires and prayed that
judgment be issued nullifying the ordinance.
City of Ozamiz asserted that the parking zone was patrimonial in character; thus, the
City was authorized by Section 2308 (f) of the Revised Administrative Code, and Section 15
(y) of the Charter of Ozamiz City (RA 321) to impose parking fees.
o Also, the charter authorizes the Municipal Board to regulate the use of streets which
carries with it the power to impose fees for its implementation;
o Pursuant to such power, the Municipal Board passed said ordinance, the purpose of
which is to minimize accidents, to avoid congestion of traffic, to enable the passengers to
know the exact time of the departure of trucks;
o Section 2 of the Local Autonomy Law (RA 2264) likewise empowers the local
governments to impose taxes and fees, except those that are enumerated therein, and
parking fee is not among the exceptions; and
o The word "parking" implies a stationary condition and the parking fees provided for
in Ordinance No. 466 are for the privilege of using the designated parking area, which is
owned by the City of Ozamiz, as its patrimonial property.
Lumapas insisted that Ozamiz City had no power to impose parking fees on motor
vehicles parked on Zulueta Street, which is property for public use.
o Because of this, Ordinance 466 imposing such fees was null and void;
o The use of Zulueta Street as a parking place is only incidental to the free passage of
motor vehicles and as such, the prohibition to impose taxes or fees embodied in Section
59[b] of RA 4136 applies to this case;
o Section 2308[f] of the Revised Administrative Code and Section 15[y] of the Charter
of Ozamiz City (RA 321) do not empower the City to impose parking fees; and
o Since the power to impose parking fees is not among those conferred by the Local
Autonomy Act on local government, said City cannot, therefore, impose such parking fees.
Court rendered judgment declaring the parking fee was in the nature of toll fees for
the use of public road and made in violation of Section 59[b] of RA 4136 (Land
Transportation and Traffic Code), there being no prior approval by the President of the
Philippines upon recommendation of the Secretary of Public Works and Communications.
Hence, the present appeal by certiorari.
Issue: Was Ozamiz City authorized to impose the tax?
YES, by virtue of the police power granted by its Charter.
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 thereof, 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 Sec. 15[Y] of the Ozamiz City Charter (RA 321), the municipal board has the
power "to regulate the use of streets, avenues, alleys, sidewalks, wharves, piers, parks,
cemeteries and other public places;" and in subsection [nn] of the same section 15, the
authority "to enact all ordinances it may deem necessary and proper for the sanitation and
safety, the furtherance of prosperity and the promotion of the morality, peace, good order,
comfort, convenience, and general welfare of the city and its inhabitants, and such others as
may be necessary to carry into effect and discharge the powers and duties conferred by this
Charter."
o By this express legislative grant of authority, police power is delegated to the
municipal corporation to be exercised as a governmental function for municipal purposes.
o In the exercise of such power, a municipal corporation can make all necessary and
desirable regulations which are reasonable and manifestly in the interest of public safety
and convenience.
o It is patent that the Municipal Board has been clothed with full power to control and
regulate the streets for the purpose of promoting the public health, safety and welfare
through the ordinance.
By virtue of the statutory grant of authority, the City can regulate the time, place,
manner of parking in the streets and public places.
The parking fee imposed is minimal in amount, the maximum being only P1.00 a day
for each passenger bus and P1.00 for each cargo truck, the rates being lower for smaller
types of vehicles.
o This indicates that its purpose is not for revenue but for regulation.
o By designating a specific place wherein passenger and freight vehicles may load and
unload passengers and cargoes, benefits are accorded to the city's residents in the form of
increased safety and convenience arising from the decongestion of traffic.
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.
The fees charged are to cover the expenses for supervision, inspection and control,
to ensure the smooth flow of traffic in the environs of the public market, and for the safety
and convenience of the public.
Issue: Does the ordinance charge a parking fee or a toll fee?
Parking fee, for the regulation of the use of Ozamizs streets.
The buses stop on the extended portion of Zulueta Street beside the public market.
As soon as they were loaded, they proceeded to the station where a toll clerk collected the
parking fee of P1.00 per bus once a day, before said buses were allowed to proceed to their
destination.
o Lumapas insists that this was not parking, but a toll fee for the use of the street.
o Since toll fees require authorization from the President, the City was not authorized
to impose a toll fee in the guise of a parking fee.
o "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.
However, 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.
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.
Considering that the buses are only charged the fee when they 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.
o This is clear from the facts which show 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 RA 4136, which requires the authorization of the President of the
Philippines.
Dispositive: CFI reversed. Ordinance valid.
Sison vs. Ancheta 1984
Facts: Petitioners challenged the constitutionality of Section 1 of Batas Pambansa Blg. 135. It
amended
Section 21 of the National Internal Revenue Code of 1977, which provides 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.
Petitioner as taxpayer alleged 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." He
characterizes the above section as arbitrary amounting to class legislation, oppressive and
capricious in character.
For petitioner, therefore, there is a transgression of both the equal protection and due
process clauses of the Constitution as well as of the rule requiring uniformity in taxation.
The OSG prayed for dismissal of the petition due to lack of merit.
