Chapter 4:

Inclusion vs. Exclusion

1. El Oriente Fabrica de tabacos vs. Posadas
2. CIR vs. CA 207 Scra 487
3. CIR vs. Henderson
4. CIR vs. CA – march 23, 1992
5. CIR vs. CA – Oct 17 , 1991
6. Cir vs. Ca – January 20, 1999
7. Cir vs. Mitsubishi metal corp (January 22, 1990)
8. Ma. Isabel Santos vs. Servier Philippines
9. Cir. vs. A. Soriano Corporation
10. Nitifan vs. CIR
11. CIR. vs British Overseas Airways Corporation
12. CIR vs. Air India
13. CIR vs. Atlas Consolidated
DK
1. El Oriente Fabrica de tabacos vs. Posadas
.
EL ORIENTE, FABRICA DE TABACOS, INC., plaintiff-appellant, vs. JUAN
POSADAS, Collector of Internal Revenue , appellee. [G.R. No. 34774. September 21,
1931.]


Malcolm, J:

Facts:
1. That the plaintiff is a domestic corporation duly organized and existing under and by
virtue of the laws of the Philippine Islands, having its principal office at No. 732 Calle
Evangelista, Manila, P. I.; and that the defendant is the duly appointed, qualified and
acting Collector of Internal Revenue of the Philippine Islands.
2. That on March 18, 1925, plaintiff, in order to protect itself against the loss that it might
suffer by reason of the death of its manager, A. Velhagen, who had had more than
thirty-five (35) years of experience in the manufacture of cigars in the Philippine Islands,
and whose death would be a serious loss to the plaintiff, procured from the
Manufacturers Life Insurance Co., of Toronto, Canada, thru its local agent E. E. Elser,
an insurance policy on the life of the said A. Velhagen for the sum of $50,000, United
States currency.
3. That the plaintiff, El Oriente, Fabrica de Tabacos, Inc., designated itself as the sole
beneficiary of said policy on the life of its said manager.
4. That during the time the life insurance policy hereinbefore referred to was in force
and effect plaintiff paid from its funds all the insurance premiums due thereon.
5. That the plaintiff charged as expenses of its business all the said premiums and
deducted the same from its gross incomes as reported in its annual income tax returns,
which deductions were allowed by the defendant upon a showing made by the plaintiff
that such premiums were legitimate expenses of its (plaintiff's) business.
6. That the said A. Velhagen, the insured, had no interest or participation in the
proceeds of said life insurance policy.
7. That upon the death of said A. Velhagen in the year 1929, the plaintiff received all the
proceeds of the said life insurance policy, together with the interests and the dividends
accruing thereon, aggregating P104,957.88.
8. That over the protest of the plaintiff, which claimed exemption under section 4 of the
Income Tax Law, the defendant Collector of Internal Revenue assessed and levied the
sum of P3,148.74 as income tax on the proceeds of the insurance policy mentioned in
the preceding paragraph, which tax the plaintiff paid under instant protest on July 2,
1930; and that defendant overruled said protest on July 9, 1930.

Ruling of Court: The Court of First Instance of Manila absolved the defendant from the
complaint, with costs against the plaintiff.
Ruling of Appellate court: None (Direct Appeal to SC)

Issue: Whether or not the proceeds of insurance taken by a corporation on the life of an
important official to indemnify it against loss in case of his death, are taxable as income
under the Philippine Income Tax Law.

Held: NO. The proceeds of insurance taken by a corporation on the life of an important
official to indemnify it against loss in case of his death, are not taxable as income under
the Philippine Income Tax Law. The indefiniteness of the local law is emphasized.

To quote the exact words in the cited case of United States vs. Supplee-Biddle
Hardware Co. ([1924], 265 U.S., 189), Chief Justice Taft delivering the opinion of the
court:

"It is earnestly pressed upon us that proceeds of life insurance paid on the
death of the insured are in fact capital, and cannot be taxed as income
under the Sixteenth Amendment. Eiser vs . Macomber, 252 U.S., 189, 207;
Merchants' Loan & Trust Co. vs. Smietanka, 255 U. S., 509, 518. We are
not required to meet this question. It is enough to sustain our construction of
the act to say that proceeds of a life insurance policy paid on the death of
the insured are not usually classed as income.

". . . Life insurance in such as case is like that of fire and marine insurance,
— a contract of indemnity. Central Nat. Bank vs. Hume, 128 U. S., 195. The
benefit to be gained by death has no periodicity. It is a substitution of money
value for something permanently lost, either in a house, a ship, or a life.
Assuming, without deciding, that Congress could call the proceeds of such
indemnity income, and validity tax it as such, we think that, in view of the
popular conception of the life insurance as resulting in a single addition of a
total sum to the resources of the beneficiary, and not in a periodical return,
such a purpose on its part should be express, as it certainly is not here."
Considering, therefore, the purport of the stipulated facts, considering the uncertainty of
Philippine law, and considering the lack of express legislative intention to tax the
proceeds of life insurance policies paid to corporate beneficiaries, particularly w hen in
the exemption in favor of individual beneficiaries in the chapter on this subject, the
clause is inserted "exempt from the provisions of this law," we deem it reasonable to
hold the proceeds of the life insurance policy in question as representing an indemnity
and not taxable income.

The foregoing pronouncements will result in the judgment being reversed and in another
judgment being rendered in favor of the plaintiff and against the defendant for the sum
of P3,148.74. So ordered, without costs in either instance.

Avanceña, C.J., Street, Villamor, Ostrand, Romualdez, Villa-Real and Imperial, JJ.,
concur.

x-------------------x

1. El Oriente Fabrica de Tabacos vs. Posadas

FACTS:

1. The plaintiff is a domestic corporation duly organized under Philippine laws and the
defendant is the duly appointed and acting collector of Internal Revenue of the
Philippines.
2. Plaintiff, in order to protect itself against the loss by reason of the death of its manager,
A. Velhagen who had had 35 years of experience in manufacture of cigars, procured from
the manufacturers life insurance Co., of Toronto, Canada, thru its local agent E.E Elser,
an insurance policy on the life of the said A. Velhagen for the sum of $50,000.00
3. The plaintiff, El Oriente, Fabrica de Tabacos, Inc. designated itself as the sole
beneficiariy of said policy on the life of its said manager.
4. During the time the life insurance policy was in force, plaintiff paid from its funds all the
insurance premiums due thereon.
5. That the plaintiff charged as expenses of its business all the said premiums and deducted
the same from its gross income as reported in its annual income tax returns.
6. That upon the death of said A. Velhagen, the plaintiff received all the proceeds of the said
life insurance policy together with the interests and the dividends accruing thereon.
7. The CIR assessed and levied the sum of P3,148.74 as income tax on the proceeds of the
insurance policy, which tax the plaintiff paid under instant protest on July 2, 1930; and
that defendant overruled said protest on July 7, 1930.
8. Thereupon, a decision was handed down which absolved the defendant from the
complaint.
9. Plaintiff appealed alleging that the trial court erred in assuming that the proceeds of the
life insurance policy in question represented a net profit to the plaintiff when, as a matter
of fact, it merely represented an indemnity for the loss suffered by it thru the death of its
manager the insured and that the trial court erred in refusing to hold that the proceeds of
the life insurance policy in question is not taxable income and in absolving the defendant
from the complaint.
ISSUE:

Whether the proceeds of insurance taken by a corporation on the life of an important official to
indemnity it against loss in case of his death are taxable as income under the Philippine income tax law.

RULING:

The SC does not believe that the fact that El Oriente, Fabrica de Tabacos, Inc. took out the
insurance on the life of its manager who had more than 35 years experience in the manufacture of cigars
in the Philippines to protect itself against the loss it might suffer by reason of the death of its manager
signifies that the plaintiff realized a net profit in the amount of P104,957.88 from the insurance on the life
of its manager.

It is true that the Income tax law, in exempting individual beneficiaries speaks of the proceeds of
life insurance policies as income but this is a very slight indication of legislative intention. In reality, what
the plaintiff received was in the nature of an indemnity for the loss which it actually suffered because of
the death of its manager.

Considering, therefore, the purport of the stipulated facts, considering the uncertainty of
Philippine law, and considering the lack of express legislative intention to tax the proceeds of life
insurance policies paid to corporate beneficiaries, particularly when in the exemption in favor of
individuals beneficiaries in the chapter on this subject, the clause is inserted “exempt from the provisions
of this law", we deem it reasonable to hold the proceeds of the life insurance policy in question as
representing an indemnity and not taxable income.

2. CIR vs. CA 207 Scra 487

FACTS:

1. Private Respondent, GCL Retirement Plan is an employees’ trust maintained by the

employer, GCL Incorporation to provide retirement, pension, disability and death benefits to
its employees.
2. The plan was approved and qualified as exempt from income tax by Petitioner Commissioner
of Internal Reveue in accordance with Rep. Act. No. 4917.
3. Respondent GCL made investment and earned therefrom interest income from which was
withheld the 15% final withholding tax imposed by P.D no. 1959 which took effect on 15
October 1984.
4. Respondent GCL filed with petitioner a claim for refund stating that it disagreed with the
collection of the 15% final withholding tax from the interest income as it is an entity fully
exempt from income tax as provided under Rep. Act. No. 4917 in relation to Section 56 (b) 3
of the tax code.
5. The request was denied
6. Respondent GCL elevated the matter to respondent Court of tax Appeals (CTA).
7. Court of Tax Appeals: ruled in favor of GCL, holding that employees trust are exempt from
the 15% final withholding tax on interest income and ordering a refund of the tax withheld.
8. Court of Appeals: Upheld the CTA Decision
9. Petitioner, the Commissioner of Internal Reveue seeks a reversal of the Decision of
respondent Court of Appeals, dated August 27,1990.
10. Petitioner submits that the deletion of the exempting and preferential tax treatment provisions
under the old law is a clear manifestation that the single 15% (now 20%) rate is imposable on
all interest incomes from deposits, deposit substitutes, trust funds and similar arrangements,
regardless of the tax status or character of the recipients thereof.
11. In short, petitioners position is that from 15 October 1984 when presidential decree no. 1959
was promulgated, employees trusts ceased to be exempt and thereafter become subject to the
final withholding tax.
12. GCL contends that the tax exempt statuts of employees trusts applies to all kinds of taxes,
including thee final withholding tax on interest income. It is derived from Section 56 (b) and
not from section 21 (d) or 24 (cc) of the tax code, as argued by petitioner.
ISSUE:

Whether or not the GCL Plan was qualified as exempt from income tax by the Commissioner of
Internal Revenue.

RULING:
 The SC upholds the exemption.

1. IT is significant to note that the GCL Plan was qualified as exempt form income tax by the
Commissioner of Internal Revenue in accordance with Republic Act. No. 4917.
2. By virtue of the raison d’etre behind the creation of employees’ trusts. Employees trusts or
benefit plans normally provide economic assistance to employees upon the occurrence of
certain contingencies, particularly, old age retirement, death, sickness, or disability. It
provides security against certain hazards to which members of the Plan may be exposed. It is
an independent and additional source of protection for the working group. What is more, it is
established for their exclusive benefit and for no other purpose.
3. The deletion in Presidential Decree No. 1959 of the provisos regarding tax exemption and
preferential tax rates under the old law, therefore, can not be deemed to extend to employees
trusts.
4. Said decree, being a general law, cannot repeal by implication a specific provision, Rep. Act.
1983, which excepted employees trusts in its Section 56 (b) was effective on 22 June 1957
while Republic Act no. 4917 was enacted on 17 June 1967, long before the issuance of Pres.
Decree No. 1959 on 15 October 1984. A subsequent statute, general in character as to its
terms and application, is not to be construed as repealing a special or specific enactment,
unless the legislative purpose to do so is manifested.
 x-------------------x

DK

3. CIR vs. Henderson

.
COLLECTOR OF INTERNAL REVENUE, petitioner, vs. ARTHUR HENDERSON, respondent. [G.R. No.
L-12954. February 28, 1961.]


PADILLA, J:
Facts:
Arthur Henderson is the president of the American International Underwriters for the Philippines, Inc., a
domestic corporation engaged in insurance business;" that the taxpayers "entertained officials, guests and
customers of his employer-corporation, in apartments furnished by the latter and successively occupied by
him as president thereof; that "In 1952, petitioner's wife, Mrs. Marie Henderson, upon request of Mr. C.V.
Starr, chairman of the parent corporation of the American International Underwriters for the Philippines,
Inc., undertook a trip to New York in connection with the purchase of a lot in Dewey Boulevard by
petitioner's employer-corporation, the construction of a building thereon, the drawing of prospectus and
plans for said building, and other related matters."
The spouses Arthur Henderson and Marie B. Henderson (later referred to as the taxpayers) filed with the
Bureau of Internal Revenue returns of annual net income for the years 1948 to 1952. In the foregoing
assessments, the Bureau of Internal Revenue considered as part of their taxable income the taxpayer-
husband's allowances for rental, residential expenses, subsistence, water, electricity and telephone; bonus
paid to him; withholding tax and entrance fee to the Marikina Gun and Country Club paid by his employer
for his account; and travelling allowance of his wife. On 26 and 27 January 1954 the taxpayers asked for
reconsideration of the foregoing assessments. On 15 and 27 February 1954, the taxpayers paid the
deficiency taxes assessed. After hearing conducted by the Conference Staff of the Bureau of Internal
Revenue on 5 October 1954, on 27 May 1955 the Staff recommended to the Collector of Internal Revenue
that the assessments made on 28 November 1953, be sustained except that the amount of P200 as
entrance fee to the Marikina Gun and Country Club paid for the husband-taxpayer's account by his
employer in 1948 should not be considered as part of the taxpayer's taxable income for that year.
Ruling of the Commissioner:
  On 14 July 1955, in line with the recommendation of the Conference Staff, the Collector of Internal
Revenue denied the taxpayer's request for reconsideration, except as regards the assessment of
their income tax due for the year 1948, and demanded payment of the deficiency taxes of
P4,370.24 for 1948, P3,662.23 for 1949, P3,023 for 1950, P2,058 for 1951 and P4,108 for 1952,
5% surcharge and 1% monthly interest thereon from 1 March 1954 to the date of payment and P80
as administrative penalty for late payment, to the City Treasurer of Manila not later than 31 July
1955.
On 30 January 1956 the taxpayers again sought a reconsideration of the denial of their request for
reconsideration and offered to settle the case on a more equitable basis by increasing the amount of
taxable portion of the husband-taxpayer's allowances for rental, etc. from P3,000 yearly to P4,800 yearly,
which "is the value to the employee of the benefits he derived therefrom measured by what he had saved
on account thereof' in the ordinary course of his life . . . for which he would have spent in any case.' The
taxpayers also reiterated their previous stand regarding the transportation allowance of the wife taxpayer of
P3,247.40 in 1952 and requested the refund of the amounts of P3,477.18, P569.33, P1,294, P354 and
P2,164, or a total of P7,858.51. On 10 February 1956 the taxpayers again requested the Collector of
Internal Revenue to refund to them the amounts allegedly paid in excess as income taxes for the years
1948 to 1952, inclusive. The Collector of Internal Revenue did not take any action on the taxpayer's request
for refund.
Ruling of the CTA:

 On 15 February 1956 the taxpayers filed in the Court of Tax Appeals a petition to review the
decision of the Collector of Internal Revenue (C.T.A. Case No. 237). After hearing, on 26 June
1957 the Court rendered judgment holding "that the inherent nature of petitioner's (the husband-
taxpayer) employment as president of the American International Underwriters of the Philippines,
Inc. does not require him to occupy the apartments supplied by his employer-corporation;" that,
however, only the amount of P4,800 annually, the ratable value to him of the quarters furnished
constitutes a part of taxable income; that since the taxpayers did not receive any benefit out of the
P3,247.40 travelling expense allowance granted in 1952 to the wife-taxpayers and that she merely
undertook the trip abroad at the behest of her husband's employer, the same could not be
considered as income; and that even if it were considered as such, still it could not be subject to
tax because it was deductible as travel expense; and ordering the Collector of Internal Revenue to
refund to the taxpayers the amount of P5,109.33 with interest from 27 February 1954, without
pronouncement as to costs.
Petitioner’s Contention: The Collector of Internal Revenue raises questions of fact. He claims that the
evidence is not sufficient to support the findings and conclusion of the Court of Tax Appeals that the
quarters occupied by the taxpayers were not of their choice but that of the husband- taxpayers employer;
that it did not take into consideration the fact that the husband-taxpayer is not a mere minor company
official, but the highest executive of his employer-corporation; and that the wife- taxpayer's trip abroad in
1952 was not, as found by the Court, a business but a vacation trip.
Respondent’s Contention: They claim that as regards the husband-taxpayer's allowances for rental and
utilities such as water, electricity and telephone, he did not receive the money for said allowances, but that
they lived in the apartment furnished and paid for by his employer for its convenience; that they had no
choice but live in the said apartment furnished by his employer, otherwise they would have lived in a less
expensive one that as regards his allowances for rental, only the amount of P3,900 (offered settlement at
4,800) for each year, which is the amount they would have spent for rental of an apartment including
utilities, should be taxed; and that as regards the wife-taxpayer's travelling allowance of P3,247.40 in 1952,
it should not be considered as part of their income because she merely accompanied him in his business
trip to New York as his secretary and, at the behest of her husband's employer, to study and look into the
details of the plans and decorations of the building intended to be constructed by his employer in its
property at Dewey Boulevard.

Issue: W/N the allowances for rental of the apartment furnished by the husband-taxpayer's employer-
corporation, including utilities such as light, water, telephone, etc. and the allowance for travel expenses
given by his employer-corporation to his wife in 1952 should be included as taxable income?

Held: Section 29, Commonwealth Act No. 466, National Internal Revenue Code, provides:

"Gross income" includes gains, profits, and income derived from salaries, wages, or
compensation for personal service of whatever kind and in whatever form paid, or from
professions, vocations, trades, businesses, commerce, sales, or dealings in property,
whether real or personal, growing out of the ownership or use of or interest, in such property;
also from interest, rents, dividend, securities, or the transactions of any business carried on
for gain or profit or gains, profits, and income derived from any source whatever. (Emphasis
supplied.)

The taxpayers in the case at bar, are childless and there are only the two of them in the family.
Although the quarters they occupied exceeded their personal needs, the exigencies of husband-
taxpayer's high executive position demanded and compelled them to live in more spawning and
pretentious quarters like the ones they had occupied. They had to entertain and put up house-
guests in their apartments. This is the reason why the husband- taxpayer's employer-corporation
had to grant him allowance for rental and utilities in addition to his annual basic salary to take care
of those extra expenses for rental and utilities in excess of their personal needs. The fact that the
taxpayers had to live or did not have to live in the apartment's chosen by the husband-taxpayer's
employer-corporation is of no moment, for no part of the allowances in question redounded to their
personal benefit or was retained by them. Their bills for rental and utilities were paid directly by the
employer-corporation to the creditors. Nevertheless, the taxpayers are entitled only to a ratable
value of the allowances in question. Only the reasonable amount they would spend for house rental
and utilities such as light, water, telephone, etc., should be subject to tax. The excess should be
considered as expenses of the corporation.
Likewise, the findings of the Court of Tax Appeals that the wife- taxpayer had to make a trip to New
York at the behest of her husband's employer-corporation to help in drawing up the plans and
specifications of a proposed building, is also supported by the evidence. The parts of the letters
written by the wife-taxpayer to her husband while in New York and the letter written by the
husband- taxpayer to Mr. C. V. Starr support the said findings. No part of the allowance for
travelling expenses redounded to the benefit of the taxpayers. Neither was a part thereof retained
by them. The fact that she had herself operated on for tumors while in New York was but incidental
to her stay there and she must have merely taken advantage of her presence in that city to undergo
the operation.
The judgment under review is modified as above indicated. The Collector of Internal Revenue is
ordered to refund to the taxpayers the sum of P5,986.61, without pronouncement as to costs.
Bengzon, Acting C . J ., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Barrera, Paredes
and Dizon, JJ ., concur.

x-------------------x

3. CIR vs. Henderson

FACTS:

1. Sps. Arthur Henderson and Marie Henderson filed their annual income tax with the BIR.
2. Arthur is president of American International Under writers 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.
3. The BIR demanded payment for alleged deficiency taxes.
4. In their computation, the BIR included as part of taxable income:
a. Arthur’s allowances for rental, residential expenses, subsistence, water,
electricity and telephone expenses.
b. Entrance fees to the Marikina Gun and Country Club which was paid by his
employer for his account and
c. Travelling allowance of his wife.
5. Respondent, Arthur Henderson did not receive money for the allowances for rental and
utilities. That the apartment is furnished and paid for by his employer-corporation, for the
employer corporation’s purposes.
6. The spouses had not choice but to live in the expensive apartment, since the company used it
to entertain guests, to accommodate officials, and to entertain customers.
7. That only P4,800 per year is the reasonable amount 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 expenses of the company.
8. The entrance fee should not be considered income since it is an expense of his employer, and
membership therein is merely incidental to his dutes of increasing and sustaining the business
of his employer.
9. The collector of Internal Revenue merely allowed the entrance fee as non-taxable. However,
the rent expense and travel expenses were still held to be taxable.
10. Court of Appeals: ruled in favor of the taxpayer, that such expenses must not be considered
part of taxable income.
ISSUE:

Whether or not the rental allowances and travel allowances furnished and given by the employer-
corporation are part of taxable income?

RULING:
 No. 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.

Arthur’s 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.

DK

4. CIR vs. CA – march 23, 1992

.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE HON. COURT OF APPEALS, THE
COURT OF TAX APPEALS, GCL RETIREMENT PLAN, represented by its Trustee-Director ,
respondents. [G.R. No. 95022. March 23, 1992.]

MELENCIO-HERRERA, J p:

Facts:
Private Respondent, GCL Retirement Plan (GCL, for brevity) is an employees' trust maintained by the
employer, GCL Inc., to provide retirement, pension, disability and death benefits to its employees. The Plan
as submitted was approved and qualified as exempt from income tax by Petitioner Commissioner of
Internal Revenue in accordance with Rep. Act No. 4917. In 1984, Respondent GCL made investments and
earned therefrom interest income from which was withheld the fifteen per centum (15%) final withholding
tax imposed by Pres. Decree No. 1959, 2 which took effect on 15 October 1984 . It appears that under
Rep. Act No. 1983, which took effect on 22 June 1957, amending Sec. 56(b) of the National Internal
Revenue Code (Tax Code, for brevity), employees' trusts were exempt from income tax. That law provided:

"SEC. 56. Imposition of tax. — (a) Application of tax. — The taxes imposed by this Title upon
individuals shall apply to the income of estates or of any kind of property held in trust,
including —
xxx xxx xxx
(b) Exception. — The tax imposed by this Title shall not apply to employees' trust which
forms part of a pension, stock bonus or profit- sharing plan of an employer for the benefits of
some or all of his employees (1) if contributions are made to the trust by such employer, or
employees, or both, for the purpose of distributing to such employees the earnings and
principal of the fund accumulated by the trust in accordance with such plan. . . ."
On 3 June 1977, Pres. Decree No. 1156 provided, for the first time, for the withholding from the interest on
bank deposits at the source of a tax of fifteen per cent (15%) of said interest. However, it also allowed a
specific exemption in its Section 53. This exemption and preferential tax treatment were carried over in
Pres. Decree No. 1739, effective on 17 September 1980, which law also subjected interest from bank
deposits and yield from deposit substitutes to a final tax of twenty per cent (20%). Subsequently, however,
on 15 October 1984, Pres. Decree No. 1959 was issued, amending the aforestated provisions to read:

"SEC. 2. Section 21(d) of this Code, as amended, is hereby further amended to read as
follows:
(d) On interest from bank deposits and yield or any other monetary benefit from deposit
substitutes and from trust fund and similar arrangements. — Interest from Philippine
Currency Bank deposits and yield or any other monetary benefit from deposit substitutes and
from trust fund and similar arrangements whether received by citizens of the Philippines or
by resident alien individuals, shall be subject to a 15% final tax to be collected and paid as
provided in Section 53 and 54 of this Code.

"SEC. 3. Section 24(cc) of this Code, as amended, is hereby further amended to read as
follows:
(cc) Rates of tax on interest from deposits and yield or any other monetary benefit from
deposit substitutes and from trust fund and similar arrangements. — Interest on Philippine
Currency Bank deposits and yield or any other monetary benefit from deposit substitutes and
from trust fund and similar arrangements received by domestic or resident foreign
corporations shall be subject to a 15% final tax to be collected and paid as provided in
Section 53 and 54 of this Code.

It is to be noted that the exemption from withholding tax on interest on bank deposits previously extended
by Pres. Decree No. 1739 if the recipient (individual or corporation) of the interest income is exempt from
income taxation, and the imposition of the preferential tax rates if the recipient of the income is enjoying
preferential income tax treatment, were both abolished by Pres. Decree No. 1959. Petitioner thus submits
that the deletion of the exempting and preferential tax treatment provisions under the old law is a clear
manifestation that the single 15% (now 20%) rate is impossible on all interest incomes from deposits,
deposit substitutes, trust funds and similar arrangements, regardless of the tax status or character of the
recipients thereof. In short, petitioner's position is that from 15 October 1984 when Pres. Decree No. 1959
was promulgated, employees' trusts ceased to be exempt and thereafter became subject to the final
withholding tax.
Upon the other hand, GCL contends that the tax exempt status of employees' trusts applies to all kinds of
taxes, including the final withholding tax on interest income. That exemption, according to GCL, is derived
from Section 56(b) and not from Section 21(d) or 24(cc) of the Tax Code, as argued by Petitioner.

Ruling of CIR: On 15 January 1985, Respondent GCL filed with Petitioner a claim for refund in the
amounts of P1,312.66 withheld by Anscor Capital and Investment Corp., and P2,064.15 by Commercial
Bank of Manila. On 12 February 1985, it filed a second claim for refund of the amount of P7,925.00
withheld by Anscor, stating in both letters that it disagreed with the collection of the 15% final withholding
tax from the interest income as it is an entity fully exempt from income tax as provided under Rep. Act No
4917 in relation to Section 56 (b) 3 of the Tax Code. The refund requested was denied.
Ruling of the CTA: Respondent GCL elevated the matter to respondent Court of Tax Appeals
(CTA). The latter ruled in favor of GCL, holding that employees' trusts are exempt from the 15% final
withholding tax on interest income and ordering a refund of the tax withheld.

Ruling of the CA: Upon appeal, originally to the SC, but referred to respondent Court of Appeals, the
latter upheld the CTA Decision.

Issue: Whether or not the GCL Plan is exempt from the final withholding tax on interest income from
money placements and purchase of treasury bills required by Pres. Decree No. 1959.

Held: SC uphold the exemption. To begin with, it appears that under Rep. Act No. 1983, which took
effect on 22 June 1957, amending Sec. 56(b) of the National Internal Revenue Code (Tax Code, for
brevity), employees' trusts were exempt from income tax. It is significant to note that the GCL Plan was
qualified as exempt from income tax by the Commissioner of Internal Revenue in accordance with Rep.
Act. No. 4917 approved on 17 June 1967. In so far as employees' trusts are concerned, the foregoing
provision should be taken in relation to then Section 56(b) (now 53[b]) of the Tax Code, as amended by
Rep. Act No. 1983, supra, which took effect on 22 June 1957. This provision specifically exempted
employees' trust from income tax.

The deletion in Pres. Decree No. 1959 of the provisos regarding tax exemption and preferential tax rates
under the old law, therefore, can not be deemed to extend to employees' trusts. Said Decree, being a
general law, can not repeal by implication a specific provision, Section 56(b) (now 53 [b]) in relation to Rep.
Act No. 4917 granting exemption from income tax to employees' trusts. Rep. Act 1983, which excepted
employees' trusts in its Section 56(b) was effective on 22 June 1957 while Rep. Act No. 4917 was enacted
on 17 June 1967, long before the issuance of Pres. Decree No. 1959 on 15 October 1984. (Villegas v.
Subido, G.R. No. L-31711, 30 September 1971, 41 SCRA 190).

Notably, too, all the tax provisions herein treated of come under Title II of the Tax Code on "Income Tax."
Section 21(d), as amended by Rep. Act No. 1959, refers to the final tax on individuals and falls under
Chapter II; Section 24(cc) to the final tax on corporations under Chapter III; Section 53 on withholding of
final tax to Returns and Payment of Tax under Chapter VI; and Section 56(b) to tax on Estates and Trusts
covered by Chapter VII. Section 56(b), taken in conjunction with Section 56(a), supra, explicitly excepts
employees' trusts from "the taxes imposed by this Title." Since the final tax and the withholding thereof are
embraced within the title on "Income Tax," it follows that said trust must be deemed exempt therefrom.
Otherwise, the exception becomes meaningless. There can be no denying either that the final withholding
tax is collected from income in respect of which employees' trusts are declared exempt (Sec. 56[b], now
53[b], Tax Code). The application of the withholdings system to interest on bank deposits or yield from
deposit substitutes is essentially to maximize and expedite the collection of income taxes by requiring its
payment at the source. If an employees' trust like the GCL enjoys a tax-exempt status from income, we see
no logic in withholding a certain percentage of that income which it is not supposed to pay in the first place.

WHEREFORE, the Writ of Certiorari prayed for is DENIED. The judgment of respondent Court of Appeals,
affirming that of the Court of Tax Appeals is UPHELD. No costs.
SO ORDERED.

Narvasa, C .J ., Gutierrez, Jr., Cruz, Paras, Feliciano, Padilla, Bidin, Griño-Aquino, Medialdea, Regalado,
Davide, Jr., Romero and Nocon, JJ ., concur.

4. CIR vs. CA and Efren P. Castaneda GR. No. 96016; Oct. 17,1991

FACTS:

1. Private respondent Efren P. Castaneda retired from the government service as Revenue
Attache in the Philippine Embassy in London, England on 10 December 1982.
2. Upon retirement, he received, among other benefits, terminal leave pay from which petitioner
Commissioner of Internal Revenue withheld P12,557 allegedly representing income tax
thereon.
3. Castaneda filed a formal written claim for a refund contending that the cash equivalent of his
terminal leave is exempt from income tax.
4. To comply with the two-year prescriptive period within which claims for refund may be filed,
Castaneda filed on 16 July 1984 with the CTA a petition for Review, seeking the refund of
income tax withheld from his terminal leave pay.
5. CTA: found for private respondent Castaneda and ordered the Commissioner of Internal
Revenue to refund Castaneda the sum of P12,557.
6. Petitioner appealed.
7. CA: dismissed the petition for review and affirmed the decision of the CTA.
8. The solicitor General, acting in behalf of the Commissioner of Internal Revenue, contends
that the terminal leave pay is income derived from employer-employee relationship and that
as part of the compensation for services rendered, terminal leave pay is actually part of gross
income of the recipient.
ISSUE:

Whether or not terminal leave pay received by a government official or employee on the occasion
of his compulsory retirement form the government service is subject to withholding income tax.

RULING:

No. The court has already ruled that the terminal leave pay received by a government official or
employee is not subject to withholding income tax.

In the recent case of Jesus N. Borromeo vs. The Hon. Civil Service Commission, the Court explained the
rationale behind the employee’s entitlement to an exemption from withholding income tax on his terminal
leave pay as follows:

…Commutation of leave credits, more commonly known as terminal leave, is applied for
by an officer or employee who retires, resigns or is separated from the service through no fault of his
own.
 In fine, not being part of the gross salary on income of a government official or employee t a
retirement benefit, terminal leave pay is not subject to income tax.

x-------------------x
DK
5. CIR vs. CA – Oct 17 , 1991
.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE COURT OF APPEALS and EFREN P.
CASTAÑEDA, respondents. [G.R. No. 96016. October 17, 1991.]


Facts:
Private respondent Efren P. Castañeda retired from the government service as Revenue Attache in the
Philippine Embassy in London, England, on 10 December 1982 under the provisions ofSection 12 (c) of
Commonwealth Act 186, as amended. Upon retirement, he received, among other benefits, terminal leave
pay from which petitioner Commissioner of Internal Revenue withheld P12,557.13 allegedly representing
income tax thereon. Castañeda filed a formal written claim with petitioner for a refund of the P12,557.13,
contending that the cash equivalent of his terminal leave is exempt from income tax. To comply with the
two-year prescriptive period within which claims for refund may be filed, Castañeda filed on 16 July 1984
with the Court of Tax Appeals a Petition for Review, seeking the refund of income tax withheld from his
terminal leave pay.

Ruling of CTA: The Court of Tax Appeals found for private respondent Castañeda and ordered the
Commissioner of Internal Revenue to refund Castañeda the sum of P12,557.13 withheld as income tax.

Ruling of CA: Petitioner appealed the above-mentioned Court of Tax Appeals decision to this Court,
which was docketed as G.R. No. 80320. In turn, we referred the case to the Court of Appeals for resolution.
On 26 September 1990, the Court of Appeals dismissed the petition for review and affirmed the decision of
the Court of Tax Appeals.

Issue: whether or not terminal leave pay received by a government official or employee on the occasion of
his compulsory retirement from the government service is subject to withholding (income) tax.

Held:
No. terminal leave pay not subject to withholding tax — The Court has already ruled that the terminal leave
pay received by a government official or employee is not subject to withholding (income) tax. In the recent
case of Jesus N. Borromeo vs. The Hon. Civil Service Commission, et al., G.R. No. 96032, 31 July 1991,
the Court explained the rationale behind the employee's entitlement to an exemption from withholding
(income) tax on his terminal leave pay as follows:
" . . . commutation of leave credits, more commonly known as terminal leave, is applied for by an officer or
employee who retires, resigns or is separated from the service through no fault of his own. (Manual on
Leave Administration Course for Effectiveness published by the Civil Service Commission, pages 16-17). In
the exercise of sound personnel policy, the Government encourages unused leaves to be accumulated.
The Government recognizes that for most public servants, retirement pay is always less than generous if
not meager and scrimpy. A modest nest egg which the senior citizen may look forward to is thus avoided.
Terminal leave payments are given not only at the same time but also for the same policy considerations
governing retirement benefits."

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

ACCORDINGLY, the petition for review is hereby DENIED. SO ORDERED.


Paras and Regalado, JJ., concur.
 Melencio-Herrera, J., is on leave.

5. CIR vs. CA, CTA and A. Soriano Corp. (January 20, 1999)

FACTS:

1. Sometime in 1930s, Don Andres Soriano, a citizen and resident of the United States formed a
corporation, “A. Soriano y Cia.”
2. A. Soriano Y Cia is a predecessor as of ANSCOR, with a P1,000,000.00 capitalization which
was increased to P2,500,000.00
3. When Don Andres died, recors revealed that he has a total shareholdings of 185,154 shares.
4. One-half of the shareholdings were transferred to his wife Dona Carmen Soriano, as her
conjugal share. The other half formed part of his estate.
5. Dona Carmen requested a ruling from the United States Internal Revenue Service (IRS),
inquiring if an exchange of common with preferred shares may be considered as a tax
avoidance scheme.
6. ANSCOR reclassified its existing 300,000 common shares into 150,000 preferred shares.
7. IRS opines that the exchange is only a recapitalization scheme and not tax avoidance.
8. Consequently Dona Carmen and the estate of Don Andres exchanged its common shares for
preferred shares.
9. ANSCOR redeemed common shares form the Don Andres’ estate.
10. The Board Resolutions stated that ANSCOR’s business purpose for bothe redemptions of
stocks is to partially retire said stocks as treasury shares in order to reduce the company’s
foreign exchange remittances in case cash dividends are declared.
11. Revenue examiners issued a report proposing that ANSCOR be assessed for deficiency
withholding tax-at-source, pursuant to Sections 53 and 54 of the 1939 Revenue Code.
12. BIR made the assessments despite the claim of ANSCOR that it availed of the tax amnesty
under Presidential Decree 23 which were amended by PD 67 and 157.
 13. Petitioner ruled that the inoked decrees do not cover Sections 53 and 54 under which
ANSCOR was assessed.
14. ANSCOR’s subsequent protest on the assessments was denied.
15. ANSCOR filed a petition for review with the CTA assailing the tax assessments on the
redemptions and exchange of stocks.
16. The tax Court reversed petiotioner’s ruling after finding sufficient of the questioned
assessments. In a petition for review, the CA affired the ruling of the CTA. Hence this
petition.
17. Petitioner contends that the exchange transaction is tantamount to “cancellation” under
Section 83 (b) making the proceeds thereof taxable. Further, petitioner claims that under the
“net effect test”, the estate of Don Andres gained from the redemption. Accordingly, it was
the duty of ANSCOR to withhold the tax-at-source arising from the two transactions.
18. ANSCOR avers that it had no duty to withhold any tax from the Don Andres estate or from
Dona Carmen based on the 2 transactions because the same were done for legitimate
purposes which are:
a. To reduce its foreign exchange remittances in the event the company would declare cash
dividends, and to
b. Subsequently “filipinized” ownership of ANSCOR, as allegedly envisioned by Don
Andres.
ISSUE:

Whether ANSCOR’s redemption of stocks from its stockholder as well as the exchange of
common with preferred shares can be considered as “essentially equivalent to the distribution of taxable
dividend,” making the proceeds thereof taxable under Section 83 (b) of the 1939 Revenue Act.

RULING:

An income taxpayer covers all persons who derive taxable income ANSCOR was assessed by
petitioner for deficiency withholding tax as such, it is being held liable in its capacity as a withholding
agent and not in its personality as taxpayer.

A withholding agent, A. Soriano Corp. in this case, cannot be deemed a taxpayer for it to avail of
a tax amnesty under a Presidential decree that condones “the collection of all internal revenue taxes
including the increments or penalties on account of non-payment as well as all civil, criminal, or
administrative liabilities arising form or incident to voluntary disclosures under the NIRC of previously
untaxed income and/or wealth realized here or abroad by any taxpayer, natural or juridical.”

The court explains: “The withholding agent is not a taxpayer, he is a mere tax collector. Under the
withholding system, however the agent-payer becomes a payee by fiction of law. His liability is direct and
independent from the taxpayer because the income tax is still imposed and due from the latter. The agent
is not liable for the tax as no wealth flowed into him, he earned no income.”

The reason behind the redemption is not material. The proceeds from a redemption is taxable and
A. Soriano Corp. is duty bound to withhold the tax at source. The Soriano Estate definitely profited from
the redemption and such profit is taxable, and again, A. Soriano Corp. 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 form the
capital of ASC. The rest 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 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 wsa intended for the protection of
corporate creditors.

DK
x-------------------x

6. Cir vs. Ca – January 20, 1999

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE COURT OF APPEALS, COURT OF
TAX APPEALS and A. SORIANO CORP., respondents. [G.R. No. 108576. January 20, 1999.]
Facts:

Don Andres Soriano, a citizen and resident of the United States formed in the 1930's the corporation "A
Soriano Y Cia," predecessor of ANSCOR. On December 30, 1964 Don Andres died. On June 30, 1968,
pursuant to a Board Resolution, ANSCOR redeemed 28,000 common shares from Don Andres' estate. By
November 1968, the Board further increased ANSCOR's capital stock to P75M divided into 150,000
preferred shares and 600,000 common shares. About a year later ANSCOR again redeemed 80,000
common shares from Don Andres' estate, further reducing the latter's common shareholdings. ANSCOR
invoked two reasons to justify the redemptions — (1) the alleged "filipinization" program and (2) the
reduction of foreign exchange remittances in case cash dividends are declared. In 1973, after examining
ANSCOR's books of account and records Revenue Examiners issued a report proposing that ANSCOR be
assessed for deficiency withholding tax- at-source, pursuant to Sections 53 and 54 of the 1939 Revenue
Code for the year 1968 and the second quarter of 1969 based on the transactions of exchange and
redemption of stocks. Subsequently, ANSCOR filed a petition for review with the Court of Tax Appeals
assailing the tax assessments on the redemptions and exchange of stocks.

Ruling of the CTA: In its decision, the CTA reversed the BIR's ruling after finding sufficient evidence
to overcome the prima facie correctness of the questioned assessments.

Ruling of the CA: The Court of Appeals affirmed the ruling of the CTA. Hence, the present petition.
Issue: Whether ANSCOR'sredemption of stocks from its stockholder as well as the exchange of common
with preferred shares can be considered as "essentially equivalent to the distribution of taxable dividend,"
making the proceeds thereof taxable under the provisions Section 83 (B) of the 1939 Revenue Act.

Held: First, the alleged "filipinization" plan cannot be considered legitimate as it was not implemented
until the BIR started making assessments on the proceeds of the redemption. Such corporate plan was not
stated in nor supported by any Board Resolution but a mere afterthought interposed by the counsel of
ANSCOR. Being a separate entity, the corporation can act only through its Board of Directors. The Board
Resolutions authorizing the redemptions state only one purpose — reduction of foreign exchange
remittances in case cash dividends are declared. Not even this purpose can be given credence. Records
show that despite the existence of enormous corporate profits no cash dividend was ever declared by
ANSCOR from 1945 until the BIR started making assessments in the early 1970's. Although a corporation
under certain exceptions, has the prerogative when to issue dividends, yet when no cash dividends was
issued for about three decades, this circumstances negates the legitimacy of ANSCOR's alleged purposes.
Moreover, to issue stock dividends is to increase the shareholdings of ANSCOR's foreign stockholders
contrary to its "filipinization" plan. This would also increase rather than reduce their need for foreign
exchange remittances in case of cash dividend declaration, considering that ANSCOR is a family
corporation where the majority shares at the time of redemptions were held by Don Andres' foreign heirs.
Secondly, assuming arguendo, that those business purposes are legitimate, the same cannot be valid
excuse for the imposition of tax. Otherwise, the taxpayer's liability to pay income tax would be made to
depend upon a third person who did not earn the income being taxed. Furthermore, even if the said
purposes support the redemption and justify the issuance of stock dividends, the same has no bearing
whatsoever on the imposition of the tax herein assessed because the proceeds of the redemption are
deemed taxable dividends since it was shown that income was generated therefrom. Thirdly, ANSCOR
argued that to treat as 'taxable dividend' the proceeds of the redeemed stock dividends would be to impose
on such stock an undisclosed lien and would be extremely unfair to intervening purchasers, i.e. those who
buys the stock dividends after their issuance. Such argument, how ever, bears no relevance in this case as
no intervening buyer is involved. And even if there is an intervening buyer, it is necessary to look into the
factual milieu of the case if income was realized from the transaction. Again, we reiterate that the dividend
equivalence test depends on such "time and manner" of the transaction and its net effect. The undisclosed
lien may be unfair to a subsequent stock buyer who has no capital interest in the company. But the
unfairness may not be true to an original subscriber like Don Andres, w ho holds stock dividends as gains
from his investments. The subsequent buyer who buys stock dividends is investing capital. It just so
happen that what he bought is stock dividends. The effect of its (stock dividends) redemption from that
subsequent buyer is merely to return his capital subscription, which is income if redeemed from the original
subscriber. After considering the manner and the circumstances by w hich the issuance and redemption of
stock dividends were made, there is no other conclusion but that the proceeds thereof are essentially
considered equivalent to a distribution of taxable dividends. As "taxable dividend" under Section 83(b), it is
part of the "entire income" subject to tax under Section 22 in relation to Section 21 of the 1939 Code.
Moreover, under Section 29(a) of said Code, dividends are included in "gross income." As income, it is
subject to income tax which is required to be withheld at source. The 1997 Tax Code may have altered the
situation but it does not change this disposition.

With regard to the exchange of shares, the Court ruled that the exchange of common with preferred shares
is not taxable because it produces no realized income to the subscriber but only a modification of the
subscriber's rights and privileges which is not a flow of wealth for tax purposes.

WHEREFORE, premises considered, the decision of the Court of Appeals is MODIFIED in that ANSCOR's
redemption of 82,752.5 stock dividends is herein considered as essentially equivalent to a distribution of
taxable dividends for which it is LIABLE for the withholding tax-at-source. The decision is AFFIRMED in all
other respects.

SO ORDERED.
 Davide, Jr., C.J., Melo, Kapunan and Pardo, JJ., concur.

x-------------------x

6. CIR vs. Mitsubishi Metal Corp. January 23, 1990

FACTS:
 1. Atlas Consolidated Mining and Development Corporation (Atlas) entered into a loan and sales
contract with Mitsubishi metal corporation a Japanese Corporation licensed to engage in business
in the Philippines.
2. Mitsubishi agreed to extend a loan to alast in the amount of $20,000.00 for the installation of a
new concentrator for copper production.
3. Atlas, undertook to sell to Mitsubishi all the copper concentrates for 15 years.
4. Mitsubishi applied for a loan with Export Import Bank of Japan (Eximbank) for purposes of its
obligation.
5. Its loan application was approved
6. Records in the BIR show that the approval of the loan by Eximbank to Mitsubishi was subject to
the condition that Mitsubishi would use the amount as a loan to Atlas and as a consideration for
imporating copper concentrates from atlas, and that Mitsubishi had to pay back the total amount
of loan.
7. Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by the
former to the latter for the years 1974 and 1975.
8. The corresponding 15% tax thereon in the amount of P1,971,595.01 was withheld pursuant to
Section 24 (b) (1) and Section 53 (b) (2) of the National Internal Revenue Code, and duly
remitted to the Government.
9. Private respondent filed a claim for tax credit requesting that the sum P1,971,595.01 be applied
against their existing and future tax liabilities.
10. The petitioner not having acted on the claim for tax credit, private respondents filed a petition for
review with respondent court.
11. The petition was grounded on the claim that Mitsubishi was a mere agent of Eximbank, which is
a financing institution owned, controlled and financed by the Japanese Government.
12. Such governmental status of Eximbank, if it may be so called, is the basis for private respondent’s
claim for exemption from paying the tax on the interest payments on the loan as earlier states.
13. Division of BIR recommended to petitioner the apporoval of private respondent’s calim for tax
credit.
14. CTA promulgated its decision ordering petitioner to grant a tax credit in favor of Atlast in the
amount of P1,971,595.01.
15. Respondent court concluded that the ultimate creditor of Atlas was Eximbank with Mitsubishi
acting as a mere “arranger or conduit”
16. A motion for reconsideration having been denied, petitioner interposed an appeal to the SC.
ISSUE:

Whether or not the interest income from the loans extended to ATLAS by Mitsubishi is
excludible form gross income taxation pursuant to Sec. 29 (b) (7) (A) of the tax code and therefore
exempt from withholding tax.

Whether or not Mitsubishi is a mere conduit of Eximbank which will then be considered as the
creditor whose investments in the Philippines on loans are exempt from taxes under the code.

RULING:

When Mitsubishi secured such loans, it was in its own independent capacity as a private entity
and not as a conduit of the consortium of Japanese banks or the Eximbank of Japan. While the loans were
secured by Mitsubishi primarily “as a loan to and in consideration for importing copper concentrates from
Atlas,” the fact remains that it was a loan by Eximbank of Japan Mitsubishi and not to Atlas.
 Thus, the transaction between Mitsubishi and Eximbank of Japan was a distinct ad separate
contract from that entered into by Mitsubishi and Atlas. Surely, in the latter contract, it is not Eximbank,
that was intended to be benefitted. It is Mitsubishi which stood to profit. Besides, the loan and Sales
contract cannot be any clearer. The only signatories to the same were Mitsubishi and Atlas. Nowhere in
the contract can it be inferred that Mitsubishi acted for and in behalf of Eximbank of Japan nor of any
entity, private or public for that matter.

DK

7. Cir vs. Mitsubishi metal corp (January 22, 1990)

.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MITSUBISHI METAL CORPORATION,
ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION and the COURT OF TAX
APPEALS, respondents. [G.R. No. 54908. January 22, 1990.]

Facts: The records reflect that on April 17,1970, Atlas Consolidated Mining and Development Corporation
(hereinafter, Atlas) entered into a Loan and Sales Contract with Mitsubishi Metal Corporation (Mitsubishi,
for brevity), a Japanese corporation licensed to engage in business in the Philippines, for purposes of the
projected expansion of the productive capacity of the former's mines in Toledo, Cebu. Under said contract,
Mitsubishi agreed to extend a loan to Atlas in the amount of $20,000,000.00, United States currency, for
the installation of a new concentrator for copper production. Atlas, in turn, undertook to sell to Mitsubishi all
the copper concentrates produced from said machine for a period of fifteen (15) years. Mitsubishi thereafter
applied for a loan with the Export-Import Bank of Japan (Eximbank, for short) obviously for purposes of its
obligation under said contract. Its loan application was approved on May 26, 1970 in the sum of
Y4,320,000,000.00, at about the same time as the approval of its loan for Y2,880,000,000.00 from a
consortium of Japanese banks. The total amount of both loans is equivalent to $20,000,000.00 in United
States currency at the then prevailing exchange rate. The records in the Bureau of Internal Revenue show
that the approval of the loan by Eximbank to Mitsubishi was subject to the condition that Mitsubishi would
use the amount as a loan to Atlas and as a consideration for importing copper concentrates from Atlas, and
that Mitsubishi had to pay back the total amount of loan by September 30, 1981.

Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by the former to the
latter totalling P13,143,966.79 for the years 1974 and 1975. The corresponding 15% tax thereon in the
amount of P1,971,595.01 was withheld pursuant to Section 24 (b) (1) and Section 53 (b) (2) of the National
Internal Revenue Code, as amended by Presidential Decree No. 131, and duly remitted to the Government.
On March 5, 1976, private respondents filed a claim for tax credit requesting that the sum of P1,971,595.01
be applied against their existing and future tax liabilities. Parenthetically, it was later noted by respondent
Court of Tax Appeals in its decision that on August 27, 1976, Mitsubishi executed a waiver and disclaimer
of its interest in the claim for tax credit in favor of Atlas.

The petitioner not having acted on the claim for tax credit, on April 23, 1976 private respondents filed a
petition for review with respondent court, docketed therein as CTA Case No. 2801. 5 The petition was
grounded on the claim that Mitsubishi was a mere agent of Eximbank, which is a financing institution
owned, controlled and financed by the Japanese Government. Such governmental status of Eximbank, if it
may be so called, is the basis for private respondents' claim for exemption from paying the tax on the
interest payments on the loan as earlier stated. It was further claimed that the interest payments on the
loan from the consortium of Japanese

banks were likewise exempt because said loan supposedly came from or were financed by Eximbank. The
provision of the National Internal Revenue Code relied upon is Section 29 (b) (7) (A), which excludes from
gross income:

"(A) Income received from their investments in the Philippines in loans, stocks, bonds or other domestic
securities, or from interest on their deposits in banks in the Philippines by (1) foreign governments, (2)
financing institutions owned, controlled, or enjoying refinancing from them, and (3) international or regional
financing institutions established by governments."

Ruling of the CTA: On April 18, 1980, respondent court promulgated its decision ordering petitioner to
grant a tax credit in favor of Atlas in the amount of P1,971,595.01. Respondent court concluded that the
ultimate creditor of Atlas was Eximbank with Mitsubishi acting as a mere "arranger or conduit through which
the loans flowed from the creditor Export-Import Bank of Japan to the debt or Atlas Consolidated Mining &
Development Corporation." A motion for reconsideration having been denied on August 20, 1980, petitioner
interposed an appeal to this Court, docketed herein as G.R. No. 54908.

While CTA Case No. 2801 was still pending before the tax court, the corresponding 15% tax on the amount
of P439,167.95 on the P2,927,789.06 interest payments for the years 1977 and 1978 was withheld and
remitted to the Government. Atlas again filed a claim for tax credit with the petitioner, repeating the same
basis for exemption.

On January 15, 1981, relying on its prior ruling in CTA Case No. 2801, respondent court rendered judgment
ordering the petitioner to credit Atlas the aforesaid amount of tax paid. A motion for reconsideration, filed on
March 10, 1981, was denied by respondent court in a resolution dated September 7, 1987. A notice of
appeal was filed on September 22, 1987 by petitioner with respondent court and a petition for review was
filed with this Court on December 19, 1987. Said later case is now before us as G.R. No. 80041 and is
consolidated with G.R. No. 54908.

Issue: Whether or not the interest income from the loans extended to Atlas by Mitsubishi is excludible from
gross income taxation pursuant to Section 29 (b) (7) (A) of the tax code and, therefore, exempt from
withholding tax.

Held: The loan and sales contract between Mitsubishi and Atlas does not contain any direct or inferential
reference to Eximbank whatsoever. The agreement is strictly between Mitsubishi as creditor in the contract
of loan and Atlas as the seller of the copper concentrates. From the categorical language used in the
document, one prestation was in consideration of the other. The specific terms and the reciprocal nature of
their obligations make it implausible, if not vacuous, to give credit to the cavalier assertion that Mitsubishi
was a mere agent in said transaction. Surely, Eximbank had nothing to do with the sale of the copper
concentrates since all that Mitsubishi stated in its loan application with the former was that the amount
being procured would be used as a loan to and in consideration for importing copper concentrates from
Atlas. Such an innocuous statement of purpose could not have been intended for, nor could it legally
constitute, a contract of agency. If that had been the purpose as respondent court believes, said
corporations would have specifically so stated, especially considering their experience and expertise in
financial transactions, not to speak of the amount involved and its purchasing value in 1970.

Respondents postulate that Mitsubishi had to be a conduit because Eximbank's charter prevents it from
making loans except to Japanese individuals and corporations. We are not impressed. Not only is there a
failure to establish such submission by adequate evidence but it posits the unfair and unexplained
imputation that, for reasons subject only of surmise, said financing institution would deliberately circumvent
its own charter to accommodate an alien borrower through a manipulated subterfuge, but with it as a
principal and the real obligee.

Definitely, the taxability of a party cannot be blandly glossed over on the basis of a supposed "broad,
pragmatic analysis" alone without substantial supportive evidence, lest governmental operations suffer due
to diminution of much needed funds. Nor can we close this discussion without taking cognizance of
petitioner's warning, of pervasive relevance at this time, that while international comity is invoked in this
case on the nebulous representation that the funds involved in the loans are those of a foreign government,
scrupulous care must be taken to avoid opening the floodgates to the violation of our tax laws. Otherwise,
the mere expedient of having a Philippine corporation enter into a contract for loans or other domestic
securities with private foreign entities, which in turn will negotiate independently with their governments,
could be availed of to take advantage of the tax exemption law under discussion.
 x-------------------x
DK
8. Ma. Isabel Santos vs. Servier Philippines
.
MA. ISABEL T. SANTOS, represented by ANTONIO P. SANTOS , petitioner, vs.
SERVIER PHILIPPINES, INC. and NATIONAL LABOR RELATIONS COMMISSION,
respondents. [G.R. No. 166377. November 28, 2008.]

Facts: On March 29, 1998, petitioner, together with her husband Antonio P. Santos, her
son, and some friends, had dinner at Leon des Bruxelles, a Paris restaurant known for
mussels as their specialty. While having dinner, petitioner complained of stomach pain,
then vomited. Eventually, she was brought to the hospital known as Centre Chirurgical
de L'Quest where she fell into coma for 21 days; and later stayed at the Intensive Care
Unit (ICU) for 52 days. The hospital found that the probable cause of her sudden attack
was "alimentary allergy", as she had recently ingested a meal of mussels which resulted
in a concomitant uticarial eruption. During the time that petitioner was confined at the
hospital, her husband and son stayed with her in Paris. Petitioner's hospitalization
expenses, as well as those of her husband and son, were paid by respondent. In a letter
dated May 14, 1999, respondent informed the petitioner that the former had requested
the latter's physician to conduct a thorough physical and psychological evaluation of her
condition, to determine her fitness to resume her work at the company. Petitioner's
physician concluded that the former had not fully recovered mentally and physically.
Hence, respondent was constrained to terminate petitioner's services effective August
31, 1999. As a consequence of petitioner's termination from employment, respondent
offered a retirement package. Of the promised retirement benefits amounting to
P1,063,841.76, only P701,454.89 was released to petitioner's husband, the balance
thereof was withheld allegedly for taxation purposes. Respondent also failed to give the
other benefits listed above. Petitioner, represented by her husband, instituted the instant
case for unpaid salaries; unpaid separation pay; unpaid balance of retirement
package plus interest…
Ruling of the LA: On September 28, 2001, Labor Arbiter Aliman D. Mangandog
rendered a Decision dismissing petitioner's complaint. In denying petitioner's claim for
separation pay, the Labor Arbiter ratiocinated that the same had already been
integrated in the retirement plan established by respondent. Thus, petitioner could no
longer collect separation pay over and above her retirement benefits. The arbiter
refused to rule on the legality of the deductions made by respondent from
petitioner's total retirement benefits for taxation purposes, as the issue was
beyond the jurisdiction of the NLRC.
Ruling of the NLRC: On appeal to the National Labor Relations Commission (NLRC),
the tribunal set aside the Labor Arbiter's decision. The NLRC emphasized that petitioner
was not retired from the service pursuant to law, collective bargaining agreement (CBA)
or other employment contract; rather, she was dismissed from employment due to a
disease/disability under Article 284 of the Labor Code. In view of her non-entitlement to
retirement benefits, the amounts received by petitioner should then be treated as her
separation pay.
Ruling of CA: Court of Appeals affirmed the NLRC decision
Issue: Whether the retirement benefits are taxable.
Held: In order to resolve the legality of the deduction, it is imperative that we settle, once
and for all, the ground relied upon by respondent in terminating the services of the
petitioner, as well as the nature of the benefits given to her after such termination. Only
then can we decide whether the amount deducted by the respondent should be paid to
the petitioner. Respondent dismissed the petitioner from her employment based on
Article 284 of the Labor Code, as amended, which reads:
Art. 284. Disease as Ground for Termination. —
An employer may terminate the services of an employee who has been found to be
suffering from any disease and whose continued employment is prohibited by law or is
prejudicial to his health as well as to the health of his co-employees: Provided, That he
is paid separation pay equivalent to at least one (1) month salary or to one-half (1/2)
month salary for every year of service, whichever is greater, a fraction of at least six (6)
months being considered as one (1) whole year.
As she was dismissed on the abovementioned ground, the law gives the petitioner the
right to demand separation pay. We have declared in Aquino v. National Labor
Relations Commission that the receipt of retirement benefits does not bar the retiree
from receiving separation pay. However, this is only true if there is no specific
prohibition against the payment of both benefits in the retirement plan and/or in the
Collective Bargaining Agreement (CBA). In the instant case, the Retirement Plan bars
the petitioner from claiming additional benefits on top of that provided for in the Plan.
Section 2, Article XII of the Retirement Plan provides:
Section 2. No Duplication of Benefits. —
No other benefits other than those provided under this Plan shall be payable from the
Fund. Further, in the event the Member receives benefits under the Plan, he shall be
precluded from receiving any other benefits under the Labor Code or under any present
or future legislation under any other contract or Collective Bargaining Agreement with
the Company.
There being such a provision, as held in Cruz v. Philippine Global Communications,
Inc., petitioner is entitled only to either the separation pay under the law or retirement
benefits under the Plan, and not both. Clearly, the benefits received by petitioner
from the respondent represent her retirement benefits under the Plan. The
question that now confronts us is whether these benefits are taxable. If so,
respondent correctly made the deduction for tax purposes. Otherwise, the
deduction was illegal and respondent is still liable for the completion of
petitioner's retirement benefits.
Contrary to the Labor Arbiter and NLRC's conclusions, petitioner's claim for illegal
deduction falls within the tribunal's jurisdiction. It is noteworthy that petitioner demanded
the completion of her retirement benefits, including the amount withheld by respondent
for taxation purposes. The issue of deduction for tax purposes is intertwined with the
main issue of whether or not petitioner's benefits have been fully given her. It is,
therefore, a money claim arising from the employer- employee relationship, which
clearly falls within the jurisdiction of the Labor Arbiter and the NLRC.
Section 32 (B) (6) (a) of the New National Internal Revenue Code (NIRC) provides
for the exclusion of retirement benefits from gross income, thus:

(6) Retirement Benefits, Pensions, Gratuities, etc. —

a) Retirement benefits received under Republic Act 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.
....

Thus, for the retirement benefits to be exempt from the withholding tax, the
taxpayer is burdened to prove the concurrence of the following elements: (1) a
reasonable private benefit plan is maintained by the employer; (2) the retiring
official or employee has been in the service of the same employer for at least ten
(10) years; (3) the retiring official or employee is not less than fifty (50) years of
age at the time of his retirement; and (4) the benefit had been availed of only
once. As discussed above, petitioner was qualified for disability retirement. At the
time of such retirement, petitioner was only 41 years of age; and had been in the
service for more or less eight (8) years. As such, the above provision is not
applicable for failure to comply with the age and length of service requirements.
Therefore, respondent cannot be faulted for deducting from petitioner's total
retirement benefits the amount of P362,386.87, for taxation purposes.
 WHEREFORE, the petition is DENIED for lack of merit.

DK
x-------------------x
9. Cir. vs. A. Soriano Corporation
.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE COURT OF APPEALS, COURT OF
TAX APPEALS and A. SORIANO CORP., respondents. [G.R. No. 108576. January 20, 1999.]

Facts:
Don Andres Soriano, a citizen and resident of the United States formed in the 1930's the corporation "A
Soriano Y Cia," predecessor of ANSCOR. On December 30, 1964 Don Andres died. On June 30, 1968,
pursuant to a Board Resolution, ANSCOR redeemed 28,000 common shares from Don Andres' estate. By
November 1968, the Board further increased ANSCOR's capital stock to P75M divided into 150,000
preferred shares and 600,000 common shares. About a year later ANSCOR again redeemed 80,000
common shares from Don Andres' estate, further reducing the latter's common shareholdings. ANSCOR
invoked two reasons to justify the redemptions — (1) the alleged "filipinization" program and (2) the
reduction of foreign exchange remittances in case cash dividends are declared. In 1973, after examining
ANSCOR's books of account and records Revenue Examiners issued a report proposing that ANSCOR be
assessed for deficiency withholding tax- at-source, pursuant to Sections 53 and 54 of the 1939 Revenue
Code for the year 1968 and the second quarter of 1969 based on the transactions of exchange and
redemption of stocks. Subsequently, ANSCOR filed a petition for review with the Court of Tax Appeals
assailing the tax assessments on the redemptions and exchange of stocks.
Ruling of the CTA: In its decision, the CTA reversed the BIR's ruling after finding sufficient evidence to
overcome the prima facie correctness of the questioned assessments.
Ruling of the CA: The Court of Appeals affirmed the ruling of the CTA. Hence, the present petition.

Issue: Whether ANSCOR'sredemption of stocks from its stockholder as well as the exchange of common
with preferred shares can be considered as "essentially equivalent to the distribution of taxable dividend,"
making the proceeds thereof taxable under the provisions Section 83 (B) of the 1939 Revenue Act.
Held: First, the alleged "filipinization" plan cannot be considered legitimate as it was not implemented until
the BIR started making assessments on the proceeds of the redemption. Such corporate plan was not
stated in nor supported by any Board Resolution but a mere afterthought interposed by the counsel of
ANSCOR. Being a separate entity, the corporation can act only through its Board of Directors. The Board
Resolutions authorizing the redemptions state only one purpose — reduction of foreign exchange
remittances in case cash dividends are declared. Not even this purpose can be given credence. Records
show that despite the existence of enormous corporate profits no cash dividend was ever declared by
ANSCOR from 1945 until the BIR started making assessments in the early 1970's. Although a corporation
under certain exceptions, has the prerogative when to issue dividends, yet when no cash dividends was
issued for about three decades, this circumstances negates the legitimacy of ANSCOR's alleged purposes.
Moreover, to issue stock dividends is to increase the shareholdings of ANSCOR's foreign stockholders
contrary to its "filipinization" plan. This would also increase rather than reduce their need for foreign
exchange remittances in case of cash dividend declaration, considering that ANSCOR is a family
corporation where the majority shares at the time of redemptions were held by Don Andres' foreign heirs.
Secondly, assuming arguendo, that those business purposes are legitimate, the same cannot be valid
excuse for the imposition of tax. Otherwise, the taxpayer's liability to pay income tax would be made to
depend upon a third person who did not earn the income being taxed. Furthermore, even if the said
purposes support the redemption and justify the issuance of stock dividends, the same has no bearing
whatsoever on the imposition of the tax herein assessed because the proceeds of the redemption are
deemed taxable dividends since it was shown that income was generated therefrom. Thirdly, ANSCOR
argued that to treat as 'taxable dividend' the proceeds of the redeemed stock dividends would be to impose
on such stock an undisclosed lien and would be extremely unfair to intervening purchasers, i.e. those who
buys the stock dividends after their issuance. Such argument, how ever, bears no relevance in this case as
no intervening buyer is involved. And even if there is an intervening buyer, it is necessary to look into the
factual milieu of the case if income was realized from the transaction. Again, we reiterate that the dividend
equivalence test depends on such "time and manner" of the transaction and its net effect. The undisclosed
lien may be unfair to a subsequent stock buyer who has no capital interest in the company. But the
unfairness may not be true to an original subscriber like Don Andres, w ho holds stock dividends as gains
from his investments. The subsequent buyer who buys stock dividends is investing capital. It just so
happen that what he bought is stock dividends. The effect of its (stock dividends) redemption from that
subsequent buyer is merely to return his capital subscription, which is income if redeemed from the original
subscriber. After considering the manner and the circumstances by w hich the issuance and redemption of
stock dividends were made, there is no other conclusion but that the proceeds thereof are essentially
considered equivalent to a distribution of taxable dividends. As "taxable dividend" under Section 83(b), it is
part of the "entire income" subject to tax under Section 22 in relation to Section 21 of the 1939 Code.
Moreover, under Section 29(a) of said Code, dividends are included in "gross income." As income, it is
subject to income tax which is required to be withheld at source. The 1997 Tax Code may have altered the
situation but it does not change this disposition.

With regard to the exchange of shares, the Court ruled that the exchange of common with preferred shares
is not taxable because it produces no realized income to the subscriber but only a modification of the
subscriber's rights and privileges which is not a flow of wealth for tax purposes.

WHEREFORE, premises considered, the decision of the Court of Appeals is MODIFIED in that ANSCOR's
redemption of 82,752.5 stock dividends is herein considered as essentially equivalent to a distribution of
taxable dividends for which it is LIABLE for the withholding tax-at-source. The decision is AFFIRMED in all
other respects.
 SO ORDERED.
 Davide, Jr., C.J., Melo, Kapunan and Pardo, JJ., concur.

x-------------------x
DK

10. Nitifan vs. CIR

.
DAVID G. NITAFAN, WENCESLAO M. POLO, and MAXIMO A. SAVELLANO, JR., petitioners, vs.
COMMISSIONER OF INTERNAL REVENUE and THE FINANCIAL OFFICER, SUPREME COURT OF
THE PHILIPPINES, respondents.[G.R. No. 78780. July 23, 1987.]



MELENCIO-HERRERA, J:

Facts:
On June 4, 1987, the Court en banc had reaffirmed the Chief Justice's directive as follows:

"RE: Question of exemption from income taxation. — The Court REAFFIRMED the Chief
Justice's previous and standing directive to the Fiscal Management and Budget Office of this
Court to continue with the deduction of the withholding taxes from the salaries of the Justices
of the Supreme Court as well as from the salaries of all other members of the judiciary."

Petitioners, the duly appointed and qualified Judges presiding over Branches 52, 19 and 53, respectively,
of the Regional Trial Court, National Capital Judicial Region, all with stations in Manila, seek to prohibit
and/or perpetually enjoin respondents, the Commissioner of Internal Revenue and the Financial Officer of
the Supreme Court, from making any deduction of withholding taxes from their salaries. prcd

In a nutshell, they submit that "any tax withheld from their emoluments or compensation as judicial officers
constitutes a decrease or diminution of their salaries, contrary to the provision of Section 10, Article VIII of
the 1987 Constitution mandating that '(d)uring their continuance in office, their salary shall not be
decreased,' even as it is anathema to the ideal of an independent judiciary envisioned in and by said
Constitution."

Issue: Whether or not the members of the judiciary are exempt from the payment of income tax.

Held: A comparison of the Constitutional provisions involved is called for. The 1935 Constitution
provided:

". . . (The members of the Supreme Court and all judges of inferior courts) shall receive such
compensation as may be fixed by law, which shall not be diminished during their
continuance in office . . ."
Under the 1973 Constitution, the same provision read:

"The salary of the Chief Justice and of the Associate Justices of the Supreme Court, and of
judges of inferior courts shall be fixed by law, which shall not be decreased during their
continuance in office . . ."

And in respect of income tax exemption, another provision in the same 1973 Constitution specifically
stipulated:

"No salary or any form of emolument of any public officer or employee, including
constitutional officers, shall be exempt from payment of income tax."

The provision in the 1987 Constitution, which petitioners rely on, reads:

"The salary of the Chief Justice and of the Associate Justices of the Supreme Court, and of
judges of lower courts shall be fixed by law. During their continuance in office, their salary
shall not be decreased."

The 1987 Constitution does not contain a provision similar to Section 6, Article XV of the 1973 Constitution,
for which reason, petitioners claim that the intent of the framers is to revert to the original concept of "non-
diminution" of salaries of judicial officers. The deliberations of the 1986 Constitutional Commission relevant
to Section 10, Article VIII, negate such contention.

The debates, interpellations and opinions expressed regarding the constitutional provision in question until
it was finally approved by the Commission disclosed that the true intent of the framers of the 1987
Constitution, in adopting it, was to make the salaries of members of the Judiciary taxable. The
ascertainment of that intent is but in keeping with the fundamental principle of constitutional construction
that the intent of the framers of the organic law and of the people adopting it should be given effect. The
clear intent of the Constitutional Commission was to delete the proposed express grant of exemption from
payment of income tax to members of the Judiciary, so as to "give substance to equality among the three
branches of Government" in the words of Commissioner Rigos.

This intent was somehow and inadvertently not clearly set forth in the final text of the Constitution as
approved and ratified in February, 1987. Although the intent may have been obscured by the failure to
include in the General Provisions a proscription against exemption of any public offi cer or employee,
including constitutional officers, from payment of income tax, the Court since then has authorized the
continuation of the deduction of the withholding tax from the salaries of the members of the Supreme Court,
as well as from the salaries of all other members of the Judiciary. The Court hereby makes of record that it
had then discarded the ruling in Perfecto vs. Meer and Endencia vs. David, infra, that declared the salaries
of members of the Judiciary exempt from payment of the income tax and considered such payment as a
diminution of their salaries during their continuance in office. The Court hereby reiterates that the salaries of
Justices and Judges are properly subject to a general income tax law applicable to all income earners and
that payment of such income tax by Justices and Judges does not fall within the constitutional protection
against decrease of their salaries during their continuance in office.

Besides, construing Section 10, Articles VIII, of the 1987 Constitution, which, for clarity, is again reproduced
hereunder:
"The salary of the Chief Justice and of the Associate Justices of the Supreme Court, and of judges of lower
courts shall be fixed by law. During their continuance in office, their salary shall not be decreased."

It is plain that the Constitution authorizes Congress to pass a law fixing another rate of compensation of
Justices and Judges but such rate must be higher than that which they are receiving at the time of
enactment, or if lower, it would be applicable only to those appointed after its approval. It would be a
strained construction to read into the provision an exemption from taxation in the light of the discussion in
the Constitutional Commission.

WHEREFORE, the instant petition for Prohibition is hereby dismissed.

Teehankee, C .J ., Fernan, Narvasa, Gutierrez, Jr., Cruz, Paras, Feliciano, Gancayco, Padilla, Bidin,
Sarmiento and Cortes, JJ ., concur.
Yap, J ., is on leave.

x-------------------x
DK

11. CIR. vs British Overseas Airways Corporation

.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. BRITISH OVERSEAS AIRWAYS
CORPORATION and COURT OF TAX APPEALS, respondents. [G.R. Nos. L-65773-74. April 30, 1987.]
MELENCIO-HERRERA, J:
Facts:
BOAC is a 100% British Government-owned corporation organized and existing under the laws of the
United Kingdom. It is engaged in the international airline business and is a member-signatory of the
Interline Air Transport Association (IATA). As such, it operates air transportation service and sells
transportation tickets over the routes of the other airline members. During the periods covered by the
disputed assessments, it is admitted that BOAC had no landing rights for traffic purposes in the Philippines,
and was not granted a Certificate of public convenience and necessity to operate in the Philippines by the
Civil Aeronautics Board (CAB), except for a nine-month period, partly in 1961 and partly in 1962, when it
was granted a temporary landing permit by the CAB. Consequently, it did not carry passengers and/or
cargo to or from the Philippines, although during the period covered by the assessments, it maintained a
general sales agent in the Philippines — Warner Barnes and Company, Ltd., and later Qantas Airways —
which was responsible for selling BOAC tickets covering passengers and cargoes.

Ruling of CIR:
G.R. No. 65773 (CTA Case No. 2373, the First Case)
On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for brevity) assessed BOAC the
aggregate amount of P2,498,358.56 for deficiency income taxes covering the years 1959 to 1963. This was
protested by BOAC. Subsequent investigation resulted in the issuance of a new assessment, dated 16
January 1970 for the years 1959 to 1967 in the amount of P858,307.79. BOAC paid this new assessment
under protest. On 7 October 1970, BOAC filed a claim for refund of the amount of P858,307.79, which
claim was denied by the CIR on 16 February 1972. But before said denial, BOAC had already filed a
petition for review with the Tax Court on 27 January 1972, assailing the assessment and praying for the
refund of the amount paid.
G.R. No. 65774 (CTA Case No. 2561, the Second Case)
On 17 November 1971, BOAC was assessed deficiency income taxes, interests, and penalty for the fiscal
years 1968/1969 to 1970-1971 in the aggregate amount of P549,327.43, and the additional amounts of
P1,000.00 and P1,800.00 as compromise penalties for violation of Section 46 (requiring the filing of
corporation returns) penalized under Section 74 of the National Internal Revenue Code (NIRC). On 25
November 1971, BOAC requested that the assessment be countermanded and set aside. In a letter, dated
16 February 1972, however, the CIR not only denied the BOAC request for refund in the First Case but also
re-issued in the Second Case the deficiency income tax assessment for P534,132.08 for the years 1969 to
1970- 71 plus P1,000.00 as compromise penalty under Section 74 of the Tax Code. BOAC's request for
reconsideration was denied by the CIR on 24 August 1973. This prompted BOAC to file the Second Case
before the Tax Court praying that it be absolved of liability for deficiency income tax for the years 1969 to
1971.

Ruling of CTA: On 26 January 1983, the Tax Court rendered the assailed joint Decision reversing the CIR.
The Tax Court held that the proceeds of sales of BOAC passage tickets in the Philippines by Warner
Barnes and Company, Ltd., and later by Qantas Airways, during the period in question, do not constitute
BOAC income from Philippine sources "since no service of carriage of passengers or freight was performed
by BOAC within the Philippines" and, therefore, said income is not subject to Philippine income tax. The
CTA position was that income from transportation is income from services so that the place where services
are rendered determines the source. Thus, in the dispositive portion of its Decision, the Tax Court ordered
petitioner to credit BOAC with the sum of P858,307.79, and to cancel the deficiency income tax
assessments against BOAC in the amount of P534,132.08 for the fiscal years 1968- 69 to 1970-71.

Issue 1: Whether or not during the fiscal years in question BOAC is a resident foreign corporation doing
business in the Philippines or has an office or place of business in the Philippines.

Held 1: Under Section 20 of the 1977 Tax Code:

"(h) the term 'resident foreign corporation' applies to a foreign corporation engaged in trade or business
within the Philippines or having an office or place of business therein.
"(i) The term 'non-resident foreign corporation' applies to a foreign corporation not engaged in trade or
business within the Philippines and not having any office or place of business therein."
BOAC, during the periods covered by the subject-assessments, maintained a general sales agent in the
Philippines. That general sales agent, from 1959 to 1971, "was engaged in (1) selling and issuing tickets;
(2) breaking down the whole trip into series of trips — each trip in the series corresponding to a different
airline company; (3) receiving the fare from the whole trip; and (4) consequently allocating to the various
airline companies on the basis of their participation in the services rendered through the mode of interline
settlement as prescribed by Article VI of the Resolution No. 850 of the IATA Agreement." 4 Those activities
were in exercise of the functions which are normally incident to, and are in progressive pursuit of, the
purpose and object of its organization as an international air carrier. In fact, the regular sale of tickets, its
main activity, is the very lifeblood of the airline business, the generation of sales being the paramount
objective. There should be no doubt then that BOAC was "engaged in" business in the Philippines through
a local agent during the period covered by the assessments. Accordingly, it is a resident foreign corporation
subject to tax upon its total net income received in the preceding taxable year from all sources within the
Philippines.
Issue 2: Whether or not the revenue from sales of tickets by BOAC in the Philippines constitutes income
from Philippine sources and, accordingly, taxable under our income tax laws. The Tax Code defines "gross
income" thus:
"'Gross income' includes gains, profits, and income derived from salaries, wages or compensation for
personal service of whatever kind and in whatever form paid, or from profession, vocations, trades,
business, commerce, sales, or dealings in property, whether real or personal, growing out of the ownership
or use of or interest in such property; also from interests, rents, dividends, securities, or the transactions of
any business carried on for gain or profit or gains, profits, and income derived from any source whatever"
(Sec. 29[3]; Emphasis supplied)

The definition is broad and comprehensive to include proceeds from sales of transport documents. "The
words 'income from any source whatever' disclose a legislative policy to include all income not expressly
exempted within the class of taxable income under our laws." Income means "cash received or its
equivalent"; it is the amount of money coming to a person within a specific time it means something distinct
from principal or capital. For, while capital is a fund, income is a flow. As used in our income tax law,
"income" refers to the flow of wealth
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. In BOAC's case, the sale of tickets in the Philippines is the
activity that produces the income. The tickets exchanged hands here and payments for fares were also
made here in 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.
True, Section 37(a) of the Tax Code, which enumerates items of gross income from sources within the
Philippines, namely: (1) interest, (2) dividends, (3) service, (4) rentals and royalties, (5) sale of real
property, and (6) sale of personal property, does not mention income from the sale of tickets for
international transportation. However, that does not render it less an income from sources within the
Philippines. Section 37, by its language, does not intend the enumeration to be exclusive. It merely directs
that the types of income listed therein be treated as income from sources within the Philippines. A cursory
reading of the section will show that it does not state that it is an all-inclusive enumeration, and that no
other kind of income may be so considered.
The absence of flight operations to and from the Philippines is not determinative of the source of income or
the situs of income taxation. Admittedly, BOAC was an off- line international airline at the time pertinent to
this case. The test of taxability is the "source"; and the source of an income is that activity . . . which
produced the income. 11 Unquestionably, the passage documentations in these cases were sold in the
Philippines and the revenue therefrom was derived from a business activity regularly pursued within the
Philippines. And even if the BOAC tickets sold covered the "transport of passengers and cargo to and from
foreign cities", 12 it cannot alter the fact that income from the sale of tickets was derived from the
Philippines. The word "source" conveys one essential idea, that of origin, and the origin of the income
herein is the Philippines.
WHEREFORE, the appealed joint Decision of the Court of Tax Appeals is hereby SET ASIDE. Private
respondent, the British Overseas Airways Corporation (BOAC), is hereby ordered to pay the amount of
 P534,132.08 as deficiency income tax for the fiscal years 1968-69 to 1970-71 plus 5% surcharge, and 1%
monthly interest from April 16, 1972 for a period not to exceed three (3) years in accordance with the Tax
Code. The BOAC claim for refund in the amount of P858,307.79 is hereby denied. Without costs.
SO ORDERED.
 Paras, Gancayco, Padilla, Bidin, Sarmiento, Yap and Cortes, JJ ., concur.
Fernan, J ., took no part, his brother-in-law being a member of the law firm representing private
respondents.

DK
x-------------------x

12. CIR vs. Air India

. COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. AIR INDIA and THE COURT OF TAX
APPEALS, respondents. [G.R. No. 72443. January 29, 1988.]
 Gancayco, J:

Facts:
The private respondent Air India is a foreign corporation organized under the laws of India. It is not licensed
to do business in the Philippines as an international carrier. Its airplanes do not operate within Philippine
territory nor service passengers embarking from Philippine ports. The firm is represented in the Philippines
by its general sales agent, Philippine AirLines, Inc., a corporate entity duly organized under the laws of the
Philippines. In sum, Air India's status in the Philippines is that of an off-line international carrier not engaged
in the business of air transportation in the Philippines. The total sales of airplane tickets transacted by
Philippine Air Lines, Inc. for the private respondent during the fiscal year ending March 31, 1976 amounted
to P2,968,156.00. On account of the same, the herein petitioner Commissioner of I nternal Revenue held
the private respondent liable for the payment of P142,471.68.1 The amount represents the 2.5% income
tax on the private respondent's gross Philippine billings for the said fiscal year pursuant to Section 24 (b)
(2) of the National Internal Revenue Code, as amended, inclusive of the 50% surcharge and interest for
willful neglect to file a return as provided under Section 72 of the same code.

From the action taken by the petitioner, the private respondent brought an Appeal to the Court of Tax
Appeals. The thrust of the Appeal is, inter alia, that the private respondent cannot be held liable to pay the
said imposition because it did not derive any income from sources within the Philippines during the said
fiscal year and that the amount of P2,968,156.00 mentioned in the assessment made by the petitioner was
derived exclusively from sources outside the Philippines.

On the other hand, the petitioner argued that the amount of P2,968,156.00 was realized in the Philippines
and was, therefore, derived from sources within the Philippines. Petitioner also stressed that in case of any
doubt, the presumption is that the tax assessment is correct.

Ruling of CTA: In its Decision dated June 27, 1985, the Court of Tax Appeals ruled in favor of the
private respondent and set aside the decision of the petitioner. The tax court likewise held that the
surcharge and interest imposed upon the private respondent are improper
Issue 1: Whether or not the revenue derived by an international air carrier from sales of tickets in the
Philippines for air transportation, while having no landing rights in the country, constitutes income of the
said international air carrier from Philippine sources and, accordingly, taxable under Section 24 (b) (2) of
the National Internal Revenue Code.
Held 1: This issue has been settled in the affirmative in Commissioner of Internal Revenue v. British
Overseas Airways Corporation. This Court, speaking, through Mme. Justice Ameurfina A. Melencio-
Herrera, held that such revenue constitutes taxable income. On the basis of the doctrine announced in
British Overseas Airways Corporation, the revenue derived by the private respondent Air India from the
sales of airplane tickets through its agent Philippine Air Lines, Inc., here in the Philippines, must be
considered taxable income. As correctly assessed by the petitioner, such income is subject to a 2.5% tax
pursuant to Presidential Decree No. 1355, amending Section 24 (b)(2) of the tax code. The total Philippine
billings of the private respondent for the taxable year in question amounts to P2,968,156.00. 2.5% of this
amount or P74,203.90 constitutes the income tax due from the private respondent.

Issue 2: W/N the 50% surcharge and the interest imposed upon it by the Commissioner of Internal
Revenue are proper.
Held 2: On one hand, the willful neglect to file the required tax return or the fraudulent intent to evade
the payment of taxes, considering that the same is accompanied by legal consequences, cannot be
presumed. The fraud contemplated by law is actual and not constructive. It must be intentional fraud,
consisting of deception willfully and deliberately done or resorted to in order to induce another to give up
some legal right. Negligence, whether slight or gross, is not equivalent to the fraud with intent to give up
some legal right. Negligence, whether slight or gross, is not equivalent to the fraud with intent to evade the
tax contemplated by the law. It must amount to intentional wrongdoing with the sole object of avoiding the
tax. There being no cogent basis to find willful neglect to file the required tax return on the part of the
private respondent, the 50% surcharge or fraud penalty imposed upon it is improper. Nonetheless, such
failure subjects the private respondent to a 25% penalty pursuant to Section 72 of the tax code cited earlier.
P74,203.90 constitutes the tax deficiency of the private respondent. 25% of this amount is P37,101.95.

On the other hand, SC finds the 42% interest assessed by the petitioner to be in order. At the time the tax
liability of the private respondent accrued, Section 51 (d) of the tax code, before it was amended by
Presidential Decree No. 1705 prescribed an interest rate of 14% per annum, provided that the maximum
amount that could be collected as interest on the tax deficiency will not exceed the amount corresponding
to a period of three years. Thus, the maximum interest rate then was 42%. This maximum interest rate is
applicable to the private respondent inasmuch as the period between March 31, 1976 (the end of the fiscal
year in question) and February 20, 1981 (the time when the petitioner made the assessment in question)
exceeds three years. P74,203.90 constitutes the tax deficiency of the private respondent. 42% of this
amount is P31,165.64.

Issue 3: Whether or not the private respondent is liable to pay additional interest of 20% per annum

Held 3: Pursuant to Section 51 (e) (2) of the tax code, as amended by Presidential Decree No. 1705, the
private respondent is liable to pay additional interest of 20% per annum (computed from February 20, 1981,
the date when the Commissioner sought the payment of the tax deficiency) on the total amount unpaid. A
careful reading of Section 51 (e) (2) shows that this interest is in addition to the interest provided in Section
51 (d). This view can be gleaned from the use of the phrase "Where a deficiency, or any interest assessed
in connection therewith under paragraph (d) of this section" in Section 51 (e) (2). The additional interest is
to be computed upon the entire amount of the tax liability (previous interest included) which remains
unpaid. This is manifested by the use of the phrase "there shall be collected upon the unpaid amount as
part of the tax" in Section 51 (e) (2). However, the same Section provides that the maximum amount that
may be collected as interest cannot exceed the amount corresponding to a period of three years. In this
case, the maximum rate would be 60%.

Issue 4: Whether or not the private respondent is likewise liable to pay an additional surcharge of 10% (flat
rate) of the total amount of tax unpaid.

Held 4: Pursuant to Section 51 (e) (3) of the same code, as amended by the said Decree, the private
respondent is likewise liable to pay an additional surcharge of 10% (flat rate) of the total amount of tax
unpaid. An examination of Section 51 (e)(3) reveals that this surcharge is imposed for the late payment of
the unpaid tax deficiency and/or unpaid interest assessed in connection therewith, in addition to all other
charges. This is confirmed by the use of the words "there shall be collectedin addition to the interest
prescribed herein [referring to the entire Section 51 (e)] and in paragraph (d) above [referring to Section 51
(d)]." The additional surcharge is computed on the amount of tax unpaid, exclusive of all other impositions.
This is confirmed by the phrase "ten per centum of the amount of tax unpaid." The failure to pay the tax
deficiency within the required period of time upon demand is penalized by this additional surcharge. Upon
such failure to pay, the surcharge is automatically due; its imposition is mandatory.

In sum, the following schedule illustrates the total tax liability of the private respondent —

Income Tax for Fiscal year
 ending March 31, 1976 P74,204.00
Add: 25% surcharge under Section 72 37,101.95
42% maximum interest under Section 51 (d) 31,165.64
—————

Total P142,471.59

Add: 60% maximum additional interest under Presidential Decree No. 1705 (computed on P142.471.59)
85,482.95
——————
Total P227,954.54

Add: 10% additional surcharge under Presidential Decree No. 1705 (computed on unpaid tax of
P74,204.00) P7,420.40
—————
TOTAL TAX DUE FROM THE PRIVATE RESPONDENT
P235,374.94

Accordingly, We hold that the private respondent is liable for unpaid taxes and charges in the total amount
of Two Hundred Thirty-Five Thousand, Three Hundred Seventy-Four Pesos and Ninety-Four Centavos
(P235,374.94).
 WHEREFORE, in view of the foregoing, the Decision of the Court of Tax Appeals in CTA Case No. 3441 is
hereby SET ASIDE. The private respondent Air India is hereby ordered to pay the amount of P235,374.94
as deficiency tax, inclusive of interest and surcharges. We make no pronouncement as to costs.

SO ORDERED.
 Teehankee, C.J., Narvasa, Cruz and Paras, JJ., concur.

x-------------------x
DK
13. CIR vs. Atlas Consolidated
.
ATLAS CONSOLIDATED MINING & DEVELOPMENT CORPORATION, petitioner,
vs. COMMISSIONER OF INTERNAL REVENUE, respondent. [G.R. No. L-26911.
January 27, 1981.] De Castro, J:

Facts:
Atlas is a corporation engaged in the mining industry registered under the laws of the
Philippines. On August 20, 1962, the Commissioner assessed against Atlas the sum of
P546,295.16 and P215,493.96 or a total of P761,789.12 as deficiency income taxes for
the years 1957 and 1958. For the year 1957, it was the opinion of the Commissioner
that Atlas is not entitled to exemption from the income tax under Section 4 of Republic
Act 909 because same covers only gold mines. On October 25, 1962, the Secretary of
Finance ruled that the exemption provided in Republic Act 909 embraces all new mines
and old mines whether gold or other minerals. Accordingly, the Commissioner
recomputed Atlas deficiency income tax liabilities' in the light of the ruling of the
Secretary of Finance. On June 9, 1964, the Commissioner issued a revised assessment
entirely eliminating the assessment of P546,295.16 for the year 1957. The assessment
for 1958 was reduced from P215,493.96 to P39,646.82 from which Atlas appealed to
the Court of Tax Appeals, assailing the disallowance of the transfer agent's fee;
stockholder's relation fee; U.S. listing expenses; suit expenses and provision for
contingencies, as deductible expenses from its gross income.

Ruling of CTA: The Court of Tax Appeals allowed said disallowed items except the
stockholders relation service fee and suit expenses. Both parties appealed by filing two
separate petitions for review, one filed by Atlas in L-26911 as to the portion disallowed
and the other by the Commissioner in L-26924, not only raising for the first time lack of
proof of payment of the expense deducted but questioning as well the allowance of said
deductible expenses.

Issue: Whether or not the expenses paid for the services rendered by a public relations
firm P.K. Macker & Co. labelled as stockholders relation service fee is an allowable
deduction as business expense under Section 30(a) (1) of the National Internal
Revenue Code.

Held: No. The law allowing expenses as deduction from gross income for purposes of
the income tax is Section 30(a) (1) of the National Internal Revenue Code which allows
a deduction of "all the ordinary and necessary expenses paid or incurred during the
taxable year in carrying on any trade or business." The statutory test of deductibility
imposes three conditions namely: (1) the expense must be ordinary and necessary; (2)
it must be paid or incurred within the taxable year; and (3) it must be paid or incurred in
carrying on a trade or business. Ordinarily, an expense will be considered "necessary"
where the expenditure is appropriate and helpful in the development of the taxpayers
business. It is "ordinary" when it connotes a payment which is normal in relation to the
business of the taxpayer and the surrounding circumstances. The term "ordinary" does
not require that the payments be habitual or normal in the sense that the same taxpayer
will have to make them often; the payment may be unique or non-recurring to the
particular taxpayer affected.