Issue: Whether the imposition of a higher tax rate on taxable net income derived from
business or profession than on compensation is constitutionally infirm.
(WON there is a transgression of both the equal protection and due process clauses of the
Constitution as well as of the rule requiring uniformity in taxation)
Held: No. Petition dismissed
Ratio:
The need for more revenues is rationalized by the government's role to fill the gap not done
by public enterprise in order to meet the needs of the times. It is better equipped to
administer for the public welfare.
The power to tax, an inherent prerogative, has to be availed of to assure the performance of
vital state functions. It is the source of the bulk of public funds.
The power to tax is an attribute of sovereignty and the strongest power of the government.
There are restrictions, however, diversely affecting as it does property rights, both the due
process and equal protection clauses may properly be invoked, as petitioner does, to
invalidate in appropriate cases a revenue measure. If it were otherwise, taxation would be a
destructive power.
The petitioner failed to prove that the statute ran counter to the Constitution. He used
arbitrariness as basis without a factual foundation. This is merely to adhere to the
authoritative doctrine that where the due process and equal protection clauses are invoked,
considering that they are not fixed rules but rather broad standards, there is a need for
proof of such persuasive character as would lead to such a conclusion.
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 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.
For equal protection, the applicable standard to determine whether this was denied in the
exercise of police power or eminent domain was the presence of the purpose of hostility or
unreasonable discrimination.
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. Favoritism and
undue preference cannot be allowed. For the principle is that equal protection and security
shall be given to every person under circumstances, which if not identical are analogous. If
law be looks upon in terms of burden or charges, those that fall within a class should be
treated in the same fashion, whatever restrictions cast on some in the group equally binding
on the rest.
The equal protection clause is, of course, inspired by the noble concept of approximating
the ideal of the laws's benefits being available to all and the affairs of men being governed
by that serene and impartial uniformity, which is of the very essence of the idea of law.
The equality at which the 'equal protection' clause aims is not a disembodied equality. The
Fourteenth Amendment enjoins 'the equal protection of the laws,' and laws are not abstract
propositions. They do not relate to abstract units A, B and C, but are expressions of policy
arising out of specific difficulties, addressed to the attainment of specific ends by the use of
specific remedies. The Constitution does not require things which are different in fact or
opinion to be treated in law as though they were the same.
Lutz v Araneta- it is inherent in the power to tax that a state be free to select the subjects of
taxation, and it has been repeatedly held that 'inequalities which result from a singling out
of one particular class for taxation, or exemption infringe no constitutional limitation.
Petitioner- kindred concept of uniformity- Court- Philippine Trust Company- The rule of
uniformity does not call for perfect uniformity or perfect equality, because this is hardly
attainable
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
There is quite a similarity then to the standard of equal protection for all that is required is
that the tax "applies equally to all persons, firms and corporations placed in similar
situation"
There was a difference between a tax rate and a 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.
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. As there is practically no overhead
expense, these taxpayers are not entitled to make deductions for income tax purposes
because they are in the same situation more or less.
Taxpayers who are recipients of compensation income are set apart as a class.
On the other hand, in the case of professionals in the practice of their calling and
businessmen, there is no uniformity in the costs or expenses necessary to produce their
income. It would not be just then to disregard the disparities by giving all of them zero
deduction and indiscriminately impose on all alike the same tax rates on the basis of gross
income.
There was a lack of a factual foundation, the forcer of doctrines on due process and equal
protection, and the reasonableness of the distinction between compensation and taxable
net income of professionals and businessmen not being a dubious classification.
Pepsi Cola vs. Municipality of Tanauan 1976
Delegation to Local Governments Double Taxation
Facts: Pepsi Cola has a bottling plant in the Municipality of Tanauan, Leyte. In September
1962, the Municipality approved Ordinance No. 23 which levies and collects from soft
drinks producers and manufacturers a tax of one-sixteenth (1/16) of a centavo for every
bottle of soft drink corked.
In December 1962, the Municipality also approved Ordinance No. 27 which levies and
collects on soft drinks produced or manufactured within the territorial jurisdiction of this
municipality a tax of one centavo P0.01) on each gallon of volume capacity.
Pepsi Cola assailed the validity of the ordinances as it alleged that they constitute double
taxation in two instances: a) double taxation because Ordinance No. 27 covers the same
subject matter and impose practically the same tax rate as with Ordinance No. 23, b) double
taxation because the two ordinances impose percentage or specific taxes.
Pepsi Cola also questions the constitutionality of Republic Act 2264 which allows for the
delegation of taxing powers to local government units; that allowing local governments to
tax companies like Pepsi Cola is confiscatory and oppressive.
The Municipality assailed the arguments presented by Pepsi Cola. It argued, among others,
that only Ordinance No. 27 is being enforced and that the latter law is an amendment of
Ordinance No. 23, hence there is no double taxation.
ISSUE: Whether or not there is undue delegation of taxing powers.
Whether or not there is double taxation.