There is no hard and fast rule on the right to a deduction which depends in each case
on the particular facts and the relation of the payment to the type of business in which
the taxpayer is engaged. The intention of the tax-payer often may be the controlling fact
in making the determination. Assuming that the expenditure is ordinary and necessary
in the operation of the taxpayer's business, the answer to the question as to whether the
expenditure is an allowable deduction as a business expense must be determined from
the nature of the expenditure itself, which in turn depends on the extent and
permanency of the work accomplished by the expenditure. Accordingly, as found by the
Court of Tax Appeals, the stockholders relation service fee, which was in effect spent
for the acquisition of additional capital, ergo, a capital expenditure, is not deductible
from Atlas gross income in 1958 because expenses relating to recapitalization and
reorganization of the corporation, the cost of obtaining stock subscription, promotions
expenses, and commission of fees paid for the sale of stock reorganization are capital
expenditures.

Issue 2: Whether or not Atlas Consolidated Mining and Development Corporation is

entitled to allowance of the U.S. listing expenses, provision for contingencies, and suit
expenses as deductible expenses from its gross income

Held: First, with regard to stock listing fee, the Commissioner cited the ruling in Dome
Mines, Ltd. vs. Commissioner of Internal Revenue involving the same issue as in the
case at bar where the U.S. Board of Tax Appeal ruled that expenses for listing capital
stock in the stock exchange are not ordinary and necessary expenses incurred in
carrying on the taxpayer's business which was gold mining and selling, which business
is strikingly similar to Atlas. On the other hand, the Court of Tax Appeals relied on the
ruling in the case of Chesapeake Corporation of Virginia vs. Commissioner of Internal
Revenue where the Tax Court allowed the deduction of stock exchange fee in dispute,
which is an annually recurring cost for the annual maintenance of the listing. SC finds
the Chesapeake decision controlling with the facts and circumstances of the instant
case. In Dome Mines, Ltd. case, the stock listing fee was disallowed as a deduction not
only because the expenditure did not meet the statutory test but also because the same
was paid only once, and the benefit acquired thereby continued indefinitely, whereas, in
the Chesapeake Corporation case, fee paid to the stock exchange was annual and
recurring. In the instant case, We deal with the stock listing fee paid annually to a stock
exchange for the privilege of having its stock listed. It must be noted that the Court of
Tax Appeals rejected the Dome Mines case, because it involves a payment made only
once, hence, it was held therein that the single payment made to the stock exchange
was a capital expenditure, as distinguished from the instant case, where payments were
made annually. For this reason, SC held that said listing fee is an ordinary and
necessary business expense. Second, with respect to "provisions for
contingencies”, the SC has consistently ruled in several cases adverted to earlier, that
in the absence of grave abuse of discretion or error on the part of the tax court its
findings of facts may not be disturbed by the Supreme Court. It is not within the province
of this Court to resolve whether or not the P60,000 representing "provision for
contingencies" was in fact added to or deducted from the taxable income. As ruled by
the Court of Tax Appeals, the said amount was in effect added to Atlas' taxable income.
The same factual in nature and supported by substantial evidence, such findings should
not be disturbed in this appeal. Finally, as regards the litigation expenses, the
Commissioner contended that the CTA erred in disallowing only the amount of
P6,666.65 as suit expenses instead of P17,499.98. It appears that petitioner deducted
from its 1958 gross income the amount of P23,333.30 as attorney's fees and litigation
expenses in the defense of title to the Toledo Mining properties purchased by Atlas from
Mindanao Lode Mines Inc. in Civil Case No. 30566 of the Court of First Instance of
Manila for annulment of the sale of said mining properties. On the ground that the
litigation expense was a capital expenditure under Section 121 of the Revenue
Regulation No. 2, the investigating revenue examiner recommended the disallow ance
of P13,333.30. The Commissioner, however, reduced this amount of P6,666.65 which
later amount was affirmed by the respondent Court of Tax Appeals on appeal. There is
no question that, as held by the Court of Tax Appeals, the litigation expenses under
consideration were incurred in defense of Atlas' title to its mining properties. In line with
the decision of the U.S. Tax Court in the case of Safety Tube Corp. vs. Commissioner of
Internal Revenue, it is well settled that litigation expenses incurred in defense or
protection of title are capital in nature and not deductible. Likewise, it was ruled by the
U.S. Tax Court that expenditures in defense of title of property constitute a part of the
cost of the property and are not deductible as expense.

WHEREFORE, judgment appealed from is hereby affirmed with modification that the
amount of P17,499.98 (3/4 of P23,333.30) representing suit expenses be disallowed as
deduction instead of P6,666.65 only. With this amount as part of the net income, the
corresponding income tax shall be paid thereon, with interest of 6% per annum from
June 20, 1959 to June 20, 1962.

SO ORDERED.

Makasiar, Fernandez, Guerrero and Melencio-Herrera, JJ ., concur. Teehankee, J .,
took no part.
x-------------------x
 Chapter 4

Cases on Allowable Deductions

1. Zamora vs. cir
2. Gregory vs. helvering
3. Calanoc vs. Cir
4. kuenzle & Streiff, inc. vs Collector of internal revenue
5. paper industries corp vs ca (dec 1, 1995)
6. CIR.vs Vda. De Prieto
7. CIR vs. Lednicky
8. Philippine Refining Company vs. CA
9. Hermanos vs. CIR
10. 3M Philippines inc vs. CIR
11. Calasanz vs. CIR (1986)
12. Tuason vs Lingad
13. CIR vs. Rufino
14. Esso Standard Eastern Inc vs. CIR
15. CIR vs. General Foods Phils
16. Atlas Consolidated Mining & Development corp vs CIR  102 scra 246
17. Maria Carla Pirovano vs CIR (14 scra)
18. CIR vs Palanca  18 scra
19. Basilan Estates vs. CIR
20. PRC/UNILEVER vs CA – 1996
21. Aguinaldo industries vs. CIR -112 SCra
22. CM Hoskins & Co. vs CIR
23. Hospital de San juan de dios vs. Cir – 175 Scra
24. Republic vs. Manila Electric company – November 15, 2002
25. china banking corporation vs ca – 336 Scra
 26. CIR vs. Isabela cultural Corp  feb, 12, 2007
27. CIR vs. Central Luzon Drug corporation
28. Bicolandia Drug Corp vs.CIR  june 22, 2006
29. Carlos superdrug corp vs. DSWD  june 29, 2007
30. Pansacola vs. CIR  Nov 16, 2006
31. Roxas vs. CTA  1968

DK

1. Zamora vs. CIR

Facts:

Mariano Zamora, owner of the Bay View Hotel and Farmacia Zamora, Manila, filed his income tax returns
for the years 1951 and 1952. The Collector of Internal Revenue found that he failed to file his return of the
capital gains derived from the sale of certain real properties and claimed deductions which were not
allowable. The Collector required him to pay the sums of P43,758.50 and P7,625.00, as deficiency income
tax for the years 1951 and 1952, respectively.

Ruling of CTA:

 On appeal by Zamora, the Court of Tax Appeals on December 29, 1958, modified the decision
appealed from and ordered him to pay the reduced total sum of P30,258.00 (P22,980.00 and
P7,278.00, as deficiency income tax for the years 1951 and 1952, respectively), within thirty (30)
days from the date the decision becomes final, plus the corresponding surcharges and interest in
case of delinquency, pursuant to section 51 (e), Int. Revenue Code. With costs against petitioner.

It is alleged by Mariano Zamora that the CTA erred in disallowing P10,478.50 as promotion expenses
incurred by his wife for the promotion of the Bay View Hotel and Farmacia Zamora. He contends that the
whole amount of P20,957.00 as promotion expenses in his 1951 income tax returns, should be allowed and
not merely one-half of it or P10,478.50, on the ground that, while not all the itemized expenses are
supported by receipts, the absence of some supporting receipts has been sufficiently and satisfactorily
established. For, as alleged, the said amount of P20,957.00 was spent by Mrs. Esperanza A. Zamora (wife
of Mariano), during her travel to Japan and the United States to purchase machinery for a new Tiki-Tiki
plant, and to observe hotel management in modern hotels. CTA, however, found that for said trip Mrs.
Zamora obtained only the sum of P5,000.00 from the Central Bank and that in her application for dollar
allocation, she stated that she was going abroad on a combined medical and business trip, which facts
were not denied by Mariano Zamora. No evidence had been submitted as to where Mariano had obtained
the amount in excess of P5,000.00 given to his wife which she spent abroad.

Issue: Whether or not the whole amount of P20,957.00 as promotion expenses in petitioner’s 1951
income tax returns, should be allowed and not merely one-half of it or P10,478.50
Held:
 Promotion expenses constitute one of the deductions in conducting a business, and should satisfy
the requirements of Section 30 of the Tax Code, which provides that in computing net income,
there shall be allowed as deductions all the ordinary and necessary expenses paid or incurred
during the taxable year, in carrying on any trade or business (Vol. 4, Martens, Law of Federal
Income Taxation, sec. 25.03, p. 307). Representation expenses fall under the category of business
expenses which are allowable deductions from gross income, if they meet the conditions
prescribed by law, particularly section 30 (a) (1), of the Tax Code. To be deductible, they must be
ordinary and necessary expenses paid or incurred in carrying on any trade or business, and should
meet the further test of reasonableness in amount. They should, moreover, be covered by
supporting paper; in the absence thereof the amount properly deductible as representation
expenses should be determined from all available data. (Visayan Cebu Terminal Co., Inc., vs.
Collector of Int. Rev., 108 Phil., 320). In view hereof, The Supreme Court is of the opinion that the
CTA, did not commit error in allowing as promotion expenses of Mrs. Zamora claimed in Mariano
Zamora's 1951 income tax returns, merely one-half or P10,478.50.

IN VIEW HEREOF, the petition in each of the above-entitled cases is dismissed, and the decision appealed
from is affirmed, without special pronouncement as to costs.

Bengzon, C . J ., Padilla, Bautista Angelo, Concepcion, Reyes, J .B.L., Dizon, Regala and Makalintal, JJ .,
concur.

Labrador and Barrera, JJ ., took no

x-------------x
 2. Gregory vs. helvering
.
Gregory vs Helvering
293 U.S. 465
January 7, 1935
MR. JUSTICE SUTHERLAND

Gregory v. Helvering, 293 U.S. 465 (1935), was a landmark decision by the United States
Supreme Court concerned with U.S. income tax law. The case is cited as part of the basis for
two legal doctrines: the business purpose doctrine and the doctrine of substance over
form.

The business purpose doctrine is essentially that where a transaction has no substantial
business purpose other than the avoidance or reduction of Federal tax, the tax law will not
regard the transaction.

The doctrine of substance over form is essentially that, for Federal tax purposes, a taxpayer is
bound by the economic substance of a transaction where the economic substance varies from
its legal form.

FACTS:

- Petitioner in 1928 was the owner of all the stock of United Mortgage Corporation.
- That corporation held among its assets 1,000 shares of the Monitor Securities
Corporation.
- For the sole purpose of procuring a transfer of these shares to herself in order to sell
them for her individual profit, and, at the same time, diminish the amount of income tax
which would result from a direct transfer by way of dividend, she sought to bring about a
'reorganization' under section 112(g) of the Revenue Act of 1928.
- To that end, she caused the Averill Corporation to be organized under the laws of
Delaware on September 18, 1928.
- Three days later, the United Mortgage Corporation transferred to the Averill Corporation
the 1,000 shares of Monitor stock, for which all the shares of the Averill Corporation
were issued to the petitioner.
- On September 24, the Averill Corporation was dissolved, and liquidated by distributing
all its assets, namely, the Monitor shares, to the petitioner.
- No other business was ever transacted, or intended to be transacted, by that company.
 - Petitioner immediately sold the Monitor shares for $133,333.33.
- She returned for taxation, as capital net gain, the sum of $76,007.88, based upon an
apportioned cost of $57,325.45.
- The Commissioner of Internal Revenue, being of opinion that the reorganization
attempted was without substance and must be disregarded, held that petitioner was
liable for a tax as though the United corporation had paid her a dividend consisting of the
amount realized from the sale of the Monitor shares.
- In a proceeding before the Board of Tax Appeals, that body rejected the commissioner's
view and upheld that of the taxpayer.
- On appeal the United States Court of Appeals for the Second Circuit reversed the Board
of Tax Appeals, ruling in favor of the Commissioner. Learned Hand J said the following
in the course of his judgment:

a transaction ... does not lose its immunity, because it is actuated by a desire to avoid, or, if one
choose, to evade, taxation. Anyone may so arrange his affairs that his taxes shall be as low as
possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even
a patriotic duty to increase one's taxes.
[...]
Nevertheless, it does not follow that Congress meant to cover such a transaction, not even though
the facts answer the dictionary definitions of each term used in the statutory definition.... the
meaning of a sentence may be more than that of the separate words, ... and no degree of
particularity can ever obviate recourse to the setting in which all appear, and which all collectively
create.
[...]

The purpose of the section is plain enough, men engaged in enterprises ... might wish to
consolidate ... their holdings. ... But the underlying presupposition is plain that the readjustment
shall be undertaken for reasons germane to the conduct of the venture in hand.... To dodge the
shareholders' taxes is not one of the transactions contemplated as corporate “reorganizations.”

ISSUE: Was there a “reorganization” as contemplated in the statute?

RULING: NO. Gregory is liable for tax for the amount realized from the monitor shares.

The Supreme Court of the United States also ruled in favour of the Commissioner.

Although the letter of the law might arguably have been complied with, the intention of the Act
was not to allow reorganizations merely for the purpose of tax avoidance. In the course of its
judgment, the Court said the following.[2]
“ It is earnestly contended on behalf of the taxpayer that since every element required by
[the statute] is to be found in what was done, a statutory reorganization was effected; and that
the motive of the taxpayer thereby to escape payment of a tax will not alter the result or make
unlawful what the statute allows. It is quite true that if a reorganization in reality was effected
within the meaning of [the statute], the ulterior purpose mentioned will be disregarded. The legal
right of a taxpayer to decrease the amount of what otherwise would be his [or her] taxes, or
altogether avoid them, by means which the law permits, cannot be doubted. [ . . . ] But the
question for determination is whether what was done, apart from the tax motive, was the thing
which the statute intended. The reasoning of the court below [i.e., the reasoning of the Court of
Appeals] in justification of a negative answer leaves little to be said.

When [the statute] speaks of a transfer of assets by one corporation to another, it means a
transfer made 'in pursuance of a plan of reorganization' [ . . . ] of corporate business; and not a
transfer of assets by one corporation to another in pursuance of a plan having no relation to the
business of either, as plainly is the case here. Putting aside, then, the question of motive in
respect of taxation altogether, and fixing the character of the proceeding by what
actuallyoccurred, what do we find? Simply an operation having no business or corporate
purpose-a mere device which put on the form of a corporate reorganization as a disguise for
concealing its real character, and the sole object and accomplishment of which was the
consummation of a preconceived plan, not to reorganize a business or any part of a business,
but to transfer a parcel of corporate shares to the petitioner. No doubt, a new and valid
corporation was created. But that corporation was nothing more than a contrivance to the end
last described. It was brought into existence for no other purpose; it performed, as it was
intended from the beginning it should perform, no other function. When that limited function had
been exercised, it immediately was put to death.

In these circumstances, the facts speak for themselves and are susceptible of but one
interpretation. The whole undertaking, though conducted according to theterms of [the statute],
was in fact an elaborate and devious form of conveyance masquerading as a corporate
reorganization, and nothing else. [ . . . T]he transaction upon its face lies outside the plain intent
of the statute. To hold otherwise would be to exalt artifice above reality and to deprive the
statutory provision in question of all serious purpose.

x---x
 3. Calanoc vs. Cir

Calanoc vs. CIR

G.R. No. L-15922
November 29, 1961
LABRADOR, J.

TAXATION; ASSESSMENT FOR AMUSEMENT TAX; EXPENSES EXORBITANT;

EXEMPTION FROM PAYMENT NOT ALLOWED. — Application for exemption from payment of
amusement tax will be denied where the net proceeds of the exhibition conducted for charitable
purposes are not substantial or where the expenses incurred by the taxpayer are exorbitant.

FACTS:
- We have here a boxing and wrestling exhibition that was held by Calanoc at Rizal Memorial
Stadium.
- Calanoc wished to be exempted given that the proceeds of the event will go to charity.
- He was assessed to pay P7,378.57 for amusement tax and surcharge.
- He contends that this should not be the case because
- By authority of a solicitation permit issued by the Social Welfare Commission on November 24,
1949, whereby the petitioner was authorized to solicit and receive contributions for the orphans
and destitute children of the Child Welfare Workers Club of the Commission, the petitioner on
December 3, 1949 financed and promoted a boxing and wrestling exhibition at the Rizal Memorial
Stadium for the said charitable purpose.
- Before the exhibition took place, the petitioner applied with the respondent Collector of Internal
Revenue for exemption from payment of the amusement tax, relying on the provisions of Section
260 of the National Internal Revenue Code, to which the respondent answered that the
exemption depended upon petitioner’s compliance with the requirements of law.
- After the said exhibition, the respondent, through his agent, investigated the tax case of the
petitioner
- It resulted to the manifestation of the following facts:
1. gross sales amounted to P26,553.00
2. the expenditures incurred was P25,157.62
3. and the net profit was only P1,375.38

- Out of the proceeds of the exhibition, only P1,375.38 was remitted to the Social Welfare
Commission for the said charitable purpose for which the permit was issued.
- His exemption was not made valid

ISSUE: Should Calanoc be exempted?

RULING: NO.
Most of the items of expenditures contained in the statement submitted to the agent are either exorbitant
or not supported by receipts. The tax court that the payment of P461.65 for police protection is illegal as it
is a consideration given by the petitioner to the police for the performance by the latter of the functions
required of them to be rendered by law. The expenditures of P460.00 for gifts, P1,880.05 for parties and
other items for representation are rather excessive, considering that the purpose of the exhibition was for
a charitable cause.
Application for exemption from payment of amusement tax will be denied where the net proceeds of the
exhibition conducted for charitable purposes are not substantial or where the expenses incurred by the
taxpayer are exorbitant.

x--------x
4. kuenzle & Streiff, inc. vs Collector of internal revenue
.
Kuenzle & Streiff, Inc. vs CIR
G.R. Nos. L-12010 and L-12113
October 20, 1959
BAUTISTA ANGELO, J.

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

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

FACTS:

- Kuenzle & Streiff for the years 1953, 1954 and 1955 filed its income tax return, declaring
losses.

- CIR filed for deficiency of income taxes against Kuenzle & Streiff Inc. for the said years
in the amounts of P40,455.00, P11,248.00 and P16,228.00, respectively, arising from
the disallowance, as deductible expenses, of the bonuses paid by the corporation to its
officers, upon the ground that they were not ordinary, nor necessary, nor reasonable
expenses within the purview of Section 30(a) (1) of the National Internal Revenue Code.

- The corporation filed with the Court of Tax Appeals a petition for review contesting the
assessments. CTA favored the CIR, however lowered the tax due on 1954. The
corporation moved for reconsideration, but still lost.
 - The Corporation contends that the tax court, in arriving at its conclusion, acted "in a
purely arbitrary manner", and erred in not considering individually the total compensation
paid to each of petitioner's officers and staff members in determining the reasonableness
of the bonuses in question, and that it erred likewise in holding that there was nothing in
the record indicating that the actuation of the respondent was unreasonable or unjust.

Whether or not the bonuses in question was reasonable

ISSUE:
and just to be allowed as a deduction?

RULING: NO.

It is a general rule that `Bonuses to employees made in good faith and as additional
compensation for the services actually rendered by the employees are deductible, provided
such payments, when added to the stipulated salaries, do not exceed a reasonable
compensation for the services rendered. The condition precedents to the deduction of bonuses
to employees are: (1) the payment of the bonuses is in fact compensation; (2) it must be for
personal services actually rendered; and (3) bonuses, when added to the salaries, are
`reasonable ... when measured by the amount and quality of the services performed with
relation to the business of the particular taxpayer. Here it is admitted that the bonuses are in fact
compensation and were paid for services actually rendered. The only question is whether the
payment of said bonuses is reasonable.

There is no fixed test for determining the reasonableness of a given bonus as compensation.
This depends upon many factors, one of them being the amount and quality of the services
performed with relation to the business. Other tests suggested are: payment must be 'made in
good faith'; the character of the taxpayer's business, the volume and amount of its net earnings,
its locality, the type and extent of the services rendered, the salary policy of the corporation'; 'the
size of the particular business'; 'the employees' qualifications and contributions to the business
venture'; and 'general economic conditions. However, 'in determining whether the particular
salary or compensation payment is reasonable, the situation must be considered as a whole.

It seems clear from the record that, in arriving at its main conclusion, the tax court considered,
inter alia, the following factors:

1) The paid officers, in the absence of evidence to the contrary, that they were competent, on
the other the record discloses no evidence nor has petitioner ever made the claim that all or
some of them were gifted with some special talent, or had undergone some extraordinary
training, or had accomplished any particular task, that contributed materially to the success of
petitioner's business during the taxable years in question.

2) All the other employees received no pay increase in the said years.

3) The bonuses were paid despite the fact that it had suffered net losses for 3 years.
Furthermore the corporation cannot use the excuse that it is 'salary paid' to an employee
because the CIR does not question the basic salaries paid by petitioner to the officers and
employees, but disallowed only the bonuses paid to petitioner's top officers at the end of the
taxable years in question.
 x-----------x

5. paper industries corp vs ca (dec 1, 1995)

Paper Industries Corp. of the Philippines vs CA
G.R. Nos. 106949-50
December 1, 1995
FELICIANO, J.
FACTS:

- On various years (1969, 1972 and 1977), Picop obtained loans from foreign creditors in
order to finance the purchase of machinery and equipment needed for its operations. In
its 1977 Income Tax Return, Picop claimed interest payments made in 1977, amounting
to P42,840,131.00, on these loans as a deduction from its 1977 gross income.

- The CIR disallowed this deduction upon the ground that, because the loans had been
incurred for the purchase of machinery and equipment, the interest payments on those
loans should have been capitalized instead and claimed as a depreciation deduction
taking into account the adjusted basis of the machinery and equipment (original
acquisition cost plus interest charges) over the useful life of such assets.

- Both the CTA and the Court of Appeals sustained the position of Picop and held that the
interest deduction claimed by Picop was proper and allowable. In the instant Petition, the
CIR insists on its original position.

ISSUE: Whether Picop is entitled to deductions against income of interest

payments on loans for the purchase of machinery and equipment.

RULING: YES.

Interest payments on loans incurred by a taxpayer (whether BOI-registered or not) are allowed
by the NIRC as deductions against the taxpayer's gross income. The basis is 1977 Tax Code
Sec. 30 (b). Thus, the general rule is that interest expenses are deductible against gross
income and this certainly includes interest paid under loans incurred in connection with the
carrying on of the business of the taxpayer. In the instant case, the CIR does not dispute that
the interest payments were made by Picop on loans incurred in connection with the carrying on
of the registered operations of Picop, i.e., the financing of the purchase of machinery and
equipment actually used in the registered operations of Picop. Neither does the CIR deny that
such interest payments were legally due and demandable under the terms of such loans, and in
fact paid by Picop during the tax year 1977.

The contention of CIR does not spring of the 1977 Tax Code but from Revenue
Regulations 2 Sec. 79. However, the Court said that the term “interest” here should be
construed as the so-called "theoretical interest," that is to say, interest "calculated" or computed
(and not incurred or paid) for the purpose of determining the "opportunity cost" of investing
funds in a given business. Such "theoretical" or imputed interest does not arise from a legally
demandable interest-bearing obligation incurred by the taxpayer who however wishes to find
out, e.g., whether he would have been better off by lending out his funds and earning interest
rather than investing such funds in his business. One thing that Section 79 quoted above makes
clear is that interest which does constitute a charge arising under an interest-bearing obligation
is an allowable deduction from gross income.

Only if sir asks: (For further discussion of CIR’s contention)

It is claimed by the CIR that Section 79 of Revenue Regulations No. 2 was "patterned
after" paragraph 1.266-1 (b), entitled "Taxes and Carrying Charges Chargeable to Capital
Account and Treated as Capital Items" of the U.S. Income Tax Regulations, which paragraph
reads as follows:

(B) Taxes and Carrying Charges. — The items thus chargeable to capital accounts are —

(11) In the case of real property, whether improved or unimproved and whether productive or
nonproductive.

(a) Interest on a loan (but not theoretical interest of a taxpayer using his own funds).

The truncated excerpt of the U.S. Income Tax Regulations quoted by the CIR needs to be
related to the relevant provisions of the U.S. Internal Revenue Code, which provisions deal with
the general topic of adjusted basis for determining allowable gain or loss on sales or exchanges
of property and allowable depreciation and depletion of capital assets of the taxpayer:

Present Rule. The Internal Revenue Code, and the Regulations promulgated thereunder
provide that "No deduction shall be allowed for amounts paid or accrued for such taxes and
carrying charges as, under regulations prescribed by the Secretary or his delegate, are
chargeable to capital account with respect to property, if the taxpayer elects, in accordance with
such regulations, to treat such taxes orcharges as so chargeable."

At the same time, under the adjustment of basis provisions which have just been discussed, it is
provided that adjustment shall be made for all "expenditures, receipts, losses, or other items"
properly chargeable to a capital account, thus including taxes and carrying charges; however,
an exception exists, in which event such adjustment to the capital account is not made, with
respect to taxes and carrying charges which the taxpayer has not elected to capitalize but for
which a deduction instead has been taken. 22 (Emphasis supplied)

The "carrying charges" which may be capitalized under the above quoted provisions of the U.S.
Internal Revenue Code include, as the CIR has pointed out, interest on a loan "(but not
theoretical interest of a taxpayer using his own funds)." What the CIR failed to point out is that
such "carrying charges" may, at the election of the taxpayer, either be (a) capitalized in which
case the cost basis of the capital assets, e.g., machinery and equipment, will be adjusted by
adding the amount of such interest payments or alternatively, be (b) deducted from gross
income of the taxpayer. Should the taxpayer elect to deduct the interest payments against its
gross income, the taxpayer cannot at the same time capitalize the interest payments. In other
words, the taxpayer is not entitled to both the deduction from gross income and the adjusted
(increased) basis for determining gain or loss and the allowable depreciation charge. The U.S.
Internal Revenue Code does not prohibit the deduction of interest on a loan obtained for
purchasing machinery and equipment against gross income, unless the taxpayer has also or
previously capitalized the same interest payments and thereby adjusted the cost basis of such
assets.

x----x
6. CIR.vs Vda. De Prieto
.
CIR vs Viuda de Prieto
G.R. Nos. L-13912
September 30, 1960
BAUTISTA ANGELO, J.

FACTS:

- On December 4, 1945, the respondent conveyed by way of gifts to her four children,
namely, Antonio, Benito, Carmen and Mauro, all surnamed Prieto, real property with a
total assessed value of P892,497.50.
- After the filing of the gift tax returns on or about February 1, 1954, the petitioner
Commissioner of Internal Revenue appraised the real property donated for gift tax
purposes at P1,231,268.00, and assessed the total sum of P117,706.50 as donor's gift
tax, interest and compromises due thereon.
- Of the total sum of P117,706.50 paid by respondent on April 29, 1954, the sum of
P55,978.65 represents the total interest on account of deliquency.
- This sum of P55,978.65 was claimed as deduction, among others, by respondent in her
1954 income tax return.
- Petitioner, however, disallowed the claim and as a consequence of such disallowance
assessed respondent for 1954 the total sum of P21,410.38 as deficiency income tax due
on the aforesaid P55,978.65, including interest up to March 31, 1957, surcharge and
compromise for the late payment.
- Under the law, for interest to be deductible, it must be shown that there be an
indebtedness, that there should be interest upon it, and that what is claimed as an
interest deduction should have been paid or accrued within the year.
- It is here conceded that the interest paid by respondent was in consequence of the late
payment of her donor's tax, and the same was paid within the year it is sought to be
declared.
- To sustain the proposition that the interest payment in question is not deductible for the
purpose of computing respondent's net income, petitioner relies heavily on section 80 of
Revenue Regulation No. 2 (known as Income Tax Regulation) promulgated by the
Department of Finance, which provides that "the word `taxes' means taxes proper and
no deductions should be allowed for amounts representing interest, surcharge, or
penalties incident to delinquency."
- The court below, however, held section 80 as inapplicable to the instant case because
while it implements sections 30(c) of the Tax Code governing deduction of taxes, the
 respondent taxpayer seeks to come under section 30(b) of the same Code providing for
deduction of interest on indebtedness.

ISSUE: Whether or not such interest was paid upon an indebtedness within the
contemplation of section 30 (b) (1) of the Tax Code?

RULING:

YES. According to the Supreme Court, although interest payment for delinquent taxes is not
deductible as tax under Section 30(c) of the Tax Code and section 80 of the Income Tax
Regulations, the taxpayer is not precluded thereby from claiming said interest payment as
deduction under section 30(b) of the same Code.

SEC. 30 Deductions from gross income. — In computing net income there shall be allowed as
deductions —

(b) Interest:

(1) In general. — The amount of interest paid within the taxable year on indebtedness,
except on indebtedness incurred or continued to purchase or carry obligations the
interest upon which is exempt from taxation as income under this Title.

The term "indebtedness" as used in the Tax Code of the United States containing similar
provisions as in the above-quoted section has been defined as an unconditional and legally
enforceable obligation for the payment of money.

To give to the quoted portion of section 80 of our Income Tax Regulations the meaning that the
petitioner gives it would run counter to the provision of section 30(b) of the Tax Code and the
construction given to it by courts in the United States. Such effect would thus make the
regulation invalid for a "regulation which operates to create a rule out of harmony with the
statute, is a mere nullity." As already stated, section 80 implements only section 30(c) of the Tax
Code, or the provision allowing deduction of taxes, while herein respondent seeks to be allowed
deduction under section 30(b), which provides for deduction of interest on indebtedness.

x------x
 7. CIR vs. Lednicky
.
CIR vs Lednicky
G.R. Nos. L-18169, L-18262 & L-21434
July 31, 1964
REYES J.B.L., J.

FACTS:
- Resp spouses V.E. Lednicky and Maria Valero Lednicky are American Citizens residing
in the Philippines and derived their income from Philippine sources for the taxable years
in question
- 1957 – Sps filed their ITR for 1956 reporting a gross income P1,017,287.65 and a net
income of P733,809.44 on which P317,395.40 was assessed after deducting P4,805.59
as withholding tax.
- Sps paid 326,247.41 on April 1957
- March 1959 – Sps filed an amended ITR for 1956. They claimed a deduction of
P205,939.24 paid in 1956 to US gov’t. Respondents requested refund of 112,437.90
- CIR failed to answer the claim for refund, resps filed their petition with the Tax Court
- G.R. No. L-18169 formerly CTA case 570[different case/year] is also a claim for refund
in the amount of P150,269.00 as alleged overpaid income tax for 1955
o Facts:
 In Feb 1956 Sps filed ITR for 1955 = gross income of P1,7771,124.63
and net income of P1,052,550.67
 1956 – sps filed an amended ITR
 Back in 1955, sps filed with the US Internal Revenue Agent in Manila their
federal ITR for the years 1947,1951-54 on income from Phil sources on a
cash basis
 1958 – Sps amended their Phil ITR for 1955 to include the deductions of
US Federal income taxes, interest accrued up to May 15, 1955, and
exchange and bank charges
 CTA case 570 was filed
- G.R. No. 21434 formerly CTA Case No. 783, facts are similar but refer to Lednickys’
OTR for 1957 filed in Feb 1958
o In 1959 sps filed amended return for 1957 claiming deductions representing
taxes paid to US Gov’t.

*** Tax court held that the taxes may be deducted because the Sps did not signify in their ITRa
desire to avail themselves of the benefits of paragraph 3(B) of Sec. 30
COMMON ISSUE: WON a citizen of the US residing in Phils who derives income
wholly from sources within the Phils may deduct from his gross income the
income taxes he has paid to US gov’t for the taxable year?

RULING:
SC: CIR correct that the construction and wording of Sec. 30c(1)B of the Internal Revenue Act
shows the law’s intent that the right to deduct income taxes paid to foreign government from the
taxpayer’s gross income is given only as an alternative or substitute to his right to claim a tax
credit for such foreign income taxes
o (B) – Income, war-profits, and excess profits taxes imposed by the authority of
any foreign country; but this deduction shall be allowed in the case of a taxpayer
who does not signify in his return his desire to have any extent the benefits of
paragraph (3) of this subsection (relating to credit for foreign countries)

So that unless the alien resident has a right to claim such tax credit if he so chooses, he is
precluded from deducting the foreign income taxes from his gross income.

For it is obvious that in prescribing that such deduction shall be allowed in the case of a
taxpayer who does not signify in his return his desire to have any extent benefits of paragraph 3,
the statute assumes that the taxpayer in question may signify his desire to claim a tax credit and
waive the deduction; otherwise, the foreign taxes would always be deductible and their mention
in the list on non-deductible items in Sec. 30c might as well have been omitted or at least
expressly limited to taxes on income from sources outside the Philippine Islands

Had the law intended that foreign income taxes could be deducted from gross income in any
event, regardless of the taxpayer’s right to claim a tax credit, it is the latter right that should be
conditioned upon the taxpayer’s waiving the deduction

No danger of double credit/taxation.

o Double taxation becomes obnoxious only where the taxpayer is taxed twice for
the benefit of the same governmental entity
o The Philippine government only receives the proceeds of one tax
o Justice and equity demand that the tax on the income should accrue to the
benefit of the Philippines
o Any relief from the alleged double taxation should come from the US since the
former’s right to burden the taxpayer is solely predicated in is citizenship, without
contributing to the production of wealth that is being taxed
o To allow an alien resident to deduct from his gross income whatever taxes he
pays to his own government amounts to conferring on the latter the power to
reduce the tax income of the Philippine government simply by increasing the tax
rates on the alien resident.

x-------x
 8. Philippine Refining Company vs. CA
.
Philippine Refining Company (now Unilever) vs CA
G.R. No. 118794
May 8, 1996
REGALADO, J.

TAXATION; NATIONAL INTERNAL REVENUE CODE; INCOME TAX; BAD DEBTS;

REQUISITES FOR DEDUCTION. For debts to be considered as worthless, and thereby
qualify as bad debts making them deductible, the taxpayer should show that (1) there is
a valid and subsisting debt; (2) the debt must be actually ascertained to be worthless
and uncollectible during the taxable year; (3) the debt must be charged off during the
taxable year; and (4) the debt must arise from the business or trade of the taxpayer.
Additionally, before a debt can be considered worthless, the taxpayer must also show
that it is indeed uncollectible even in the future. Furthermore, there are steps outlined to
be undertaken by the taxpayer to prove that he exerted diligent efforts to collect the
debts, viz: (1) sending of statement of accounts; (2) sending of collection letters; (3)
giving the account to a lawyer for collection; and (4) filing a collection case in court.

FACTS:

- Philippine Refining Corp (PRC) was assessed deficiency tax payments for the year 1985
in the amount of around 1.8M.
- This figure was computed based on the disallowance of the claim of bad debts by PRC.
- PRC duly protested the assessment claiming that under the law, bad debts and interest
expense are allowable deductions.
- When the BIR subsequently garnished some of PRC’s properties, the latter considered
the protest as being denied and filed an appeal to the CTA which set aside the
disallowance of the interest expense and modified the disallowance of the bad debts by
allowing 3 accounts to be claimed as deductions.
- However, 13 supposed “bad debts” were disallowed as the CTA claimed that these were
not substantiated and did not satisfy the jurisprudential requirement of “worthlessness of
a debt” The CA denied the petition for review.
ISSUE: Whether or not the CA was correct in disallowing the 13 accounts as bad
debts.

RULING: YES.

Both the CTA and CA relied on the case of Collector vs. Goodrich International, which laid down
the requisites for “worthlessness of a debt” to wit:

In said case, we held that for debts to be considered as "worthless," and thereby qualify as "bad
debts" making them deductible, the taxpayer should show that (1) there is a valid and
subsisting debt. (2) the debt must be actually ascertained to be worthless and
uncollectible during the taxable year; (3) the debt must be charged off during the taxable
year; and (4) the debt must arise from the business or trade of the taxpayer. Additionally,
before a debt can be considered worthless, the taxpayer must also show that it is indeed
uncollectible even in the future.

Furthermore, there are steps outlined to be undertaken by the taxpayer to prove that he exerted
diligent efforts to collect the debts, viz.: (1) sending of statement of accounts; (2) sending of
collection letters; (3) giving the account to a lawyer for collection; and (4) filing a
collection case in court.

PRC only used the testimony of its accountant Ms. Masagana in order to prove that these
accounts were bad debts. This was considered by all 3 courts to be self-serving. The SC said
that PRC failed to exercise due diligence in order to ascertain that these debts were
uncollectible. In fact, PRC did not even show the demand letters they allegedly gave to some of
their debtors.

x------------x
 9. Hermanos vs. CIR
.
FERNANDEZ HERMANOS, INC. vs COMMISSIONER OF INTERNAL REVENUE
G.R. No. L-21551, L-21557, L-24972, L-24978, September 30, 1969

 Consists of four appeals involve two decisions of the Court of Tax Appeals
determining the taxpayer's income tax liability for the years 1950 to 1954 and for
the year 1957.
 Both the taxpayer and the Commissioner of Internal Revenue, as petitioner and
respondent in the cases a quo respectively, appealed from the Tax Court's
decisions, insofar as their respective contentions on particular tax items were
therein resolved against them.
 CASES L-21551 AND L-21557
o The taxpayer, Fernandez Hermanos, Inc., is a domestic-corporation
organized for the principal purpose of engaging in business as an
"investment company" with main office at Manila.
o Upon verification of the taxpayer's income tax returns for the period in
question, the Commissioner of Internal Revenue assessed against the
taxpayer the sums of P13,414.00, P119,613.00, P11,698.00, P6,887.00
and P14,451.00 as alleged deficiency income taxes for the years 1950,
1951, 1952, 1953 and 1954, respectively.
o Said assessments were the result of alleged discrepancies found upon the
examination and verification of the taxpayer's income tax returns for the
said years
 o The Tax Court sustained the Commissioner's disallowances, but overruled
the Commissioner's disallowances of all the remaining items.
o It therefore modified the deficiency assessments accordingly, found the
total deficiency income taxes due from the taxpayer for the years under
review to amount to P23,436.00 instead of P166,063.00 as originally
assessed by the Commissioner
o Both parties have appealed from the respective adverse rulings against
them in the Tax Court's decision.

ISSUE: WHETHER OR NOT THE GOVERNMENT'S RIGHT TO COLLECT THE DEFICIENCY INCOME
TAXES IN QUESTION HAS ALREADY PRESCRIBED
HELD:
 NO. DISALLOWANCE WAS PROPER
 The Commissioner of Internal Revenue questions the Tax Court's allowance of the
taxpayer's writing off as worthless securities in its 1950 return the sum of P8,050.00
representing the cost of shares of stock of Mati Lumber Co. acquired by the taxpayer on
January 1, 1948, on the ground that the worthlessness of said stock in the year 1950 had
not been clearly established.
 The Commissioner contends that although the said Company was no longer in
operation in 1950, it still had its sawmill and equipment which must be of considerable
value. The Court, however, found that "the company ceased operations in 1949 when
its Manager and owner, a certain Mr. Rocamora, left for Spain where he subsequently
died. When the company ceased to operate, it had no assets, in other words,
completely insolvent.
 There was adequate basis for the writing off of the stock as worthless securities.
Assuming that the Company would later somehow realize some proceeds from its
sawmill and equipment, which were still existing as claimed by the Commissioner, and
that such proceeds would later be distributed to its stockholders such as the taxpayer,
 the amount so received by the taxpayer would then properly be reportable as income
of the taxpayer in the year it is received.
 Bad debts of Palawan Manganese Mines, Inc. (1951). — The taxpayer appeals from the
Tax Court's disallowance of its writing off in 1951 as a loss or bad debt the sum of
P353,134.25, which it had advanced or loaned to Palawan Manganese Mines, Inc. The
Tax Court's findings on this item follow:
"Sometime in 1945, Palawan Manganese Mines, Inc., the controlling
stockholders of which are also the controlling stockholders of petitioner
corporation, requested financial help from petitioner to enable it to resume its
mining operations in Coron, Palawan. The request for financial assistance was
readily and unanimously approved by the Board of Directors of petitioner, and
thereafter a memorandum agreement was executed on August 12, 1945,
embodying the terms and conditions under which the financial assistance was to
be extended
The parties hereto have agreed and covenanted that in consideration of the
financial help to be extended by the FIRST PARTY to the SECOND PARTY to
enable the latter to resume its mining operations in Coron, Palawan, the
SECOND PARTY has agreed and undertaken as it hereby agrees and undertakes
to pay to the FIRST PARTY fifteen per centum (15%) of its net profits.'
 Pursuant to the agreement mentioned above, petitioner gave to Palawan Manganese
Mines, Inc. yearly advances starting from 1945, which advances amounted to
P587,308.07 by the end of 1951.
 Despite these advances and the resumption of operations by Palawan Manganese
Mines, Inc., it continued to suffer losses. By 1951, petitioner became convinced that
those advances could no longer be recovered.
 While it continued to give advances, it decided to write off as worthless the sum of
P353,134.25. This amount 'was arrived at on the basis of the total of advances made
from 1945 to 1949 in the sum of P438,981.39, from which amount the sum of
P35,647.14 had to be deducted, the latter sum representing its pre-war assets.
 Petitioner decided to maintain the advances given in 1950 and 1951 in the hope that it
might be able to recover the same, as in fact it continued to give advances up to 1952.
From these facts, and as admitted by petitioner itself, Palawan Manganese Mines, Inc.,
was still in operation when the advances corresponding to the years 1945 to 1949 were
written off the books of petitioner.
 SC’s RULING: BAD DEBTS? NO. It will be noted that in giving advances to Palawan
Manganese Mines, Inc., petitioner did not expect to be repaid. It is true that some
testimonial evidence was presented to show that there was some agreement that the
advances would be repaid, but no documentary evidence was presented to this effect.
The memorandum agreement signed by the parties appears to be very clear that the
consideration for the advances made by petitioner was 15% of the net profits of
Palawan Manganese Mines, Inc. In other words, if there were no earnings or profits,
there was no obligation to repay those advances. It has been held that the voluntary
advances made without expectation of repayment do not result in deductible losses.
 DEDUCTIBLE AS BAD DEBT? NO. As already stated, petitioner gave advances to Palawan
Manganese Mines, Inc., without expectation of repayment. Petitioner could not sue for
recovery under the memorandum agreement because the obligation of Palawan
Manganese Mines, Inc. was to pay petitioner 15% of its net profits, not the advances.
No bad debt could arise where there is no valid and subsisting debt.
 The debt is not deductible in 1951 as a worthless debt. It appears that the debtor was
still in operation in 1951 and 1952, as petitioner continued to give advances in those
years. It has been held that if the debtor corporation, although losing money or
insolvent, was still operating at the end of the taxable year, the debt is not considered
worthless and therefore not deductible."
 DISALLOWANCE OF THE WRITE-OFF WAS PROPER: The Solicitor General has rightly
pointed out that the taxpayer has taken an "ambiguous position" and "has not definitely
taken a stand on whether the amount involved is claimed as losses or as bad debts but
insists that it is either a loss or a bad debt." The advances made by the taxpayer to its
100% subsidiary, Palawan Manganese Mines, Inc. amounting to P587,308,07 as of 1951
 were investments and not loans. The evidence on record shows that the board of
directors of the two companies were identical and that the only capital of Palawan
Manganese Mines, Inc. is the amount of P100,000.00 entered in the taxpayer's
balance sheet as its investment in its subsidiary company. This fact explains the
liberality with which the taxpayer made such large advances to the subsidiary, despite
the latter's admittedly poor financial condition.
 The Tax Court correctly held that the subsidiary company was still in operation in
1951 and 1952 and the taxpayer continued to give it advances in those years, and,
therefore, the alleged debt or investment could not properly be considered worthless
and deductible in 1951, as claimed by the taxpayer.
 Section 30 (d) (2) of our Tax Code providing for deduction by corporations of losses
actually sustained and charged off during the taxable year nor under Section 30 (e) (1)
thereof providing for deduction of bad debts actually ascertained to be worthless and
charged off within the taxable year, can there be a partial writing off of a loss or bad
debt, as was sought to be done here by the taxpayer. For such losses or bad debts must
be ascertained to be so and written off during the taxable year, are therefore
deductible in full or not at all, in the absence of any express provision in the Tax
Code authorizing partial deductions.
 Disallowance of losses in Balamban Coal Mines: DISALLOWED. The Tax Court correctly
held that the losses "are deductible in 1952, when the mines were abandoned, and not
in 1950 and 1951, when they were still in operation." The taxpayer's claim that these
expeditions should be allowed as losses for the corresponding years that they were
incurred, because it made no sales of coal during said years, since the promised road or
outlet through which the coal could be transported from the mines to the provincial
road was not constructed, cannot be sustained. Some definite event must fix the time
when the loss is sustained, and here it was the event of actual abandonment of the
mines in 1952.
 Allowance of losses in Hacienda Dalupiri (1950 to 1954) and Hacienda Samal (1951-
1952). DEDUCTIONS ARE ALLOWED. These deductions were disallowed by respondent
 on the ground that the farm was operated solely for pleasure or as a hobby and not for
profit. This conclusion is based on the fact that the farm was operated continuously at a
loss.
 SC’s RULING:The Hacienda was mainly a cattle farm, although a few race horses were
also raised. It does not appear that the farm was used by petitioner for entertainment,
social activities, or other non-business purposes. Therefore, it is entitled to deduct
expenses and losses in connection with the operation of said farm.
 "Section 100 of Revenue Regulations No. 2, otherwise known as the Income Tax
Regulations, authorizes farmers to determine their gross income on the basis of
inventories. Said regulations provide:
 'If gross income is ascertained by inventories, no deduction can be made for livestock or
products lost during the year, whether purchased for resale, produced on the farm, as
such losses will be reflected in the inventory by reducing the amount of livestock or
products on hand at the close of the year.'
 Disallowance of excessive depreciation of buildings (1950- 1954): DISALLOWED.During
the years 1950 to 1954, the taxpayer claimed a depreciation allowance for its buildings
at the annual rate of 10%. The Commissioner claimed that the reasonable depreciation
rate is only 3% per annum, and, hence, disallowed as excessive the amount claimed as
depreciation allowance in excess of 3% annually.
 SC’s RULING: The taxpayer did not submit adequate proof of the correctness of the
taxpayer's claim that the depreciable assets or buildings in question had a useful life
only of 10 years so as to justify its 10% depreciation per annum claim, such finding being
supported by the record.
 Taxable increase in net worth (1950-1951). —INCREASES IN NET WORTH ARE NOT
TAXABLE INCOME.
 "For the year 1950, respondent determined that petitioner had an increase in net worth
in the sum of P30,050.00 and for the year 1951, the sum of P1,382.85.
 It appears that petitioner had an account with the Manila Insurance Company, the
records bearing on which were lost. When its records were reconstituted the amount of
 P349,800.00 was set up as its liability to the Manila Insurance Company. It was
discovered later that the correct liability was only P319,750.00, or a difference of
P30,050.00, so that the records were adjusted so as to show the correct liability. The
correction or adjustment was made in 1950.
 Respondent contends that the reduction of petitioners liability to Manila Insurance
Company resulted in the increase of petitioner's net worth to the extent of P30,050.00
which is taxable. This is erroneous. The principle underlying the taxability of an increase
in the net worth of a taxpayer rests on the theory that such an increase in net worth, if
unreported and not explained by the taxpayer, comes from income derived from a
taxable source.
 SC’s RULING:The increase in the net worth of petitioner for 1950 to the extent of
P30,050.00 was not the result of the receipt by it of taxable income. It was merely the
outcome of the correction of an error in the entry in its books relating to its
indebtedness to the Manila Insurance Company.
 The Income Tax Law imposes a tax on income; it does not tax any or every increase in
net worth whether or not derived from income. Surely, the said sum of P30,050.00 was
not income to petitioner; and it was error for respondent to assess a deficiency income
tax on said amount.If there was an increase in net worth of the petitioner, the increase
in net worth was not the result of receipt by petitioner of taxable income."
 Gain realized from sale of real property (1950). It was sufficiently proved from the
taxpayer's books that after acquiring the property, the taxpayer had made
improvements totalling P11,147.26, accounting for the apparent discrepancy in the
reported gain. In other words, this figure added to the original acquisition cost of
P11,852.74 results in a total cost of P23,000.00, and the gain derived from the sale of
the property for P60,000.00 was correctly reported by the taxpayer at P37,000.00.

 ON THE ISSUE OF PRESCRIPTION: NOT YET PRESCRIBED. “A judicial action for the
collection of a tax is begun by the filing of a complaint with the proper court of first
instance, or where the assessment is appealed to the Court of Tax Appeals, by filing an
 answer to the taxpayer's petition for review wherein payment of the tax is prayed
for."
 Said Court is vested with the authority to pronounce judgment as to the taxpayer's
liability to the exclusion of any other court. In the present case, regardless of whether
the assessments were made on February 24 and 27, 1956, as claimed by the
Commissioner, or on December 27, 1955 as claimed by the taxpayer, the government's
right to collect the taxes due has clearly not prescribed, as the taxpayer's appeal or
petition for review was filed with the Tax Court on May 4, 1960, with the
Commissioner filing on May 20, 1960 his Answer with a prayer for payment of the
taxes due, long before the expiration of the five-year period to effect collection by
judicial action counted from the date of assessment.

 Cases L-24972 and L-24978

o These cases refer to the taxpayer's income tax liability for the year 1957.
 The Tax Court overruled the Commissioner's disallowance of the taxpayer's losses in the
operation of its Hacienda Dalupiri in the sum of P89,547.33 but sustained the
disallowance of the sum of P48,481.62, which allegedly represented 1/5 of the cost of
the "contractual right" over the mines of its subsidiary, Palawan Manganese Mines, Inc.
which the taxpayer had acquired. It found the taxpayer liable for deficiency income tax
for the year 1957 in the amount of P9,696.00
 UHM MEDYO MAGULO YUNG FORMAT. AKO DIN NAGUGULUHAN.
 Allowance of losses in Hacienda Dalupiri (1957).ALLOWED. "It is true that petitioner
followed the cash basis method of reporting income and expenses in the operation of
the Hacienda Dalupiri and used the accrual method with respect to its mine operations.
This method of accounting, otherwise known as the hybrid method, followed by
petitioner is not without justification.
 '. . . A taxpayer may not, ordinarily, combine the cash and accrual bases. The 1954 Code
provisions permit, however, the use of a hybrid method of accounting, combining a
cash and accrual method, under circumstances and requirements to be set out in
 Regulations to be issued. Also, if a taxpayer is engaged in more than one trade or
business he may use a different method of accounting for each trade or business. And
a taxpayer may report income from a business on accrual basis and his personal income
on the cash basis.'
 Disallowance of amortization of alleged "contractual rights."DISALLOWED.
 During a meeting, the BoD of Palawan Manganese Mines issued a resolution stating that
the corporation's current assets composed of ores, fuel, and oil, materials and supplies,
spare parts and canteen supplies appearing in the inventory and balance sheet of the
Corporation as of December 31, 1955, contractual rights for the operation of various
mining claims in Palawan, its title on various mining claims in Palawan, are hereby ceded
and transferred to Fernandez Hermanos, Inc., as partial settlement of the indebtedness
of the corporation to said Fernandez Hermanos, Inc., in the amount of P442,885.23.
 Said offer was accepted.
 Respondent Commissioner disallowed the deduction on the following grounds:
 that the Palawan Manganese Mines, Inc. could not transfer P242,408.10
worth of assets to petitioner because the balance sheet of the said
corporation for 1955 shows that it had only current assets worth
P97,636.96; and
 that the alleged amortization of 'contractual rights' is not allowed by the
Revenue Code.
 Section 30 (g) (1) (B) of the Revenue Code:
(g) Depletion of oil and gas wells and mines:in the case of mines, a reasonable
allowance for depletion thereof not to exceed the market value in the mine of the
product thereof, which has been mined and sold during the year for which the return
and computation are made. The allowances shall be made under rules and regulations
to be prescribed by the Secretary of Finance: Provided, That when the allowances shall
equal the capital invested, . . . no further allowance shall be made.'
 "Assuming, arguendo, that the Palawan Manganese Mines, Inc. had assets worth
P242,408.10 which it actually transferred to the petitioner in 1956, the latter cannot just
 deduct one-fifth (1/5) of said amount from its gross income for the year 1957 because
such deduction in the form of depletion charge was not sanctioned by Section 30(g) (1)
(B) of the Revenue Code
 No evidence whatsoever was presented to show the produced mine and for how much
they were sold during the year for which the return and computation were made. This is
necessary in order to determine the amount of depletion that can be legally deducted
from petitioner's gross income. The method employed by petitioner in making an
outright deduction of 1/5 of the cost of the mines is not authorized under Section 30(g)
(1) (B) of the Revenue Code. Respondent's disallowance of the alleged 'contractual
rights' amounting to P48,481.62 must therefore be sustained."
 The taxpayer insists in this appeal that it could use as a method for depletion under the
pertinent provision of the Tax Code its "capital investment," representing the alleged
value of its contractual rights and titles to mining claims.
 The very authorities cited in its brief give the correct concept of depletion charges that
they "allow for the exhaustion of the capital value of the deposits by production"; thus,
"as the cost of the raw materials must be deducted from the gross income before the
net income can be determined, so the estimated cost of the reserve used up is
allowed."
 The alleged "capital investment" method invoked by the taxpayer is not a method of
depletion, but the Tax Code provision, prior to its amendment by Section 1, of Republic
Act No. 2698, expressly provided that "when the allowances shall equal the capital
invested . . . no further allowances shall be made;" in other words, the "capital
investment" was but the limitation of the amount of depletion that could be claimed.

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 10. 3M Philippines inc vs. CIR
.
3M PHILS., INC. vs. COMMISSIONER OF INTERNAL REVENUE
G.R. No. 82833, September 26, 1988

 3M Philippines, Inc. is a subsidiary of the Minnesota Mining and Manufacturing

Company (or "3M-St. Paul") a non-resident foreign corporation with principal
office in St. Paul, Minnesota, U.S.A. It is the exclusive importer, manufacturer,
wholesaler, and distributor in the Philippines of all products of 3M-St. Paul.
 To enable it to manufacture, package, promote, market, sell and install the
highly specialized products of its parent company, and render the necessary
post-sales service and maintenance to its customers, petitioner entered into a
"Service Information and Technical Assistance Agreement" and a "Patent and
Trademark License Agreement" with the latter under which the petitioner
agreed to pay to 3M-St. Paul a technical service fee of 3% and a royalty of 2% of
its net sales. Both agreements were submitted to, and approved by, the Central
Bank of the Philippines.
 In its income tax return for the fiscal year ended October 31, 1974, the petitioner
claimed the following deductions as business expenses:
(a) royalties and technical service fees of P3,050,646.00; and
(b) pre-operational cost of tape coater of P97,485.08.

 On the first item, the respondent Commissioner of Internal Revenue allowed a

deduction of P797,046.09 only as technical service fee and royalty for locally
manufactured products, but disallowed the sum of P2,323,599.92 alleged to
have been paid by the petitioner to 3M-St. Paul as technical service fee and
royalty on P46,471,998.00 worth of finished products imported by the petitioner
from the parent company, on the ground that the fee and royalty should be
 based only on locally manufactured goods. The improper deduction was treated
by respondent as a disguised dividend or income.
 On the second item, respondent allowed P19,544.77 or one-fifth (1/5) of
petitioner's capital expenditure of P97,046.09 for its tape coater which was
installed in 1973 because such expenditure should be amortized for a period of
five (5) years, hence, payment of the disallowed balance of P77,740.38 should be
spread over the next four (4) years. Respondent ordered petitioner to pay
P840,540 as deficiency income tax on its 1974 return
 Petitioner protested the assessment in a letter dated March 7, 1980. The
respondent Commissioner did not answer the protest. Instead, he issued
warrants of distraint and levy. Petitioner appealed to the Court of Tax Appeals by
petition for review with a prayer for the issuance of a writ of preliminary
injunction to stop the enforcement of the warrants of distraint and levy.
 After the respondent had filed his answer to the petition for review and hearings
were held, the Tax Court rendered a decision upholding the Commissioner's
ruling. Petitioner's motion for reconsideration of the decision was denied
 Petitioner sought a review in this Court of the Tax Court's decision.

ISSUE: WHETHER OR NOT THE DEDUCTIONS OF "BUSINESS EXPENSES" IN THE FORM OF

ROYALTY PAYMENTS TO ITS FOREIGN LICENSOR OF THE PETITIONER SHOULD BE ALLOWED
HELD:
 NO HEHEHE
"Section 3. Requirements for Approval and Registration. — The
requirements for approval and registration as provided for in Section 2
above include, but are not limited to the following:
"c. The royalty/rental contracts involving manufacturing'
royalty, e.g., actual transfers of technological services such as secret
formula/processes, technical know-how and the like shall not exceed five
(5) per cent of the wholesale price of the
 commodity/tiesmanufactured under the royalty agreement. For contracts
involving 'marketing' services such as the use of foreign brands or trade
names or trademarks, the royalty/rental rate shall not exceed two (2) per
cent of the wholesale price of the commodity/tiesmanufactured under
the royalty agreement. The producer's or foreign licensor's share in the
proceeds from the distribution/exhibition of the films shall not exceed
sixty (60) per cent of the net proceeds (gross proceeds less local
expenses) from the exhibition/distribution of the films. . . .

 Section 3-c of CB Circular No. 393 provides for payment of royalties only on
commodities manufactured by the licensee under the royalty agreement not on the
wholesale price of finished products imported by the licensee from the licensor.
 Although the Tax Code allows payments of royalty to be deducted from gross income as
business expenses, it is CB Circular No. 393 that defines what royalty payments are
proper. Improper payments of royalty are not deductible as legitimate business
expenses.
 Central Bank Circulars, like CB Circular No. 393 (dated December 7, 1973, published in
the Official Gazette issue of December 17, 1973 [69 O.G. No. 51, p. 11737] issued by the
Central Bank in the exercise of fits authority under the Central Bank Act, duly published
in the Official Gazette, have the force and effect of law (Cases cited) and binding on
everybody.

x--------------x
 11. Calasanz vs. CIR (1986)
.
G.R. No. L-26284 October 8, 1986
TOMAS CALASANZ, ET AL., petitioners, vs. THE COMMISSIONER OF INTERNAL REVENUE and the COURT
OF TAX APPEALS, respondents.

FACTS: Petitioner Ursula Calasanz inherited from her father Mariano de Torres an agricultural land located in Cainta,
Rizal. In order to liquidate her inheritance, Ursula Calasanz had the land surveyed and subdivided into lots.
Improvements, such as good roads, concrete gutters, drainage and lighting system, were introduced to make the lots
saleable. Soon after, the lots were sold to the public at a profit.In their joint income tax return for the year 1957
petitioners disclosed a profit of P31,060.06 realized from the sale of the subdivided lots, and reported fifty per centum
thereof or P15,530.03 as taxable capital gains.
Upon an audit and review of the return thus filed, the Revenue Examiner adjudged petitioners engaged in business
as real estate dealers, required them to pay the real estate dealer's tax and assessed a deficiency income tax on
profits derived from the sale of the lots based on the rates for ordinary income. On October 17, 1962, petitioners filed
with the Court of Tax Appeals a petition for review contesting the aforementioned assessments.
On June 7, 1966, the Tax Court upheld the respondent Commissioner. Hence, the present appeal.
The theory advanced by the petitioners is that inherited land is a capital asset within the meaning of Section 34[a] [1]
of the Tax Code and that an heir who liquidated his inheritance cannot be said to have engaged in the real estate
business and may not be denied the preferential tax treatment given to gains from sale of capital assets, merely
because he disposed of it in the only possible and advantageous way.
On the other hand, respondent Commissioner maintained that the imposition of the taxes in question is in accordance
with law since petitioners are deemed to be in the real estate business for having been involved in a series of real
estate transactions pursued for profit.
ISSUES: a. Whether or not petitioners are real estate dealers liable for real estate dealer's fixed tax; and
b. Whether the gains realized from the sale of the lots are taxable in full as ordinary income or capital gains
taxable at capital gain rates.
HELD: We agree with the respondent.The assets of a taxpayer are classified for income tax purposes into ordinary
assets and capital assets. Section 34[a] [1] of the National Internal Revenue Code broadly defines capital assets as
follows:
[1] Capital assets.-The term 'capital assets' means property held by the taxpayer [whether or not
connected with his trade or business], but does not include, stock in trade of the taxpayer or other
property of a kind which would properly be included, in the inventory of the taxpayer if on hand at
the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the
ordinary course of his trade or business, or property used in the trade or business of a character
which is subject to the allowance for depreciation provided in subsection [f] of section thirty; or real
property used in the trade or business of the taxpayer.
The statutory definition of capital assets is negative in nature. 5 If the asset is not among the exceptions, it is a capital
asset; conversely, assets falling within the exceptions are ordinary assets. And necessarily, any gain resulting from
the sale or exchange of an asset is a capital gain or an ordinary gain depending on the kind of asset involved in the
transaction.However, there is no rigid rule or fixed formula by which it can be determined with finality whether
property sold by a taxpayer was held primarily for sale to customers in the ordinary course of his trade or business or
whether it was sold as a capital asset Each case must in the last analysis rest upon its own peculiar facts and
circumstances.
Upon an examination of the facts on record, We are convinced that the activities of petitioners are
indistinguishable from those invariably employed by one engaged in the business of selling real estate.
One strong factor against petitioners' contention is the business element of development which is very much in
evidence. Petitioners did not sell the land in the condition in which they acquired it. While the land was originally
devoted to rice and fruit trees, 10 it was subdivided into small lots and in the process converted into a residential
subdivision and given the name Don Mariano Subdivision. Extensive improvements like the laying out of streets,
construction of concrete gutters and installation of lighting system and drainage facilities, among others, were
undertaken to enhance the value of the lots and make them more attractive to prospective buyers. The audited
financial statements 11 submitted together with the tax return in question disclosed that a considerable amount was
expended to cover the cost of improvements. As a matter of fact, the estimated improvements of the lots sold
reached P170,028.60 whereas the cost of the land is only P 4,742.66. There is authority that a property ceases to be
a capital asset if the amount expended to improve it is double its original cost, for the extensive improvement
indicates that the seller held the property primarily for sale to customers in the ordinary course of his business. 12
Another distinctive feature of the real estate business discernible from the records is the existence of contracts
receivables, which stood at P395,693.35 as of the year ended December 31, 1957. The sizable amount of
receivables in comparison with the sales volume of P446,407.00 during the same period signifies that the lots were
sold on installment basis and suggests the number, continuity and frequency of the sales. Also of significance is the
circumstance that the lots were advertised 13 for sale to the public and that sales and collection commissions were
paid out during the period in question. We hold that in the course of selling the subdivided lots, petitioners engaged in
the real estate business and accordingly, the gains from the sale of the lots are ordinary income taxable in full.
 x------------x
12. Tuason vs Lingad
.
G.R. No. L-24248 July 31, 1974
ANTONIO TUASON, JR., petitioner, vs. JOSE B. LINGAD, as Commissioner of Internal Revenue, respondent.

FACTS: In 1948 the petitioner inherited from his mother several tracts of land, among which were two contiguous
parcels situated on Pureza and Sta. Mesa streets in Manila. When the petitioner's mother was yet alive she had these
two parcels subdivided into twenty-nine lots. Twenty-eight were allocated to their then occupants who had lease
contracts with the petitioner's predecessor. The 29th lot, was not leased to any person. It needed filling because of its
very low elevation. After the petitioner took possession of the mentioned parcels in 1950, he instructed his attorney-
in-fact, J. Antonio Araneta, to sell them. There was no difficulty encountered in selling the 28 small lots as their
respective occupants bought them on a 10-year installment basis. Lot 29 could not however be sold immediately due
to its low elevation. Sometime in 1952 the petitioner's attorney-in-fact had Lot 29 filled, then subdivided into small lots
and paved with macadam roads. The small lots were then sold over the years on a uniform 10-year annual
amortization basis. J. Antonio Araneta, the petitioner's attorney-in-fact, did not employ any broker nor did he put up
advertisements in the matter of the sale thereof.
In 1953 and 1954 the petitioner reported his income from the sale of the small lots as long-term capital gains. On May
17, 1957 the Collector of Internal Revenue upheld the petitioner's treatment of his gains from the said sale of small
lots, against a contrary ruling of a revenue examiner.
In his 1957 tax return the petitioner as before treated his income from the sale of the small lots as capital gains and
included only ½ thereof as taxable income. In this return, the petitioner deducted the real estate dealer's tax he paid
for 1957. It was explained, however, that the payment of the dealer's tax was on account of rentals received from the
mentioned 28 lots and other properties of the petitioner. On the basis of the 1957 opinion of the Collector of Internal
Revenue, the revenue examiner approved the petitioner's treatment of his income from the sale of the lots in
question. In a memorandum dated July 16, 1962 to the Commissioner of Internal Revenue, the chief of the BIR
Assessment Department advanced the same opinion, which was concurred in by the Commissioner of Internal
Revenue.On January 9, 1963, however, the Commissioner reversed himself and considered the petitioner's profits
from the sales of the mentioned lots as ordinary gains. On January 28, 1963 the petitioner received a letter from the
Bureau of Internal Revenue advising him to pay deficiency income tax for 1957, The petitioner's motion for
reconsideration of the foregoing deficiency assessment was denied, and so he went up to the Court of Tax Appeals,
which however rejected his posture Hence, the present petition

ISSUE: Whether the properties in question which the petitioner had inherited and subsequently sold in small lots to
other persons should be regarded as capital assets.

HELD: The National Internal Revenue defines the term "capital assets" as follows:
(1) Capital assets. — The term "capital assets" means property held by the taxpayer (whether or
not connected with his trade or business), but does not include stock in trade of the taxpayer or
other property of a kind which would properly be included in the inventory of the taxpayer if on hand
at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in
the ordinary course of his trade or business, or property, used in the trade or business, of a
character which is subject to the allowance for depreciation provided in subsection (f) of section
thirty; or real property used in the trade or business of the taxpayer.
As thus defined by law, the term "capital assets" includes all the properties of a taxpayer whether or not connected
with his trade or business, except: (1) stock in trade or other property included in the taxpayer's inventory; (2)
property primarily for sale to customers in the ordinary course of his trade or business; (3) property used in the trade
or business of the taxpayer and subject to depreciation allowance; and (4) real property used in trade or business. 1If
the taxpayer sells or exchanges any of the properties above-enumerated, any gain or loss relative thereto is an
ordinary gain or an ordinary loss; the gain or loss from the sale or exchange of all other properties of the taxpayer is a
capital gain or a capital loss. 2
Under section 34(b) (2) of the Tax Code, if a gain is realized by a taxpayer (other than a corporation) from the sale or
exchange of capital assets held for more than twelve months, only 50% of the net capital gain shall be taken into
account in computing the net income.
In the case at bar, after a thoroughgoing study of all the circumstances relevant to the resolution of the issue
raised, this Court is of the view, and so holds, that the petitioner's thesis is bereft of merit.
The following circumstances in combination show unequivocally that the petitioner was, at the time material to this
case, engaged in the real estate business: (1) the parcels of land involved have in totality a substantially large area,
nearly seven (7) hectares, big enough to be transformed into a subdivision, and in the case at bar, the said properties
are located in the heart of Metropolitan Manila; (2) they were subdivided into small lots and then sold on installment
basis (this manner of selling residential lots is one of the basic earmarks of a real estate business); (3) comparatively
valuable improvements were introduced in the subdivided lots for the unmistakable purpose of not simply liquidating
the estate but of making the lots more saleable to the general public; (4) the employment of J. Antonio Araneta, the
petitioner's attorney-in-fact, for the purpose of developing, managing, administering and selling the lots in question
indicates the existence of owner-realty broker relationship; (5) the sales were made with frequency and continuity,
and from these the petitioner consequently received substantial income periodically; (6) the annual sales volume of
the petitioner from the said lots was considerable, e.g., P102,050.79 in 1953; P103,468.56 in 1954; and P119,072.18
in 1957; and (7) the petitioner, by his own tax returns, was not a person who can be indubitably adjudged as a
stranger to the real estate business. Under the circumstances, this Court finds no error in the holding below that the
income of the petitioner from the sales of the lots in question should be considered as ordinary income.
ACCORDINGLY, the judgment of the Court of Tax Appeals is affirmed, except the portion thereof that imposes 5%
surcharge and 1% monthly interest, which is hereby set aside. No costs.

x--------------x
 13. CIR vs. Rufino
.
G.R. Nos. L-33665-68 February 27, 1987
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. VICENTE A. RUFINO and REMEDIOS S. RUFINO,
ERNESTO D. RUFINO and ELVIRA B. RUFINO, RAFAEL R. RUFINO and JULIETA A. RUFINO, MANUEL S.
GALVEZ and ESTER R. GALVEZ, and COURT OF TAX APPEALS, respondents.

FACTS: The private respondents were the majority stockholders of the defunct Eastern Theatrical Co., Inc., a
corporation organized to engage in the business of operating theaters, opera houses, places of amusement and other
related business enterprises, more particularly the Lyric and Capitol Theaters in Manila. The private respondents are
also the majority and controlling stockholders of another corporation, the Eastern Theatrical Co Inc. (hereinafter
referred to as the New Corporation), which is engaged in the same kind of business as the Old Corporation.
In a special meeting of stockholders of the Old Corporation on December 17, 1958, to provide for the continuation of
its business after the end of its corporate life, and upon the recommendation of its board of directors, a resolution was
passed authorizing the Old Corporation to merge with the New Corporation by transferring its business, assets,
goodwill, and liabilities to the latter, which in exchange would issue and distribute to the shareholders of the Old
Corporation one share for each share held by them in the said Corporation.
Pursuant to the said resolution, the Old Corporation, represented by Ernesto D. Rufino as President, and the New
Corporation, represented by Vicente A. Rufino as General Manager, signed on January 9, 1959, a Deed of
Assignment providing for the conveyance and transfer of all the business, property, assets and goodwill of the Old
Corporation to the New Corporation in exchange for the latter's shares of stock to be distributed among the
shareholders on the basis of one stock for each stock held in the Old Corporation except that no new and unissued
shares would be issued to the shareholders of the Old Corporation; the delivery by the New Corporation to the Old
Corporation of 125,005-3/4 shares to be distributed to the shareholders of the Old Corporation as their corresponding
shares of stock in the New Corporation; the assumption by the New Corporation of all obligations and liabilities of the
Old Corporation under its bargaining agreement with the Cinema Stage & Radio Entertainment Free Workers (FFW)
which included the retention of all personnel in the latter's employ; and the increase of the capitalization of the New
Corporation in compliance with their agreement. This agreement was made retroactive to January 1, 1959.
The aforesaid transfer was eventually made by the Old Corporation to the New Corporation, which continued the
operation of the Lyric and Capitol Theaters and assumed all the obligations and liabilities of the Old Corporation
beginning January 1, 1959.
The resolution of the Old Corporation of December 17, 1958, and the Deed of Assignment of January 9, 1959, were
approved in a resolution by the stockholders of the New Corporation in their special meeting on January 12, 1959. In
the same meeting, the increased capitalization of the New Corporation to P2,000,000.00 was also divided into
200,000 shares at P10.00 par value each share, and the said increase was registered on March 5, 1959, with the
Securities and Exchange Commission, which approved the same on August 20,1959.
As agreed, and in exchange for the properties, and other assets of the Old Corporation, the New Corporation issued
to the stockholders of the former stocks in the New Corporation equal to the stocks each one held in the Old
Corporation.It was this above-narrated series of transactions that the Bureau of Internal Revenue examined later,
resulting in the petitioner declaring that the merger of the aforesaid corporations was not undertaken for a bona
fide business purpose but merely to avoid liability for the capital gains tax on the exchange of the old for the new
shares of stock. Accordingly, he imposed the deficiency assessments against the private respondents for the
amounts already mentioned. The private respondents' request for reconsideration having been denied, they elevated
the matter to the Court of Tax Appeals, which reversed the petitioner.

ISSUE: whether or not there was a valid merger between the new and old corporation, making the transaction
exempt from capital gains tax.

HELD:
Section 35 of the Tax Code, on the proper interpretation and application of which the resolution of this case depends,
provides in material part as follows:
Sec. 35. Determination of gain or loss from the sale or other disposition of property. — The gain
derived or loss sustained from the sale or other disposition of property, real, personal or mixed,
shall be determined in accordance with the following schedule:
 xxx xxx xxx
(c) Exchange of property-
(1) General Rule. — Except as herein provided upon the sale or exchange of
property, the entire amount of the gain or loss, as the case may be, shall be
recognized.
(2) Exceptions. — No gain or loss shall be recognized if in pursuance of a plan of
merger or consolidation (a) a corporation which is a party to a merger or
consolidation, exchanges property solely for stock in a corporation which is a
party to the merger or consolidation, (b) a shareholder exchanges stock in a
corporation which is a party to the merger or consolidation solely for the stock of
another corporation, also a party to the merger or consolidation, or (c) a security
holder of a corporation which is a party to the merger or consolidation exchanges
his securities in such corporation solely for stock or securities in another
corporation, a party to the merger or consolidation.

We sustain the Court of Tax Appeals. We hold that it did not err in finding that no taxable gain was derived by
the private respondents from the questioned transaction.
Contrary to the claim of the petitioner, there was a valid merger although the actual transfer of the properties
subject of the Deed of Assignment was not made on the date of the merger.
The basic consideration, of course, is the purpose of the merger, as this would determine whether the
exchange of properties involved therein shall be subject or not to the capital gains tax. The criterion laid
down by the law is that the merger" must be undertaken for a bona fide business purpose and not solely for
the purpose of escaping the burden of taxation." We must therefore seek and ascertain the intention of the
parties in the light of their conduct contemporaneously with, and especially after, the questioned merger
pursuant to the Deed of Assignment of January 9, 1959.
It has been suggested that one certain indication of a scheme to evade the capital gains tax is the subsequent
dissolution of the new corporation after the transfer to it of the properties of the old corporation and the liquidation of
the former soon thereafter. This highly suspect development is likely to be a mere subterfuge aimed at circumventing
the requirements of Section 35 of the Tax Code while seeming to be a valid corporate combination.
We see no such furtive intention in the instant case. It is clear, in fact, that the purpose of the merger was to continue
the business of the Old Corporation, whose corporate life was about to expire, through the New Corporation to which
all the assets and obligations of the former had been transferred. What argues strongly, indeed, for the New
Corporation is that it was not dissolved after the merger agreement in 1959. On the contrary, it continued to operate
the places of amusement originally owned by the Old Corporation and transfered to the New Corporation, particularly
the Capitol and Lyric Theaters, in accordance with the Deed of Assignment. The New Corporation, in fact, continues
to do so today after taking over the business of the Old Corporation twenty-seven years ago.
What is also worth noting is that, as in the case of the Old Corporation when it was dissolved on December 31, 1958,
there has been no distribution of the assets of the New Corporation since then and up to now, as far as the record
discloses. To date, the private respondents have not derived any benefit from the merger of the Old Corporation and
the New Corporation almost three decades earlier that will make them subject to the capital gains tax under Section
35. They are no more liable now than they were when the merger took effect in 1959, as the merger, being
genuine, exempted them under the law from such tax.
The reason for this conclusion is traceable to the purpose of the legislature in adopting the provision of law in
question. The basic Idea was to correct the Tax Code which, by imposing taxes on corporate combinations and
expansions, discouraged the same to the detriment of economic progress, particularly the promotion of local industry.
Speaking of this problem, HB No. 7233, which was subsequently enacted into R.A. No. 1921 embodying Section 35
as now worded, declared in the Explanatory Note:
The exemption from the tax of the gain derived from exchanges of stock solely for stock of another
corporation resulting from corporate mergers or consolidations under the above provisions, as
amended, was intended to encourage corporations in pooling, combining or expanding their
resources conducive to the economic development of the country. 3
Our ruling then is that the merger in question involved a pooling of resources aimed at the continuation and
expansion of business and so came under the letter and intendment of the National Internal Revenue Code, as
amended by the above cited law, exempting from the capital gains tax exchanges of property effected under lawful
corporate combinations.
 x-----x

14. Esso Standard Eastern Inc vs. CIR

.
G.R. Nos. L-28508-9 July 7, 1989
ESSO STANDARD EASTERN, INC., (formerly, Standard-Vacuum Oil Company), petitioner,
vs. THE COMMISSIONER OF INTERNAL REVENUE, respondent.

FACTS: In CTA Case No. 1251, petitioner ESSO deducted from its gross income for 1959, as part of its ordinary and
necessary business expenses, the amount it had spent for drilling and exploration of its petroleum concessions. This
claim was disallowed by the respondent Commissioner of Internal Revenue on the ground that the expenses should
be capitalized and might be written off as a loss only when a "dry hole" should result. ESSO then filed an amended
return where it asked for the refund of P323,279.00 by reason of its abandonment as dry holes of several of its oil
wells. Also claimed as ordinary and necessary expenses in the same return was the amount of P340,822.04,
representing margin fees it had paid to the Central Bank on its profit remittances to its New York head office.
On August 5, 1964, the CIR granted a tax credit of P221,033.00 only, disallowing the claimed deduction for the
margin fees paid.
In CTA Case No. 1558, the CR assessed ESSO a deficiency income tax for the year 1960, in the amount of
P367,994.00, plus 18% interest thereon of P66,238.92 for the period from April 18,1961 to April 18, 1964, for a total
of P434,232.92. The deficiency arose from the disallowance of the margin fees of Pl,226,647.72 paid by ESSO to the
Central Bank on its profit remittances to its New York head office.
CIR denied the claims of ESSO for refund of the overpayment of its 1959 and 1960 income taxes, holding that the
margin fees paid to the Central Bank could not be considered taxes or allowed as deductible business expenses.
ESSO appealed to the CTA and sought the refund of P102,246.00 for 1959, contending that the margin fees were
deductible from gross income either as a tax or as an ordinary and necessary business expense

ISSUE: w/n THE margin fees should be considered necessary and ordinary business expenses and therefore still
deductible from its gross income.

HELD: The applicable provision is Section 30(a) of the National Internal Revenue Code reading as follows:
SEC. 30. Deductions from gross income in computing net income there shall be allowed as
deductions
(a) Expenses:
(1) In general. — All the ordinary and necessary expenses paid or incurred during the taxable year
in carrying on any trade or business, including a reasonable allowance for salaries or other
compensation for personal services actually rendered; traveling expenses while away from home in
the pursuit of a trade or business; and rentals or other payments required to be made as a
condition to the continued use or possession, for the purpose of the trade or business, of property
to which the taxpayer has not taken or is not taking title or in which he has no equity.
(2) Expenses allowable to non-resident alien individuals and foreign corporations. — In the case of
a non-resident alien individual or a foreign corporation, the expenses deductible are the necessary
expenses paid or incurred in carrying on any business or trade conducted within the Philippines
exclusively.
We hold that the Court of Tax Appeals did not err. The margin fees are not expenses in connection with the
production or earning of petitioner's incomes in the Philippines. They were expenses incurred in the disposition of
said incomes; expenses for the remittance of funds after they have already been earned by petitioner's branch in the
Philippines for the disposal of its Head Office in New York which is already another distinct and separate income
taxpayer.

x------x
 15. CIR vs. General Foods Phils
.
[G.R. No. 143672. April 24, 2003]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. GENERAL FOODS (PHILS.), INC., respondent.

FACTS: On June 14, 1985, respondent corporation, which is engaged in the manufacture of beverages such as
Tang, Calumet and Kool-Aid, filed its income tax return for the fiscal year ending February 28, 1985. In said tax
return, respondent corporation claimed as deduction, among other business expenses, the amount of P9,461,246 for
media advertising for Tang. On May 31, 1988, the Commissioner disallowed 50% or P4,730,623 of the deduction
claimed by respondent corporation. Consequently, respondent corporation was assessed deficiency income taxes in
the amount of P2,635, 141.42. The latter filed a motion for reconsideration but the same was denied. On September
29, 1989, respondent corporation appealed to the Court of Tax Appeals but the appeal was dismissed. Aggrieved,
respondent corporation filed a petition for review at the Court of Appeals which rendered a decision reversing and
setting aside the decision of the Court of Tax Appeals. Thus, the instant petition.

ISSUE: Was the media advertising expense for Tang paid or incurred by respondent corporation for the fiscal year
ending February 28, 1985 necessary and ordinary, hence, fully deductible under the NIRC? Or was it a capital
expenditure, paid in order to create goodwill and reputation for respondent corporation and/or its products, which
should have been amortized over a reasonable period?

HELD: We find the subject expense for the advertisement of a single product to be inordinately large. Therefore,
even if it is necessary, it cannot be considered an ordinary expense deductible under then Section 29 (a) (1) (A) of
the NIRC.
Section 34 (A) (1), formerly Section 29 (a) (1) (A), of the NIRC provides:
(A) Expenses.-
(1) Ordinary and necessary trade, business or professional expenses.-
(a) In general.- There shall be allowed as deduction from gross income all ordinary and necessary
expenses paid or incurred during the taxable year in carrying on, or which are directly
attributable to, the development, management, operation and/or conduct of the trade,
business or exercise of a profession.
Simply put, to be deductible from gross income, the subject advertising expense must comply with the following
requisites: (a) the expense must be ordinary and necessary; (b) it must have been paid or incurred during the taxable
year; (c) it must have been paid or incurred in carrying on the trade or business of the taxpayer; and (d) it must be
supported by receipts, records or other pertinent papers.[7]
The parties are in agreement that the subject advertising expense was paid or incurred within the corresponding
taxable year and was incurred in carrying on a trade or business. Hence, it was necessary. However, their views
conflict as to whether or not it was ordinary. To be deductible, an advertising expense should not only be necessary
but also ordinary. These two requirements must be met.
Advertising is generally of two kinds: (1) advertising to stimulate the current sale of merchandise or use of
services and (2) advertising designed to stimulate the future sale of merchandise or use of services. The second type
involves expenditures incurred, in whole or in part, to create or maintain some form of goodwill for the taxpayers trade
or business or for the industry or profession of which the taxpayer is a member. If the expenditures are for the
advertising of the first kind, then, except as to the question of the reasonableness of amount, there is no doubt such
expenditures are deductible as business expenses. If, however, the expenditures are for advertising of the second
kind, then normally they should be spread out over a reasonable period of time.
We agree with the Court of Tax Appeals that the subject advertising expense was of the second kind. Not only
was the amount staggering; True, it is the taxpayers prerogative to determine the amount of advertising expenses it
will incur and where to apply them.[11] Said prerogative, however, is subject to certain considerations. The first
relates to the extent to which the expenditures are actually capital outlays; this necessitates an inquiry into the nature
or purpose of such expenditures.[12] The second, which must be applied in harmony with the first, relates to whether
the expenditures are ordinary and necessary. Concomitantly, for an expense to be considered ordinary, it must be
reasonable in amount. The Court of Tax Appeals ruled that respondent corporation failed to meet the two foregoing
limitations.
 x-----------x

16. Atlas Consolidated Mining & Development corp vs CIR  102 scra
246
.
G.R. No. L-26911 January 27, 1981
ATLAS CONSOLIDATED MINING & DEVELOPMENT CORPORATION, petitioner, vs. COMMISSIONER OF
INTERNAL REVENUE, respondent.
G.R. No. L-26924 January 27, 1981
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.ATLAS CONSOLIDATED MINING & DEVELOPMENT
CORPORATION and COURT OF TAX APPEALS,respondents.

FACTS: Atlas is a corporation engaged in the mining industry registered under the laws of the Philippines. On August
20, 1962, the Commissioner assessed against Atlas the sum of P546,295.16 and P215,493.96 or a total of
P761,789.12 as deficiency income taxes for the years 1957 and 1958. For the year 1958, the assessment of
deficiency income tax of P761,789.12 covers the disallowance of items claimed by Atlas as deductible from gross
income. On October 9, 1962, Atlas protested the assessment asking for its reconsideration and cancellation. 2 Acting
on the protest, the Commissioner conducted a reinvestigation of the case. Accordingly, the Commissioner
recomputed Atlas deficiency income tax liabilities. On June 9, 1964, the Commissioner issued a revised assessment
entirely eliminating the assessment of P546,295.16 for the year 1957. The assessment for 1958 was reduced from
P215,493.96 to P39,646.82 from which Atlas appealed to the Court of Tax Appeals, assailing the disallowance of the
following items claimed as deductible from its gross income for 1958:
Transfer agent's fee.........................................................P59,477.42
Stockholders relation service fee....................................25,523.14
U.S. stock listing expenses..................................................8,326.70
Suit expenses..........................................................................6,666.65
Provision for contingencies..................................... .........60,000.00
Total....................................................................P159,993.91
After hearing, the Court of Tax Appeals rendered a decision on October 25, 1966 allowing the above mentioned
disallowed items, except the items denominated by Atlas as stockholders relation service fee and suit expenses From
the Court of Tax Appeals' decision of October 25, 1966, both parties appealed to this Court by way of two (2)
separate petitions for review docketed as G. R. No. L-26911 (Atlas, petitioner) and G. R. No. L-29924
(Commissioner, petitioner). Atlas appealed only that portion of the Court of Tax Appeals' decision disallowing the
deduction from gross income of the so-called stockholders relation service fee amounting to P25,523.14

ISSUE: 1) whether or not the expenses paid for the services rendered by a public relations firm P.K MacKer & Co.
labelled as stockholders relation service fee is an allowable deduction as business expense under Section 30 (a) (1)
of the National Internal Revenue Code.
2) whether or not the CTA erred in allowing the deduction from gross income of listing expenses allegedly
incurred by respondent.
3) whether or not the CTA erred in disallowing only the amount of P6,666.65 as suit expenses the correct
amount that should have been disallowed being P17,499.98.
HELD: The principle is recognized that when a taxpayer claims a deduction, he must point to some specific provision
of the statute in which that deduction is authorized and must be able to prove that he is entitled to the deduction
which the law allows. As previously adverted to, the law allowing expenses as deduction from gross income for
purposes of the income tax is Section 30(a) (1) of the National Internal Revenue which allows a deduction of 'all the
ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.' An
item of expenditure, in order to be deductible under this section of the statute, must fall squarely within its language.
We come, then, to the statutory test of deductibility where it is axiomatic that to be deductible as a
business expense, three conditions are imposed, namely: (1) the expense must be ordinary and
necessary, (2) it must be paid or incurred within the taxable year, and (3) it must be paid or incurred
in carrying on a trade or business. In addition, not only must the taxpayer meet the business test,
he must substantially prove by evidence or records the deductions claimed under the law,
otherwise, the same will be disallowed. The mere allegation of the taxpayer that an item of expense
is ordinary and necessary does not justify its deduction.
 While it is true that there is a number of decisions in the United States delving on the interpretation
of the terms 'ordinary and necessary' as used in the federal tax laws, no adequate or satisfactory
definition of those terms is possible. Similarly, this Court has never attempted to define with
precision the terms 'ordinary and necessary.' There are however, certain guiding principles worthy
of serious consideration in the proper adjudication of conflicting claims. Ordinarily, an expense will
be considered 'necessary' where the expenditure is appropriate and helpful in the development of
the taxpayer's business. It is 'ordinary' when it connotes a payment which is normal in relation to
the business of the taxpayer and the surrounding circumstances. The term 'ordinary' does not
require that the payments be habitual or normal in the sense that the same taxpayer will have to
make them often; the payment may be unique or non-recurring to the particular taxpayer affected.
There is thus no hard and fast rule on the matter. The right to a deduction depends in each case on
the particular facts and the relation of the payment to the type of business in which the taxpayer is
engaged. The intention of the taxpayer often may be the controlling fact in making the
determination. Assuming that the expenditure is ordinary and necessary in the operation of the
taxpayer's business, the answer to the question as to whether the expenditure is an allowable
deduction as a business expense must be determined from the nature of the expenditure itself,
which in turn depends on the extent and permanency of the work accomplished by the expenditure.
1) We sustain the ruling of the tax court that the expenditure of P25,523.14 paid to P.K. Macker & Co. as
compensation for services carrying on the selling campaign in an effort to sell Atlas' additional capital stock
of P3,325,000 is not an ordinary expense. Accordingly, as found by the Court of Tax Appeals, the said expense is
not deductible from Atlas gross income in 1958 because expenses relating to recapitalization and reorganization of
the corporation, the cost of obtaining stock, promotion expenses and commission or fees paid for the sale of stock
reorganization are capital expenditures.That the expense in question was incurred to create a favorable image of the
corporation in order to gain or maintain the public's and its stockholders' patronage, does not make it deductible as
business expense. As held in the case of Welch vs. Helvering, 15 efforts to establish reputation are akin to acquisition
of capital assets and, therefore, expenses related thereto are not business expense but capital expenditures.
2) Listing fee is an ordinary and necessary business expense .We find the Chesapeake
decision controlling with the facts and circumstances of the instant case. In Dome Mines, Ltd case the stock listing
fee was disallowed as a deduction not only because the expenditure did not meet the statutory test but also because
the same was paid only once, and the benefit acquired thereby continued indefinitely, whereas, in the Chesapeake
Corporation case, fee paid to the stock exchange was annual and recurring. In the instant case, we deal with the
stock listing fee paid annually to a stock exchange for the privilege of having its stock listed. It must be noted that the
Court of Tax Appeal rejected the Dome Mines case because it involves a payment made only once, hence, it was
held therein that the single payment made to the stock exchange was a capital expenditure, as distinguished from the
instant case, where payments were made annually. For this reason, we hold that said listing fee is an ordinary and
necessary business expense

3) it is well settled that litigation expenses incurred in defense or protection of title are capital in nature and not
deductible. Likewise, it was ruled by the U.S. Tax Court that expenditures in defense of title of property
constitute a part of the cost of the property, and are not deductible as expense. Surprisingly, however, the
investigating revenue examiner recommended a partial disallowance of P13,333.30 instead of the entire amount of
P23,333.30, which, upon review, was further reduced by the Commissioner of Internal Revenue. Whether it was due
to mistake, negligence or omission of the officials concerned, the arithmetical error committed herein should not
prejudice the Government. This Court will pass upon this particular question since there is a clear error committed by
officials concerned in the computation of the deductible amount. WHEREFORE, judgment appealed from is hereby
affirmed with modification that the amount of P17,499.98 (3/4 of P23,333.00) representing suit expenses be
disallowed as deduction instead of P6,666.65 only.

x------------x
 17. Maria Carla Pirovano vs CIR (14 scra)
.
G.R. No. L-19865 July 31, 1965
MARIA CARLA PIROVANO, etc., et al., petitioners-appellants, vs. THE COMMISSIONER OF INTERNAL
REVENUE, respondent-appellee.
FACTS: Enrico Pirovano was the father of the herein petitioners-appellants. Sometime in the early part of 1941, De la
Rama Steamship Co. insured the life of said Enrico Pirovano, who was then its President and General Manager until
the time of his death, with various Philippine and American insurance companies. In the latter part of 1944, said
Enrico Pirovano died. The Board of Directors of De la rama steamship made a resolution donating the insurance
proceeds to the Pirovano children which was later on accepted by their legal guardian. On March 8, 1951, however,
the majority stockholders of the Company voted to revoke the resolution approving the donation in favor of the
Pirovano children. As a consequence of this revocation and refusal of the Company to pay the balance of the
donation amounting to P564,980.90 despite demands therefor, the herein petitioners-appellants represented by their
natural guardian, Mrs. Estefania R. Pirovano, brought an action for the recovery of said amount, plus interest and
damages against De la Rama Steamship Co., in the Court of First Instance of Rizal, which case ultimately culminated
to an appeal to this Court. On December 29, 1954, this court rendered its decision in the appealed case (96 Phil. 335)
holding that the donation was valid and remunerative in nature. The above decision became final and executory. In
compliance therewith, De la Rama Steamship Co. made, on April 6, 1955, a partial payment on the amount of the
judgment and paid the balance thereof on May 12, 1955.
On March 6, 1955, respondent Commissioner of Internal Revenue assessed the amount of P60,869.67 as donees'
gift tax, inclusive of surcharges, interests and other penalties, against each of the petitioners-appellants, or for the
total sum of P243,478.68; and, on April 23, 1955, a donor's gift tax in the total amount of P34,371.76 was also
assessed against De la Rama Steamship Co., which the latter paid.
Petitioners-appellants herein contested respondent Commissioner's assessment and imposition of the donees' gift
taxes and donor's gift tax and also made a claim for refund of the donor's gift tax so collected.
On January 31, 1962, the Court of Tax Appeals rendered its decision in the two cases, the dispositive part of which
reads:
In resume, we are of the opinion, that (1) the donor's gift tax in the sum of P34,371.76 was erroneously
assessed and collected, hence, petitioners are entitled to the refund thereof; (2) the donees' gift taxes were
correctly assessed; (3) the imposition of the surcharge of 25% is not proper; (4) the surcharge of 5% is
legally due; and (5) the interest of 1% per month on the deficiency donees' gift taxes is due from petitioners
from March 8, 1955 until the taxes are paid.
ISSUE: w/n a donation made out of gratitude for past services is not subject to deduction.