HELD: No. There is no undue delegation. The Constitution even allows such delegation.
Legislative powers may be delegated to local governments in respect of matters of local
concern. By necessary implication, the legislative power to create political corporations for
purposes of local self-government carries with it the power to confer on such local
governmental agencies the power to tax. Under the New Constitution, local governments
are granted the autonomous authority to create their own sources of revenue and to levy
taxes. Section 5, Article XI provides: Each local government unit shall have the power to
create its sources of revenue and to levy taxes, subject to such limitations as may be
provided by law. Withal, it cannot be said that Section 2 of Republic Act No. 2264
emanated from beyond the sphere of the legislative power to enact and vest in local
governments the power of local taxation.
There is no double taxation. The argument of the Municipality is well taken. Further, Pepsi
Colas assertion that the delegation of taxing power in itself constitutes double taxation
cannot be merited. It must be observed that the delegating authority specifies the
limitations and enumerates the taxes over which local taxation may not be exercised. The
reason is that the State has exclusively reserved the same for its own prerogative.
Moreover, double taxation, in general, is not forbidden by our fundamental law unlike in
other jurisdictions. Double taxation becomes obnoxious only where the taxpayer is taxed
twice for the benefit of the same governmental entity or by 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.
Pascual vs. Secretary of Public Works, L-10405, December 29, 1960
"A law appropriating the public revenue is invalid if the public advantage or benefit, derived
from such expenditure, is merely incidental in the promotion of a particular enterprise."
FACTS: Governor Wenceslao Pascual of Rizal instituted this action for declaratory relief, with
injunction, upon the ground that RA No. 920, which apropriates funds for public works
particularly for the construction and improvement of Pasig feeder road terminals. Some of
the feeder roads, however, as alleged and as contained in the tracings attached to the
petition, were nothing but projected and planned subdivision roads, not yet constructed
within the Antonio Subdivision, belonging to private respondent Zulueta, situated at Pasig,
Rizal; and which projected feeder roads do not connect any government property or any
important premises to the main highway. The respondents' contention is that there is public
purpose because people living in the subdivision will directly be benefitted from the
construction of the roads, and the government also gains from the donation of the land
supposed to be occupied by the streets, made by its owner to the government.
ISSUE: Should incidental gains by the public be considered "public purpose" for the purpose
of justifying an expenditure of the government?
HELD: No. It is a general rule that the legislature is without power to appropriate public
revenue for anything but a public purpose. It is the essential character of the direct object of
the expenditure which must determine its validity as justifying a tax, and not the magnitude
of the interest to be affected nor the degree to which the general advantage of the
community, and thus the public welfare, may be ultimately benefited by their promotion.
Incidental to the public or to the state, which results from the promotion of private interest
and the prosperity of private enterprises or business, does not justify their aid by the use
public money.
The test of the constitutionality of a statute requiring the use of public funds is whether
the statute is designed to promote the public interest, as opposed to the furtherance of the
advantage of individuals, although each advantage to individuals might incidentally serve
the public.
Lutz vs. Araneta, L-7859 December 22, 1955 (98 Phil 148)
FACTS: Appelant in this case Walter Lutz in his capacity as the Judicial Administrator of the
intestate of the deceased Antonio Jayme Ledesma, seeks to recover from the Collector of
the Internal Revenue the total sum of fourteen thousand six hundred sixty six and forty
cents (P 14, 666.40) paid by the estate as taxes, under section 3 of Commonwealth Act No.
567, also known as the Sugar Adjustment Act, for the crop years 1948-1949 and 1949-1950.
Commonwealth Act. 567 Section 2 provides for an increase of the existing tax on the
manufacture of sugar on a graduated basis, on each picul of sugar manufacturer; while
section 3 levies on the owners or persons in control of the land devoted tot he cultivation of
sugarcane and ceded to others for consideration, on lease or otherwise - "a tax equivalent
to the difference between the money value of the rental or consideration collected and the
amount representing 12 per centum of the assessed value of such land. It was alleged that
such tax is unconstitutional and void, being levied for the aid and support of the sugar
industry exclusively, which in plaintiff's opinion is not a public purpose for which a tax may
be constitutionally levied. The action was dismissed by the CFI thus the plaintiff appealed
directly to the Supreme Court.
ISSUE: Whether or not the tax imposition in the Commonwealth Act No. 567 are
unconstitutional.
RULING: Yes, the Supreme Court held that the fact that sugar production is one of the
greatest industry of our nation, sugar occupying a leading position among its export
products; that it gives employment to thousands of laborers in the fields and factories; that
it is a great source of the state's wealth, is one of the important source of foreign exchange
needed by our government and is thus pivotal in the plans of a regime committed to a policy
of currency stability. Its promotion, protection and advancement, therefore redounds
greatly to the general welfare. Hence it was competent for the legislature to find that the
general welfare demanded that the sugar industry be stabilized in turn; and in the wide field
of its police power, the law-making body could provide that the distribution of benefits
therefrom be readjusted among its components to enable it to resist the added strain of the
increase in taxes that it had to sustain.
The subject tax is levied with a regulatory purpose, to provide means for the rehabilitation
and stabilization of the threatened sugar industry. In other words, the act is primarily a valid
exercise of police power.
Gomez vs. Palomar, L-23645, October 29, 1968 (25 SCRA 827)
The eradication of a dreaded disease is a public purpose, but if by public purpose the
petitioner means benefit to a taxpayer as a return for what he pays, then it is sufficient
answer to say that the only benefit which the taxpayer is constitutionally entitled is that
derived from his enjoyment of the privileges of living in an organized society, established
and safeguarded by the devotion of taxes to public purposes
FACTS: Petitioner Benjamin Gomez mailed a letter at the post office in San Fernando,
Pampanga. It did not bear the special anti-TB stamp required by the RA 1635. It was
returned to the petitioner. Petitioner now assails the constitutionality of the statute
claiming that RA 1635 otherwise known as the Anti-TB Stamp law is violative ofthe equal
protection clause because it constitutes mail users into a class for the purpose of the tax
while leaving untaxed the rest of the population and that even among postal patrons the
statute discriminatorily grants exemptions. The law in question requires an additional 5
centavo stamp for every mail being posted, and no mail shall be delivered unless bearing the
said stamp.
ISSUE: Is the Anti-TB Stamp Law unconstitutional, for being allegedly violative of the equal
protection clause?
HELD: No. It is settled that the legislature has the inherent power to select the subjects of
taxation and to grant exemptions. This power has aptly been described as "of wide range
and flexibility." Indeed, it is said that in the field of taxation, more than in other areas, the
legislature possesses the greatest freedom in classification. The reason for this is that
traditionally, classification has been a device for fitting tax programs to local needs and
usages in order to achieve an equitable distribution of the tax burden.
The classification of mail users is based on the ability to pay, the enjoyment of a privilege
and on administrative convenience. Tax exemptions have never been thought of as raising
revenues under the equal protection clause.
Abakada Guro Party List vs. Ermita, G.R. No. 168056, September 1, 2005
Facts:
On May 24, 2005, the President signed into law Republic Act 9337 or the VAT Reform Act.
Before the law took effect on July 1, 2005, the Court issued a TRO enjoining government
from implementing the law in response to a slew of petitions for certiorari and prohibition
questioning the constitutionality of the new law.
The challenged section of R.A. No. 9337 is the common proviso in Sections 4, 5 and 6: That
the President, upon the recommendation of the Secretary of Finance, shall, effective