HELD: A donation made out of gratitude for past services is not subject to deductions for the value of said
services which do not constitute a recoverable debt.

Appellants contend, the entire property or right donated should not be considered as a gift for taxation purposes; only
that portion of the value of the property or right transferred, if any, which is in excess of the value of the services
rendered should be considered as a taxable gift. They cite in support Section 111 of the Tax Code which provides
that —
Where property is transferred for less, than an adequate and full consideration in money or money's worth,
then the amount by which the value of the property exceeded the value of the consideration shall, for the
purpose of the tax imposed by this Chapter, be deemed a gift, ... .
The flaw in this argument lies in the fact that, as copied from American law, the term consideration used in this
section refers to the technical "consideration" defined by the American Law Institute (Restatement of Contracts) as
"anything that is bargained for by the promisor and given by the promisee in exchange for the promise" (Also, Corbin
on Contracts, Vol. I, p. 359). But, as we have seen, Pirovano's successful activities as officer of the De la Rama
Steamship Co. cannot be deemed such consideration for the gift to his heirs, since the services were rendered long
before the Company ceded the value of the life policies to said heirs; cession and services were not the result of one
bargain or of a mutual exchange of promises.
What is more, the actual consideration for the cession of the policies, as previously shown, was the Company's
gratitude to Pirovano; so that under section 111 of the Code there is no consideration the value of which can be
 deducted from that of the property transferred as a gift. Like "love and affection," gratitude has no economic value
and is not "consideration" in the sense that the word is used in this section of the Tax Code.

DK
x------------x
18. CIR vs Palanca  18 scra
Facts:
 In 1950, the late Don Carlos Palanca, Sr. donated in favor of his son, the petitioner herein, shares
of stock in La Tondeña, Inc. amounting to 12,500 shares. For failure to file a return on the
donation within the statutory period, the petitioner was assessed the sums of P97,691.23,
P24,442.81 and P47,868.70 as gift tax, 25% surcharge and interest, respectively, which he paid
on June 22, 1955. On March 1, 1956, the petitioner filed with the Bureau of Internal Revenue his
income tax return for the calendar year 1955, claiming, among others, a deduction for interest
amounting to P9,706.45 and reporting a taxable income of P65,982.12. On the basis of this
return, he was assessed the sum of P21,052.91*, as income tax, which he paid.

 Subsequently, on November 10, 1956, the petitioner filed an amended return for the calendar
year 1955, claiming therein an additional deduction in the amount of P47,868.70 representing
interest paid on the donee's gift tax, thereby reporting a taxable net income of P18,113.42 and a
tax due thereon in the sum of P3,167.00. The claim for deduction was based on the provisions of
Section 30(b)(1) of the Tax Code, which authorizes the deduction from gross income of interest
paid within the taxable year on indebtedness. A claim for the refund of alleged overpaid income
taxes for the year 1955 amounting to P17,885.01, which is the difference between the amount of
P21,052.01 he paid as income taxes under his original return and of P3,167.00, was filed
together with this amended return.

 In a communication dated June 20, 1957, the respondent (BIR) denied the claim for refund.
Petitioner reiterated his claim for refund, and at the same time requested that the case be
elevated to the Appellate Division of the Bureau of Internal Revenue for decision. The reiterated
claim was denied on October 14, 1957. Later, on November 6, 1957, he requested the
respondent to hold his action on the case in abeyance until after the Court of Tax Appeals
renders its decision on a similar case. And on November 7, 1957, the respondent denied the
claim for the refund of the sum of P17,885.01.

 Meanwhile, the Bureau of Internal Revenue considered the transfer of 12,500 shares of stock of
La Tondeña, Inc. to be a transfer in contemplation of death pursuant to section 88(b) of the
National Internal Revenue Code. Consequently the respondent assessed against the petitioner
the sum of P191,591.62 as estate and inheritance taxes on the transfer of said 12,500 shares of
stock. The amount of P170,002.74 paid on June 22, 1955 by the petitioner as gift tax, including
interest and surcharge, under Official Receipt No. 2855 was applied to his estate and inheritance
tax liability. On the tax liability of P191,591.62, the petitioner paid the amount of P60,581.80 as
interest for delinquency.

 On August 12, 1958, the petitioner once more filed an amended income tax return for the
calendar year 1955, claiming, in addition to the interest deduction of P9,076.45 appearing in his
original return, a deduction in the amount of P60,581.80, representing interest on the estate and
inheritance taxes on the 12,500 shares of stock, thereby reporting a net taxable income for 1955
in the amount of P5,400.32 and an income tax due thereon in the sum of P428.00. Attached to
this amended return was a letter of the petitioner, dated August 11, 1958, wherein he requested
the refund of P20,624.01 which is the difference between the amounts of P21,052.01 he paid as
income tax under his original return and of P428.00.
  Without waiting for the respondent's decision on this claim for refund, the petitioner filed his
petition for review before this Court on August 13, 1958. On July 24, 1959, the respondent denied
the petitioner's request for the refund of the sum of P20,624.01."

Issue: W/N the amount paid by respondent Palanca for interest on his delinquent estate
and inheritance tax is deductible from the gross income for that year under section
30(b)(1) of the Revenue Code, and, that said respondent's claim for refund therefor has
not prescribed.

Held: SC finds for the respondents. While "taxes" and "debt" are distinguishable legal concepts, in
certain cases as in the suit at bar, on account of their nature, the distinction becomes inconsequential.
This qualification is recognized even in the United States. Thus,

"The term 'debt' is properly used in a comprehensive sense as embracing not merely money due by contract, but
whatever one is bound to render to another, either for contract or the requirements of the law. (Camden vs. Fink
Coule and Coke Co., 61 ALR 584).
"Where statutes impose a personal liability for a tax, the tax becomes at least in a broad sense, a debt." (Idem.)
"Some American authorities hold that, especially for remedial purposes, Federal taxes are debts." (Tax Commission
vs. National Malleable Castings Co., 35 ALR 1448)

In our jurisdiction, the rule is settled that although taxes already due have not, strictly speaking, the same
concept as debts, they are, however, obligations that may be considered as such. (Sambrano vs. Court of
Tax Appeals, 101 Phil. 1). In a more recent case, Commissioner of Internal Revenue vs. Prieto, 109 Phil.
592, SC explicitly announced that while the distinction between "taxes" and "debts" was recognized in this
jurisdiction, the variance in their legal conception does not extend to the interests paid on them, at least
insofar as Section 30(b) (1) of the National Internal Revenue Code is concerned.

We do not see any element in this case which can justify a departure from or abandonment of the
doctrine in the Prieto case above. In both this and the said case, the taxpayer sought the allowance as
deductible items from the gross income of the amounts paid by them as interests on delinquent tax
liabilities. Of course, what was involved in the cited case was the donor's tax while the present suit
pertains to interest paid on the estate and inheritance tax. This difference, however, submits no
appreciable consequence to the rationale of this Court's previous determination that interests on taxes
should be considered as interests on indebtedness within the meaning of section 30(b) (1) of the Tax
Code. The interpretation we have placed upon the said section was predicated on the congressional
intent, not on the nature of the tax for which the interest was paid.

On the issue of prescription: The 30-day period under Section 11 of Republic Act 1125 should be
computed from the receipt of the final denial by the Bureau of Internal Revenue of the said claim.
Palanca's claim in this incident was filed with the Court of Tax Appeals even before it had been denied by
the herein petitioner or the Bureau of Internal Revenue, i.e., the claim was filed with the former Court on
Aug. 13, 1958, while the petitioner denied it on July 24, 1959. The claim at bar refers to the alleged
overpayment by respondents of the 1955 income tax. Inasmuch as the said account was paid by him by
installment, then the computation of the two-year prescriptive period, under Section 306 of the National
Internal Revenue Code, should be from the date of the last installment, (Antonio Prieto, et al. vs. Collector
of Internal Revenue, G. R. No. L- 11976, August 29, 1961). Palanca paid the last installment on his 1955
income tax on August 14, 1956. His claim for refund of the alleged overpayment was filed with the Court
on August 13, 1958. It was, therefore, still timely instituted.

WHEREFORE, the decision appealed from is affirmed in full, without pronouncement on costs.
Concepcion, C. J., Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez and Castro, JJ.,
concur.
Allan
x--------------x
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. CARLOS
PALANCA, JR., respondent.

Facts:

 Sometime in July, 1950, the late Don Carlos Palanca, Sr. donated in favor of his son, the petitioner
herein, shares of stock in La Tondeña, Inc. amounting to 12,500 shares. For failure to file a return
on the donation within the statutory period, the petitioner was assessed the sums of P97,691.23,
P24,442.81 and P47,868.70 as gift tax, 25% surcharge and interest, respectively, which he paid on
June 22, 1955.
 On March 1, 1956, the petitioner filed with the Bureau of Internal Revenue his income tax return for
the calendar year 1955, claiming, among others, a deduction for interest amounting to P9,706.45
and reporting a taxable income of P65,982.12.
 Subsequently, on November 10, 1956, the petitioner filed an amended return for the calendar year
1955, claiming therein an additional deduction in the amount of P47,868.70 representing interest
paid on the donee's gift tax.
 On August 27, 1957, the petitioner reiterated his claim for refund, and at the same time requested
that the case be elevated to the Appellate Division of the Bureau of Internal Revenue for decision.
The reiterated claim was denied.
 On August 12, 1958, the petitioner once more filed an amended income tax return for the calendar
year 1955, claiming, in addition to the interest deduction of P9,076.45 appearing in his original
return, a deduction in the amount of P60,581.80, representing interest on the estate and
inheritance taxes on the 12,500 shares of stock, thereby reporting a net taxable income for 1955 in
the amount of P5,400.32 and an income tax due thereon in the sum of P428.00.

Issue: Whether the amount paid by respondent Palanca for interest on his delinquent
estate and inheritance tax is deductible from the gross income for that year under
section 30(b)(1) of the Revenue Code.

Held: — While taxes and debts are distinguishable legal concepts, in certain cases as
in the suit at bar, on account of their nature, the distinction becomes inconsequential.
This qualification is recognized even in the United States. Thus, "The term debt is
properly used in a comprehensive sense as embracing not merely money due by
contract, but whatever one is bound to render to another, either for contract or the
requirement of the law. In our jurisdiction, the rule is settled that although taxes already
due have not, strictly speaking, the same concept as debts, they are however,
obligations that may be considered as such. It follows that the interest paid by herein
 respondent for the late payment of her donor's tax is deductible from her gross income
under Section 30(b) of the Tax Code above-quoted.

x--------------x
DK
19. Basilan Estates vs. CIR
Facts:
A Philippine corporation engaged in coconut industry, Basilan Estate, Inc. with principal offices in Basilan
City, filed on March 24, 1954 its income tax returns for 1953 and paid an income tax of P8,028. Basilan
Estates, Inc. claimed deductions for the depreciation of its assets up to 1949 on the basis of their
acquisition cost. As of January 1, 1950 it changed the depreciable value of said assets by increasing it to
conform with the increase in cost for their replacement. Accordingly, from 1950 to 1953 it deducted from
gross income the value of depreciation computed on the reappraised value.
In 1953, the year involved in this case, taxpayer claimed the following depreciation deduction:
Reappraised assets P47,342.53
New assets consisting of hospital building and equipment 3,910.45
Total depreciation P51,252.98

Upon investigation and examination of taxpayer's books and papers, the Commissioner of Internal
Revenue found that the reappraised assets depreciated in 1953 were the same ones upon which
depreciation was claimed in 1952. And for the year 1952, the Commissioner had already determined, with
taxpayer's concurrence, the depreciation allow able on said assets to be P36,842.04, computed on their
acquisition cost at rates fixed by the taxpayer. Hence, the Commissioner pegged the deductible
depreciation for 1953 on the same old assets at P36,842.04 and disallowed the excess thereof in the
amount of P10,500.49.
Ruling of the CTA: On December 20, 1960, Basilan Estate, Inc. filed before the Court of Tax Appeals a
petition for review of the Commissioner's assessment, alleging prescription of the period of assessment and
collection; error in disallowing claimed depreciations, travelling and miscellaneous expenses and error in
finding the existence of unreasonably accumulated profits and the imposition of 25% surtax thereon. On
October 31, 1963, the Court of Tax Appeals found that there was no prescription and affirmed the
deficiency assessment in toto.

Issue: Whether or not the disallowance of items claimed as deductible proper and whether depreciation
shall be determined on the acquisition cost or on the reappraised value of the assets.

Held: The questioned assessment is as follows:

Net Income per return P40,142.90

Add: Overclaimed depreciation P10,500.49

Mis. expenses disallowed 6,759.17

Officer's travelling expenses disallowed 2,300.40

_________

19,560.06

Net Income per Investigation P59,702.96

_________

20% tax on P59,702.96 11,940.00

Less: Tax already assessed 8,028.00

________

Deficiency income tax P3,912.00

Add Additional tax of 25% on P347,507.01 86,876.75

_________

Tax Due & Collectible P90,788.75

=========

The Commissioner disallowed:

Overclaimed depreciation P10,500.49

Miscellaneous expenses 6,759.17

Officer's travelling expenses 2,300.40

Depreciation is the gradual diminution in the useful value of tangible property resulting from wear and tear
and normal obsolescense. The term is also applied to amortization of the value of intangible assets, the use
of which in the trade or business is definitely limited in duration. Depreciation commences with the
acquisition of the property and its owner is not bound to see his property gradually waste, without making
provision out of earnings for its replacement. It is entitled to see that from earnings the value of the property
invested is kept unimpaired, so that at the end of any given term of years, the original investment remains
as it was in the beginning. It is not only the right of a company to make such a provision, but it is its duty to
its bond and stockholders, and, in the case of a public service corporation, at least, its plain duty to the
public. Accordingly, the law permits the taxpayer to recover gradually his capital investment in wasting
assets free from income tax. Precisely, Section 30 (f) (1) which states:
"(1) In general. — A reasonable allowance for deterioration of property arising out of its use or
employment in the business or trade, or out of its not being used: Provided, that when the
allowance authorized under this subsection shall equal the capital invested by the taxpayer . . .
no further allowance shall be made. . . ."
allows a deduction from gross income for depreciation but limits the recovery to the capital invested in the
asset being depreciated.
The income tax law does not authorize the depreciation of an asset beyond its acquisition cost. Hence, a
deduction over and above such cost cannot be claimed and allowed. The reason is that deductions from
gross income are privileges,not matters of right. They are not created by implication but upon clear
expression in the law.
Moreover, the recovery, free of income tax, of an amount more than the invested capital in an asset w ill
transgress the underlying purpose of a depreciation allowance. For then what the taxpayer would recover
will be, not only the acquisition cost, but also some profit. Recovery in due time thru depreciation of
investment made is the philosophy behind depreciation allowance; the idea of profit on the investment
made has never been the underlying reason for the allowance of a deduction for depreciation.
Accordingly, the claim for depreciation beyond P36,842.04 or in the amount of P10,500.49 has no
justification in the law. The determination, therefore, of the Commissioner of Internal Revenue disallowing
said amount, affirmed by the Court of Tax Appeals, is sustained.
B. Expenses. — The next item involves disallowed expenses incurred in 1953, broken as follows:
Miscellaneous expenses P6,759.17
Officer's travelling expenses 2,300.40
Total P9,059.57

These were disallowed on the ground that the nature of these expenses could not be satisfactorily
explained nor could the same be supported by appropriate papers.
Felix Gulfin, petitioner's accountant, explained the P6,759.17 as actual expenses credited to the account of
the president of the corporation incurred in the interest of the corporation during the president's trip to
Manila (pp. 33-34 of TSN of Dec. 5, 1962); he stated that the P2,300.40 was the president's travelling
expenses to and from Manila; as to the vouchers and receipts of these, he said the same were made but
got burned during the Basilan fire on March 30, 1962 (p. 40 of same TSN). Petitioner further argues that
when it sent its records to Manila in February, 1959, the papers in support of these miscellaneous and
travelling expenses were not included for the reason that by February 9, 1959, when the Bureau of Internal
Revenue decided to investigate, petitioner had no more obligation to keep the same since five years had
lapsed from the time these expenses were incurred (p. 41 of same TSN). On this ground, the petitioner
may be sustained for under Section 337 of the Tax Code, receipts and papers supporting such expenses
need be kept by the taxpayer for a period of five years from the last entry. At the time of the investigation,
said five years had lapsed. Taxpayer's stand on this issue is therefore sustained.
WHEREFORE, the judgment appealed from is modified to the extent that petitioner is allowed its
deductions for travelling and miscellaneous expenses, but affirmed insofar as the petitioner is liable for
P2,100.67 as 25% deficiency income tax for 1953 and P86,876.75 as 25% surtax on the unreasonably
accumulated profit of P347,507.01. No costs. So ordered.
 Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Ruiz Castro, Angeles and
Fernando, JJ., concur.

Allan
x-----------------x
Basilan Estates, Inc. v. Commissioner of Internal Revenue

G.R. No. L-22492, September 5, 1967

Facts:

 A Philippine corporation engaged in coconut industry, Basilan Estate, Inc. with

principal offices in Basilan City, filed on March 24, 1954 its income tax returns for
1953 and paid an income tax of P8,028. On February 26, 1959, the
Commissioner of Internal Revenue, per examiner's report of February 19, 1959,
assessed Basilan Estates, Inc., a deficiency income tax of P3,912 for 1953 and
P86,867.85 as 25% surtax on unreasonably accumulated profits as of 1953
pursuant to Section 25 of the Tax Code||
 On December 20, 1960, Basilan Estate, Inc. filed before the Court of Tax
Appeals a petition for review of the Commissioner's assessment, alleging
prescription of the period of assessment and collection; error in disallowing
claimed depreciations, travelling and miscellaneous expenses and error in finding
the existence of unreasonably accumulated profits and the imposition of 25%
surtax thereon. On October 31, 1963, the Court of Tax Appeals found that there
was no prescription and affirmed the deficiency assessment in toto.|

Issue: Was the disallowance of items claimed as deductible proper?

Held: The income tax law does not authorize the depreciation of an asset beyond its
acquisition cost. Hence, a deduction over and above such cost cannot be claimed
and allowed. The reason is that deductions from gross income are privileges, not
matters of right. They are not created by implication but upon clear expression in the
law. Accordingly, the claim for depreciation beyond P36,842.04 or in the amount of
P10,500.49 has no justification in the law. The determination, therefore, of the
Commissioner of Internal Revenue disallowing said amount, affirmed by the Court of
Tax Appeals, is sustained.||

Expenses

Petitioner argues that when it sent its records to Manila in February, 1959, the
papers in support of these miscellaneous and travelling expenses were not included
for the reason that by February 9, 1959, when the Bureau of Internal Revenue
decided to investigate, petitioner had no more obligation to keep the same since five
 years had lapsed from the time these expenses were incurred (p. 41 of same TSN).
On this ground, the petitioner may be sustained for under Section 337 of the Tax
Code, receipts and papers supporting such expenses need be kept by the taxpayer
for a period of five years from the last entry. At the time of the investigation, said five
years had lapsed. Taxpayer's stand on this issue is therefore sustained. | |
DK
20. PRC/UNILEVER vs CA – 1996
.
Facts:

Mariano Zamora, owner of the Bay View Hotel and Farmacia Zamora, Manila, filed his income tax returns
for the years 1951 and 1952. The Collector of Internal Revenue found that he failed to file his return of the
capital gains derived from the sale of certain real properties and claimed deductions which were not
allowable. The Collector required him to pay the sums of P43,758.50 and P7,625.00, as deficiency income
tax for the years 1951 and 1952, respectively.

Ruling of CTA:

On appeal by Zamora, the Court of Tax Appeals on December 29, 1958, modified the decision appealed
from and ordered him to pay the reduced total sum of P30,258.00 (P22,980.00 and P7,278.00, as
deficiency income tax for the years 1951 and 1952, respectively), within thirty (30) days from the date the
decision becomes final, plus the corresponding surcharges and interest in case of delinquency, pursuant to
section 51 (e), Int. Revenue Code. With costs against petitioner.

It is alleged by Mariano Zamora that the CTA erred in disallowing P10,478.50 as promotion expenses
incurred by his wife for the promotion of the Bay View Hotel and Farmacia Zamora. He contends that the
whole amount of P20,957.00 as promotion expenses in his 1951 income tax returns, should be allowed and
not merely one-half of it or P10,478.50, on the ground that, while not all the itemized expenses are
supported by receipts, the absence of some supporting receipts has been sufficiently and satisfactorily
established. For, as alleged, the said amount of P20,957.00 was spent by Mrs. Esperanza A. Zamora (wife
of Mariano), during her travel to Japan and the United States to purchase machinery for a new Tiki-Tiki
plant, and to observe hotel management in modern hotels. CTA, however, found that for said trip Mrs.
Zamora obtained only the sum of P5,000.00 from the Central Bank and that in her application for dollar
allocation, she stated that she was going abroad on a combined medical and business trip, which facts
were not denied by Mariano Zamora. No evidence had been submitted as to where Mariano had obtained
the amount in excess of P5,000.00 given to his wife which she spent abroad.

Issue: Whether or not the whole amount of P20,957.00 as promotion expenses in petitioner’s 1951 income
tax returns, should be allowed and not merely one-half of it or P10,478.50

Held: Promotion expenses constitute one of the deductions in conducting a business, and should satisfy
the requirements of Section 30 of the Tax Code, which provides that in computing net income, there shall
be allowed as deductions all the ordinary and necessary expenses paid or incurred during the taxable year,
in carrying on any trade or business (Vol. 4, Martens, Law of Federal Income Taxation, sec. 25.03, p. 307).
Representation expenses fall under the category of business expenses which are allowable deductions
from gross income, if they meet the conditions prescribed by law, particularly section 30 (a) (1), of the Tax
Code. To be deductible, they must be ordinary and necessary expenses paid or incurred in carrying on any
trade or business, and should meet the further test of reasonableness in amount. They should, moreover,
be covered by supporting paper; in the absence thereof the amount properly deductible as representation
expenses should be determined from all available data. (Visayan Cebu Terminal Co., Inc., vs. Collector of
Int. Rev., 108 Phil., 320). In view hereof, The Supreme Court is of the opinion that the CTA, did not commit
error in allowing as promotion expenses of Mrs. Zamora claimed in Mariano Zamora's 1951 income tax
returns, merely one-half or P10,478.50.

IN VIEW HEREOF, the petition in each of the above-entitled cases is dismissed, and the decision appealed
from is affirmed, without special pronouncement as to costs.

Bengzon, C . J ., Padilla, Bautista Angelo, Concepcion, Reyes, J .B.L., Dizon, Regala and Makalintal, JJ .,
concur.

Labrador and Barrera, JJ ., took no

x----------x
Allan
Philippine Refining Co. v. Court of Appeals,
G.R. No. 118794, May 8, 1996
Facts:
 Petitioner Philippine Refining Company (PRC) was assessed by respondent
Commissioner of Internal Revenue (Commissioner) to pay a deficiency tax for
the year 1985 in the amount of P1,892,584.00|.|
 The assessment was timely protested by petitioner on April 26, 1989, on the
ground that it was based on the erroneous disallowances of "bad debts" and
"interest expense" although the same are both allowable and legal deductions.
 Tax Court reversed and set aside the Commissioner's disallowance of the
interest expense of P2,666,545.19 but maintained the disallowance of the bad
debts of thirteen (13) debtors in the total sum of P395,324.27. Court of Appeals
which, as earlier stated, denied due course to the petition for review and
dismissed the same|.
Issue: Whether Court of Appeals is correct in affirming the decision of the Court of
Tax Appeals which disallowed petitioner's claim for deduction as bad debts of
several accounts.
Held: We find that said accounts have not satisfied the requirements of the
'worthlessness of a debt'. Mere testimony of the Financial Accountant of the
Petitioner explaining the worthlessness of said debts is seen by this Court as nothing
more than a self-serving exercise which lacks probative value. Mere allegations
cannot prove the worthlessness of such debts in 1985. Hence, the claim for
deduction of these thirteen (13) debts should be rejected.|
For debts to be considered as "worthless," and thereby qualify as "bad debts"
making them deductible, the taxpayer should show that (1) there is a valid and
subsisting debt; (2) the debt must be actually ascertained to be worthless and
uncollectible during the taxable year; (3) the debt must be charged off during the
taxable year; and (4) the debt must arise from the business or trade of the taxpayer.
Additionally, before a debt can be considered worthless, the taxpayer must also
show that it is indeed uncollectible even in the future. Furthermore, there are steps
outlined to be undertaken by the taxpayer to prove that he exerted diligent efforts to
collect the debts, viz: (1) sending of statement of accounts; (2) sending of collection
 letters; (3) giving the account to a lawyer for collection; and (4) filing a collection
case in court.| ||

DK
21. Aguinaldo industries vs. CIR -112 Scra
Facts:

Aguinaldo Industries Corporation is a domestic corporation engaged in two lines of business, namely: (a)
the manufacture of fishing nets, a tax- exempt industry, and (b) the manufacture of furniture. For
accounting purposes, each division is provided with separate books of accounts as required by the
Department of Finance. Under the company's accounting method, the net income from its Fish Nets
Division, miscellaneous income of the Fish Nets Division, and the income of the- Furniture Division are
computed individually.

Previously, petitioner acquired a parcel of land in Muntinglupa, Rizal, as site of its fishing net factory. This
transaction was entered in the books of the Fish Nets Division of the Company. Later, when another parcel
of land in Marikina Heights was found supposedly more suitable for the needs of petitioner, it sold the
Muntinglupa property. Petitioner derived profit from this sale which was entered in the books of the Fish
Nets Division as miscellaneous income to distinguish it from its tax-exempt income.

For the year 1957, petitioner filed two separate income tax returns — one for its Fish Nets Division and
another for its Furniture Division. After investigation of these returns, the examiners of the Bureau of
Internal Revenue found that the Fish Nets Division deducted from its gross income for that year the amount
of P61,187.48 as additional remuneration paid to the officers of petitioner. The examiner further found that
this amount was taken from the net profit of an isolated transaction (sale of aforementioned land) not in the
course of or carrying on of petitioner's trade or business. (It was reported) as part of the selling expenses of
the land in Muntinglupa, Rizal.

Upon recommendation of aforesaid examiner that the said sum of P61,187.48 be disallowed as deduction
from gross income, petitioner asserted in its letter of February 19, 1958, that said amount should be
allowed as deduction because it was paid to its officers as allowance or bonus pursuant to Section 3 of its
by-laws

Ruling of CTA: Upon the submission of the case for judgment on the basis of the pleadings and BIR offi
cial records, the respondent Court held the petitioner liable for the sum ofP17,123.93 as deficiency income
tax for 1957, plus 5% surcharge and 1% monthly interest for late payment from December 15, 1957 until
full payment is made.

Issue: Whether or not the bonus given to the officers of the petitioner upon the sale of its Muntinglupa land
is an ordinary and necessary business expense deductible for income tax purposes;
Held: NO. The applicable legal provision is Sec. 30 (a) (1) of the Tax Code which reads:
"In computing net income there shall be allowed as deductions —

"(a) Expenses:

"(1) In general. — All the ordinary and necessary expenses paid or incurred during the taxable year
in carrying on any trade or business, including a reasonable allowance for personal services
actually rendered. . . ."

On the basis of the forgoing standards, the bonus given to the officers of the petitioner as their share of the
profit realized from the sale of petitioner's Muntinglupa land cannot be deemed a deductible expense for tax
purposes, even if the aforesaid sale could be considered as a transaction for carrying on the trade or
business of the petitioner and the grant of the bonus to the corporate officers
pursuant to petitioner's by-laws could, as an intra-corporate matter, be sustained. The records show that
the sale was effected through a broker who was paid by petitioner a commission of P51,723 72 for his
services. On the other hand, there is absolutely no evidence of any service actually rendered by petitioner's
officers which could be the basis of a grant to them of a bonus out of the profit derived from the sale. This
being so, the payment of a bonus to them of the gain realized from the sale cannot be considered as a
selling expense; nor can it be deemed reasonable and necessary so as to make it deductible for tax
purposes. As stated by this Court in Alhambra Cigar and Cigarette Manufacturing Co. vs. Collector of
Internal Revenue, G.R. No. L-12026, May 29, 1959, construing Section 30 (a) (1) of the Tax Code:

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

Then, this Court quoted with approval the appealed decision:

". . . these extraordinary and unusual amounts paid by petitioner to these directors in the guise and form of
compensation for their supposed services as such, without any relation to the measure of their actual
services, cannot be regarded as ordinary and necessary expenses within the meaning of the law."

This posture is in line with the doctrine in the law of taxation that the taxpayer must show that its claimed
deductions clearly come within the language of the law since allowances, like exemptions, are matters of
legislative grace.

WHEREFORE, the judgment under review is affirmedin toto. Costs against the petitioner. cdasia

SO ORDERED.
 Teehankee, Fernandez, Guerrero and Melencio-Herrera, JJ ., concur. Makasiar, J ., took

no part.
 x----------------x

Allan
Aguinaldo Industries Corp. v. Commissioner of Internal Revenue, G.R. No. L-
29790, February 25, 1982
Facts:
 Aguinaldo Industries Corporation is a domestic corporation engaged in two
lines of business, namely: (a) the manufacture of fishing nets, a tax-exempt
industry, and (b) the manufacture of furniture.|||
 Under the company's accounting method, the net income from its Fish Nets
Division, miscellaneous income of the Fish Nets Division, and the income of
the-Furniture Division are computed individually.||
 For the year 1957, petitioner filed two separate income tax returns — one for
its Fish Nets Division and another for its Furniture Division. After investigation
of these returns, the examiners of the Bureau of Internal Revenue found that
the Fish Nets Division deducted from its gross income for that year the
amount of P61,187.48 as additional remuneration paid to the officers of
petitioner. The examiner further found that this amount was taken from the
net profit of an isolated transaction (sale of aforementioned land) not in the
course of or carrying on of petitioner's trade or business.
 Upon recommendation of aforesaid examiner that the said sum of P61,187.48
be disallowed as deduction from gross income, petitioner asserted in its letter
of February 19, 1958, that said amount should be allowed as deduction
because it was paid to its officers as allowance or bonus pursuant to Section
3 of its by-laws.
Issue: Whether or not the bonus given to the officers of the petitioner upon the sale of
its Muntinglupa land is an ordinary and necessary business expense deductible for
income tax purposes.
Held: On the basis of the forgoing standards, the bonus given to the officers of the
petitioner as their share of the profit realized from the sale of petitioner's Muntinglupa
land cannot be deemed a deductible expense for tax purposes, even if the aforesaid
sale could be considered as a transaction for carrying on the trade or business of the
petitioner and the grant of the bonus to the corporate officers pursuant to petitioner's by-
laws could, as an intra-corporate matter, be sustained. The records show that the sale
was effected through a broker who was paid by petitioner a commission of P51,723 72
for his services. On the other hand, there is absolutely no evidence of any service
actually rendered by petitioner's officers which could be the basis of a grant to them of a
bonus out of the profit derived from the sale. This being so, the payment of a bonus to
them of the gain realized from the sale cannot be considered as a selling expense; nor
can it be deemed reasonable and necessary so as to make it deductible for tax
purposes.| As stated by this Court in Alhambra Cigar and Cigarette Manufacturing
Co. vs. Collector of Internal Revenue, G.R. No. L-12026, May 29, 1959, construing
Section 30 (a) (1) of the Tax Code:
". . . whenever a controversy arises on the deductibility, for purposes of
income tax, of certain items for alleged compensation of officers of the
taxpayer, two (2) questions become material, namely: (a) Have 'personal
services' been 'actually rendered' by said officers? (b) In the affirmative
case, what is the 'reasonable allowance' thereof?”
 x--------------x
DK

22. CM Hoskins & Co. vs CIR

Facts:
Hoskins is a domestic corporation engaged in the realty business. It was a realtor duly provided w ith a
real estate broker's privilege tax receipt. I t developed subdivisions and promoted the sale or lease of the
subdivision lots. It entered into management contracts with Paradise Farms, Inc., Patricia, Inc., Realty
Investments, Inc., and Bay Boulevard Subdivision Inc. for the development of their subdivisions, the sale
of the lots, and the collection of the installments on the contracts to sell the lots. For each of those
services, it was paid a distinct compensation. Thus, in its contract with Realty Investments, Inc. dated
July 26, 1956 it was stipulated that as "managing agents to supervise and direct the subdivision,
development, sale and administration" of the latter's land, Hoskins was to receive (1) as selling
commission, ten percent (10%) of the gross sales; (2) for its services in planning the project and
supervising the development of the subdivision, eight percent (8%) of the gross sales, and (3) as
collection fee, five per cent (5%) of all sums collected.

During the period from October, 1953 to September, 1958 Hoskins received from the subdivision owners
the sums of (1) P1,572,953.54 as selling commissions, (2) P392,658.58 supervision fees, and (3)
P285,991.47 as collection fees. On the selling commissions, it paid P94,184.14 as six percent brokerage
tax. But it did not pay any percentage tax on its supervision and collection fees.

Ruling of the CIR:

 The Commissioner of Internal Revenue ruled that the supervision and collection fees are subject
to the real estate broker's percentage tax. In a letter of demand dated August 11, 1960 he
required Hoskins to pay the sum of P51,140.09 as percentage tax on the collection and
supervision fees amounting to P678,650.05 plus twenty-five percent surcharge. The
Commissioner also imposed a compromise penalty of P8, 000. Hoskins refused to pay the
deficiency assessment. It contended that the supervision and collection fees do not form part of
its taxable gross compensation as a real estate broker. The Commissioner rejected Hoskins'
contention. It appealed to the Tax Court.

Ruling of the CTA:

 On appeal, the Court of Tax Appeal sustained the view of the Commissioner of Internal Revenue
and held that income derived from supervision of subdivisions and collections of installments for
lots sold are subject to the brokerage percentage tax.
Issue 1: Whether the term "gross compensation" in section 195 includes supervision and collection
fees received by a real estate broker as a realty subdivision operator.

Held 1: Section 195 of the Tax Code provides that real estate brokers "shall pay a percentage tax
equivalent to six per centum of the gross compensation received by them".

Section 194(s) of the Tax Code as amended by Republic Act No. 588 provides that a "real estate broker
includes any person, other than a real estate salesman" "who for another, and for a compensation or in
the expectation or promise of receiving compensation" performs any of the following acts:

xxx xxxx xxxx

"(4) Or shall be employed by or on behalf of the owner or owners of lots or other parcels of real
estate at a stated salary, on commission, or otherwise, to sell such real estate or any parts thereof
in lots or parcels." (Paragraphing supplied).

With respect to the collection fees, there can be little doubt that the services rendered by Hoskins in
collecting the amounts due on the sales of lots on the installment plan are incidental to its brokerage
service in selling the lots. The sale of a lot may be on the cash basis or on installment. If the broker's
commissions on the cash sales of lots are subject to the brokerage percentage tax, it should logically
follow that its commissions on installment sales are likewise taxable.

As to the supervision fees for the development and management of the subdivisions paid out of the
proceeds of the sale of subdivision lots and commissions from collecting installments due are subject to
the real estate broker's percentage tax. As enunciated in the case of J. M. Tuazon & Co. vs. Collector of
Internal Revenue, 108 Phil. 700, "the duty of developing the subdivision, with its lots, streets playgrounds,
sewage etc. is also necessary incident to the duty of selling the lands subject of the contract"; that the
lands must be subdivided into residential lots, with streets laid out, before said lots can be sold, and that
as the development work was entrusted to the broker, instead of to another person, and was integrated
into the agency contract, the same must be regarded as an indivisible contract of brokerage."

Republic Act No. 588, which took effect on September 22, 1950, added a fourth category of real estate
brokers, namely, those persons who are employed by owners of real estate to sell, for compensation,
such real estate or any parts thereof in lots or parcels. Circumstances have transformed real estate
brokers from mere agents, negotiating the purchase and sale of lands, into realtors or operators of real
estate subdivision. The increase in population and the rising middle class have created a considerable
demand for housing lots. To meet the great demand, land-owners have converted farm lands into
residential lands. But many of them do not want to shoulder the onerous task of developing and
managing their subdivisions. They entrust that prestation to the real estate broker w ho w illingly assumes
that responsibility because it means that the availability of lots for sale would be ensured.

Hence, there is basis for holding that the operation of subdivisions is really incidental to the main
business of the broker which is the sale of the lots on commission.

Issue 2: Whether or not the imposition of the twenty-five percent surcharge on the deficiency
assessment is proper.

Held 2: SURCHARGES FORM PART OF TAX. — Section 183 of the Tax Code provides that if the
business percentage tax is not paid within twenty days after the end of each amount (formerly calendar
quarter), "the amount of the tax shall be increased by twenty-five per centum, the increment to be a part
of the tax." However, considering that the taxability of collection and supervision fees was really a
debatable or controversial matter and was set at rest only on June 30, 1960, when the case of J. M.
Tuazon & Co. vs. Collector of Internal Revenue, 108 Phil. 700 was decided, the imposition of the twenty-
five percent surcharge is not justified.

WHEREFORE, the Tax Court's judgment is modified by eliminating therefrom the twenty-five percent
surcharge amounting to P7,746.39 and affirming it as to the deficiency percentage tax amounting to
P30,985.56. No costs. aisa dc

SO ORDERED.
 Fernando (Chairman), Antonio, Muñoz Palma and Martin, JJ ., concur. Barredo, J ., took
no part.
 Muñoz Palma and Martin JJ ., were designated to sit in the Second Division. Concepcion, Jr., J
., is on leave.

x-----------x
Allan
C. M. Hoskins & Co., Inc. v. Commissioner of Internal Revenue, G.R. No. L-
24059, November 28, 1969
Facts:
 Petitioner, a domestic corporation engaged in the real estate business as
brokers, managing agents and administrators, filed its income tax return
for its fiscal year ending September 30, 1957 showing a net income of
P92,540.25 and a tax liability due thereon of P18,508.00, which it paid in
due course.
 Upon verification of its return, respondent Commissioner of Internal
Revenue, disallowed four items of deduction in petitioner's tax returns and
assessed against it an income tax deficiency in the amount of P28,054.00
plus interests. The Court of Tax Appeals upon reviewing the assessment
at the taxpayer's petition, upheld respondent's disallowance of the
principal item of petitioner's having paid to Mr. C. M. Hoskins, its founder
and controlling stockholder the amount of P99,977.91 representing 50% of
supervision fees earned by it and set aside respondent's disallowance of
three other minor items.
Issue: Whether the Tax Court's findings that the disallowed payment to Hoskins
was an inordinately large one is correct.
Held: Considering that in addition to being Chairman of the board of directors of
petitioner corporation, which bears his name, Hoskins, who owned 99.6% of its total
authorized capital stock while the four other officers-stockholders of the firm owned a
total of four-tenths of 1%, or one tenth of 1% each, with their respective nominal
shareholdings of one share each, was also salesman-broker for his company, receiving
a 50% share of the sales commissions earned by petitioner, besides his monthly salary
of P3,750.00 amounting to an annual compensation of P45,000.00 and an annual salary
bonus of P40,000.00, plus free use of the company car and receipt of other similar
allowances and benefits, the Tax Court correctly ruled that the payment by petitioner to
Hoskins of the additional sum of P99,977.91 as his equal or 50% share of the 8%
supervision fees received by petitioner as managing agents of the real estate,
subdivision projects of Paradise Farms, Inc. and Realty Investments, Inc. was
inordinately large and could not be accorded the treatment of ordinary and necessary
expenses allowed as deductible items within the purview of Section 30 (a) (i) of the Tax
Code.|
There could be no question that as Chairman of the board and practically an absolutely
controlling stockholder of petitioner, holding 99.6% of its stock, Hoskins wielded
 tremendous power and influence in the formulation and making of the company's
policies and decisions.|
The conditions precedent to the deduction of bonuses to employees are: (1) the
payment of the bonuses is in fact compensation; (2) it must be for personal services
actually rendered; and (3) the bonuses, when added to the salaries, are 'reasonable . . .
when measured by the amount and quality of the services performed with relation to the
DK business of the particular taxpayer.'

23. Hospital de San juan de dios vs. Cir – 175 Scra

Facts:
In a letter dated January 15, 1959, the Commissioner of Internal Revenue assessed and demanded from
the petitioner, Hospital de San Juan De Dios, Inc., payment of P51,462 as deficiency income taxes for 1952
to 1955. The petitioner protested against the assessment and requested the Commissioner to cancel and
withdraw it. After reviewing the assessment, the Commissioner advised petitioner on November 8, 1960
that the deficiency income tax assessment against it was reduced to only P16,852.41. Still the petitioner,
through its auditors, insisted on the cancellation of the revised assessment. The request was, however,
denied. There is no dispute that petitioner is engaged in both taxable and non- taxable operations. The
income derived from the operations of the hospital and the nursing school are exempt from income tax
while the rest of petitioner's income are subject thereto. Its taxable or non-operating income consists of
rentals, interests and dividends received from its properties and investments. In the computation of its
taxable income for the years 1952 to 1955, petitioner allowed all its taxable income to share in the
allocation of administrative expenses. Respondent CIR disallowed, however, the interests and dividends
from sharing in the allocation of administrative expenses on the ground that the expenses incurred in the
administration or management of petitioner's investments are not allowable business expenses inasmuch
as they were not incurred in 'carrying on any trade or business' within the contemplation of Section 30
(a)(1) of the Revenue Code. Consequently, petitioner was assessed deficiency income taxes for the years
in question.

Ruling of CIR:
 On September 18, 1965, petitioner sought a review of the assessment by the Court of Tax Appeals
(hereafter "CTA"). In a decision dated August 29, 1969, the CTA upheld the Commissioner. It held
that the expenses incurred by the petitioner for handling its funds or income consisting solely of
dividends and interests, were not expenses incurred in "carrying on any trade or business," hence,
not deductible as business or administrative expenses.

Issue: Whether or not the expenses incurred by the petitioner in the administration or management of its
investments consisting solely of dividends and interests are deductible as business or administrative
expenses.

Held: The Court of Tax Appeals found that the interests and dividends received by the petitioner "were
merely incidental income to petitioner's main activity, which is the operation of its hospital and nursing
schools [hence] the conclusion is inevitable that petitioner's activities never went beyond that of a passive
investor, which under existing jurisprudence do not come within the purview of carrying on any 'trade or
business."' That factual finding is binding on this Court. And, as the principle of allocating expenses is
grounded on the premise that the taxable income was derived from carrying on a trade or business, as
distinguished from mere receipt of interests and dividends from one's investments, the Court of Tax
Appeals correctly ruled that said income should not share in the allocation of administrative expenses.
Hospital de San Juan De Dios, Inc., according to its Articles of Incorporation, was established for purposes
"which are benevolent, charitable and religious, and not for financial gain" (p. 12, Petitioner's Brief). It is not
carrying on a trade or business for the word "business" in its ordinary and common use means "human
efforts which have for their end living or reward; it is not commonly used as descriptive of charitable,
religious, educational or social agencies" or "any particular occupation or employment habitually engaged
in especially for livelihood or gain" or "activities where profit is the purpose or livelihood is the motive."
(Collector of Internal Revenue vs. Manila Lodge BPOE, 105 Phil. 986).

WHEREFORE, finding no reversible error in the decision of the Court of Tax Appeals, the same is
affirmedin toto. Costs against the petitioner. This decision is immediately executory.