January 1, 2006, raise the rate of value-added tax to 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 one-half percent (1%)
Petitioners allege that the grant of stand-by authority to the President to increase the VAT
rate is an abdication by Congress of its exclusive power to tax because such delegation is not
covered by Section 28 (2), Article VI Consti. They argue that VAT is a tax levied on the sale or
exchange of goods and services which cant be included within the purview of tariffs under
the exemption delegation since this refers to customs duties, tolls or tribute payable upon
merchandise to the government and usually imposed on imported/exported goods.
Petitioners further alleged that delegating to the President the legislative power to tax is
contrary to republicanism. They insist that accountability, responsibility and transparency
should dictate the actions of Congress and they should not pass to the President the
decision to impose taxes. They also argue that the law also effectively nullified the
Presidents power of control, which includes the authority to set aside and nullify the acts of
her subordinates like the Secretary of Finance, by mandating the fixing of the tax rate by the
President upon the recommendation of the Secretary of Justice.
Issue:
Whether or not the RA 9337's stand-by authority to the Executive to increase the VAT rate,
especially on account of the recommendatory power granted to the Secretary of Finance,
constitutes undue delegation of legislative power?
Ruling:
The powers which Congress is prohibited from delegating are those which are strictly, or
inherently and exclusively, legislative. Purely legislative power which can never be delegated
is the authority to make a complete law- complete as to the time when it shall take effect
and as to whom it shall be applicable, and to determine the expediency of its enactment. It
is the nature of the power and not the liability of its use or the manner of its exercise which
determines the validity of its delegation.
The exceptions are:
(a) delegation of tariff powers to President under Constitution
(b) delegation of emergency powers to President under Constitution
(c) delegation to the people at large
(d) delegation to local governments
(e) delegation to administrative bodies
For the delegation to be valid, it must be complete and it must fix a standard. A sufficient
standard is one which defines legislative policy, marks its limits, maps out its boundaries and
specifies the public agency to apply it.
In this case, it is not a delegation of legislative power BUT a delegation of ascertainment of
facts upon which enforcement and administration of the increased 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. Highlighting the absence of discretion is the
fact that the word SHALL is used in the common proviso. The use of the word SHALL
connotes a mandatory order. Its use in a statute denotes an imperative obligation and is
inconsistent with the idea of discretion.
Thus, it is the ministerial duty of the President to immediately impose the 12% rate upon
the existence of any of the conditions specified by Congress. This is a duty, which cannot be
evaded by the President. It is a clear directive to impose the 12% VAT rate when the
specified conditions are present.
Congress just granted the Secretary of Finance the authority to ascertain the existence of a
fact--- whether by December 31, 2005, the VAT collection as a percentage of GDP of the
previous year exceeds 2 4/5 % or the national government deficit as a percentage of GDP of
the previous year exceeds one and 1%. If either of these two instances has occurred, the
Secretary of Finance, by legislative mandate, must submit such information to the President.
In making his recommendation to the President on the existence of either of the two
conditions, the Secretary of Finance is not acting as the alter ego of the President or even
her subordinate. He is acting as the agent of the legislative department, to determine and
declare the event upon which its expressed will is to take effect. The Secretary of Finance
becomes the means or tool by which legislative policy is determined and implemented,
considering that he possesses all the facilities to gather data and information and has a
much broader perspective to properly evaluate them. His function is to gather and collate
statistical data and other pertinent information and verify if any of the two conditions laid
out by Congress is present.
Congress does not abdicate its functions or unduly delegate power when it describes what
job must be done, who must do it, and what is the scope of his authority; in our complex
economy that is frequently the only way in which the legislative process can go forward.
There is no undue delegation of legislative power but only of the discretion as to the
execution of a law. This is constitutionally permissible. Congress did not delegate the power
to tax but the mere implementation of the law.
City of Baguio vs. De Leon 1968
FACTS: The City of Baguio passed a license fee on any person, entity or corporation doing
business in the City. The ordinance
sourced its authority from RA 329, thereby amending the city charter empowering it to fix
the license fee and regulate businesses, trades and occupation as may be established in the
City. De Leon was assessed for P50 annual fee it being shown that he was engaged in
property rental and deriving income therefrom. The latter assailed the validity of the
ordinance arguing that it is ultra vires for there is no statutory authority which expressly
grants the City of Baguio to levy such tax and that there it imposed double taxation and
violates the requirement of uniformity.
ISSUE: Is the ordinance valid?
RULING: Yes. First, RA 329 was enacted amending Section 2553 of the Revised
Administrative Code empowering the City Council not only to impose a license fee but to
levy a tax for purposes of revenue, thus the ordinance cannot be considered ultra vires for
there is more than ample statutory for the enactment thereof.
Second, an argument against double taxation may not be invoked where one tax is imposed
by the state and the other imposed by the City.
Third, violation of uniformity is out of place it being widely recognized that there is nothing
inherently obnoxious in the requirement that license fees of taxes be enacted with respect
to the same occupation, calling or activity by both the state and the political subdivision
thereof.
Eastern Technical Co. vs. Alfonso, L-1104, May 31, 1949 (83 Phil. 852)"
FACTS: Twelve corporations engaged in the motion picture business filed a complaint to
impugn the validity of Ord No.2958 of the City of Manila entitiled "AN ORDINANCE
IMPOSING A FEE ON THE PRICE OF EVERY ADMISSION TICKET SOLD BY CINEMATOGRAPHS
THEATERS, VAUDEVILLE COMPANIES, THEATRICAL SHOWS AND BOXING EXHIBITIONS AND
PROVIDING FOR OTHER PURPOSES.
Plaintiffs, impugn as null and void, Sections 1, 2, and 4 upon the following grounds; (a) For
violating the Constitution, more particularly the provisions regarding the uniformity and
equality of taxation and the equal protection of the laws (b) because the Municipal Board
of Manila exceeded and overstepped the powers granted it by the Charter of the City of
Manila (c) because it contravenes, violates, and is inconsistent with, existing national
legislation, more particularly revenue and tax laws and, (d) because it is unfair, unjust,
arbitrary, capricious, unreasonable, oppressive, and is contrary to and violates our basic and
recognized principles of taxation and licensing laws.
Defendants allege as affirmative defenses that; (a) the ordinance was passed by the
Municipal Board by virtue of its express legislative power to tax, fix license fee and regulate
the business of theatres, (b) that the graduated tax required by said ordinance being
applied to all as a class without distinction or exception and does not violate the
constitutional prohibition against uniformity and equality of taxation, (c) that the tax
imposed by NIRC is collected for the National Government whereas Ord No. 2958 is for the
City of Manila and that there is no case of double taxation, (d) that said ordinance having
been enacted under the express power of the Municipal Board to tax for revenue, as
distinguished from its power to license for purely police purposes, the fact that the amounts
collected thereunder are higher than what are needed for police regulation and supervision
does not render said ordinance unfair, unjust,
capricious, unreasonable and oppressive (e) that, considering the nature of the business of
the plaintiffs and the enormous volume of business they handle, the graduated tax fixed by
the ordinance is not unreasonable.
Defendants also allege that since the ordinance in question took effect, plaintiffs have been
charging the theatre-going public increased rates of prices of admissions equal and
corresponding to the graduated tax imposed by the ordinance, an as a result while refusing
to pay said tax but at the same time collecting the said tax, plaintiffs have taken undue
advantage of said ordinance to realize more profits.
September 5, 1946, CFI upheld the validity of Ord. No 2958.
ISSUE Whether Ordinance No. 2958 is valid? YES