SO ORDERED.
 Narvasa, Cruz and Medialdea, JJ., concur. Gancayco, J., is on leave.

x--------------x
Allan
Hospital De San Juan De Dios, Inc. v. Commissioner of Internal Revenue,
G.R. No. 31305, May 10, 1990

Facts:

 In a letter dated January 15, 1959, the Commissioner of Internal Revenue

assessed and demanded from the petitioner, Hospital de San Juan De
Dios, Inc., payment of P51,462 as deficiency income taxes for 1952 to
1955.|

 The petitioner protested against the assessment and requested the

Commissioner to cancel and withdraw it. After reviewing the assessment,
the Commissioner advised petitioner on November 8, 1960 that the
deficiency income tax assessment against it was reduced to only
P16,852.41. |||

 Petitioner sought a review of the assessment by the Court of Tax Appeals

(hereafter "CTA"). In a decision dated August 29, 1969, the CTA upheld
the Commissioner. It held that the expenses incurred by the petitioner for
handling its funds or income consisting solely of dividends and interests,
were not expenses incurred in "carrying on any trade or business," hence,
not deductible as business or administrative expenses.||

 In the computation of its taxable income for the years 1952 to 1955,
petitioner allowed all its taxable income to share in the allocation of
administrative expenses. Respondent disallowed, however,
the interests and dividends from sharing in the allocation of administrative
expenses on the ground that the expenses incurred in the administration
or management of petitioner's investments are not allowable business
expenses inasmuch as they were not incurred in 'carrying on any trade or
business' within the contemplation of Section 30 (a)(1) of the Revenue
Code. Consequently, petitioner was assessed deficiency income taxes for
the years in question."|

Issue: Whether receipt of interests and dividends constituted the carrying

on of a 'trade or business' so as to warrant the deductibility of the
expenses incurred in their realization.

Held: No. petitioner failed to establish by competent proof that its receipt
of interests and dividends constituted the carrying on of a 'trade or
business' so as to warrant the deductibility of the expenses incurred in
their realization. Under these circumstances and coupled with the fact that
the interests and dividends here in question are merely incidental income
to petitioner's main activity, which is the operation of its hospital and
nursing schools, the conclusion becomes inevitable that petitioner's
activities never go beyond that of a passive investor, which under existing
jurisprudence do not come within the purview of carrying on any 'trade or
business.' Hospital de San Juan De Dios, Inc., according to its Articles of
Incorporation, was established for purposes "which are benevolent,
charitable and religious, and not for financial gain."

x-----------------x
DK

24. Republic vs. Manila Electric company – November 15, 2002

,
REPUBLIC OF THE PHILIPPINES, REPRESENTED BY ENERGY REGULATORY BOARD , petitioner,
vs. MANILA ELECTRIC COMPANY, respondent. [G.R. No. 141314. November 15, 2002.]
Puno, J:

Facts:
 MERALCO filed with the ERB an application for the revision of its rate schedules. The application
reflected an average increase of 21 centavos per kilowatt hour (kwh) in its distribution charge. The
application also included a prayer for provisional approval of the increase pursuant to Section 16(c)
of the Public Service Act and Section 8 of Executive Order No. 172. On January 28, 1994, the ERB
issued an Order granting a provisional increase of P0.184 per kwh, subject to the following
condition:
 "In the event, however, that the Board finds, after hearing and submission by the Commission on
Audit of an audit report on the books and records of the applicant that the latter is entitled to a
lesser increase in rates, all excess amounts collected from the applicant's customers as a result of
this Order shall either be refunded to them or correspondingly credited in their favor for application
to electric bills covering future consumptions."
 In the same Order, the ERB requested the Commission on Audit (COA) to conduct an "audit and
examination of the books and other records of account of the applicant for such period of time,
which in no case shall be less than 12 consecutive months, as it may deem appropriate" and to
submit a copy thereof to the ERB immediately upon completion.
 On February 11, 1997, the COA submitted its Audit Report SAO No. 95-07 (the "COA Report")
which contained, among others, the recommendation not to include income taxes paid by
MERALCO as part of its operating expenses for purposes of rate determination and the use of the
net average investment method for the computation of the proportionate value of the properties
used by MERALCO during the test year for the determination of the rate base.
Ruling of the ERB:

 the ERB rendered its decision adopting the above recommendations and authorized MERALCO to
implement a rate adjustment in the average amount of P0.017 per kwh, effective with respect to
MERALCO's billing cycles beginning February 1994. The ERB further ordered that "the provisional
relief in the amount of P0.184 per kilowatt hour granted under the Board's Order dated January 28,
1994 is hereby superseded and modified and the excess average amount of P0.167 per kilowatt
hour starting with MERALCO's billing cycles beginning February 1994 until its billing cycles
beginning February 1998, be refunded to MERALCO's customers or correspondingly credited in
their favor for future consumption."

The ERB held that income tax should not be treated as operating expense as this should be "borne by the
stockholders who are recipients of the income or profits realized from the operation of their business"
hence, should not be passed on to the consumers. 5 Further, in applying the net average investment
method, the ERB adopted the recommendation of COA that in computing the rate base, only the
proportionate value of the property should be included, determined in accordance with the number of
months the same was actually used in service during the test year.

Ruling of the CA:

 the Court of Appeals set aside the ERB decision insofar as it directed the reduction of the
MERALCO rates by an average of P0.167 per kwh and the refund of such amount to MERALCO's
customers beginning February 1994 and until its billing cycle beginning February 1998.

Issue: Whether the income tax paid by Meralco should be treated as part of its operating expenses and
thus considered in determining the amount of increase in the electric rates.

Held: In determining the just and reasonable rates to; be charged by a public utility, three major factors
are considered by the regulating agency: a) rate of return; b) rate base; and c) the return itself or the
computed revenue to be earned by the public utility based on the rate of return and rate base. The rate of
return is a judgment percentage which, if multiplied with the rate base, provides a fair return on the public
utility for the use of its property for service to the public: The rate of return of a public utility is not prescribed
by statute but by administrative and judicial pronouncements. This Court has consistently adopted a 12%
rate of return for public utilities. The rate base, on the other hand, is an evaluation of the property devoted
by the utility to the public service or the value of invested capital or property which the utility is entitled to a
return.
In determining whether or not a rate yields a fair return to the utility, the operating expenses of the utility
must be considered. The return allowed to a public utility in accordance with the prescribed rate must be
sufficient to provide for the payment of such reasonable operating expenses incurred by the public utility in
the provision of its services to the public. Thus, the public utility is allowed a return on capital over and
above operating expenses. However, only such expenses and in such amounts as are reasonable for the
efficient operation of the utility should be allowed for determination of the rates to be charged by a public
utility. The ERB correctly ruled that income tax should not be included in the computation of operating
expenses of a public utility. Income tax paid by a public utility is inconsistent with the nature of operating
expenses. In general, operating expenses are those which are reasonably incurred in connection with
business operations to yield revenue or income. They are items of expenses which contribute or are
attributable to the production of income or revenue. As correctly put by the ERB, operating expenses
"should be a requisite of or necessary in the operation of a utility, recurring, and that it redounds to the
service or benefit of customers." Income tax, it should be stressed, is imposed on an individual or entity as
a form of excise tax or a tax on the privilege of earning income. In exchange for the protection extended by
the State to the taxpayer, the government collects taxes as a source of revenue to finance its activities.
Clearly, by its nature, income tax payments of a public utility are not expenses which contribute to or are
incurred in connection with the production of profit of a public utility. Income tax should be borne by the
taxpayer alone as they are payments made in exchange for benefits received by the taxpayer from the
State. No benefit is derived by the customers of a public utility for the taxes paid by such entity and no
direct contribution is made by the payment of income tax to the operation of a public utility for purposes of
generating revenue or profit. Accordingly, the burden of paying income tax should be Meralco's alone and
should not be shifted to the consumers by including the same in the computation of its operating expenses.

WHEREFORE, in view of the foregoing, the instant petitions are GRANTED and the decision of the Court
of Appeals in C.A. G.R. SP No. 46888 is REVERSED. Respondent MERALCO is authorized to adopt a rate
adjustment in the amount of P0.017 per kilowatt hour, effective with respect to MERALCO's billing cycles
beginning February 1994. Further, in accordance with the decision of the ERB dated February 16, 1998,
the excess average amount of P0.167 per kilowatt hour starting with the applicant's billing cycles beginning
February 1998 is ordered to be refunded to MERALCO's customers or correspondingly credited in their
favor for future consumption.

SO ORDERED.
 Panganiban, Sandoval-Gutierrez, Corona and Carpio-Morales, JJ., concur.

x-----------------------------x

x--------x
Republic v. Manila Electric Co., G.R. No. 141314, 141369, November 15,
2002
Facts:
 On December 23, 1993, MERALCO filed with the ERB an application for
the revision of its rate schedules. The application reflected an average
increase of 21 centavos per kilowatt hour (kwh) in its distribution
charge.|||
 ERB requested the Commission on Audit (COA) to conduct an "audit and
examination of the books and other records of account of the applicant for
such period of time, which in no case shall be less than 12 consecutive
months, as it may deem appropriate" and to submit a copy thereof to the
ERB immediately upon completion.|||
 ERB rendered its decision adopting the recommendations of COA and
authorized MERALCO to implement a rate adjustment in the average
amount of P0.017 per kwh, effective with respect to MERALCO's billing
cycles beginning February 1994.|
 ERB held that income tax should not be treated as operating expense as
this should be "borne by the stockholders who are recipients of the income
or profits realized from the operation of their business" hence, should not
be passed on to the consumers.|||
 Court of Appeals set aside the ERB decision insofar as it directed the
reduction of the MERALCO rates by an average of P0.167 per kwh and
the refund of such amount to MERALCO's customers.
Issue: Whether income tax paid by MERALCO should be treated as part of
its operating expenses and thus considered in determining the amount of
increase in rates imposed by MERALCO.
Held: No. In general, operating expenses are those which are reasonably
incurred in connection with business operations to yield revenue or income.
They are items of expenses which contribute or are attributable to the
production of income or revenue. As correctly put by the ERB, operating
expenses "should be a requisite of or necessary in the operation of a utility,
recurring, and that it redounds to the service or benefit of customers." |
Income tax, it should be stressed, is imposed on an individual or entity as a
form of excise tax or a tax on the privilege of earning income. In exchange for
the protection extended by the State to the taxpayer, the government collects
taxes as a source of revenue to finance its activities.
Accordingly, the burden of paying income tax should be Meralco's alone and
should not be shifted to the consumers by including the same in the
computation of its operating expenses.|||||||
 x---------x

25. china banking corporation vs ca – 336 Scra

26. CIR vs. Isabela cultural Corp  feb, 12, 2007
27. CIR vs. Central Luzon Drug corporation
28. Bicolandia Drug Corp vs.CIR  june 22, 2006
29. Carlos superdrug corp vs. DSWD  june 29, 2007
30. Pansacola vs. CIR  Nov 16, 2006
31. Roxas vs. CTA  1968
 Chapter 4

Exempt Corporation
CIR vs. YMCA – 1998
1.
2. CIR vs. CA  298 Scra 83
3. CIR vs. G.Cinco Educational Corp.  1956
4. Coconut oil refiners vs. Executive Secretary  july 29, 2005
5. Commissioner of customs vs. Philippine Phosphate Fertilizer Corp.
1. CIR vs. YMCA – 1998

x----------------x
 2. CIR vs. CA  298 Scra 83
.
COMMISSIONER OF INTERNAL REVENUE vs. COURT OF APPEALS, COURT OF TAX APPEALS and
YOUNG MEN'S CHRISTIAN ASSOCIATION OF THE PHILIPPINES, INC.
G.R. No. 124043, October 14, 1998

 Private Respondent YMCA is a non-stock, non-profit institution, which conducts

various programs and activities that are beneficial to the public, especially the
young people, pursuant to its religious, educational and charitable objectives.
 In 1980, private respondent earned, among others, an income of P676,829.80
from leasing out a portion of its premises to small shop owners, like restaurants
and canteen operators, and P44,259.00 from parking fees collected from non-
members.
 The commissioner of internal revenue (CIR) issued an assessment to private
respondent including surcharge and interest, for deficiency income tax,
deficiency expanded withholding taxes on rentals and professional fees and
deficiency withholding tax on wages.
 Private respondent formally protested the assessment and, as a supplement to
its basic protest, filed a letter. In reply, the CIR denied the claims of YMCA.
 Contesting the denial of its protest, the YMCA filed a petition for review at the
Court of Tax Appeals (CTA)
 In due course, the CTA issued this ruling in favor of the YMCA:

. . . [T]he leasing of [private respondent's] facilities to small shop owners,

to restaurant and canteen operators and the operation of the parking lot
are reasonably incidental to and reasonably necessary for the
accomplishment of the objectives of the [private respondents]. The
rentals were minimal as for example, the barbershop was only charged
P300 per month. He also testified that there was actually no lot devoted
for parking space but the parking was done at the sides of the building.
 The parking was primarily for members with stickers on the windshields
of their cars and they charged P.50 for non-members. The rentals and
parking fees were just enough to cover the costs of operation and
maintenance only. The earning[s] from these rentals and parking charges
including those from lodging and other charges for the use of the
recreational facilities constitute [the] bulk of its income which [is]
channeled to support its many activities and attainment of its objectives.
Under these circumstances, we could conclude that the activities are
already profit oriented, not incidental and reasonably necessary to the
pursuit of the objectives of the association and therefore, will fall under
the last paragraph of Section 27 of the Tax Code and any income derived
therefrom shall be taxable.Considering our findings that [private
respondent] was not engaged in the business of operating or contracting
[a] parking lot, we find no legal basis also for the imposition of [a]
deficiency fixed tax and [a] contractor's tax in the amount[s] of P353.15
and P3,129.73, respectively.

 Dissatisfied with the CTA ruling, the CIR elevated the case to the Court of
Appeals (CA).
 CA’s decision cited the case of Province of Abra vs. Hernando and Abra Valley
College Inc. vs. Aquino which held that "the leasing of petitioner's (herein
respondent's) facilities to small shop owners, to restaurant and canteen
operators and the operation of the parking lot are reasonably incidental to and
reasonably necessary for the accomplishment of the objectives of the
petitioners, and the income derived therefrom are tax exempt, must be
reversed.
 Finding merit in the Motion for Reconsideration filed by the YMCA, the CA
reversed itself and promulgated on September 28, 1995 its first assailed
Resolution which, in part, reads:
  The second ground raised is that the respondent CTA did not err in saying that
the rental from small shops and parking fees do not result in the loss of the
exemption. Not even the petitioner would hazard the suggestion that YMCA is
designed for profit.
 The internal revenue commissioner's own Motion for Reconsideration was
denied by Respondent

ISSUE: WHETHER OR NOT THE INCOME OF PRIVATE RESPONDENT FROM RENTALS OF SMALL
SHOPS AND PARKING FEES [IS] EXEMPT FROM TAXATION
HELD:
 NO. NOT AN EDUCATIONAL INSTITUTION.
"SEC. 27. Exemptions from tax on corporations. — The following organizations shall not
be taxed under this Title in respect toincome received by them as such —
(g) Civic league or organization not organized for profit but operated exclusively
for the promotion of social welfare
(h)Club organized and operated exclusively for pleasure, recreation, and other
non-profitable purposes, no part of the net income of which inures to the
benefit of any private stockholder or member;
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 the tax
imposed under this Code. (as amended by Pres. Decree No. 1457)"
 Petitioner argues that while the income received by the organizations enumerated in
Section 27 (now Section 26) of the NIRC is, as a rule, exempted from the payment of tax
"in respect to income received by them as such," the exemption does not apply to
income derived ". . . 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 . . ."
 Because taxes are the lifeblood of the nation, the Court has always applied the doctrine
of strict interpretation in construing tax exemptions. Furthermore, a claim of statutory
exemption from taxation should be manifest and unmistakable from the language of
the law on which it is based. Thus, the claimed exemption "must expressly be granted
in a statute stated in a language too clear to be mistaken."
 In the instant case, the exemption claimed by the YMCA is expressly disallowed by the
very wording of the last paragraph of then Section 27 of the NIRC which mandates
that the income of exempt organizations (such as the YMCA) from any of their
properties, real or personal, be subject to the tax imposed by the same Code. Because
the last paragraph of said section unequivocally subjects to tax the rent income of the
YMCA from its real property, the Court is duty-bound to abide strictly by its literal
meaning and to refrain from resorting to any convoluted attempt at construction.
 It is axiomatic that where the language of the law is clear and unambiguous, its express
terms must be applied.
 A reading of the last paragraph ineludibly shows that the income from any property of
exempt organizations, as well as that arising from any activity it conducts for profit, is
taxable. The phrase "any of their activities conducted for profit" does not qualify the
word "properties." This makes income from the property of the organization taxable,
regardless of how that income is used — whether for profit or for lofty non-profit
purposes.
 Verbalegis non estrecedendum. Not allowed merely on the unconvincing ground that
the said income is not collected for profit but is merely incidental to its operation. The
law does not make a distinction. The rental income is taxable regardless of whence such
income is derived and how it is used or disposed of. Where the law does not distinguish,
neither should we.
 Private respondent enunciates three points. First, the present provision is divisible into
two categories: (1) "[c]haritable institutions, churches and parsonages or convents
appurtenant thereto, mosques and non-profit cemeteries," the incomes of which are,
from whatever source, all tax-exempt; and (2) "[a]ll lands, buildings and improvements
 actually and directly used for religious, charitable or educational purposes," which are
exempt only from property taxes.
 Second, Lladoc v. Commissioner of Internal Revenue, which limited the exemption only
to the payment of property taxes, referred to the provision of the 1935 Constitution and
not to its counterparts in the 1973 and the 1987 Constitutions.
 Third, the phrase "actually, directly and exclusively used for religious, charitable or
educational purposes" refers not only to "all lands, buildings and improvements," but
also to the above-quoted first category which includes charitable institutions like the
private respondent.
 Justice Hilario G. Davide, Jr.: ". . . what is exempted is not the institution itself . . .; those
exempted from real estate taxes are lands, buildings and improvements actually,
directly and exclusively used for religious, charitable or educational
purposes." EXEMPTION ONLY PERTAINS TO PROPERTY TAXES.
 Laws allowing tax exemption are construed strictissimi juris. YMCA must prove with
substantial evidence that
o it falls under the classification non-stock, non-profit educational institution; and
o the income it seeks to be exempted from taxation is used actually, directly, and
exclusively for educational purposes.

 The term "educational institution " or "institution of learning" has acquired a well-
known technical meaning, of which the members of the Constitutional Commission are
deemed cognizant.Under the Education Act of 1982, such term refers to schools.
 The school system is synonymous with formal education, which "refers to the
hierarchically structured and chronologically graded learnings organized and provided
by the formal school system and for which certification is required in order for the
learner to progress through the grades or move to the higher levels."
 It is settled that the term "educational institution," when used in laws granting tax
exemptions, refers to a ". . . school seminary, college or educational establishment . .
 ."Therefore, the private respondent cannot be deemed one of the educational
institutions covered by the constitutional provision under consideration.
 ". . . Words used in the Constitution are to be taken in their ordinary acceptation. While
in its broadest and best sense education embraces all forms and phases of instruction,
improvement and development of mind and body, and as well of religious and moral
sentiments, yet in the common understanding and application it means a place where
systematic instruction in any or all of the useful branches of learning is given by
methods common to schools and institutions of learning.
 The cases relied on by private respondent do not support its cause. YMCA of Manila
v. Collector of Internal Revenue and Abra Valley College, Inc. v. Aquino are not
applicable, because the controversy in both cases involved exemption from the
payment of property tax, not income tax.
 It is a basic rule in taxation that the factual findings of the CTA, when supported by
substantial evidence, will not be disturbed on appeal unless it is shown that the said
court committed gross error in the appreciation of facts. The latter merely applied the
law to the facts as found by the CTA and ruled on the issue raised by the CIR
 The distinction between a question of law and a question of fact is clear-cut. It has been
held that "[t]here is a question of law in a given case when the doubt or difference
arises as to what the law is on a certain state of facts; there is a question of fact when
the doubt or difference arises as to the truth or falsehood of alleged facts."

DISSENTING OPINION: JUSTICE BELLOSILLO

 Respondent YMCA is undoubtedly exempt from corporate income tax under the
provisions of Sec. 27, pars. (g) and (h), of the National Internal Revenue Code
 Income derived from its property by a tax exempt organization is not absolutely taxable.
Taken in solitude, a word or phrase such as, in this case, "the income of whatever kind
and character . . . from any of their properties" might easily convey a meaning quite
different from the one actually intended and evident when a word or phrase is
considered with those with which it is associated.
 It is a rule in statutory construction that every part of the statute must be interpreted
with reference to the context, that every part of the statute must be considered
together with the other parts and kept subservient to the general intent of the whole
enactment. A close reading of the last paragraph of Sec. 27 of the National Internal
Revenue Code, in relation to the whole section on tax exemption of the organizations
enumerated therein, shows that the phrase "conducted for profit" in the last paragraph
of Sec. 27 qualifies, limits and describes "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" in order to make such income taxable.
 It is the exception to Sec. 27, pars. (g) and (h) providing for the tax exemptions of the
income of said organizations. Hence, if such income from property or any other
property is not conducted for profit, then it is not taxable.
 The word "income" which is derived from property, real or personal, provided in the last
paragraph of Sec. 27 means the amount of money coming to a person or corporation
within a specified time as profit from investment; the return in money from one's
business or capital invested. Clearly, therefore, income derived from property whether
real or personal connotes profit from business or from investment of the same.
 There is no question that in leasing its facilities to small shop owners and in operating
parking spaces, YMCA does not engage in any profit-making business. Both the Court
of Tax Appeals, and the Court of Appeals in its resolution of 25 September 1995,
categorically found that these activities conducted on YMCA's property were aimed not
only at fulfilling the needs and requirements of its members as part of YMCA'S youth
program but, more importantly, at raising funds to finance the multifarious projects of
the Association.
 As the Court has ruled in one case, the fact that an educational institution charges
tuition fees and other fees for the different services it renders to the students does not
in itself make the school a profit-making enterprise that would place it beyond the
purview of the law exempting it from taxation. The mere realization of profits out of
its operation does not automatically result in the loss of an educational institution's
 exemption from income tax as long as no part of its profits inures to the benefit of any
stockholder or individual.
 In order to claim exemption from income tax, a corporation or association must show
that it is organized and operated exclusively for religious, charitable, scientific, athletic,
cultural or educational purposes or for the rehabilitation of veterans, and that no part of
its income inures to the benefit of any private stockholder or individual.
 The criterion or test in order to make such income taxable is when it arises from purely
profit-making business. Otherwise, when the income derived from use of property is
reasonable and incidental to the charitable, benevolent, educational or religious
purpose for which the corporation or association is created, such income should be tax-
exempt. The majority, if not all, of the income of the organizations covered by the
exemption provided in Sec. 27, pars. (g) and (h), of the NIRC are derived from their
properties, real or personal.
 If we are to interpret the last paragraph of Sec. 27 to the effect that all income of
whatever kind from the properties of said organization, real or personal, are taxable,
even if not conducted for profit, then Sec. 27, pars. (g) and (h), would be rendered
ineffective and nugatory.
 Jesus Sacred Heart College v. Collector of Internal Revenue: every responsible
organization must be so run as to at least insure its existence by operating within the
limits of its own resources, especially its regular income. It should always strive
whenever possible to have a surplus. If the benefits of the exemption would be limited
to institutions which do not hope or propose to have such surplus, then the
exemption would apply only to schools which are on the verge of bankruptcy.
 Unlike Harvard in the USA, there are and there have always been very few educational
enterprises in the Philippines which are supported by donations, and these
organizations usually have a very precarious existence.

x-------------------------x
 3. CIR vs. G.Cinco Educational Corp.  1956
.
COLLECTOR OF INTERNAL REVENUE vs. G. SINCO EDUCATIONAL CORP.
G.R. No. L-9276, October 23, 1956

 Vicente G. Sinco established and operated an educational institution known as

Foundation College of Dumaguete. Sinco would have continued operating said
college were it not for the requirement of the Department of Education that as
far as practicable schools and colleges recognized by the government should be
incorporated, and so on September 21, 1951, the V. G. Sinco Educational
Institution was organized.
 This corporation was non-stock and was capitalized by V. G. Sinco and members
of his immediate family. This corporation continued the operations of
Foundation College of Dumaguete.
 The investigation conducted by an income tax examiner of the Bureau of Internal
Revenue revealed that the college realized a taxable net income for the year
1949 in the sum of P3,098.06 and for the year 1950 in the sum of P17,038.59.
 For the years 1951 to 1953, inclusive, the income tax returns of the college have
not as yet been verified but it reported a taxable net profit of P26,868.60 for the
year 1951; a loss of P9,129.80 for the year 1952 and a profit of P223.56 for the
year 1953.
 The Collector of Internal Revenue assessed against the college an income tax for
the years 1950 and 1951 in the aggregate sum of P5,364.77, which was paid by
the college. Two years thereafter, the corporation commenced an action in the
Court of First Instance of Negros Oriental for the refund of this amount alleging
that it is exempt from income tax under section 27 (e) of the National Internal
Revenue Code. Pursuant to the provisions of Republic Act 1125, the case was
remanded to the Court of Tax Appeals which, after due trial, decided the case in
favor of the corporation.
 Invoking section 27 (e) of the National Internal Revenue Code, the appellee
claims that it is exempt from the payment of the income tax because it is
organized and maintained exclusively for the educational purposes and no part
of its net income inures to the benefit of any private individual.
 On the other hand, the appellant maintains that part of the net income
accumulated by the appellee inured to the benefit of V. G. Sinco, president and
founder of the corporation, and therefore the appellee is not entitled to the
exemption prescribed by the law.
 Considering the above quoted entries, appellant claims that a great portion of
the net profits realized by the corporation was channeled and redounded to the
personal benefit of V. G. Sinco, who was its founder and president.
 Another benefit that accrued to Sinco according to appellant is represented by
the several amounts which appear payable to the Community Publishers, Inc.
because, being the biggest stockholder of this entity, the money to be paid by
the appellee to that entity as appearing in the above quoted entries would
redound to the personal benefit of Sinco.
 Sincoacted as president of the Foundation College and as chairman of its Board
of Directors; in 1949 he served as its teacher for a time; the accountant of the
college suggested that a certain amount be set aside as his salary for purposes of
orderly and practical accounting; but notwithstanding this suggestion, he never
collected his salary for which reason it was carried in the books as accrued
expenses.
 With regard to the account of the Community Publishers, Inc., Sinco said that
this is a distinct and separate corporation although he is one of its stockholders.
The account represents payment for services rendered by this entity to the
college.
 These are two different entities and whatever relation there is between the two
is that the former merely extends help to the latter to enable it to comply with
the requirements of the law and to fill its needs for educational purposes
ISSUE: WHETHER OR NOT THE APPELLEE IS AN EDUCATIONAL INSTITUTION IN WHICH PART
OF ITS INCOME INURES TO THE BENEFIT OF ONE OF ITS STOCKHOLDERS AS MAINTAINED BY
APPELLANT
HELD:
 YES
 Only part of its income went to the payment of its teachers or professors and to the
other expenses of the colleges incident to an educational institution but none of the
income had never been channeled to the benefit of any individual stockholders.
 Whatever payment is made to those who work for a school or college as a
remuneration for their services is not considered as distribution of profit as would
make the school one conducted for profit.
 Mayor and Common Council of Borough of Princeton vs. State Board of Taxes &
Assessments, et al: wherein the principal officer of the school was formerly its owner
and principal and as such principal he was given a salary for his services, the court held
that the school is not conducted for profit merely because moderate salaries were
paid to the principal and to the teachers.
 The fact that the appellant charges tuition fees and other fees for the different services
it renders to the students, which is its only source of income, does not in itself make the
school a profit-making enterprise that would place it beyond the purview of the law.
Thus, this Court has held that "the amount of fees charged by a school, college or
university depends, ultimately upon the policy and a given administration, at a
particular time. It is not conclusive of the purposes of the institution. Otherwise, such
purpose would vary with the particular persons in charge of the administration of the
organization."
 While the acquisition of additional facilities, such as buildings and equipment, may
rebound to the benefit of the institution itself, it cannot be positively asserted that the
same will redound to the benefit of its stockholder, for no one can predict the
financial condition of the institution upon its dissolution.
 The mere provision for the distribution of its assets to the stockholders upon dissolution
does not remove the right of an educational institution from tax exemption.
 U.S. vs. Pickwick Electric Membership Corp: "The fact that the members may receive
some benefit on dissolution upon distribution of the assets is a contingency too remote
to have any material bearing upon the question where the association is admittedly not
a scheme to avoid taxation and its good faith and honesty of purpose is not challenged."
 The proof of exemption required by section 243, Regulation No. 2, Department of
Finance is intended to relieve the tax-payer of the duty of filing returns and paying the
tax. The failure to observe the requirement called for therein cannot constitute a waiver
of the right to enjoy the exemption. To hold otherwise would be tantamount to
incorporating into the tax laws same legislative matter by administrative regulation.

x-----------------x
 4. Coconut oil refiners vs. Executive Secretary  july
29, 2005
.
COCONUT OIL REFINERS ASSOCIATION, INC. vs. TORRES
G.R. No. 132527, July 29, 2005

 Petition for Prohibition and Injunction seeking to enjoin and prohibit the
Executive Branch, through the public respondents Ruben Torres in his capacity as
Executive Secretary, the Bases Conversion Development Authority (BCDA), the
Clark Development Corporation (CDC) and the Subic Bay Metropolitan Authority
(SBMA), from allowing, and the private respondents from continuing with, the
operation of tax and duty-free shops located at the Subic Special Economic Zone
(SSEZ) and the Clark Special Economic Zone (CSEZ), and to declare the some
issuances as unconstitutional, illegal, and void:
o Section 5 of Executive Order No. 80 regarding the CSEZ.
o Executive Order No. 97-A pertaining to the SSEZ.
o Section 4 of BCDA Board Resolution No. 93-05-034 pertaining to the
CSEZ.
 Petitioners contend that the aforecited issuances are unconstitutional and void
as they constitute executive lawmaking, and that they are contrary to Republic
Act No. 7227 and in violation of the Constitution, particularly Section 1, Article III
(equal protection clause), Section 19, Article XII (prohibition of unfair
competition and combinations in restraint of trade), and Section 12, Article XII
(preferential use of Filipino labor, domestic materials and locally produced
goods).
 Republic Act No. 7227 was enacted, providing for, among other things, the sound
and balanced conversion of the Clark and Subic military reservations and their
extensions into alternative productive uses in the form of special economic
zones in order to promote the economic and social development of Central
Luzon in particular and the country in general.
SECTION 12.Subic Special Economic Zone. —
(a)Within the framework and subject to the mandate and
limitations of the Constitution and the pertinent provisions of the
Local Government Code, the Subic Special Economic Zone shall be
developed into a self-sustaining, industrial, commercial, financial
and investment center to generate employment opportunities in
and around the zone and to attract and promote productive
foreign investments;
The Subic Special Economic Zone shall be operated and managed
as a separate customs territory ensuring free flow or movement
of goods and capital within, into and exported out of the Subic
Special Economic Zone, as well as provide incentives such as tax
and duty-free importations of raw materials, capital and
equipment. However, exportation or removal of goods from the
territory of the Subic Special Economic Zone to the other parts of
the Philippine territory shall be subject to customs duties and
taxes under the Customs and Tariff Code and other relevant tax
laws of the Philippines;
(c)The provision of existing laws, rules and regulations to the
contrary notwithstanding, no taxes, local and national, shall be
imposed within the Subic Special Economic Zone. In lieu of
paying taxes, three percent (3%) of the gross income earned by
all businesses and enterprises within the Subic Special Economic
Zone shall be remitted to the National Government, one percent
(1%) each to the local government units affected by the
declaration of the zone in proportion to their population area,
and other factors. In addition, there is hereby established a
 development fund of one percent (1%) of the gross income
earned by all businesses and enterprises within the Subic Special
Economic Zone to be utilized for the development of
municipalities outside the City of Olongapo and the Municipality
of Subic, and other municipalities contiguous to the base areas.

SECTION 15.Clark and Other Special Economic Zones. — Subject to the

concurrence by resolution of the local government units directly affected,
the President is hereby authorized to create by executive proclamation a
Special Economic Zone covering the lands occupied by the Clark military
reservations and its contiguous extensions as embraced, covered and
defined by the 1947 Military Bases Agreement between the Philippines
and the United States of America, as amended, located within the
territorial jurisdiction of Angeles City, Municipalities of Mabalacat and
Porac, Province of Pampanga and the Municipality of Capas, Province of
Tarlac, in accordance with the policies as herein provided insofar as
applicable to the Clark military reservations.
 The policies to govern and regulate the Clark Special Economic Zone shall be
determined upon consultation with the inhabitants of the local government
units directly affected which shall be conducted within six (6) months upon
approval of this Act.
 President Fidel V. Ramos issued Executive Order No. 80, which declared, among
others, that Clark shall have all the applicable incentives granted to the Subic
Special Economic and Free Port Zone under Republic Act No. 7227.

SECTION 5.Investments Climate in the CSEZ. — Pursuant to Section 5(m) and

Section 15 of RA 7227, the BCDA shall promulgate all necessary policies, rules
and regulations governing the CSEZ, including investment incentives, in
 consultation with the local government units and pertinent government
departments for implementation by the CDC.

 The CSEZ Main Zone covering the Clark Air Base proper shall have all the
aforecited investment incentives, while the CSEZ Sub-Zone covering the rest of
the CSEZ shall have limited incentives. The full incentives in the Clark SEZ Main
Zone and the limited incentives in the Clark SEZ Sub-Zone shall be determined by
the BCDA.
 Pursuant to the directive under Executive Order No. 80, the BCDA passed Board
Resolution No. 93-05-034 allowing the tax and duty-free sale at retail of
consumer-goods imported via Clark for consumption outside the CSEZ.
 President issued Executive Order No. 97, "Clarifying the Tax and Duty Free
Incentive Within the Subic Special Economic Zone Pursuant to R.A. No. 7227."
SECTION 1. On Import Taxes and Duties — Tax and duty-free
importations shall apply only to raw materials, capital goods and
equipment brought in by business enterprises into the SSEZ. Except for
these items, importations of other goods into the SSEZ, whether by
business enterprises or resident individuals, are subject to taxes and
duties under relevant Philippine laws.

 The exportation or removal of tax and duty-free goods from the territory of the
SSEZ to other parts of the Philippine territory shall be subject to duties and taxes
under relevant Philippine laws.

SECTION 1. The following guidelines shall govern the tax and duty-free
privilege within the Secured Area of the Subic Special Economic and Free
Port Zone:
The Secured Area consisting of the presently fenced-in former Subic
Naval Base shall be the only completely tax and duty-free area in the
 SSEFPZ. Consumption items, however, must be consumed within the
Secured Area. Removal of raw materials, capital goods, equipment and
consumer items out of the Secured Area for sale to non-SSEFPZ
registered enterprises shall be subject to the usual taxes and duties,
except as may be provided herein.
Residents of the SSEFPZ living outside the Secured Area can enter the
Secured Area and consume any quantity of consumption items in hotels
and restaurants within the Secured Area. However, these residents can
purchase and bring out of the Secured Area to other parts of the
Philippine territory consumer items worth not exceeding US$100 per
month per person. Only residents age 15 and over are entitled to this
privilege.
Filipinos not residing within the SSEFPZ can enter the Secured Area and
consume any quantity of consumption items in hotels and restaurants
within the Secured Area. However, they can purchase and bring out [of]
the Secured Area to other parts of the Philippine territory consumer
items worth not exceeding US$200 per year per person. Only Filipinos
age 15 and over are entitled to this privilege.
 Petitioners thus filed the instant petition, seeking the declaration of nullity of the
assailed issuances
 In their Comments, respondents point out procedural issues, alleging lack of
petitioners' legal standing, the unreasonable delay in the filing of the petition,
laches, and the propriety of the remedy of prohibition.
 Respondents argue that petitioners, being mere suppliers of the local retailers
operating outside the special economic zones, do not stand to suffer direct injury
in the enforcement of the issuances being assailed herein. Assuming this is true,
this Court has nevertheless held that in cases of paramount importance where
serious constitutional questions are involved, the standing requirements may be
 relaxed and a suit may be allowed to prosper even where there is no direct injury
to the party claiming the right of judicial review.
 Petitioners claim that the assailed issuances constitute executive legislation, in
violation of the rule on separation of powers. Petitioners argue that the
Executive Department, by allowing through the questioned issuances the setting
up of tax and duty-free shops and the removal of consumer goods and items
from the zones without payment of corresponding duties and taxes
 [Republic Act No. 7227] allowed only tax and duty-free
importation of raw materials, capital and equipment.
 It provides that any exportation or removal of goods from the
territory of the Subic Special Economic Zone to other parts of the
Philippine territory shall be subject to customs duties and taxes
under the Customs and Tariff Code and other relevant tax laws of
the Philippines.
 They claim that the assailed issuances constitute executive legislation for
invalidly granting tax incentives in the importation of consumer goods such as
those being sold in the duty-free shops, in violation of the letter and intent
of Republic Act No. 7227
 Petitioners argue that the assailed issuance (Executive Order No. 97-A) is
violative of their right to equal protection of the laws, as enshrined in Section 1,
Article III of the Constitution. To support this argument, they assert that private
respondents operating inside the SSEZ are not different from the retail
establishments located outside, the products sold being essentially the same.
The only distinction, they claim, lies in the products' variety and source, and the
fact that private respondents import their items tax-free, to the prejudice of the
retailers and manufacturers located outside the zone.
 Petitioners next argue that the grant of special tax exemptions and privileges
gave the private respondents undue advantage over local enterprises which do
not operate inside the SSEZ, thereby creating unfair competition in violation of
 the constitutional prohibition against unfair competition and practices in
restraint of trade.

ISSUE: WHETHER OR NOT THE SAID ISSUANCES GRANTING TAX EXEMPTIONS VIOLATE THE
EQUAL PROTECTION CLAUSE IN THE CONSTITUTION
HELD:
 NO. TAX EXEMPTIONS REVOKED ONLY AS TO CSEZ
 AS TO THE EXECUTIVE LEGISLATION:
SECTION 12.Subic Special Economic Zone. —
(b)The Subic Special Economic Zone shall be operated and
managed as a separate customs territory ensuring free flow or
movement of goods and capital within, into and exported out of
the Subic Special Economic Zone, as well as provide incentives
such as tax and duty-free importation of raw materials, capital
and equipment.

 While it is true that Section 12 (b) of Republic Act No. 7227 mentions only raw
materials, capital and equipment, this does not necessarily mean that the tax
and duty-free buying privilege is limited to these types of articles to the
exclusion of consumer goods. It must be remembered that in construing
statutes, the proper course is to start out and follow the true intent of the
Legislature and to adopt that sense which harmonizes best with the context
and promotes in the fullest manner the policy and objects of the Legislature.
 In the present case, there appears to be no logic in following the narrow
interpretation petitioners urge. To limit the tax-free importation privilege of
enterprises located inside the special economic zone only to raw materials,
capital and equipment clearly runs counter to the intention of the Legislature
to create a free port where the "free flow of goods or capital within, into, and
out of the zones" is insured.
 The phrase "tax and duty-free importations of raw materials, capital and
equipment" was merely cited as an example of incentives that may be given to
entities operating within the zone.
 Public respondent SBMA correctly argued that the
maxim expressiouniusestexclusioalterius, on which petitioners impliedly rely to
support their restrictive interpretation, does not apply when words are
mentioned by way of example.
 The records of the Senate containing the discussion of the concept of "special
economic zone" in Section 12 (a) of Republic Act No. 7227show the legislative
intent that consumer goods entering the SSEZ which satisfy the needs of the
zone and are consumed there are not subject to duties and taxes in accordance
with Philippine laws
 Senator Guingona. As far as the goods required for manufacture is concerned,
Mr. President, it would have privileges of duty-free and tax-free. But in addition,
the Special Economic Zone could embrace the needs of tourism, could embrace
the needs of servicing, could embrace the needs of financing and other
investment aspects.
 DUTY FREE? Senator Guingona. For as long as it services the needs of the Special
Economic Zone, yes.
 Senator Enrile. For as long as the goods remain within the zone, whether we call
it an economic zone or a free port, for as long as we say in this law that all goods
entering this particular territory will be duty-free and tax-free, for as long as they
remain there, consumed there or reexported or destroyed in that place, then they
are not subject to the duties and taxes in accordance with the laws of the
Philippines?
 The Court finds that the setting up of such commercial establishments which are
the only ones duly authorized to sell consumer items tax and duty-free is still
well within the policy enunciated in Section 12 of Republic Act No. 7227 that ". .
. the Subic Special Economic Zone shall be developed into a self-sustaining,
 industrial, commercial, financial and investment center to
generate employment opportunities in and around the zone and to attract and
promote productive foreign investments."
 However, the Court reiterates that the second sentences of paragraphs 1.2 and
1.3 of Executive Order No. 97-A, allowing tax and duty-free removal of goods to
certain individuals, even in a limited amount, from the Secured Area of the
SSEZ, are null and void for being contrary to Section 12 of Republic Act No.
7227. Said Section clearly provides that "exportation or removal of goods from
the territory of the Subic Special Economic Zone to the other parts of the
Philippine territory shall be subject to customs duties and taxes under the
Customs and Tariff Code and other relevant tax laws of the Philippines."
 CONCERNING THE CSEZ
 John Hay Peoples Alternative Coalition, et al. v. Victor Lim, et al: In this case,
among the arguments raised was that the granting of tax exemptions to John
Hay was an invalid and illegal exercise by the President of the powers granted
only to the Legislature. Petitioners therein argued that Republic Act No.
7227 expressly granted tax exemption only to Subic and not to the other
economic zones yet to be established. Thus, the grant of tax exemption to John
Hay by Presidential Proclamation contravenes the constitutional mandate that
"[n]o law granting any tax exemption shall be passed without the concurrence
of a majority of all the members of Congress." Ruled that the incentives
under Republic Act No. 7227 are exclusive only to the SSEZ. The President,
therefore, had no authority to extend their application to John Hay.
 It is the legislature, unless limited by a provision of a state constitution,that has
full power to exempt any person or corporation or class of property from
taxation, its power to exempt being as broad as its power to tax. Other than
Congress, the Constitution may itself provide for specific tax exemptions, or local
governments may pass ordinances on exemption only from local taxes.
 The challenged grant of tax exemption would circumvent the Constitution's
imposition that a law granting any tax exemption must have the concurrence of
a majority of all the members of Congress.
 Tax exemption should be manifest and unmistakable from the language of the
law on which it is based; it must be expressly granted in a statute stated in a
language too clear to be mistaken. Tax exemption cannot be implied as it must
be categorically and unmistakably expressed.
 While Section 12 of Republic Act No. 7227 expressly provides for the grant of
incentives to the SSEZ, it fails to make any similar grant in favor of other
economic zones, including the CSEZ.
 Tax and duty-free incentives being in the nature of tax exemptions, the basis
thereof should be categorically and unmistakably expressed from the language
of the statute. Consequently, in the absence of any express grant of tax and
duty-free privileges to the CSEZ in Republic Act No. 7227, there would be no
legal basis to uphold use questioned portions of two issuances
 Executive Order No. 444 was issued, curtailing the duty-free shopping privileges
in the SSEZ and the CSEZ "to prevent abuse of duty-free privilege and to protect
local industries from unfair competition."

Upon effectivity of this Order and up to the Centennial Year 1998, in

addition to the permanent residents, locators and employees of the
fenced-in areas of the Subic Special Economic and Freeport Zone and the
Clark Special Economic Zone who are allowed unlimited duty free
purchases, provided these are consumed within said fenced-in areas of
the Zones, the residents of the municipalities adjacent to Subic and Clark
as respectively provided in R.A. 7227 (1992) and E.O. 97-A s. 1993 shall
continue to be allowed One Hundred US Dollars (US$100) monthly
shopping privilege until 31 December 1998.
 The term "Residents" shall refer to individuals who, by virtue of domicile or
employment, reside on permanent basis within the freeport area. The term
excludes
o non-residents who have entered into short- or long-term property lease
inside the freeport,
o outsiders engaged in doing business within the freeport, and
o members of private clubs (e.g., yacht and golf clubs) based or located
within the freeport.

 Residents of the fenced-in area of the free port are still allowed unlimited
purchase of consumer goods, "as long as these are for consumption within these
freeports." Hence, the only individuals allowed by law to shop in the duty-free
outlets and remove consumer goods out of the free ports tax-free are tourists
and Filipinos traveling to or returning from foreign destinations, and Overseas
Filipino Workers and Balikbayans as defined under Republic Act No. 6768.
"[a]ll special shopping privileges as granted under Section 3 of Executive Order
444, s. 1997, are hereby deemed terminated. The grant of duty free shopping
privileges shall be restricted to qualified individuals as provided by law."
 From the foregoing, it appears that petitioners' objection to the allowance of
tax-free removal of goods from the special economic zones as previously
authorized by the questioned issuances has become moot and academic.
 The removal of goods from the SSEZ to other parts of the Philippine territory
without payment of said customs duties and taxes is not authorized by the Act.
 NULL AND VOID

1.2.Residents of the SSEFPZ living outside the Secured Area can enter and
consume any quantity of consumption items in hotels and restaurants
within the Secured Area. However, these residents can purchase and
bring out of the Secured Area to other parts of the Philippine territory
 consumer items worth not exceeding US $100 per month per person. Only
residents age 15 and over are entitled to this privilege.
Filipinos not residing within the SSEFPZ can enter the Secured Area and
consume any quantity of consumption items in hotels and restaurants
within the Secured Area. However, they can purchase and bring out of the
Secured Area to other parts of the Philippine territory consumer items
worth not exceeding US $200 per year per person. Only Filipinos age 15
and over are entitled to this privilege.
 AS TO EQUAL PROTECTION OF THE LAWS
 It is an established principle of constitutional law that the guaranty of the equal
protection of the laws is not violated by a legislation based on a reasonable
classification. Classification, to be valid, must
 rest on substantial distinction,
 be germane to the purpose of the law,
 not be limited to existing conditions only, and
 apply equally to all members of the same class.