RULING: PROVISIONS OF SECTION 2444 (M) OF THE REVISED ADMINISTRATIVE CODE,
CONSTRUED.The whole argument of plaintiffs hinges on the assumption that the power
granted to the City of Manila by section 2444 (ra) of the Revised Administrative Code is
limited to the authority to impose a tax on business, with exclusion of the power to impose
a tax on amusement but, the assumption is based on an arbitrary labelling of the kind of tax
authorized by said section 2444 (m). The distinction as to the power to tax business and the
power to tax amusement has no ground under the provisions of section 2444 (m) of the
Revised Administrative Code. The tax therein authorized cannot be defined as tax on
business and cannot be restricted within a smaller scope than what is authorized by the
words used, to the extent of excluding what plaintiffs describe as tax on amusement.
The very fact that section 2444(m) of the Revised Administrative Code includes theatres,
cinematographs, public billiard tables, public pool tables, bowling alleys, dance halls, public
dancing halls, cabarets, circuses and other similar places, race tracks, horse races, theatrical
performances, public exhibition, circus and other performances and places of amusements,
will show conclusively that the power to tax amusement is expressly included within the
power granted by section 2444 (m) of the Revised Administrative Code.
In support of the contention that section 2444 (m) of the Revised Administrative Code was
repealed, plaintiffs aver that the Charter of the City of Manila, containing section 2444 (m)
of the Revised Administrative Code, was enacted on. December 8, 1929. On April 25, 1940,
the National Assembly enacted Commonwealth Act No. 466, including provisions on
amusement tax, covering the whole field on taxation and provided for more than what the
ordinance in question has provided. As a result, there are two taxing powers seeking to
occupy exactly the same field of legislation, and so the apparent conflict must be resolved
with the conclusion that, with the enactment of Commonwealth Act No. 466, as later
amended by Republic Act No. 39, section 2444 (m) of the Revised Administrative Code has
been impliedly repealed and the power therein delegated to the City of Manila withdrawn.
Held: That the conflict pointed out is imaginary. Both provisions of law may stand together
and be enforced at the same time without any incompatibility.
EQUALITY AND UNIFORMITY OF TAXATION VALIDITY OF ORDINANCE NO. 2958.Appellants
point out to the fact that the ordinance in question does not tax "many more kinds of
amusements" than those therein specified, such as "race tracks, cockpits, cabarets, concert
halls, circuses, and other places of amusement." The argument has absolutely no merit. The
fact that some places of amusement are not taxed while others, such as cinematographs,
theaters, vaudeville companies, theatrical shows, and boxing exhibitions and other kinds of
amusements or places of amusement are taxed, is no argument at all against the equality
and uniformity of the tax imposition. 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 reason able and natural classifications for purposes
of taxation and the appellants cannot point out what places of amusement taxed by the
ordinance do not constitute a class by themselves and which can be confused with those not
included in the ordinance.
Part 2 Income Taxation
1 Organization and Structure of the BIR Sec 2-21 of Tax Code
2 Features of Income Taxation
3 General Definitoins
4 General Principles
SEC. 23. General Principles of Income Taxation in the Philippines. - Except when otherwise
provided in this Code:
(A) A citizen of the Philippines residing therein is taxable on all income derived from sources
within and without the Philippines;
(B) A nonresident citizen is taxable only on income derived from sources within the
Philippines;
(C) An individual citizen of the Philippines who is working and deriving income from abroad
as an overseas contract worker is taxable only on income derived from sources within the
Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives
compensation for services rendered abroad as a member of the complement of a vessel
engaged exclusively in international trade shall be treated as an overseas contract worker;
(D) An alien individual, whether a resident or not of the Philippines, is taxable only on
income derived from sources within the Philippines;
(E) A domestic corporation is taxable on all income derived from sources within and without
the Philippines; and
(F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is
taxable only on income derived from sources within the Philippines.
Kinds of IT payers
Collector vs Batangas Transportation
Evangelista vs Collector
Income from Sources w/in & w/out
SEC. 42. 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) Interests. - Interests derived from sources within the Philippines, and interests on bonds,
notes or other interest-bearing obligation of residents, corporate or otherwise;
(2) Dividends. - The amount received as dividends:
(a) From a domestic corporation; and
(b) From a foreign corporation, unless less than fifty percent (50%) of the gross income of
such foreign corporation for the three-year period ending with the close of its taxable year
preceding the declaration of such dividends or for such part of such period as the
corporation has been in existence) was derived from sources within the Philippines as
determined under the provisions of this Section; but only in an amount which bears the
same ratio to such dividends as the gross income of the corporation for such period derived
from sources within the Philippines bears to its gross income from all sources;
(3) Services.- Compensation for labor or personal services performed in the Philippines;
(4) Rentals and Royalties. - Rentals and royalties from property located in the Philippines or
from any interest in such property, including rentals or royalties for -
(a) The use of or the right or privilege to use in the Philippines any copyright, patent, design
or model, plan, secret formula or process, goodwill, trademark, trade brand or other like
property or right;
(b) The use of, or the right to use in the Philippines any industrial, commercial or scientific
equipment;
(c) The supply of scientific, technical, industrial or commercial knowledge or information;
(d) The supply of any assistance that is ancillary and subsidiary to, and is furnished as a
means of enabling the application or enjoyment of, any such property or right as is
mentioned in paragraph (a), any such equipment as is mentioned in paragraph (b) or any
such knowledge or information as is mentioned in paragraph (c);
(e) The supply of services by a nonresident person or his employee in connection with the
use of property or rights belonging to, or the installation or operation of any brand,
machinery or other apparatus purchased from such nonresident person;
(f) Technical advice, assistance or services rendered in connection with technical
management or administration of any scientific, industrial or commercial undertaking,
venture, project or scheme; and
(g) The use of or the right to use:
(i) Motion picture films;
(ii) Films or video tapes for use in connection with television; and
(iii) Tapes for use in connection with radio broadcasting.
(5) Sale of Real Property. -Gains, profits and income from the sale of real property located in
the Philippines; and
(6) Sale of Personal Property. - Gains; profits and income from the sale of personal property,
as determined in Subsection (E) of this Section.
(B) Taxable Income From Sources Within the Philippines. -
(1) General Rule. - From the items of gross income specified in Subsection (A) of this Section,
there shall be deducted the expenses, losses and other deductions properly allocated
thereto and a ratable part of expenses, interests, losses and other deductions effectively
connected with the business or trade conducted exclusively within the Philippines which
cannot definitely be allocated to some items or class of gross income: Provided, That such
items of deductions shall be allowed only if fully substantiated by all the information
necessary for its calculation. The remainder, if any, shall be treated in full as taxable income
from sources within the Philippines.
(2) Exception. - No deductions for interest paid or incurred abroad shall be allowed from the
item of gross income specified in subsection (A) unless indebtedness was actually incurred
to provide funds for use in connection with the conduct or operation of trade or business in
the Philippines.
(C) Gross Income From Sources Without the Philippines. - The following items of gross
income shall be treated as income from sources without the Philippines:
(1) Interests other than those derived from sources within the Philippines as provided in
paragraph (1) of Subsection (A) of this Section;
(2) Dividends other than those derived from sources within the Philippines as provided in
paragraph (2) of Subsection (A) of this Section;
(3) Compensation for labor or personal services performed without the Philippines;
(4) Rentals or royalties from property located without the Philippines or from any interest in
such property including rentals or royalties for the use of or for the privilege of using
without the Philippines, patents, copyrights, secret processes and formulas, goodwill,
trademarks, trade brands, franchises and other like properties; and
(5) Gains, profits and income from the sale of real property located without the Philippines.
(D) Taxable Income From Sources Without the Philippines. - From the items of gross income
specified in Subsection (C) of this Section, there shall be deducted the expenses, losses, and
other deductions properly apportioned or allocated thereto and a ratable part of any
expense, loss or other deduction which cannot definitely be allocated to some items or
classes of gross income. The remainder, if any, shall be treated in full as taxable income
from sources without the Philippines.
(E) Income From Sources Partly Within and Partly Without the Philippines.- Items of gross
income, expenses, losses and deductions, other than those specified in Subsections (A) and
(C) of this Section, shall be allocated or apportioned to sources within or without the
Philippines, under the rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner. Where items of gross income are separately
allocated to sources within the Philippines, there shall be deducted (for the purpose of
computing the taxable income therefrom) the expenses, losses and other deductions
properly apportioned or allocated thereto and a ratable part of other expenses, losses or
other deductions which cannot definitely be allocated to some items or classes of gross
income. The remainder, if any, shall be included in full as taxable income from sources
within the Philippines. In the case of gross income derived from sources partly within and
partly without the Philippines, the taxable income may first be computed by deducting the
expenses, losses or other deductions apportioned or allocated thereto and a ratable part of
any expense, loss or other deduction which cannot definitely be allocated to some items or
classes of gross income; and the portion of such taxable income attributable to sources
within the Philippines may be determined by processes or formulas of general
apportionment prescribed by the Secretary of Finance. Gains, profits and income from the
sale of personal property produced (in whole or in part) by the taxpayer within and sold
without the Philippines, or produced (in whole or in part) by the taxpayer without and sold
within the Philippines, shall be treated as derived partly from sources within and partly from
sources without the Philippines.
Gains, profits and income derived from the purchase of personal property within and its sale
without the Philippines, or from the purchase of personal property without and its sale
within the Philippines shall be treated as derived entirely form sources within the country in
which sold: Provided, however, That gain from the sale of shares of stock in a domestic
corporation shall be treated as derived entirely form sources within the Philippines
regardless of where the said shares are sold. The transfer by a nonresident alien or a foreign
corporation to anyone of any share of stock issued by a domestic corporation shall not be
effected or made in its book unless: (1) the transferor has filed with the Commissioner a
bond conditioned upon the future payment by him of any income tax that may be due on
the gains derived from such transfer, or (2) the Commissioner has certified that the taxes, if
any, imposed in this Title and due on the gain realized from such sale or transfer have been
paid. It shall be the duty of the transferor and the corporation the shares of which are sold
or transferred, to advise the transferee of this requirement.
(F) Definitions. - As used in this Section the words 'sale' or 'sold' include 'exchange' or
'exchanged'; and the word 'produced' includes 'created', 'fabricated', 'manufactured',
'extracted', 'processed', 'cured' or 'aged'.
British Overseas vs CIR
Facts: British Overseas Airways Corp (BOAC) is a 100% British Government-owned
corporation engaged in international airline business and is a member of the Interline Air
Transport Association, and thus, it operates air transportation services and sells
transportation tickets over the routes of the other airline members.
From 1959 to 1972, BOAC had no landing rights for traffic purposes in the Philippines and
thus, did not carry passengers and/or cargo to or from the Philippines but maintained a
general sales agent in the Philippines - Warner Barnes & Co. Ltd. and later, Qantas Airways
- which was responsible for selling BOAC tickets covering passengers and cargoes. The
Commissioner of Internal Revenue assessed deficiency income taxes against BOAC.
Issue: Whether the revenue derived by BOAC from ticket sales in the Philippines, constitute
income of BOAC from Philippine sources, and accordingly taxable.
Held: The source of an income is the property, activity, or service that produced the income.
For the source of income to be considered as coming from the Philippines, it is sufficient
that the income is derived from activity within the Philippines. Herein, the sale of tickets
in the Philippines is the activity that produced the income. The tickets exchanged hands
here and payment for fares were also made here in the Philippine currency.
The situs of the source of payments is the Philippines. The flow of wealth proceeded from,
and occurred within Philippine territory, enjoying the protection accorded by the
Philippine government. In consideration of such protection, the flow of wealth should
share the burden of supporting the government. PD 68, in relation to PD 1355, ensures that
international airlines are taxed on their income from Philippine sources. The 2 1/2% tax on
gross billings is an income tax. If it had been intended as an excise tax or percentage tax, it
would have been placed under Title V of the Tax Code covering taxes on business.
5 Computation of Taxable Income
A Definition
SEC. 31. Taxable Income Defined. -The term 'taxable income' [28] means the pertinent items
of gross income specified in this Code, less the deductions and/or personal and additional
exemptions, if any, authorized for such types of income by this Code or other special laws.
Madrigal vs Rafferty
The essential difference between capital and income is that capital is a fund; income is a
flow. A fund of property existing at an instant of time is called capital. A 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 is called income. Capital is
wealth, while income is the service of wealth.
FACTS:
Vicente Madrigal and Susana Paterno were legally married prior to Januray 1, 1914. The
marriage was contracted under the provisions of law concerning conjugal partnership
On 1915, Madrigal filed a declaration of his net income for year 1914, the sum of
P296,302.73
Vicente Madrigal was contending that the said declared income does not represent 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 should be divided
by 2.
The revenue officer was not satisfied with Madrigals explanation and ultimately, the
United States Commissioner of Internal Revenue decided against the claim of Madrigal.
Madrigal paid under protest, and the couple decided to recover the sum of P3,786.08
alleged to have been wrongfully and illegally assessed and collected by the CIR.
ISSUE: Whether or not the income reported by Madrigal on 1915 should be divided into 2 in
computing for the additional income tax.
HELD:
No! The point of view of the CIR is that the Income Tax Law, as the name implies, taxes
upon income and not upon capital and property.
 The essential difference between capital and income is that capital is a fund; income is a
flow. A fund of property existing at an instant of time is called capital. A 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 is called income. Capital is
wealth, while income is the service of wealth.
As Paterno has no estate and income, actually and legally vested in her and entirely
distinct from her husbands property, the income cannot properly be considered the
separate income of the wife for the purposes of the additional tax.
To recapitulate, Vicente wants to half his declared income in computing for his tax since
he is arguing that he has a conjugal partnership with his wife. However, the court ruled that
the one that should be taxed is the income which is the flow of the capital, thus it should
not be divided into 2.
B Computation of Gross Incme
C Gross Income Items subject to Tax
(A) General Definition. - Except when otherwise provided in this Title, gross income means
all income derived from whatever source, including (but not limited to) the following items:
(1) Compensation for services in whatever form paid, including, but not limited to fees,
salaries, wages, commissions, and similar items;
(2) Gross income derived from the conduct of trade or business or the exercise of a
profession;
(3) Gains derived from dealings in property;
(4) Interests;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Annuities;
(9) Prizes and winnings;
(10) Pensions; and
(11) Partner's distributive share from the net income of the general professional
partnership.
Rental allowances and travel allowances by a company are not part of taxable income
FACTS: Sps. Arthur Henderson and Marie Henderson filed their annual income tax with the
BIR. Arthur is president of American International Underwriters for the Philippines, Inc.,
which is a domestic corporation engaged in the business of general non-life insurance, and
represents a group of American insurance companies engaged in the business of general
non-life insurance.
The BIR demanded payment for alleged deficiency taxes. In their computation, the BIR
included as part of taxable income: 1) Arthurs allowances for rental, residential expenses,
subsistence, water, electricity and telephone expenses 2) entrance fee to the Marikina Gun
and Country Club which was paid by his employer for his account and 3) travelling allowance
of his wife
The taxpayers justifications are as follows:
1) as to allowances for rental and utilities, Arthur did not receive money for the allowances.
Instead, the apartment is furnished and paid for by his employer-corporation (the mother
company of American International), for the employer corporations purposes. The spouses
had no choice but to live in the expensive apartment, since the company used it to entertain
guests, to accommodate officials, and to entertain customers. According to taxpayers, only P
4,800 per year is the reasonable amount that the spouses would be spending on rental if
they were not required to live in those apartments. Thus, it is the amount they deem is
subject to tax. The excess is to be treated as expense of the company.
2) The entrance fee should not be considered income since it is an expense of his employer,
and membership therein is merely incidental to his duties of increasing and sustaining the
business of his employer.
3) His wife merely accompanied him to New York on a business trip as his secretary, and at
the employer-corporations request, for the wife to look at details of the plans of a building
that his employer intended to construct. Such must not be considered taxable income.