 The Court finds no violation of the right to equal protection of the laws.
 First, contrary to petitioners' claim, substantial distinctions lie between the
establishments inside and outside the zone, justifying the difference in their
treatment.
 Tiu v. Court of Appeals(YOU CAN SUCK IT JENICA TI. ETO YUNG SAGOT KO
NUNG FINALS. GO BACK TO CHINA): the constitutionality of Executive Order
No. 97-A was challenged for being violative of the equal protection clause. In
that case, petitioners claimed that Executive Order No. 97-A was discriminatory
in confining the application of Republic Act No. 7227 within a secured area of the
SSEZ, to the exclusion of those outside but are, nevertheless, still within the
economic zone.
 Upholding the constitutionality of Executive Order No. 97-A, this Court therein
found substantial differences between the retailers inside and outside the
secured area, thereby justifying a valid and reasonable classification:
Certainly, there are substantial differences between the big investors
who are being lured to establish and operate their industries in the so-
called "secured area" and the present business operators outside the
area. On the one hand, we are talking of billion-peso investments and
thousands of new jobs.On the other hand, definitely none of such
magnitude. In the first, the economic impact will be national; in the
second, only local.
Even more important, at this time the business activities outside the
"secured area" are not likely to have any impact in achieving the purpose
of the law, which is to turn the former military base to productive use for
the benefit of the Philippine economy. There is, then, hardly any
reasonable basis to extend to them the benefits and incentives accorded
in R.A. 7227.
Additionally, as the Court of Appeals pointed out, it will be easier to
manage and monitor the activities within the "secured area," which is
already fenced off, to prevent "fraudulent importation of merchandise"
or smuggling.
 It is well-settled that the equal-protection guarantee does not require territorial
uniformity of laws. As long as there are actual and material differences
between territories, there is no violation of the constitutional clause. And of
course, anyone, including the petitioners, possessing the requisite investment
capital can always avail of the same benefits by channeling his or her resources
or business operations into the fenced-off free port zone.
 A significant distinction between the two groups is that enterprises outside the
zones maintain their businesses within Philippine customs territory, while
 private respondents and the other duly-registered zone enterprises operate
within the so-called "separate customs territory."
 The classification is germane to the purpose of Republic Act No. 7227. As held
in Tiu, the real concern of Republic Act No. 7227 is to convert the lands
formerly occupied by the US military bases into economic or industrial areas. In
furtherance of such objective, Congress deemed it necessary to extend
economic incentives to the establishments within the zone to attract and
encourage foreign and local investors.
 The classification, moreover, is not limited to the existing conditions when the
law was promulgated, but to future conditions as well, inasmuch as the law
envisioned the former military reservation to ultimately develop into a self-
sustaining investment center.
 And, lastly, the classification applies equally to all retailers found within the
"secured area." As ruled in Tiu, the individuals and businesses within the
"secured area," being in like circumstances or contributing directly to the
achievement of the end purpose of the law, are not categorized further. They
are all similarly treated, both in privileges granted and in obligations required.

 PROHIBITION AGAINST UNFAIR COMPETITION AND PRACTICES IN RESTRAINT

OF TRADE
 Republic Act No. 7227, and consequently Executive Order No. 97-A, cannot be
said to be distinctively arbitrary against the welfare of businesses outside the
zones. The mere fact that incentives and privileges are granted to certain
enterprises to the exclusion of others does not render the issuance
unconstitutional for espousing unfair competition. Said constitutional
prohibition cannot hinder the Legislature from using tax incentives as a tool to
pursue its policies.
 If petitioners had wanted to avoid any alleged unfavorable consequences on
their profits, they should upgrade their standards of quality so as to effectively
 compete in the market. OOOOH BUUUUURN! In the alternative, if petitioners
really wanted the preferential treatment accorded to the private respondents,
they could have opted to register with SSEZ in order to operate within the special
economic zone.
 PREFERENTIAL USE OF FILIPINO LABOR, DOMESTIC MATERIALS AND LOCALLY
PRODUCED GOODS
 Petitioners failed to substantiate their sweeping conclusion that the issuance has
violated the State policy of giving preference to Filipino goods and labor. The
mere fact that said issuance authorizes the importation and trade of foreign
goods does not suffice to declare it unconstitutional on this ground.
 Tañada v. Angara:[W]hile the Constitution indeed mandates a bias in favor of
Filipino goods, services, labor and enterprises, at the same time,it recognizes the
need for business exchange with the rest of the world on the bases of equality
and reciprocity and limits protection of Filipino enterprises only against foreign
competition and trade practices that are unfair.
 In other words, the Constitution did not intend to pursue an isolationist policy. It
did not shut out foreign investments, goods and services in the development of
the Philippine economy. While the Constitution does not encourage the
unlimited entry of foreign goods, services and investments into the country, it
does not prohibit them either.
 AND BESIDES THE OTHER EO’s HAVE COUNTERMEASURES TO ENSURE FAIR
MARKET COMPETITION. SEE Executive Order No. 303 has limited the range of
items that may be sold in the duty-free outlets, and imposed sanctions to curb
abuses of duty-free privileges. With these measures, this Court finds no reason
to strike down Executive Order No. 97-A for allegedly being prejudicial to Filipino
labor, domestic materials and locally produced goods.
 AND LASTLY:
 Ingrained in our jurisprudence is the time-honored principle that a statute is
presumed to be valid. This presumption is rooted in the doctrine of separation of
 powers which enjoins upon the three coordinate departments of the
Government a becoming courtesy for each other's acts.
 The theory is that before the act was done or the law was enacted, earnest
studies were made by Congress, or the President, or both, to insure that the
Constitution would not be breached. This Court, however, may declare a law, or
portions thereof, unconstitutional where a petitioner has shown a clear and
unequivocal breach of the Constitution, not merely a doubtful or
argumentative one.
 In other words, before a statute or a portion thereof may be declared
unconstitutional, it must be shown that the statute or issuance violates the
Constitution clearly, palpably and plainly, and in such a manner as to leave no
doubt or hesitation in the mind of the Court.

x-------x
 5. Commissioner of customs vs. Philippine
Phosphate Fertilizer Corp.
.
COMMISSIONER OF CUSTOMS vs. PHILIPPINE PHOSPHATE FERTILIZER CORP.
G.R. No. 144440, September 1, 2004

 Respondent Philippine Phosphate Fertilizer Corporation (Philphos) is a domestic

corporation engaged in the manufacture and production of fertilizers for
domestic and international distribution. Its base of operations is in the Leyte
Industrial Development Estate, an export processing zone. It is also registered
with the Export Processing Zone Authority (EPZA), now known as the Philippine
Export Zone Authority (PEZA).
 The manufacture of fertilizers required Philphos to purchase fuel and petroleum
products for its machineries. These fuel supplies are considered indispensable by
Philphos, as they are used to run the machines and equipment and in the
transformation of raw materials into fertilizer.
 The fuel supplies are secured domestically from local distributors, in this case,
Petron Corporation (Petron), which imports the same and pays the
corresponding customs duties to the Bureau of Customs; and, the ad
valorem and specific taxes to the Bureau of Internal Revenue.
 When the fuel and petroleum products are delivered at Philphos’s
manufacturing plant inside the Leyte Industrial Development Estate, Philphos is
billed by Petron the corresponding customs duties imposed on these products.
Effectively thus, Philphos reimburses Petron for the customs duties on the
purchased fuels and petroleum products which are passed on by the Petron as
part of the selling price
 Under this arrangement, Philphos made several purchases from Petron of fuels
and other petroleum products used directly or indirectly in the manufacture of
fertilizers for the period of October 1991 until June 1992. During the period in
question, Philphos indirectly paid as customs duties, the amount P20,149,473.77
 In a letter to the Bureau of Customs, Philphos sought the refund of customs
duties it had paid for the period covering the months of October to December
1991, and January to June, 1992.
 It pointed out that Philphos, being an enterprise registered with the export
processing zone, is entitled to tax incentives under Presidential Decree No.
66 (EPZA Law), referring specifically to Section 17 thereof which exempts from
customs and internal revenue laws, supplies brought into the export processing
zone. Consequently, Philphos argued that the customs duties billed by Petron
on Philphos should be refunded.
 The Bureau of Customs denied the claim for refund in a letter. Hence, a Petition
for Review was filed with the Court of Tax Appeals (CTA), assailing the denial of
the refund.
 The CTA ruled for Philphos in a Decision, ordering the issuance of a Tax Credit
Certificate in the amount of P20,149,473.77 in favor of Philphos.
 The matter was elevated by the Commissioner of Customs (Commissioner) to the
Court of Appeals (CA), which eventually affirmed the CTA’s Decision in toto.
 Both the CTA and the CA relied upon Section 17(1) of the EPZA Law to justify the
conclusion that Philphos is entitled to the refund. Before this Court, the
Commissioner argues that since the importation of the subject products, made
by the seller Petron, had already been finally terminated, all future claims for
refund are thus barred. It likewise insists that controlling in this case is Section
18(i) of the EPZA Law, under which claims for refunds similar to Philphos’s are
precluded.
 Finally, the Commissioner posits that since a refund on tax credit partakes the
nature of an exemption, the grant thereof must be explicit.
 The EPZA Law, promulgated in 1972, has since been superseded by Republic Act
No. 7916, or “The Special Economic Zone Act of 1995.” However, since the claim
for exemption covers the years 1991 and 1992, or before the enactment of
 Republic Act No. 7916, the provisions of the EPZA Law are applicable in the
present petition.

ISSUE: WHETHER OR NOT PHILPHOS IS EXEMPTED FROM PAYING CUSTOMS DUTIES IN

ACCORDANCE WITH SEC 17 OF THE EPZA LAW
HELD:
 YES. IN LIEU OF THE ISSUANCE OF A TAX CREDIT CERTIFICATE, THE AMOUNT OF
P20,149,473.77SHALL BE REFUNDED TO RESPONDENT PHILPHOS
 The export processing zone is intended to be a viable commercial, industrial and
investment area. The enunciated policy of the EPZA Law is to encourage and promote
foreign commerce as a means of making the Philippines a center of international
trade; strengthening our export trade and foreign exchange position; hastening
industrialization; reducing domestic unemployment; and accelerating the development
of the country, by establishing export processing zones in strategic locations in the
Philippines.
 The basic policy in establishing export processing zones is to attract enterprises,
especially foreign investors, who will be manufacturing products primarily for export
and be able to do so without their supplies and raw materials entering, and the export
products leaving, the Philippine territory within the context of customs and revenue
regulations.
 From a macro-perspective though, export processing zones are not intended to solely
benefit investors. These zones are scattered throughout the country in remote areas
and have the patent benefit of creating employment opportunities within their
localities. It is the presence of tangible tax benefits attached to these zones which make
them viable as investment locations, areas which ordinarily would be overlooked.
 The incentives offered to enterprises duly registered with the PEZA consist, among
others, of tax exemptions. The expectation is that the tax breaks ultimately redound to
the benefit of the national economy, enticing as they do more enterprises to invest and
 do business within the zones; thus creating more employment opportunities and
infusing more dynamism to the vibrant interplay of market forces.

SEC. 17. Tax Treatment of Merchandize in the Zone. — (1) Except as otherwise
provided in this Decree, foreign and domestic merchandise, raw
materials, supplies, articles, equipment, machineries, spare parts and wares of
every description, except those prohibited by law, brought into the Zone to be
sold, stored, broken up, repacked, assembled, installed, sorted, cleaned, graded,
or otherwise processed, manipulated, manufactured, mixed with foreign or
domestic merchandise or used whether directly or indirectly in such activity, shall
not be subject to customs and internal revenue laws and regulations nor to local
tax ordinances, the following provisions of law to the contrary notwithstanding.

 The cited provision certainly covers petroleum supplies used, directly or indirectly, by
Philphos to facilitate its production of fertilizers, subject to the minimal requirement
that these supplies are brought into the zone. The supplies are not subject to customs
and internal revenue laws and regulations, nor to local tax ordinances. It is clear that
Section 17(1) considers such supplies exempt even if they are usedindirectly, as they had
been in this case.
 Since Section 17(1) treats these supplies for tax purposes as beyond the ambit of
customs laws and regulations, the arguments of the Commissioner invoking the
provisions of the Tariff and Customs Code must fail. Particularly, his point that the
importation of the petroleum products by Petron was deemed terminated
under Section 1202 of the Tariff and Customs Code, and that the termination
consequently barred any future claim for refund under Section 1603 of the same law is
misplaced and inconsequential.
 The provisions of law to the contrary notwithstanding cannot be interpreted in any
other manner than to mean that merchandise or supplies brought into the zone are
exempt from customs duties and taxes. The incentive given under Section 17(1) is
 broader than a mere tax exemption. The phrase is so broad to include not only the
exemption from customs duties and taxes but everything required in the enforcement
of the customs and internal revenue laws save on the exceptions and conditions
specified in the EPZA law itself. The phrase will also include exemption from other rules
and regulations which are normally followed in the discharge of importation such as the
filing of import entries, examinations and other requirements attendant to the
importation of goods into the country.
 Nestle Philippines, Inc. v. Court of Appeals: claim for refund of customs duties in
protestable cases may be foreclosed by the failure to file a written protest, is
not apropos in the case at bar because petitioner therein was not a duly registered
enterprise under the EPZA Law and thus not entitled to the exemptions therein.
 WHAT IS THE PRESCRIPTIVE PERIOD WHICH A DULY REGISTERED ENTERPRISE SHOULD
OBSERVE IN APPLYING FOR A REFUND TO WHICH IT IS ENTITLED UNDER THE EPZA
LAW?
 EPZA IS SILENT ON THIS ONE AND the prescriptive periods under the Tariff and Customs
Code and other revenue laws are inapplicable, by specific mandate of Section 17(1) of
the EPZA Law. This does not mean though that prescription will not lie, as the Civil Code
provisions on solutioindebiti may find application. The Civil Code is not a customs and
internal revenue law. The Court has in the past sanctioned the application of the
provisions on solutioindebiti in cases when taxes were collected thru error or
mistake. Solutioindebiti is a quasi-contract, thus the claim for refund must be
commenced within six (6) years from date of payment pursuant to Article 1145(2) of
the New Civil Code.
 Section 18 of EPZA does not exclude or otherwise limit the broad grant of benefits
accorded by Section 17. These “additional incentives” under Section 18 are to be
enjoyed in conjunction with the incentives under Section 17. They include allowance of
net-operating loss carry-over, accelerated depreciation, exemption from export tax,
foreign exchange assistance, financial assistance, exemptions for local taxes and
 licenses, deductions for labor training services, and deductions for organizational and
pre-operating expenses.
 Section 18 does not serve the purpose of qualifying the benefits provided under Section
17. Instead, it enumerates another class of incentives also available to registered
enterprises, in addition to, and apart from, the general benefits accorded under Section
17. There can be no doubt that the additional incentives under Section 18 are separate
and distinct from those under the preceding section.
 A plain reading of Section 18(i) unmistakably indicates that the tax credit as an
additional incentive avails only if the supplies actually form part of the export products.
There is an apparent distinction between this provision and Section 17(1) which
exempts from taxation supplies used indirectly by the registered enterprise. It is
apparent that the petroleum supplies in question, which physically do not form part of
the exportable fertilizers, are exempt from taxation under Section 17(1), but no tax
credit could be claimed on them under Section 18(i).
 Still, this acknowledged distinction is not a cause for abject reversal of the assailed
decisions, as it does not affect the key disposition. For Section 17(1) is determinative of
the fundamental question whether there is legal basis for the claim of exemption. On
the other hand, Section 18(i) does not impose limitations on the exemptions granted in
the preceding provisions, but would only affect, if at all, the modality by which the
exemption takes form.
 The Tax Reform Act of 1997 authorizes either a refund or credit as a means of recovery
of tax erroneously or illegally collected.
 HOW ARE THEY DIFFERENT? Formally, a tax refund requires a physical return of the sum
erroneously paid by the taxpayer, while a tax credit involves the application of the
reimbursable amount against any sum that may be due and collectible from the
taxpayer.
 The taxpayer to whom the tax is refunded would have the option, among others, to
invest for profit the returned sum, an option not proximately available if the taxpayer
chooses instead to receive a tax credit.
 The CTA, as affirmed by the CA, ordered the issuance of a Tax Credit Certificate in favor
of Philphos. No elaboration was made as to why the relief granted was a tax credit and
not a refund, but we can deduce that such was the relief afforded as it was the relief
prayed for by Philphos in its Petition before the tax court.
 A slight modification of the award is necessary so as not to render nugatory the
proscription under Section 18(i) that a tax credit avails only if the supplies form part of
the export product. Instead of awarding a Tax Credit Certificate to Philphos, a refund of
the same amount is warranted under the circumstances.
 The grant of exemption under Section 17(1) is clear and unambiguous. The disposition
arises not out of a blind solicitude towards the concerns of business, but from the duty
to affirm and enforce a crystal-clear legislative policy and initiative intent.
 Indeed, the revenue collectors of the government should be cautious before
attempting to gut away at concessions the State itself has deemed worthy of award to
deserving investors. It is unsound practice and uncouth behaviour to invite over guests
to dinner at home, then charge them for the use of the silverware before allowing them
to dine.

x------------x
Chapter 5

 Tax on Capital Gains

1. Ferrer vs. CIR
2. CIR vs. Estate of Benigno Toda
3. CIR. vs Del Rosario
4. Vive Eagle Land Inc vs. CA.
5. SMI-ED Phil Technology vs. CA (2004)

x-----------------x
DK

1. Ferrer vs. CIR

ANTONIO PORTA FERRER, petitioner, vs. (COLLECTOR) now COMMISSIONER OF INTERNAL
REVENUE, respondent. [G.R. No. L-16021. August 31, 1962.]


Regala, J:

Facts: The petitioner was the sole proprietor of the "La Suiza Bakery" on R. Hidalgo, Quiapo, Manila. He
owned this bakery from October 16, 1951 up to September 15, 1955, when he sold the same to Juan
Pons for the sum of P100,000.00. The assets of the bakery consisted of accounts receivable, raw
materials, wrapping supplies, firewood, unexpired insurance, good-will, machinery and equipment, and
furniture

and fixtures, with a total book value of P74,321.91. In selling the bakery, petitioner spent P5,000.00 for
broker's commission and P1,000.00 for accountant's fee, or a total of P6,000.00.

After deducting the total book value of the assets and the incidental expenses from the gross selling
price, petitioner filed on February 14, 1956 his income tax return, showing a net profit of P19,678.09 as
having been realized from the sale of the bakery. On the basis of this amount, he paid P2,439.00 as
income tax on February 15, 1956.

Ruling of the CIR: Petitioner later requested the respondent to refund to him the sum of P2,030.00,
claiming that the bakery was a capital asset which he had held for more than twelve months so that the
profit from its sale was a long term capital gain, and therefore, only 50 per cent of it was taxable under the
National Internal Revenue Code. When no action was taken by respondent on his request, petitioner filed
a petition for refund in the Court of Tax Appeals.

Ruling of the CTA: The Tax Court held that the sale of the bakery did not constitute a sale of a single
asset but of individual assets, some of which were capital assets while others were ordinary assets. But
since petitioner failed to show what portion of the selling price of the bakery was fairly attributable to each
asset, the Tax Court held that it could not ascertain the capital and/or ordinary gains taxes properly
payable upon the sale of the business. For this reason, it denied petitioner's claim for refund.

Issue: Whether or not the sale of the business known as "La Suiza Bakery" was a sale not of the
individual assets comprising the same but of an entire, single asset which, under the law, is a capital
asset.

Held: The sale of the bakery in question was not a single asset but of individual assets that made up the
business. Section 34 of the Tax Code provides in part:

"Capital gains and losses. — (a) Definitions.—As used in this Title —

(1)Capital assets. — The term 'capital assets' means property held by the taxpayer (whether or not connected with his trade or
business), but does not include, stock in trade of the taxpayer or other property of a kind which would properly be included in the
inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers
in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to
allowance for depreciation provided in subsection (f) of section thirty; or real property used in the trade or business of the taxpayer.

xxx xxx xxx

(b)Percentage taken into account. — In the case of a taxpayer, other than a corporation, only the following percentage of the gain or
loss recognized upon the sale shall be taken into account in computing net capital gain, net capital loss, and net income.

(1)One hundred per centum if the capital asset has been held for not more than twelve months;

(2)Fifty per centum if the capital asset has been held for more than twelve months.

The sale of the "La Suiza Bakery" was a sale not of a single asset but of individual assets that made up
the business. And since petitioner failed to point out what part of the price he had received could be fairly
attributed to each asset, the Tax Court correctly denied his claim.

The SC believes that any profit which the petitioner may have gained in the same must have come from
the sale of the other assets of the business which must have been sold for amounts other than their
stated book value. As the Tax Court held, in order to ascertain the capital and/or ordinary gains taxes
properly payable on the sale of a business, including its tangible assets, it is incumbent upon the taxpayer
to show not only the cost basis of each asset, but also what portion of the selling price is fairly attributable
to each asset. (Cohen vs. Kelm, 119 F supp. 376.)

WHEREFORE, the decision of the Court of Tax Appeals is hereby affirmed, with costs against the
petitioner.

Bengzon, C . J ., Bautista Angelo, Labrador, Paredes, Dizon and Makalintal, JJ ., concur.

Concepcion and Barrera, JJ ., concur in the result. Padilla, J ., took no part.

x--------x
DK

2. CIR vs. Estate of Benigno Toda

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE ESTATE OF BENIGNO P. TODA, JR.,
Represented by Special Co- administrators Lorna Kapunan and Mario Luza Bautista, respondents.
[G.R. No. 147188. September 14, 2004.]

DAVIDE, JR., C.J:

Facts: On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of its
issued and outstanding capital stock, to sell the Cibeles Building and the two parcels of land on which the
building stands for an amount of not less than P90 million. On 30 August 1989, Toda purportedly sold the
property for P100 million to Rafael A. Altonaga, who, in turn, sold the same property on the same day to
Royal Match Inc. (RMI) for P200 million. These two transactions were evidenced by Deeds of Absolute
Sale notarized on the same day by the same notary public. For the sale of the property to RMI, Altonaga
paid capital gains tax in the amount of P10 million. On 16 April 1990, CIC filed its corporate annual
income tax return 7 for the year 1989, declaring, among other things, its gain from the sale of real
property in the amount of P75,728.021. After crediting withholding taxes of P254,497.00, it paid
P26,341,207 8 for its net taxable income of P75,987,725. On 12 July 1990, Toda sold his entire shares of
stocks in CIC to Le Hun T. Choa for P12.5 million, as evidenced by a Deed of Sale of Shares of Stocks. 9
Three and a half years later, or on 16 January 1994, Toda died. On 29 March 1994, the Bureau of
Internal Revenue (BIR) sent an assessment notice 10 and demand letter to the CIC for deficiency income
tax for the year 1989 in the amount of P79,099,999.22. The new CIC asked for a reconsideration,
asserting that the assessment should be directed against the old CIC, and not against the new CIC,
which is owned by an entirely different set of stockholders; moreover, Toda had undertaken to hold the
buyer of his stockholdings and the CIC free from all tax liabilities for the fiscal years 1987–1989. On 27
January 1995, the Estate of Benigno P. Toda, Jr., represented by special co administrators Lorna
Kapunan and Mario Luza Bautista, received a Notice of Assessment dated 9 January 1995 from the
Commissioner of Internal Revenue for deficiency income tax for the year 1989 in the amount of
P79,099,999.22.

Ruling of Commissioner: In the letter dated 19 October 1995, the Commissioner dismissed the protest,
stating that a fraudulent scheme was deliberately perpetuated by the CIC wholly owned and controlled by
Toda by covering up the additional gain of P100 million, which resulted in the change in the income
structure of the proceeds of the sale of the two parcels of land and the building thereon to an individual
capital gains, thus evading the higher corporate income tax rate of 35%.

Petitioner’s Contention: On 15 February 1996, the Estate filed a petition for review with the CTA
alleging that the Commissioner erred in holding the Estate liable for income tax deficiency; that the
inference of fraud of the sale of the properties is unreasonable and unsupported; and that the right of the
Commissioner to assess CIC had already prescribed.
Respondent’s Contention: The Commissioner argued that the two transactions actually constituted a
single sale of the property by CIC to RMI, and that Altonaga was neither the buyer of the property from
CIC nor the seller of the same property to RMI. The additional gain of P100 million realized by CIC was
taxed at the rate of only 5% purportedly as capital gains tax of Altonaga, instead of at the rate of 35% as
corporate income tax of CIC. The income tax return filed by CIC for 1989 with intent to evade payment of
the tax was thus false or fraudulent and was well within the prescriptive period prescribed by Section 223
(a) of the National Internal Revenue Code of 1986. With the sale being tainted with fraud, the separate
corporate personality of CIC should be disregarded. Since Toda he is already dead, his estate shall
answer for his liability.

Ruling of the CTA: Court of Tax Appeals (CTA) in C.T.A. Case No. 5328, held that the respondent
Estate of Benigno P. Toda, Jr. is not liable for the deficiency income tax of Cibeles Insurance Corporation
(CIC) in the amount of P79,099,999.22 for the year 1989, and ordered the cancellation and setting aside
of the assessment issued by Commissioner of Internal Revenue.

Ruling of the CA: the Court of Appeals Affirmed the decision of the CTA, reasoning that the CTA, being
more advantageously situated and having the necessary expertise in matters of taxation, is "better
situated to determine the correctness, propriety, and legality of the income tax assessments assailed by
the Toda Estate."

Issue/s:

1. Is this a case of tax evasion or tax avoidance?

2. Has the period for assessment of deficiency income tax for the year 1989 prescribed? and

3. Can respondent Estate be held liable for the deficiency income tax of CIC for the year 1989, if any?

Held 1: Tax avoidance is the tax saving device within the means sanctioned by law. This method should
be used by the taxpayer in good faith and at arms length. Tax evasion, on the other hand, is a scheme
used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or
additional civil or criminal liabilities. Tax evasion connotes the integration of three factors: (1) the end to
be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the non-
payment of tax when it is shown that a tax is due; (2) an accompanying state of mind which is described
as being "evil," in "bad faith," "willful," or "deliberate and not accidental"; and (3) a course of action or
failure of action which is unlawful.

All these factors are present in the instant case. It is significant to note that as early as 4 May 1989, prior
to the purported sale of the Cibeles property by CIC to Altonaga on 30 August 1989, CIC received P40
million from RMI, 25 and not from Altonaga. That P40 million was debited by RMI and reflected in its trial
balance 26 as "other inv. — Cibeles Bldg." Also, as of 31 July 1989, another P40 million was debited and
reflected in RMI's trial balance as "other inv. — Cibeles Bldg." This would show that the real buyer of the
properties was RMI, and not the intermediary Altonaga. The scheme resorted to by CIC in making it
appear that there were two sales of the subject properties, i.e., from CIC to Altonaga, and then from
Altonaga to RMI cannot be considered a legitimate tax planning. Such scheme is tainted with fraud. Here,
it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid
especially that the transfer from him to RMI would then subject the income to only 5% individual capital
gains tax, and not the 35% corporate income tax. Altonaga's sole purpose of acquiring and transferring
title of the subject properties on the same day was to create a tax shelter. Altonaga never controlled the
property and did not enjoy the normal benefits and burdens of ownership. The sale to him was merely a
tax ploy, a sham, and without business purpose and economic substance. Doubtless, the execution of the
two sales was calculated to mislead the BIR with the end in view of reducing the consequent income tax
liability. In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was prompted more on
the mitigation of tax liabilities than for legitimate business purposes constitutes one of tax evasion.

Generally, a sale or exchange of assets will have an income tax incidence only when it is consummated.
The incidence of taxation depends upon the substance of a transaction. The tax consequences arising
from gains from a sale of property are not finally to be determined solely by the means employed to
transfer legal title. Rather, the transaction must be viewed as a whole, and each step from the
commencement of negotiations to the consummation of the sale is relevant. A sale by one person cannot
be transformed for tax purposes into a sale by another by using the latter as a conduit through which to
pass title. To permit the true nature of the transaction to be disguised by mere formalisms, which exist
solely to alter tax liabilities, would seriously impair the effective administration of the tax policies of
Congress. To allow a taxpayer to deny tax liability on the ground that the sale was made through another
and distinct entity when it is proved that the latter was merely a conduit is to sanction a circumvention of
our tax laws. Hence, the sale to Altonaga should be disregarded for income tax purposes. The two sale
transactions should be treated as a single direct sale by CIC to RMI. CIC is therefore liable to pay a 35%
corporate tax for its taxable net income in 1989. The 5% individual capital gains tax provided for in
Section 34 (h) of the NIRC of 1986 (now 6% under Section 24 (D) (1) of the Tax Reform Act of 1997) is
inapplicable. Hence, the assessment for the deficiency income tax issued by the BIR must be upheld.

Held 2: No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform Act of 1997) read:

Sec. 269. Exceptions as to period of limitation of assessment and collection of taxes. — (a) In the case of a false
or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding
in court after the collection of such tax may be begun without assessment, at any time within ten years after the
discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has become final and
executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for collection
thereof . . ..

The prescriptive period to assess the correct taxes in case of false returns is ten years from the
discovery of the falsity. The false return was filed on 15 April 1990, and the falsity thereof was
claimed to have been discovered only on 8 March 1991. 37 The assessment for the 1989
deficiency income tax of CIC was issued on 9 January 1995. Clearly, the issuance of the correct
assessment for deficiency income tax was well within the prescriptive period.

Held 3: A corporation has a juridical personality distinct and separate from the persons owning or
composing it. Thus, the owners or stockholders of a corporation may not generally be made to
answer for the liabilities of a corporation and vice versa. There are, however, certain instances in
which personal liability may arise. It has been held in a number of cases that personal liability of a
corporate director, trustee, or officer along, albeit not necessarily, with the corporation may validly
attach when:

1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross negligence in directing its affairs, or
(c) conflict of interest, resulting in damages to the corporation, its stockholders, or other persons;

2. He consents to the issuance of watered down stocks or, having knowledge thereof, does not forthwith file with the
corporate secretary his written objection thereto;

3. He agrees to hold himself personally and solidarily liable with the corporation; or

4. He is made, by specific provision of law, to personally answer for his corporate action.

It is worth noting that when the late Toda sold his shares of stock to Le Hun T. Choa, he
knowingly and voluntarily held himself personally liable for all the tax liabilities of CIC and the
buyer for the years 1987, 1988, and 1989. Respondent estate cannot, therefore, deny liability for
CIC's deficiency income tax for the year 1989 by invoking the separate corporate personality of
CIC, since its obligation arose from Toda's contractual undertaking, as contained in the Deed of
Sale of Shares of Stock.

WHEREFORE, in view of all the foregoing, the petition is hereby GRANTED. The decision of the
Court of Appeals of 31 January 2001 in CA-G.R. SP No. 57799 is REVERSED and SET ASIDE,
and another one is hereby rendered ordering respondent Estate of Benigno P. Toda Jr. to pay
P79,099,999.22 as deficiency income tax of Cibeles Insurance Corporation for the year 1989,
plus legal interest from 1 May 1994 until the amount is fully paid.

Costs against respondent.


SO ORDERED.
 Quisumbing, Ynares-Santiago, Carpio and Azcuna, JJ ., concur.

x--------x
Allan

Commissioner of Internal Revenue v. Estate of Toda, Jr., G.R. No. 147188,

September 14, 2004
 The case at bar stemmed from a Notice of Assessment sent to CIC by the
Commissioner of Internal Revenue for deficiency income tax arising from an
alleged simulated sale of a 16-storey commercial building known as Cibeles
Building, situated on two parcels of land on Ayala Avenue, Makati City.
 On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of
99.991% of its issued and outstanding capital stock, to sell the Cibeles Building
and the two parcels of land on which the building stands for an amount of not
less than P90 million.
 On 30 August 1989, Toda purportedly sold the property for P100 million to Rafael
A. Altonaga, who, in turn, sold the same property on the same day to Royal
Match Inc. (RMI) for P200 million. These two transactions were evidenced by
Deeds of Absolute Sale notarized on the same day by the same notary public.
 On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an assessment
notice and demand letter to the CIC for deficiency income tax for the year 1989 in
the amount of P79,099,999.22.
 Commissioner dismissed the protest, stating that a fraudulent scheme was
deliberately perpetuated by the CIC wholly owned and controlled by Toda by
covering up the additional gain of P100 million, which resulted in the change in
the income structure of the proceeds of the sale of the two parcels of land and
the building thereon to an individual capital gains, thus evading the higher
corporate income tax rate of 35%. On 15 February 1996, the Estate filed a
petition for review with the CTA.
 CTA held that the Commissioner failed to prove that CIC committed fraud to
deprive the government of the taxes due it.
 Court of Appeals affirmed the decision of the CTA, reasoning that the CTA, being
more advantageously situated and having the necessary expertise in matters of
taxation, is "better situated to determine the correctness, propriety, and legality of
the income tax assessments assailed by the Toda Estate."|||
Issue: Can respondent Estate be held liable for the deficiency income tax of CIC
for the year 1989, if any?
Held: Yes. Here, it is obvious that the objective of the sale to Altonaga was to
reduce the amount of tax to be paid especially that the transfer from him to RMI
would then subject the income to only 5% individual capital gains tax, and not the
35% corporate income tax. Altonaga's sole purpose of acquiring and transferring
title of the subject properties on the same day was to create a tax shelter.
Altonaga never controlled the property and did not enjoy the normal benefits and
burdens of ownership. The sale to him was merely a tax ploy, a sham, and
without business purpose and economic substance. Doubtless, the execution of
the two sales was calculated to mislead the BIR with the end in view of reducing
the consequent income tax liability.
To allow a taxpayer to deny tax liability on the ground that the sale was made
through another and distinct entity when it is proved that the latter was merely a
conduit is to sanction a circumvention of our tax laws. Hence, the sale to
Altonaga should be disregarded for income tax purposes. 34 The two sale
transactions should be treated as a single direct sale by CIC to RMI.|||
When the late Toda undertook and agreed "to hold the BUYER and Cibeles free
from any all income tax liabilities of Cibeles for the fiscal years 1987, 1988, and
1989," he thereby voluntarily held himself personally liable therefor. Respondent
estate cannot, therefore, deny liability for CIC's deficiency income tax for the year
1989 by invoking the separate corporate personality of CIC, since its obligation
arose from Toda's contractual undertaking, as contained in the Deed of Sale of
Shares of Stock.|| |||

x------------x
3. CIR. vs Del Rosario
.

x----------------x
DK

4. Vive Eagle Land Inc vs. CA.

VIVE EAGLE LAND, INC. and VIRGILIO O. CERVANTES, petitioners, vs. COURT OF APPEALS and
GENUINO ICE CO., INC., respondents. [G.R. No. 150308. November 26, 2004.]

CALLEJO, SR., J:

Facts: The Spouses Raul and Rosalie Flores were the owners of two parcels of land situated along
Aurora Boulevard, Cubao, Quezon City, covered by Transfer Certificates of Title (TCT) Nos. 241845 and
241846, with an area of 1,026 and 2,963 square meters, respectively. On October 10, 1987, the Spouses
Flores and Tatic Square International Corporation (TATIC) executed an Agreement to Sell in which the
said spouses bound and obliged themselves to sell the properties to TATIC. On April 13, 1988, the
Spouses Flores, TATIC, Isidro S. Tobias (who acted as broker), and the Bank executed a Memorandum
of Agreement (MOA), wherein the Spouses Flores, as vendees-owners, warranted that "the titles of the
two properties were free and clear from any and all obligations and claims, whether past or present, from
any creditors or third persons." Tobias, as broker, undertook to pay any and all the taxes and
assessments imposed and/or charged over the lots, including the payment of capital gains tax; and to
secure tax clearances from the proper government agencies within thirty days from April 12, 1988. Tobias
also undertook to remove any and all tenants/occupants on the lots within sixty days from April 12, 1988
with the assistance and cooperation of the Spouses Flores. The parties agreed that the expenses to be
incurred by Tobias and TATIC would be deducted from the purchase price of the property, which was
estimated at P790,000.00. Although the torrens titles over the lots were still in the custody of the Bank,
TATIC, as vendor, and petitioner VELI, as vendee, executed a deed of absolute sale 6 on April 14, 1988,
in w hich TATI C sold the properties to the petitioner for P6,295,224.88, receipt of which was
acknowledged in the said deed by TATIC. The latter warranted in the said deed that there were valid titles
to the property and that it would deliver possession thereof to the petitioner. On November 11, 1988,
VELI, as vendor, through its president, petitioner Virgilio Cervantes, and respondent Genuino Ice Co.,
Inc., as vendee, executed a deed of absolute sale over the parcel of land covered by TCT No. 241846 for
the price of P4,000,000.00, receipt of which was acknowledged by petitioner VELI. On the same day, the
respondent and petitioner VELI executed a deed of assignment of rights in which the latter assigned in
favor of the respondent, for and in consideration of P4,000,000.00, all its rights and interests under the
Deed of Absolute Sale executed on April 13, 1988 by the Spouses Flores and the deed of absolute sale
executed by TATIC in its favor, insofar as that lot covered by TCT No. 241846 only was concerned. On
June 24, 1990, the respondent filed a Complaint against petitioner VELI and its president, Virgilio
Cervantes, for specific performance and damages in the Regional Trial Court (RTC) of Quezon City. The
respondent alleged, inter alia, that petitioner VELI failed (a) to transfer title to and in the name of the
respondent over the property covered by TCT No. 241846 despite the lapse of a reasonable time; (b) to
cause the eviction/removal of the squatters/occupants on the property; and (c) to pay the capital gains tax
and other assessments due to effectuate the transfer of the titles of the property to and in its name. In
their answer to the complaint, the petitioners alleged that the respondent had no cause of action against
them because (a) petitioner VELI was exempt from the payment of capital gains tax; (b) the Spouses
Flores and Tobias were liable for the payment of capital gains tax; and (c) the Spouse Flores and To bias
were responsible for the eviction of the occupants/squatters from the property.
Ruling of the RTC: The trial court held that the petitioners were liable for the payment of the capital gains
tax, and that the respondent was not privy to the deeds of absolute sale executed by the Spouses Flores
and TATIC, and TATIC and petitioner VELI, and as such is not bound by the said deeds; neither could the
respondent enforce the same against the Spouses Flores, TATIC and petitioner VELI.

Ruling of CA: Affirmed, with modification, the appealed decision. The CA held that the petitioners were
liable for the expenses for the registration of the sale. It also ruled that the respondent was not bound by
the deed of absolute sale executed by TATIC and the petitioners because it was not a party thereto, and
that the latter were obliged to cause the eviction of the squatters from the property.

Issue: Whether or not the petitioners are liable for the capital gains tax for the sale between petitioner
VELI and the respondent.

Held: Petitioner VELI is Not Liable for Payment of the Capital Gains Tax for the Third Sale . We agree
with the petitioners' contention that petitioner VELI is not liable for the payment of capital gains tax for the
third deed of sale. A capital gains tax is a final tax assessed on the presumed gain derived by citizens
and resident aliens, as well as estates and trusts, from the sale or exchange of real property. Under the
first sale, per the agreement of the Spouses Flores, TATIC, and Tobias, the said spouses were obliged to
pay the capital gains tax. However, under the deed of absolute sale for the second sale, TATIC was not
obliged to pay the said tax. The Court notes that in answer to the respondent's demand letter, petitioner
VELI claimed that such tax could not be assessed against it or against TATIC for the reason that they are
corporations and, therefore, exempt from the payment of capital gains tax for any sale or exchange or
disposition of property.

When the first and second deeds of absolute sale took place in 1988, the 1977 National Internal Revenue
Code (NIRC), as amended by Batas Pambansa Blg. 37 and Executive Order No. 237 was still in effect.
Under Sections 21(e) and 34(h) of the 1977 NIRC, as amended, the Spouses Flores, as vendors, were
liable for the payment of capital gains tax. In the second sale, however, TATIC was not similarly liable
because while Article 1487 of the Civil Code provides that the seller is obliged to pay the capital gains tax
based on its obligation to transfer title over the property to the vendee under Sections 21(e) and 34(h) of
the 1977 NIRC, the payment of capital gains tax from the sale, exchange of disposition of real property
devolved only upon individual taxpayers. In fact, the Bureau of Internal Revenue (BIR), in response to the
queries of several corporations which had sold, exchanged or disposed of their real properties, definitely
ruled that the corporations were exempt from the payment of capital gains tax. Their income from the sale
or exchange or disposition of real property was treated as ordinary income, and was taxed as such.

This is the reason why, in the second sale, neither TATIC nor petitioner VELI paid any capital gains tax.
Similarly, in the third sale, i.e., between petitioner VELI and the respondent, petitioner VELI, being a
corporation, was not obliged to pay the capital gains tax. However, petitioner VELI, as seller, should have
included in its ordinary income tax return, whatever gain or loss it incurred with respect to the sale of the
property in dispute, pursuant to Section 24(a) of the 1977 NIRC, as amended.
SC did not agree with the ruling of the CA that, under Section 24(d) of the 1997 NIRC, previously Section
34(h) of the 1977 NIRC, petitioner VELI is obliged to pay capital gains tax for its sale of the property to the
respondent.

The gains that a corporation earned in the sale, exchange or disposition of the real properties it made
should be included in the Corporation' return, pursuant to Sections 24(a) and 45 of the 1977 NIRC, as
amended.

IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The decision of the Court of
Appeals in CA-G.R. CV No. 51933 is hereby AFFIRMED WITH MODIFICATION. That portion of the
Decision of the Court of Appeals mandating petitioner Vive Eagle Land, Inc. to pay capital gains tax for
the November 11, 1988 sale of the property covered by TCT No. 241846 to respondent Genuino Ice Co.,
Inc. is DELETED. No costs.

SO ORDERED.
 Puno, Austria-Martinez, Tinga and Chico-Nazario, JJ ., concur. Footnotes

x------------x
Allan
Vive Eagle Land, Inc. v. Court of Appeals, G.R. No. 150308, November 26, 2004

Facts:

 The Spouses Raul and Rosalie Flores were the owners of two parcels of land
situated along Aurora Boulevard, Cubao, Quezon City, covered by Transfer
Certificates of Title (TCT) Nos. 241845 and 241846, with an area of 1,026 and
2,963 square meters, respectively. On October 10, 1987, the Spouses Flores
and Tatic Square International Corporation (TATIC) executed an Agreement to
Sell in which the said spouses bound and obliged themselves to sell the
properties to TATIC.|||

 Tobias, as broker, undertook to pay any and all the taxes and assessments
imposed and/or charged over the lots, including the payment of capital gains tax;
and to secure tax clearances from the proper government agencies within thirty
days from April 12, 1988. Tobias also undertook to remove any and all
tenants/occupants on the lots within sixty days from April 12, 1988 with the
assistance and cooperation of the Spouses Flores. |

 Although the torrens titles over the lots were still in the custody of the Bank,
TATIC, as vendor, and petitioner VELI, as vendee, executed a deed of absolute
sale.

 VELI, as vendor, through its president, petitioner Virgilio Cervantes, and

respondent Genuino Ice Co., Inc., as vendee, executed a deed of absolute
sale over the parcel of land covered by TCT No. 241846 for the price of
P4,000,000.00.

 Respondent filed a Complaint against petitioner VELI and its president, Virgilio
Cervantes, for specific performance and damages in the Regional Trial Court
(RTC) of Quezon City.|
  The trial court held that the petitioners were liable for the payment of the capital
gains tax. In due course, the petitioners appealed to the CA which rendered
judgment, on July 19, 2001, affirming, with modification, the appealed decision.

Issue: Whether or not the petitioners are liable for the capital gains tax for the sale
between petitioner VELI and the respondent.

Held: No. is settled that only laws existing at the time of the execution of a contract are
applicable thereto and not later statutes, unless the latter are specifically intended to
have retroactive effect. When the first and second deeds of absolute sale took place in
1988, the 1977 National Internal Revenue Code (NIRC), as amended by Batas
Pambansa Blg. 37 and Executive Order No. 237was still in effect. Under Sections
21(e) and 34(h) of the 1977 NIRC, as amended, the Spouses Flores, as vendors, were
liable for the payment of capital gains tax. In the second sale, however, TATIC was not
similarly liable because while Article 1487 of the Civil Code provides that the seller is
obliged to pay the capital gains tax based on its obligation to transfer title over the
property to the vendee under Sections 21(e) and 34(h) of the 1977 NIRC, the payment
of capital gains tax from the sale, exchange of disposition of real property devolved only
upon individual taxpayers.|

This is the reason why, in the second sale, neither TATIC nor petitioner VELI paid any
capital gains tax. Similarly, in the third sale, i.e., between petitioner VELI and the
respondent, petitioner VELI, being a corporation, was not obliged to pay the capital
gains tax. However, petitioner VELI, as seller, should have included in its ordinary
income tax return, whatever gain or loss it incurred with respect to the sale of the
property in dispute, pursuant to Section 24(a) 26 of the 1977 NIRC, as amended.

x----------------x
DK
5. SMI-ED Phil Technology vs. CA (2004)
SMI-ED PHILIPPINES TECHNOLOGY, INC., petitioner, vs. COMMISSIONER OF INTERNAL
REVENUE, respondent. [G.R. No. 175410. November 12, 2014.]