Henderson vs Collector The Collector of Internal Revenue merely allowed the entrance fee as nontaxable. The rent
expense and travel expenses were still held to be taxable. The Court of Tax Appeals ruled in
favor of the taxpayers, that such expenses must not be considered part of taxable income.
Letters of the wife while in New York concerning the proposed building were presented as
evidence.
ISSUE: Whether or not the rental allowances and travel allowances furnished and given by
the employer-corporation are part of taxable income?
HELD: NO. Such claims are substantially supported by evidence.
These claims are therefore NOT part of taxable income. No part of the allowances in
question redounded to their personal benefit, nor were such amounts retained by them.
These bills were paid directly by the employer-corporation to the creditors. The rental
expenses and subsistence allowances are to be considered not subject to income tax.
Arthurs high executive position and social standing, demanded and compelled the couple to
live in a more spacious and expensive quarters. Such subsistence allowance was a
SEPARATE account from the account for salaries and wages of employees. The company did
not charge rentals as deductible from the salaries of the employees. These expenses are
COMPANY EXPENSES, not income by employees which are subject to tax.
In re to dividends Sec 73 A-c
SEC. 73. Distribution of Dividends or Assets by Corporations. -
(A) Definition of Dividends. - The term 'dividends' when used in this Title means any
distribution made by a corporation to its shareholders out of its earnings or profits and
payable to its shareholders, whether in money or in other property.
Where a corporation distributes all of its assets in complete liquidation or dissolution, the
gain realized or loss sustained by the stockholder, whether individual or corporate, is a
taxable income or a deductible loss, as the case may be.
(B) Stock Dividend. - A stock dividend representing the transfer of surplus to capital account
shall not be subject to tax. However, if a corporation cancels or redeems stock issued as a
dividend at such time and in such manner as to make the distribution and cancellation or
redemption, in whole or in part, essentially equivalent to the distribution of a taxable
dividend, the amount so distributed in redemption or cancellation of the stock shall be
considered as taxable income to the extent that it represents a distribution of earnings or
profits.
(C) Dividends Distributed are Deemed Made from Most Recently Accumulated Profits. - Any
distribution made to the shareholders or members of a corporation shall be deemed to have
been made from the most recently accumulated profits or surplus, and shall constitute a
part of the annual income of the distributee for the year in which received.
(D) Net Income of a Partnership Deemed Constructively Received by Partners. - The taxable
income declared by a partnership for a taxable year which is subject to tax under Section 27
(A) of this Code, after deducting the corporate income tax imposed therein, shall be deemed
to have been actually or constructively received by the partners in the same taxable year
and shall be taxed to them in their individual capacity, whether actually distributed or not.
CIR vs CA GR 108576
301 SCRA 152 Business Organization Corporation Law Trust Fund Doctrine
Don Andres Soriano (American), founder of A. Soriano Corp. (ASC) had a total shareholdings
of 185,154 shares. Broken down, the shares comprise of 50,495 shares which were of
original issue when the corporation was founded and 134,659 shares as stock dividend
declarations. So in 1964 when Soriano died, half of the shares he held went to his wife as
her conjugal share (wifes legitime) and the other half (92,577 shares, which is further
broken down to 25,247.5 original issue shares and 82,752.5 stock dividend shares) went to
the estate. For sometime after his death, his estate still continued to receive stock dividends
from ASC until it grew to at least 108,000 shares.
In 1968, ASC through its Board issued a resolution for the redemption of shares from
Sorianos estate purportedly for the planned Filipinization of ASC. Eventually, 108,000
shares were redeemed from the Soriano Estate. In 1973, a tax audit was conducted.
Eventually, the Commissioner of Internal Revenue (CIR) issued an assessment against ASC
for deficiency withholding tax-at-source. The CIR explained that when the redemption was
made, the estate profited (because ASC would have to pay the estate to redeem), and so
ASC would have withheld tax payments from the Soriano Estate yet it remitted no such
withheld tax to the government.
ASC averred that it is not duty bound to withhold tax from the estate because it redeemed
the said shares for purposes of Filipinization of ASC and also to reduce its remittance
abroad.
ISSUE: Whether or not ASCs arguments are tenable.
HELD: No. The reason behind the redemption is not material. The proceeds from a
redemption is taxable and ASC is duty bound to withhold the tax at source. The Soriano
Estate definitely profited from the redemption and such profit is taxable, and again, ASC had
the duty to withhold the tax. There was a total of 108,000 shares redeemed from the estate.
25,247.5 of that was original issue from the capital of ASC. The rest (82,752.5) of the shares
are deemed to have been from stock dividend shares. Sale of stock dividends is taxable. It is
also to be noted that in the absence of evidence to the contrary, the Tax Code presumes
that every distribution of corporate property, in whole or in part, is made out of corporate
profits such as stock dividends.
It cannot be argued that all the 108,000 shares were distributed from the capital of ASC and
that the latter is merely redeeming them as such. The capital cannot be distributed in the
form of redemption of stock dividends without violating the trust fund doctrine wherein
the capital stock, property and other assets of the corporation are regarded as equity in
trust for the payment of the corporate creditors. Once capital, it is always capital. That
doctrine was intended for the protection of corporate creditors.
D Exclusions from Gross Income
(B) Exclusions from Gross Income. - The following items shall not be included in gross
income and shall be exempt from taxation under this Title:
(1) Life Insurance. - The proceeds of life insurance policies paid to the heirs or beneficiaries
upon the death of the insured, whether in a single sum or otherwise, but if such amounts
are held by the insurer under an agreement to pay interest thereon, the interest payments
shall be included in gross income.
(2) Amount Received by Insured as Return of Premium. - The amount received by the
insured, as a return of premiums paid by him under life insurance, endowment, or annuity
contracts, either during the term or at the maturity of the term mentioned in the contract or
upon surrender of the contract.
(3) Gifts, Bequests, and Devises. - The value of property acquired by gift, bequest, devise, or
descent: Provided, however, That income from such property, as well as gift, bequest,
devise or descent of income from any property, in cases of transfers of divided interest, shall
be included in gross income.
(4) Compensation for Injuries or Sickness. - amounts received, through Accident or Health
Insurance or under Workmen's Compensation Acts, as compensation for personal injuries or
sickness, plus the amounts of any damages received, whether by suit or agreement, on
account of such injuries or sickness.
(5) Income Exempt under Treaty. - Income of any kind, to the extent required by any treaty
obligation binding upon the Government of the Philippines.
(6) Retirement Benefits, Pensions, Gratuities, etc.-
(a) Retirement benefits received under Republic Act No. 7641 and those received by officials
and employees of private firms, whether individual or corporate, in accordance with a
reasonable private benefit plan maintained by the employer: Provided, That the retiring
official or employee has been in the service of the same employer for at least ten (10) years
and is not less than fifty (50) years of age at the time of his retirement: Provided, further,
That the benefits granted under this subparagraph shall be availed of by an official or
employee only once. For purposes of this Subsection, the term 'reasonable private benefit
plan' means a pension, gratuity, stock bonus or profit-sharing plan maintained by an
employer for the benefit of some or all of his officials or employees, wherein contributions
are made by such employer for the officials or employees, or both, for the purpose of
distributing to such officials and employees the earnings and principal of the fund thus
accumulated, and wherein its is provided in said plan that at no time shall any part of the
corpus or income of the fund be used for, or be diverted to, any purpose other than for the
exclusive benefit of the said officials and employees.
(b) Any amount received by an official or employee or by his heirs from the employer as a
consequence of separation of such official or employee from the service of the employer
because of death sickness or other physical disability or for any cause beyond the control of
the said official or employee.
(c) The provisions of any existing law to the contrary notwithstanding, social security
benefits, retirement gratuities, pensions and other similar benefits received by resident or
nonresident citizens of the Philippines or aliens who come to reside permanently in the
Philippines from foreign government agencies and other institutions, private or public.

(d) Payments of benefits due or to become due to any person residing in the Philippines
under the laws of the United States administered by the United States Veterans
Administration.
(e) Benefits received from or enjoyed under the Social Security System in accordance with
the provisions of Republic Act No. 8282.
(f) Benefits received from the GSIS under Republic Act No. 8291, including retirement
gratuity received by government officials and employees.
(7) Miscellaneous Items. -
(a) Income Derived by Foreign Government. - Income derived from investments in the
Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits
in banks in the Philippines by (i) foreign governments, (ii) financing institutions owned,
controlled, or enjoying refinancing from foreign governments, and (iii) international or
regional financial institutions established by foreign governments.
(b) Income Derived by the Government or its Political Subdivisions. - Income derived from
any public utility or from the exercise of any essential governmental function accruing to the
Government of the Philippines or to any political subdivision thereof.
(c) Prizes and Awards. - Prizes and awards made primarily in recognition of religious,
charitable, scientific, educational, artistic, literary, or civic achievement but only if:
(i) The recipient was selected without any action on his part to enter the contest or
proceeding; and
(ii) The recipient is not required to render substantial future services as a condition to
receiving the prize or award.
(d) Prizes and Awards in sports Competition. - All prizes and awards granted to athletes in
local and international sports competitions and tournaments whether held in the Philippines
or abroad and sanctioned by their national sports associations.
(e) 13th Month Pay and Other Benefits. - Gross benefits received by officials and employees
of public and private entities: Provided, however, That the total exclusion under this
subparagraph shall not exceed eighty-two thousand pesos (P82,000) which shall cover:
(i) Benefits received by officials and employees of the national and local government
pursuant to Republic Act No. 6686;
(ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended by
Memorandum Order No. 28, dated August 13, 1986;
(iii) Benefits received by officials and employees not covered by Presidential decree No.
851, as amended by Memorandum Order No. 28, dated August 13, 1986; and
(iv) Other benefits such as productivity incentives and Christmas bonus: Provided, That
every three (3) years after the effectivity of this Act, the President of the Philippines shall
adjust the amount herein stated to its present value using the Consumer Price Index (CPI),
as published by the National Statistics Office.
(f) GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS, Medicare and Pag-Ibig
contributions, and union dues of individuals.
(g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. - Gains
realized from the same or exchange or retirement of bonds, debentures or other certificate
of indebtedness with a maturity of more than five (5) years.
(h) Gains from Redemption of Shares in Mutual Fund. - Gains realized by the investor upon
redemption of shares of stock in a mutual fund company as defined in Section 22 (BB) of this
Code.
E Exempt Corportion
SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be
taxed under this Title in respect to income received by them as such:
(A) Labor, agricultural or horticultural organization not organized principally for profit;
(B) Mutual savings bank not having a capital stock represented by shares, and cooperative
bank without capital stock organized and operated for mutual purposes and without profit;
(C) A beneficiary society, order or association, operating for the exclusive benefit of the
members such as a fraternal organization operating under the lodge system, or mutual aid
association or a nonstock corporation organized by employees providing for the payment of
life, sickness, accident, or other benefits exclusively to the members of such society, order,
or association, or nonstock corporation or their dependents;
(D) Cemetery company owned and operated exclusively for the benefit of its members;
(E) Nonstock corporation or association organized and operated exclusively for religious,
charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no
part of its net income or asset shall belong to or inure to the benefit of any member,
organizer, officer or any specific person;
(F) Business league chamber of commerce, or board of trade, not organized for profit and
no part of the net income of which inures to the benefit of any private stock-holder, or
individual;
(G) Civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare;
(H) A nonstock and nonprofit educational institution;
(I) Government educational institution;
(J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation
company, mutual or cooperative telephone company, or like organization of a purely local
character, the income of which consists solely of assessments, dues, and fees collected from
members for the sole purpose of meeting its expenses; and
(K) Farmers', fruit growers', or like association organized and operated as a sales agent for
the purpose of marketing the products of its members and turning back to them the
proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce
finished by them;
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind
and character of the foregoing organizations from any of their properties, real or personal,
or from any of their activities conducted for profit regardless of the disposition made of
such income, shall be subject to tax imposed under this Code.
CIR vs PAGCOR
6 Special Treatment of Fringe Benefits/ Fringe Benefits Tax Section 33
RR 3-98 as amended
SEC. 33. Special Treatment of Fringe Benefit. -
(A) Imposition of Tax. - A final tax of thirty-four percent (34%) effective January 1, 1998;
thirty-three percent (33%) effective January 1, 1999; and thirty-two percent (32%) effective
January 1, 2000 and thereafter, is hereby imposed on the grossed-up monetary value of
fringe benefit furnished or granted to the employee (except rank and file employees as
defined herein) by the employer, whether an individual or a corporation (unless the fringe
benefit is required by the nature of, or necessary to the trade, business or profession of the
employer, or when the fringe benefit is for the convenience or advantage of the employer).
The tax herein imposed is payable by the employer which tax shall be paid in the same
manner as provided for under Section 57 (A) of this Code. The grossed-up monetary value of
the fringe benefit shall be determined by dividing the actual monetary value of the fringe
benefit by sixty-six percent (66%) effective January 1, 1998; sixty-seven percent (67%)
effective January 1, 1999; and sixty-eight percent (68%) effective January 1, 2000 and
thereafter: Provided, however, That fringe benefit furnished to employees and taxable
under Subsections (B), (C), (D) and (E) of Section 25 shall be taxed at the applicable rates
imposed thereat: Provided, further, That the grossed -up monetary value of the fringe
benefit shall be determined by dividing the actual monetary value of the fringe benefit by
the difference between one hundred percent (100%) and the applicable rates of income tax
under Subsections (B), (C), (D), and (E) of Section 25.
(B) Fringe Benefit Defined. - For purposes of this Section, the term 'fringe benefit' means any
good, service or other benefit furnished or granted in cash or in kind by an employer to an
individual employee (except rank and file employees as defined herein) such as, but not
limited to, the following:
(1) Housing; the provisions of this Section, taking into account the peculiar nature and special need of
the trade, business or profession of the employer.
(2) Expense account;

(3) Vehicle of any kind;

(4) Household personnel, such as maid, driver and others;

(5) Interest on loan at less than market rate to the extent of the difference between the
market rate and actual rate granted;

(6) Membership fees, dues and other expenses borne by the employer for the employee in
social and athletic clubs or other similar organizations;

(7) Expenses for foreign travel;

(8) Holiday and vacation expenses;

(9) Educational assistance to the employee or his dependents; and

(10) Life or health insurance and other non-life insurance premiums or similar amounts in
excess of what the law allows.

(C) Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this
Section:

(1) Fringe benefits which are authorized and exempted from tax under special laws;
(2) Contributions of the employer for the benefit of the employee to retirement, insurance
and hospitalization benefit plans;
(3) Benefits given to the rank and file employees, whether granted under a collective
bargaining agreement or not; and
(4) De minimis benefits as defined in the rules and regulations to be promulgated by the
Secretary of Finance, upon recommendation of the Commissioner.

The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the

Commissioner, such rules and regulations as are necessary to carry out efficiently and fairly