LEONEN, J p:

Facts: SMI-Ed Philippines is a PEZA-registered corporation authorized "to engage in the business of
manufacturing ultra high-density microprocessor unit package. After its registration on June 29, 1998,
SMI-Ed Philippines constructed buildings and purchased machineries and equipment. As of December
31, 1999, the total cost of the properties amounted to P3,150,925,917.00. SMI-Ed Philippines "failed to
commence operations." Its factory was temporarily closed, effective October 15, 1999. On August 1,
2000, it sold its buildings and some of its installed machineries and equipment to Ibiden Philippines, Inc.,
another PEZA- registered enterprise, for ¥2,100,000,000.00 (P893,550,000.00). SMI-Ed Philippines was
dissolved on November 30, 2000. In its quarterly income tax return for year 2000, SMI-Ed Philippines
subjected the entire gross sales of its properties to 5% final tax on PEZA-registered corporations. SMI-Ed
Philippines paid taxes amounting to P44,677,500.00. On February 2, 2001, after requesting the
cancellation of its PEZA registration and amending its articles of incorporation to shorten its corporate
term, SMI -Ed Philippines filed an administrative claim for the refund of P44,677,500.00 with the Bureau
of Internal Revenue (BIR). SMI-Ed Philippines alleged that the amount was erroneously paid. It also
indicated the refundable amount in its final income tax return filed on March 1, 2001. It also alleged that it
incurred a net loss of P2,233,464,538.00.

The BIR did not act on SMI-Ed Philippines' claim, which prompted the latter to file a petition for review
before the Court of Tax Appeals on September 9, 2002.

Ruling of CTA Division: The Court of Tax Appeals Second Division denied SMI-Ed Philippines' claim for
refund in the decision dated December 29, 2004. It found out that SMI-Ed Philippines' administrative
claim for refund and the petition for review with the Court of Tax Appeals were filed within the two-year
prescriptive period. However, fiscal incentives given to PEZA-registered enterprises may be availed only
by PEZA- registered enterprises that had already commenced operations. Since SMI-Ed Philippines had
not commenced operations, it was not entitled to the incentives of either the income tax holiday or the 5%
preferential tax rate. Payment of the 5% preferential tax amounting to P44,677,500.00 was erroneous.

After finding that SMI-Ed Philippines sold properties that were capital assets under Section 39 (A) (1) of
the National Internal Revenue Code of 1997, the Court of Tax Appeals Second Division subjected the
sale of SMI-Ed Philippines' assets to 6% capital gains tax under Section 27 (D) (5) of the same Code and
Section 2 of Revenue Regulations No. 8-98. It was found liable for capital gains tax amounting to
P53,613,000.00. Therefore, SMI-Ed Philippines must still pay the balance of P8,935,500.00 as deficiency
tax, "which respondent should perhaps look into." The Court of Tax Appeals denied SMI-Ed Philippines'
motion for reconsideration in itsJune 15, 2005 resolution.
Ruling of CTA En Banc: In the decision promulgated on November 3, 2006, the Court of Tax Appeals
En Banc dismissed SMI-Ed Philippines' petition and affirmed the Court of Tax Appeals Second Division's
decision and resolution. The dispositive portion of the Court of Tax Appeals En Banc's decision reads:

Issues:

1. Whether or not CTA En Banc has the right to make an assessment against the petitioner.

2. Whether or not petitioner's entitlement to benefits given to PEZA-registered enterprises.

3. Whether or not the machineries and equipment sold by the petitioner-appellant is subject to the
six percent (6%) capital gains tax under Section 27 (D) (5) of the Tax Code.

4. Whether or not the power to make assessment had already prescribed under Sec 203 of NIRC.

Contention of Petitioner: It argued that the Court of Tax Appeals has no jurisdiction to make an
assessment since its jurisdiction, with respect to the decisions of respondent, is merely
appellate. Petitioner also argued that the Court of Tax Appeals En Banc erroneously subjected
petitioner's machineries to 6% capital gains tax. Section 27 (D) (5) of the National Internal Revenue Code
of 1997 is clear that the 6% capital gains tax on domestic corporations applies only on the sale of lands
and buildings and not to machineries and equipment.

Contention of Respondent: In its comment, respondent argued that the Court of Tax Appeals'
determination of petitioner's liability for capital gains tax was not an assessment. Such determination was
necessary to settle the question regarding the tax consequence of the sale of the properties. This is
clearly within the Court of Tax Appeals' jurisdiction under Section 7 of Republic Act No. 9282.
Respondent also argued that "petitioner failed to justify its claim for refund."

Held: Jurisdiction of the Court of Tax Appeals ― The Court of Tax Appeals has no power to make an
assessment at the first instance. On matters such as tax collection, tax refund, and others related to the
national internal revenue taxes, the Court of Tax Appeals' jurisdiction is appellate in nature. Section 7 (a)
(1) and Section 7 (a) (2) of Republic Act No. 1125, 51 as amended by Republic Act No. 9282, 52 provide
that the Court of Tax Appeals reviews decisions and inactions of the Commissioner of Internal Revenue
in disputed assessments and claims for tax refunds. The BIR first has to make an assessment of the
taxpayer's liabilities. When the BIR makes the assessment, the taxpayer is allowed to dispute that
assessment before the BIR. If the BIR issues a decision that is unfavorable to the taxpayer or if the BIR
fails to act on a dispute brought by the taxpayer, the BIR's decision or inaction may be brought on appeal
to the Court of Tax Appeals. The Court of Tax Appeals then acquires jurisdiction over the case. When the
BIR's unfavorable decision is brought on appeal to the Court of Tax Appeals, the Court of Tax Appeals
reviews the correctness of the BIR's assessment and decision. In reviewing the BIR's assessment and
decision, the Court of Tax Appeals had to make its own determination of the taxpayer's tax liabilities. The
Court of Tax Appeals may not make such determination before the BIR makes its assessment and before
a dispute involving such assessment is brought to the Court of Tax Appeals on appeal.

However, the Court of Tax Appeals' jurisdiction is not limited to cases when the BIR makes an
assessment or a decision unfavorable to the taxpayer. Because Republic Act No. 1125 53 also vests the
Court of Tax Appeals with jurisdiction over the BIR's inaction on a taxpayer's refund claim, there may be
instances when the Court of Tax Appeals has to take cognizance of cases that have nothing to do with
the BIR's assessments or decisions. When the BIR fails to act on a claim for refund of voluntarily but
mistakenly paid taxes, for example, there is no decision or assessment involved.

In this case, the Court of Tax Appeals' jurisdiction was acquired because petitioner brought the case on
appeal before the Court of Tax Appeals after the BIR had failed to act on petitioner's claim for refund of
erroneously paid taxes. The Court of Tax Appeals did not acquire jurisdiction as a result of a disputed
assessment of a BIR decision. Petitioner argued that the Court of Tax Appeals had no jurisdiction to
subject it to 6% capital gains tax or other taxes at the first instance. The Court of Tax Appeals has no
power to make an assessment. As earlier established, the Court of Tax Appeals has no assessment
powers. In stating that petitioner's transactions are subject to capital gains tax, however, the Court of Tax
Appeals was not making an assessment. It was merely determining the proper category of tax that
petitioner should have paid, in view of its claim that it erroneously imposed upon itself and paid the 5%
final tax imposed upon PEZA- registered enterprises.

The determination of the proper category of tax that petitioner should have paid is an incidental matter
necessary for the resolution of the principal issue, which is whether petitioner was entitled to a refund.
Nonetheless, it is important to note that any liability in excess of the refundable amount, however, may
not be collected in a case involving solely the issue of the taxpayer's entitlement to refund. The question
of tax deficiency is distinct and unrelated to the question of petitioner's entitlement to refund. Tax
deficiencies should be subject to assessment procedures and the rules of prescription. The court cannot
be expected to perform the BIR's duties whenever it fails to do so either through neglect or oversight.
Neither can court processes be used as a tool to circumvent laws protecting the rights of taxpayers.

Held: Petitioner's entitlement to benefits given to PEZA-registered enterprises — Petitioner is not entitled
to benefits given to PEZA-registered enterprises, including the 5% preferential tax rate under Republic
Act No. 7916 or the Special Economic Zone Act of 1995. This is because it never began its operation.
Essentially, the purpose of Republic Act No. 7916 is to promote development and encourage investments
and business activities that will generate employment. 59 Giving fiscal incentives to businesses is one of
the means devised to achieve this purpose. It comes with the expectation that persons who will avail
these incentives will contribute to the purpose's achievement. Hence, to avail the fiscal incentives under
Republic Act No. 7916, the law did not say that mere PEZA registration is sufficient. The fiscal incentives
and the 5% preferential tax rate are available only to businesses operating within the Ecozone. A
business is considered in operation when it starts entering into commercial transactions that are not
merely incidental to but are related to the purposes of the business. It is similar to the definition of "doing
business," as applied in actions involving the right of foreign corporations to maintain court
actions. Petitioner never started its operations since its registration on June 29, 1998 63 because of the
Asian financial crisis. 64 Petitioner admitted this. 65 Therefore, it cannot avail the incentives provided
under Republic Act No. 7916. It is not entitled to the preferential tax rate of 5% on gross income in lieu of
all taxes. Because petitioner is not entitled to a preferential rate, it is subject to ordinary tax rates under
the National Internal Revenue Code of 1997.

Held: Imposition of capital gains tax — The Court of Tax Appeals found that petitioner's sale of its
properties is subject to capital gains tax. For petitioner's properties to be subjected to capital gains tax,
the properties must form part of petitioner's capital assets. Section 39 (A) (1) of the National Internal
Revenue Code of 1997 defines "capital assets":

SEC. 39. Capital Gains and Losses. —

(A) Definitions. — As used in this Title —

(1) Capital Assets. — the term 'capital assets' means property held by the taxpayer (whether or not connected with his trade or
business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the
inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers
in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the
allowance for depreciation provided in Subsection (F) of Section 34; or real property used in trade or business of the taxpayer.

The properties involved in this case include petitioner's buildings, equipment, and machineries. They are
not among the exclusions enumerated in Section 39 (A) (1) of the National Internal Revenue Code of
1997. None of the properties were used in petitioner's trade or ordinary course of business because
petitioner never commenced operations. They were not part of the inventory. None of them were stocks in
trade. Based on the definition of capital assets under Section 39 of the National Internal Revenue Code of
1997, they are capital assets. Respondent insists that since petitioner's machineries and equipment are
classified as capital assets, their sales should be subject to capital gains tax. Respondent is mistaken.

Capital gains of individuals and corporations from the sale of real properties are taxed
differently. Individuals are taxed on capital gains from sale of all real properties located in the Philippines
and classified as capital assets. (Sec. 24 of the National Internal Revenue Code of 1997) For
corporations, the National Internal Revenue Code of 1997 treats the sale of land and buildings, and the
sale of machineries and equipment, differently. Domestic corporations are imposed a 6% capital gains tax
only on the presumed gain realized from the sale of lands and/or buildings. The National Internal
Revenue Code of 1997 does not impose the 6% capital gains tax on the gains realized from the sale of
machineries and equipment. (Section 27(D)(5) of the National Internal Revenue Code of 1997)

Therefore, only the presumed gain from the sale of petitioner's land and/or building may be subjected to
the 6% capital gains tax. The income from the sale of petitioner's machineries and equipment is subject to
the provisions on normal corporate income tax.

Petitioner indicated, however, in its March 1, 2001 income tax return for the 11- month period ending on
November 30, 2000 that it suffered a net loss of P2,233,464,538.00. 69 This declaration was made under
the pain of perjury under Section 267 of the National Internal Revenue Code of
1997. Moreover, presumption that the law has been obeyed unless contradicted or overcome by other
evidence.

The BIR did not make a deficiency assessment for this declaration. Neither did the BIR dispute this
statement in its pleadings filed before this court. There is, therefore, no reason to doubt the truth that
petitioner indeed suffered a net loss in 2000. Since petitioner had not started its operations, it was also
not subject to the minimum corporate income tax of 2% on gross income. Therefore, petitioner is not
liable for any income tax

Held: Prescription -— Section 203 of the National Internal Revenue Code of 1997 provides that as a
general rule, the BIR has three (3) years from the last day prescribed by law for the filing of a return to
make an assessment. If the return is filed beyond the last day prescribed by law for filing, the three-year
period shall run from the actual date of filing. the Supreme Court said in Commissioner of Internal
Revenue v. FMF Development Corporation that the prescriptive period to make an assessment of internal
revenue taxes is provided primarily to safeguard the interests of taxpayers from unreasonable
investigation.

The BIR had three years from the filing of petitioner's final tax return in 2000 to assess petitioner's taxes.
Nothing stopped the BI R from making the correct assessment. The elevation of the refund claim with the
Court of Tax Appeals was not a bar against the BIR's exercise of its assessment powers. The BIR,
however, did not initiate any assessment for deficiency capital gains tax. Since more than a decade have
lapsed from the filing of petitioner's return, the BIR can no longer assess petitioner for deficiency capital
gains taxes, if petitioner is later found to have capital gains tax liabilities in excess of the amount claimed
for refund.

The Court of Tax Appeals should not be expected to perform the BIR's duties of assessing and collecting
taxes whenever the BIR, through neglect or oversight, fails to do so within the prescriptive period allowed
by law.

WHEREFORE, the Court of Tax Appeals' November 3, 2006 decision is SET ASIDE. The Bureau of
Internal Revenue is ordered to refund petitioner SMI-Ed Philippines Technology, Inc. the amount of 5%
final tax paid to the BIR, less the 6% capital gains tax on the sale of petitioner SMI-Ed Philippines
Technology, Inc.'s land and building. In view of the lapse of the prescriptive period for assessment, any
capital gains tax accrued from the sale of its land and building that is in excess of the 5% final tax paid to
the Bureau of Internal Revenue may no longer be recovered from petitioner SMI-Ed Philippines
Technology, Inc.

SO ORDERED.


Carpio, Brion, Del Castillo and Mendoza, JJ., concur.

x------------------x
Allan

SMI-ED Phil. Technology, Inc. v. Commissioner of Internal Revenue, G.R. No.

175410, November 12, 2014

Facts:

 SMI-Ed Philippines is a PEZA-registered corporation authorized "to engage in the

business of manufacturing ultra high-density microprocessor unit package."|||

 SMI-Ed Philippines "failed to commence operations." 9 Its factory was

temporarily closed, effective October 15, 1999. On August 1, 2000, it sold its
buildings and some of its installed machineries and equipment to Ibiden
Philippines, Inc., another PEZA-registered enterprise, for ¥2,100,000,000.00
(P893,550,000.00). SMI-Ed Philippines was dissolved on November 30, 2000.|||

 SMI-Ed Philippines filed an administrative claim for the refund of P44,677,500.00

with the Bureau of Internal Revenue (BIR). SMI-Ed Philippines alleged that the
amount was erroneously paid.|||

 BIR did not act on SMI-Ed Philippines' claim, which prompted the latter to file a
petition for review before the Court of Tax Appeals which held that since SMI-Ed
Philippines had not commenced operations, it was not entitled to the incentives
of either the income tax holiday or the 5% preferential tax rate. 17 Payment of the
5% preferential tax amounting to P44,677,500.00 was erroneous.

 Court of Tax Appeals En Banc dismissed SMI-Ed Philippines' petition and

affirmed the Court of Tax Appeals Second Division's decision and resolution.

Issue: Whether Court of Tax Appeals En Banc erroneously subjected petitioner's

machineries to 6% capital gains tax.

Held: Yes. For corporations, the National Internal Revenue Code of 1997 treats the sale
of land and buildings, and the sale of machineries and equipment, differently. Domestic
corporations are imposed a 6% capital gains tax only on the presumed gain realized
from the sale of lands and/or buildings. The National Internal Revenue Code of 1997
does not impose the 6% capital gains tax on the gains realized from the sale of
machineries and equipment.

Therefore, only the presumed gain from the sale of petitioner's land and/or building may
be subjected to the 6% capital gains tax. The income from the sale of petitioner's
machineries and equipment is subject to the provisions on normal corporate income tax.

Petitioner indicated, however, in its March 1, 2001 income tax return for the 11-month
period ending on November 30, 2000 that it suffered a net loss of P2,233,464,538.00.|||

The BIR did not make a deficiency assessment for this declaration. Neither did the BIR
dispute this statement in its pleadings filed before this court. There is, therefore, no
reason to doubt the truth that petitioner indeed suffered a net loss in 2000.

Since petitioner had not started its operations, it was also not subject to the minimum
corporate income tax of 2% on gross income. Therefore, petitioner is not liable for any
income tax.

x--------------x
 Tax on Domestic Corporations
1. CIR vs. Philippine Airlines  july 7, 2009
 Tax on Resident Foreign Corporations
1. Commissioner vs. burroughs
2. Bank of America NT & SA vs. CA (1994)
 1. Commissioner vs. burroughs
.
COMMISSIONER OF INTERNAL REVENUE. vs. BURROUGHS LTD.
G.R. No. L-66653, June 19, 1986

 Burroughs Limited is a foreign corporation authorized to engage in trade or

business in the Philippines through a branch office located at De la Rosa corner
Esteban Streets, Legaspi Village, Makati, Metro Manila.
 Sometime in March 1979, said branch office applied with the Central Bank for
authority to remit to its parent company abroad, branch profit amounting to
P7,647,058.00. Thus, on March 14, 1979, it paid the 15% branch profit
remittance tax, pursuant to Sec. 24 (b) (2) (ii) and remitted to its head office the
amount of P6,499,999.30
 Claiming that the 15% profit remittance tax should have been computed on the
basis of the amount actually remitted (P6,499,999.30) and not on the amount
before profit remittance tax (P7,647,058.00), private respondent filed on
December 24, 1980, a written claim for the refund or tax credit of the amount of
P172,058.90 representing alleged overpaid branch profit remittance tax,
 Private respondent filed with respondent court, a petition for review, docketed
as C.T.A. Case No. 3204 for the recovery of the above-mentioned amount of
P172,058.81.
 CTA: ordered refund

ISSUE: WHETHER THE TAX BASE UPON WHICH THE 15% BRANCH PROFIT REMITTANCE TAX
SHALL BE IMPOSED UNDER THE PROVISIONS OF SECTION 24(B) OF THE TAX CODE, AS
AMENDED, IS THE AMOUNT APPLIED FOR REMITTANCE ON THE PROFIT ACTUALLY REMITTED
AFTER DEDUCTING THE 15% PROFIT REMITTANCE TAX.
HELD:
 YES.
"Sec. 24. Rates of tax on corporations. . . .
(b) Tax on foreign corporations. . . .
(2) (ii) Tax on branch profits remittances. — Any profit remitted
abroad by a branch to its head office shall be subject to a tax of fifteen
per cent (15%) . . . ."
 Said provision had been interpreted to mean that "the tax base upon which the 15%
branch profit remittance tax . . . shall be imposed . . . (is) the profit actually
remittedabroad and not on the total branch profits out of which the remittance is to
be made."
 The 15% branch profit tax shall be imposed on the branch profits actually remitted
abroad and not on the total branch profits out of which the remittance is to be made.
 Applying, therefore, the aforequoted ruling, the claim of private respondent that it
made an overpayment in the amount of P172,058.90 which is the difference between
the remittance tax actually paid of P1,147,058.70 and the remittance tax that should
have been paid of P974,999.89
 "Respondent concedes at least that in his ruling dated January 21, 1980 he held that
under Section 24 (b) (2) of the Tax Code the 15% branch profit remittance tax shall be
imposed on the profit actually remitted abroad and not on the total branch profit out
of which the remittance is to be made. Based on such ruling petitioner should have
paid only the amount of P974,999.89 in remittance tax computed by taking the 15%
of the profits of P6,499,999.89 in remittance tax actually remitted to its head office in
the United States, instead of P1,147,058.70, on its net profits of P7,647,058.00.
 What is applicable in the case at bar is Revenue Ruling of January 21, 1980 because
private respondent Burroughs Limited paid the branch profit remittance tax in
question on March 14, 1979. Memorandum Circular No. 8-82 dated March 17, 1982
 cannot be given retroactive effect in the light of Section 327 of the National Internal
Revenue Code which provides —
"Sec. 327. Non-retroactivity of rulings. Any revocation, modification, or reversal
of any of the rules and regulations promulgated in accordance with the preceding
section or any of the rulings or circulars promulgated by the Commissioner shall not
be given retroactive application if the revocation, modification, or reversal will be
prejudicial to the taxpayer except in the following cases (a) where the taxpayer
deliberately misstates or omits material facts from his return or in any document
required of him by the Bureau of Internal Revenue; (b) where the facts subsequently
gathered by the Bureau of Internal Revenue are materially different from the facts
on which the ruling is based, or (c) where the taxpayer acted in bad faith." (ABS-CBN
Broadcasting Corp. v. CTA, 108 SCRA 151-152)

x------------x
 2. Bank of America NT & SA
vs. CA (1994)
.
BANK OF AMERICA NT & SA vs. COURT OF APPEALS
G.R. No. 103092, 103106, July 21, 1994

 Petitioner Bank of America NT & SA argues that the 15% branch profit
remittance tax on the basis of the above provision should be assessed on the
amount actually remitted abroad, which is to say that the 15% profit remittance
tax itself should not form part of the tax base.
 Respondent Commissioner of Internal Revenue, contending otherwise, holds the
position that, in computing the 15% remittance tax, the tax should be inclusive
of the sum deemed remitted.
 "Petitioner is a foreign corporation duly licensed to engaged in business in the
Philippines with Philippines branch office at BA Lepanto Bldg., Paseo de Roxas,
Makati, Metro Manila.
 On July 20, 1982 it paid 15% branch profit remittance tax in the amount of
P7,538,460.72 on profit from its regular banking unit operations and
P445,790.25 on profit from its foreign currency deposit unit operations or a total
of P7,984,250.97. The tax was based on net profits after income tax without
deducting the amount corresponding to the 15% tax.
 "Petitioner filed a claim for refund with the Bureau of Internal Revenue of that
portion of the payment which corresponds to the 15% branch profit remittance
tax, on the ground that the tax should have been computed on the basis of
profits actually remitted, which is P45,244,088.85, and not on the amount before
profit remittance tax, which is P53,228,339.82.
 Subsequently, without awaiting respondent's decision, petitioner filed a petition
for review
  CTA: upheld petitioner bank in its claim for refund. The Commissioner of
Internal Revenue filed a timely appeal to the Supreme Court which referred it to
the Court of Appeals following this Court's pronouncement in Development Bank
of the Philippines vs. Court of Appeals, et al. (180 SCRA 609).
 CA: set aside. The use of the word remitted may well be understood as referring
to that part of the said total branch profits which would be sent to the head
office as distinguished from the total profits of the branch (not all of which need
be sent or would be ordered remitted abroad). If the legislature indeed had
wanted to mitigate the harshness of successive taxation, it would have been
simpler to just lower the rates without in effect requiring the relatively novel and
complicated way of computing the tax, as envisioned by the herein private
respondent. The same result would have been achieved.

ISSUE: WHETHER OR NOT THE BRANCH PROFIT REMITTANCE TAX SHOULD BE BASE ON THE
AMOUNT ACTUALLY REMITTED?
HELD:
 YES
 The Solicitor General correctly points out that almost invariably in an ad valorem tax,
the tax paid or withheld is not deducted from the tax base. Such impositions as the
ordinary income tax, estate and gift taxes, and the value added tax are generally
computed in like manner. In these cases, however, it is so because the law, in defining
the tax base and in providing for tax withholding, clearly spells it out to be such.
 ". . . In all the situations . . . where the mechanism of withholding of taxes at source
operates to ensure collection of the tax, and which respondent claims the base on which
the tax is computed is the amount to be paid or remitted, the law applicable expressly,
specifically and unequivocally mandates that thetax is on the total amount thereof
which shall be collected and paid as provided in Sections 53 and 54 of the Tax Code.
 "'Dividends received by an individual who is a citizen or resident of the
Philippines from a domestic corporation, shall be subject to a final tax at the rate
of fifteen (15%) per cent on the total amount thereof, which shall be collected
and paid as provided in Sections 53 and 54 of this Code. (Emphasis supplied; Sec.
21, Tax Code).
 'Interest from Philippine Currency bank deposits and yield from deposit substitutes
whether received by citizens of the Philippines or by resident aliens individuals, shall
be subject to a final tax as follows: (a) 15% of the interest or savings deposits, and (b)
20$ of the interest on time deposits and yield from deposits substitutes, which shall be
collected and paid as provided in Sections 53 and 54 of this Code: . .

"'SECTION 1. Income payments subject to withholding tax and rates

prescribed therein. — Except as therein otherwise provided, there shall
be withheld a creditable income tax at the rates herein specified for each
class of payee from the following items of income payments to persons
residing in the Philippines.

'(c) Rentals — When the gross rental or the payment required to be made
as a condition to the continued use or possession of property, whether
real or personal, to which the payor or obligor has not taken or is not
taking title or in which he has no equity, exceeds five hundred pesos
(P500.00) per contract or payment whichever is greater — five per
centum (5%).'

 "Note that the basis of the 5% withholding tax, as expressly and unambiguously
provided therein, is on the gross rental. Revenue Regulations No. 13-78 was
promulgated pursuant to Section 53 (f) of the then in force National Internal Revenue
Code which authorized the Minister of Finance, upon recommendation of the
Commissioner of Internal Revenue, to require the withholding of income tax on the
 same items of income payable to persons (natural or judicial) residing in the
Philippines by the persons making such payments at the rate of not less than 2 1/2%
but not more than 35% which are to be credited against the income tax liability of the
taxpayer for the taxable year.
 "On the other hand, there is absolutely nothing in Section 24(b) (2) (ii), supra, which
indicates that the 15% tax on branch profit remittance is on the total amount of profit
to be remitted abroad which shall be collected and paid in accordance with the tax
withholding device provided in Sections 53 and 54 of the Tax Code.
 The statute employs 'Any profit remitted abroad by a branch to its head office shall be
subject to a tax of fifteen per cent (15%)' — without more.
 Nowhere is there said of 'base on the total amount actually applied for by the branch
with the Central Bank of the Philippines as profit to be remitted abroad, which shall be
collected and paid as provide in Sections 53 and 54 of this Code.'
 Where the law does not qualify that the tax is imposed and collected at source based
on profit to be remitted abroad, that qualification should not be read into the law. It is
a basic rule of statutory construction that there is no safer nor better canon of
interpretation than that when the language of the law is clear and unambiguous, it
should be applied as written.
 The term 'any profit remitted abroad' can only mean such profit as 'forwarded, sent, or
transmitted abroad' as the word 'remitted' is commonly and popularly accepted and
understood. To say therefore that the tax on branch profit remittance is imposed and
collected at source and necessarily the tax base should be the amount actually applied
for the branch with the Central Bank as profit to be remitted abroad is to ignore the
unmistakable meaning of plain words."
 The tax is imposed on the amount sent abroad, and the law (then in force) calls for
nothing further. The taxpayer is a single entity, and it should be understandable if,
such as in this case, it is the local branch of the corporation, using its own local funds,
which remits the tax to the Philippine Government.
 The remittance tax was conceived in an attempt to equalize the income tax burden on
foreign corporations maintaining, on the one hand, local branch offices and organizing,
on the other hand, subsidiary domestic corporations where at least a majority of all the
latter's shares of stock are owned by such foreign corporations.
 In order to avert what would otherwise appear to be an unequal tax treatment on such
subsidiaries vis-a-vis local branch offices, a 20%, later reduced to 15% profit remittance
tax was imposed on local branches on their remittances of profits abroad. But this is
where the tax pari-passuends between domestic branches and subsidiaries of foreign
corporations.
 In the operation of the withholding tax system, the payee is the taxpayer, the person on
whom the tax is imposed, while the payor, a separate entity, acts no more than an agent
of the government for the collection of the tax in order to ensure its payment.
 The amount used to settle the tax liability is deemed sourced from the proceeds
constructive of the tax base. Since the payee, not the payor, is the real taxpayer, the
rule on constructive remittance (or receipt) can be easily rationalized, if not indeed,
made clearly manifest. It is hardly the case, however, in the imposition of the 15%
remittance tax where there is but one taxpayer using its own domestic funds in the
payment of the tax.

x-------------x
 Tax on Non Resident Foreign Corporation
1. Compagnie Financiere Sucres et Denrees vs. CIR
 IAET
1. Manila wine Merchants
2. Basilan Estates Inc vs. CIR
3. CIR vs. Tuason – 173 Scra
4. Cynamid Philippines vs. CA – January 20, 2000
Basilan Estates vs CIR
G.R. No. L-22492
September 5, 1967
BENGZON, J.

’In determining whether accumulations of earnings or profits in a particular year are

within the reasonable needs of a corporation, it is necessary to take into account prior
accumulations, since accumulations prior to the year involved may have been sufficient
to cover the business needs and additional accumulations during the year involved
would not reasonably be necessary.’

FACTS:

- Basilan Estates, Inc. is a Philippine corporation involved in the coconut industry

- With principal offices in Basilan City, it filed on March 24, 1954 its income tax returns for
1953 and paid an income tax of P8,028.
- On February 26, 1959, the Commissioner of Internal Revenue, per examiners' report of
February 19, 1959, assessed Basilan Estates, Inc., a deficiency income tax of P3,912 for
1953 and P86,876.85 as 25% surtax on unreasonably accumulated profits as of 1953
pursuant to Section 25 of the Tax Code.
- On non-payment of the assessed amount, a warrant of distraint and levy was issued but
the same was not executed because Basilan Estates, Inc. succeeded in getting the
Deputy Commissioner of Internal Revenue to order the Director of the district in
Zamboanga City to hold execution and maintain constructive embargo instead.
- Because of its refusal to waive the period of prescription, the corporation's request for
reinvestigation was not given due course, and on December 2, 1960, notice was served
the corporation that the warrant of distraint and levy would be executed.
- On December 20, 1960, Basilan Estates, Inc. filed before the Court of Tax Appeals a
petition for review of the Commissioner's assessment, alleging prescription of the period
for assessment and collection; error in disallowing claimed depreciations, travelling and
miscellaneous expenses; and error in finding the existence of unreasonably
accumulated profits and the imposition of 25% surtax thereon.
- On October 31, 1963, the Court of Tax Appeals found that there was no prescription and
affirmed the deficiency assessment in toto.
- On February 21, 1964, the case was appealed by the taxpayer.

ISSUE:

Have there been unreasonably accumulated profits? If so, should the 25% surtax
be imposed on the balance of the entire surplus from 1947-1953, or only for
1953?

RULING: YES.
Section 25 of the Tax Code which imposes a surtax on profits unreasonably accumulated
provides:

Sec. 25. Additional tax on corporations improperly accumulating profits or surplus - (a)
Imposition of tax. - If any corporation, except banks, insurance companies, or personal holding
companies, domestic or foreign, is formed or availed of for the purpose of preventing imposition
of tax upon its shareholders or members or the shareholders or members of another
corporation, through the medium of permitting its gains and profits to accumulate instead of
being divided or distributed, there is levied and assessed against such corporation, for each
taxable year, a tax equal to 25% of the undistributed portion of its accumulated profits or surplus
which shall be in addition to the tax imposed by Section 24, and shall be computed, collected,
and paid in the same manner and subject to the same provisions of law, including penalties, as
that tax.

Petitioner failed to provide sufficient explanation. In order to determine whether profits were
accumulated for the reasonable needs of the business or to avoid the surtax upon shareholders,
the controlling intention of the taxpayer is that which is manifested at the time of the
accumulation, not subsequently declared intentions which are merely the products of
afterthought. As correctly held by the CTA, while certain expenses of the corporation were
credited against large amounts, the unspent balance was retained by the stockholders without
refunding them to petitioner at the end of each year. These advances were in fact indirect loans
to the stockholders indicating the unreasonable accumulation or surplus beyond the needs of
the business.
CIR vs Tuason
G.R. No. 85749
May 15, 1989
GRIÑO-AQUINO, J.

The importance of liability is the purpose behind the accumulation of the income and not the
consequences of the accumulation. Thus, if the failure to pay dividends were for the purpose of
using the undistributed earnings & profits for the reasonable needs of the business, that
purpose would not fall to overcome the presumption and correctness of CIR.

FACTS:

- CTA set aside petitioner’s revenue commissioner’s assessment of 1.1 M as the 25%
surtax on private respondent’s unreasonable accumulation of surplus for the year 1975-
1978.

- Private respondent protested the assessment on the ground that the accumulation of
surplus profits during the years in question was solely for the purpose of expanding its
business operations as a real estate broker.

- Private res. filed a petition that pending determination of the case, an order be issued
restraining the commissioner and/or his reps from enforcing the warrants of distraint and
levy. Writ of injunction was issued by tax court.

- Due to the reversal of CTA of the commissioner’s decision, CIR appeals to the SC.

ISSUES:

1. Whether or not private respondent is a holding company and/or investment

company?
2. Whether or not Antonio accumulated surplus for years 75-78
3. Whether or not Tuason Inc. is liable for the 25% surtax on undue
accumulation of surplus for 75-78

RULING: YES TO ALL. Antionio is liable for the 25% surtax assessed.

Sec. 25. Additional tax on corporation improperly accumulating profits or surplus.—

(a) Imposition of tax. — If any corporation, except banks, insurance companies, or personal
holding companies, whether domestic or foreign, is formed or availed of for the purpose of
preventing the imposition of the tax upon its shareholders or members or the shareholders or
members of another corporation, through the medium of permitting its gains and profits to
accumulate instead of being divided or distributed, there is levied and assessed against such
corporation, for each taxable year, a tax equal to twenty-five per centum of the undistributed
portion of its accumulated profits or surplus which shall be in addition to the tax imposed by
section twentyfour, and shall be computed, collected and paid in the same manner and subject
to the same provisions of law, including penalties, as that tax.

(b) Prima facie evidence. — The fact that any corporation is a mere holding company shall be
prima facie evidence of a purpose to avoid the tax upon its shareholders or members. Similar
presumption will lie in the case of an investment company where at any time during the taxable
year more than fifty per centum in value of its outstanding stock is owned, directly or indirectly,
by one person.

In this case, Tuason Inc, a mere holding company for the corporation did not involve itself in the
development of subdivisions but merely subdivided its own lots and sold them for bigger profits.
It derived its income mostly from interest, dividends, and rentals realized from the sale of realty.

Tuason Inc is also owned by Antonio himself. While these profits were actually made, the
commissioner points out that the corp. did not use up its surplus profits. Antonio claims that he
spent the money to build an apartment in urdaneta but there’s a large discrepancy bet. The
market value and the alleged investment cost.

The importance of liability is the purpose behind the accumulation of the income and not the
consequences of the accumulation. Thus, if the failure to pay dividends were for the purpose of
using the undistributed earnings & profits for the reasonable needs of the business, that
purpose would not fall to overcome the presumption and correctness of CIR.
Cyanamid Philippines Inc. vs CIR
G.R. No. 108067
January 20, 2000
QUISUMBING, J.

TAX ON IMPROPER ACCUMULATION OF SURPLUS AS A PENALTY. When corporations do

not declare dividends, income taxes are not paid on the undeclared dividends received by the
shareholders. The tax on improper accumulation of surplus is essentially a penalty tax designed
to compel corporations to distribute earnings so that the said earnings by shareholders could, in
turn, be taxed.

RULE ON ENUMERATION: THE EXPRESS MENTION OF ONE PERSON, THING, ACT, OR

CONSEQUENCE IS CONSTRUED TO EXCLUDE ALL OTHERS. Exemptions from tax are
construed strictissimi juris against the taxpayer. Taxation is the rule and exemption is the
exception. The burden of proof rests upon the party claiming exemption to prove that it is in fact
covered by the exemption so claimed.

WORKING CAPITAL NEEDS; CURRENT RATIO. The working capital needs of a business
depend upon the nature of the business, its credit policies, the amount of inventories, the rate of
turnover, the amount of accounts receivable, the collection rate, the availability of credit to the
business, and similar factors. Aside from the Bardahl Formula, other formulas are also used,
e.g. the ratio of current assets to current liabilities and the adoption of the industry standard. The
ratio of current assets to current liabilities is used to determine the sufficiency of working capital.
Ideally, the working capital should equal the current liabilities and there must be 2 units of
current assets for every unit of current liability, hence the so-called "2 to 1" rule.

BURDEN OF PROOF. If the CIR determined that the corporation avoided the tax on
shareholders by permitting earnings or profits to accumulate, and the taxpayer contested such
determination, the burden of proving the determination wrong, together with the corresponding
burden of first going forward with evidence, is on the taxpayer. This applies even if the
corporation is not a mere holding or investment company and does not have an unreasonable
accumulation of earnings or profits.

RELEVANT PROVISIONS OF LAW:

1. SEC. 43 PAR. 2 OF THE CORPORATION CODE OF THE PHILIPPINES
Stock corporations are prohibited from retaining surplus profits in excess of one
hundred (100%) percent of their paid-in capital stock, except: (1) when justified by
definite corporate expansion projects or programs approved by the board of
directors; or (2) when the corporation is prohibited under any loan agreement with
any financial institution or creditor, whether local or foreign, from declaring dividends
without its/his consent, and such consent has not yet been secured; or (3) when it
can be clearly shown that such retention is necessary under special circumstances
 obtaining in the corporation, such as when there is need for special reserve for
probable contingencies.

2. SECTION 25 OF THE OLD NATIONAL INTERNAL REVENUE CODE OF 1977

Sec. 25. Additional tax on corporation improperly accumulating profits or surplus -
"(a) Imposition of tax. -- If any corporation is formed or availed of for the purpose of
preventing the imposition of the tax upon its shareholders or members or the
shareholders or members of another corporation, through the medium of permitting
its gains and profits to accumulate instead of being divided or distributed, there is
levied and assessed against such corporation, for each taxable year, a tax equal to
twenty-five per-centum of the undistributed portion of its accumulated profits or
surplus which shall be in addition to the tax imposed by section twenty-four, and shall
be computed, collected and paid in the same manner and subject to the same
provisions of law, including penalties, as that tax.

"(b) Prima facie evidence. -- The fact that any corporation is mere holding company
shall be prima facie evidence of a purpose to avoid the tax upon its shareholders or
members. Similar presumption will lie in the case of an investment company where
at any time during the taxable year more than fifty per centum in value of its
outstanding stock is owned, directly or indirectly, by one person.

"(c) Evidence determinative of purpose. -- The fact that the earnings or profits of a
corporation are permitted to accumulate beyond the reasonable needs of the
business shall be determinative of the purpose to avoid the tax upon its shareholders
or members unless the corporation, by clear preponderance of evidence, shall prove
the contrary.

"(d) Exception -- The provisions of this sections shall not apply to banks, non-bank
financial intermediaries, corporation organized primarily, and authorized by the
Central Bank of the Philippines to hold shares of stock of banks, insurance
companies, whether domestic or foreign.

BARDAHL FORMULA. The Bardahl formula was first adopted in Bardahl Manufacturing Corp.
to allow the taxpayer to accumulate earnings and profits to provide a working capital reserve
sufficient to meet ordinary operating expenses incurred during one complete operating cycle.
The corporation’s operating cycle was described as “the period of time required to convert cash
into raw materials, raw materials into inventory of marketable products, the inventory into sales
and accounts receivable, and the period of time required to collected its outstanding accounts.”

FACTS:

- Cyanamid Philippines Inc. is a corporation organized under Philippine laws, is a wholly

owned subsidiary of American Cyanamid Co. based in Maine, USA. It is engaged in the
 manufacture of pharmaceutical products and chemicals, a wholesaler of imported
finished goods, and an importer/indentor.
- Petitioner was found liable for P3,774,867.50 as 25% surtax on improper accumulation
of profits for 1981, plus 10% surcharge and 20% annual interest from January 30, 1985
to January 30, 1987, under Sec. 25 of the National Internal Revenue Code.
- Petitioner claimed that CIR’s assessment representing the 25% surtax on its
accumulated earnings for the year 1981 had no legal basis for the following reasons:
(a) That the accumulation of earnings and profits was for reasonable business
requirements to meet working capital needs and retirement of indebtedness;
(b) That petitioner is a wholly owned subsidiary of American Cyanamid Company, a
corporation organized under the laws of the State of Maine, in the United States of
America, whose shares of stock are listed and traded in New York Stock Exchange.
This being the case, no individual shareholder of petitioner could have evaded or
prevented the imposition of individual income taxes by petitioner’s accumulation of
earnings and profits, instead of distribution of the same.
- The Court of Tax Appeals made the following pronouncements:
o Petitioner’s purpose for accumulating its earnings does not fall within the ambit of
any of the specified purposes under Section 43, paragraph 2 of the Corporation
Code of the Philippines.
o That there was no need for petitioner to set aside a portion of its retained
earnings as working capital reserve as it claims since it had considerable liquid
funds. A thorough review of petitioner’s financial statement reveals that the
corporation had considerable liquid funds consisting of cash accounts receivable,
inventory and even its sales for the period is adequate to meet the normal needs
of the business. The current ratio of the company was computed to be 2.21:1.
The ratio serves as a primary test of a company’s solvency to meet current
obligations from current assets as a going concern or a measure of adequacy of
working capital.

ISSUE:
Whether the petitioner was liable for accumulated earnings tax for the year
1981.

RULING: YES, there is liability.

The court concluded that the petitioner was liable for accumulated earnings tax for the year
1981.

Section 25 of the Old NIRC of 1977 discouraged tax avoidance through corporate surplus
accumulation. When corporations do not declare dividends, income taxes are not paid on the
undeclared dividends received by the shareholders. The tax on improper accumulation of
surplus is essentially a penalty tax designed to compel corporations to distribute earnings so
that the said earnings by shareholders could, in turn, be taxed.
Petitioner’s assertion that it is exempt from the tax for being a wholly owned subsidiary of a
public owned company is without merit. The amendatory provision of Section 25 of the 1977
NIRC, which was PD 1739, enumerated the corporations exempt from the imposition of
improperly accumulated tax: (a) banks; (b) non-bank financial intermediaries; (c) insurance
companies; and (d) corporations organized primarily and authorized by the Central Bank of the
Philippines to hold shares of stocks of banks. Petitioner does not fall among those exempt
classes. Besides, the rule on enumeration is that the express mention of one person, thing, act,
or consequence is construed to exclude all others. Laws granting exemption from tax are
construed strictissimi juris against the taxpayer and liberally in favor of the taxing power.
Taxation is the rule and exemption is the exception. The burden of proof rests upon the party
claiming exemption to prove that it is, in fact, covered by the exemption so claimed, a burden
which petitioner here has failed to discharge.

Another point raised by the petitioner in objecting to the assessment, is that increase of working
capital by a corporation justifies accumulating income. Petitioner relies on the so-called
"Bardahl" formula, which allowed retention, as working capital reserve, sufficient amounts of
liquid assets to carry the company through one operating cycle. The "Bardahl" formula was
developed to measure corporate liquidity.

However, the court noted that the companies where the "Bardahl" formula was applied, had
operating cycles much shorter than that of petitioner. Cynamid’s operating cycle was 288.35
days, or 78.55% of a year, reflecting that petitioner will need sufficient liquid funds, of at least
three quarters of the year, to cover the operating costs of the business. In times when there is
no recurrence of a business cycle (as in the case of Cyanamid), the working capital needs
cannot be predicted with accuracy. As stressed by American authorities, although the "Bardahl"
formula is well-established and routinely applied by the courts, it is not a precise rule. It is used
only for administrative convenience. Petitioner’s application of the "Bardahl" formula merely
creates a false illusion of exactitude.

Other formulas are also used, e.g. the ratio of current assets to current liabilities and the
adoption of the industry standard. The ratio of current assets to current liabilities is used to
determine the sufficiency of working capital. Ideally, the working capital should equal the current
liabilities and there must be 2 units of current assets for every unit of current liability, hence the
so-called "2 to 1" rule.

As of 1981 the working capital of Cyanamid was P25,776,991.00, or more than twice its current
liabilities. That current ratio of Cyanamid, therefore, projects adequacy in working capital. Said
working capital was expected to increase further when more funds were generated from the
succeeding year’s sales.

The court has held in Basilan Estates, Inc. vs. Commissioner of Internal Revenue that:
"...[T]here is no need to have such a large amount at the beginning of the following year
because during the year, current assets are converted into cash and with the income
realized from the business as the year goes, these expenses may well be taken cared
 of. Thus, it is erroneous to say that the taxpayer is entitled to retain enough liquid net
assets in amounts approximately equal to current operating needs for the year to cover
‘cost of goods sold and operating expenses:’ for ‘it excludes proper consideration of
funds generated by the collection of notes receivable as trade accounts during the
course of the year."

If the CIR determined that the corporation avoided the tax on shareholders by permitting
earnings or profits to accumulate, and the taxpayer contested such determination, the burden of
proving the determination wrong, together with the corresponding burden of first going forward
with evidence, is on the taxpayer. This applies even if the corporation is not a mere holding or
investment company and does not have an unreasonable accumulation of earnings or profits.

As enunciated in the Manila Wine Merchants case, reasonable needs of the business means
immediate needs. In case of failure to prove reasonable needs, the penalty tax would apply.

The working capital needs of a business depend upon the nature of the business, its credit
policies, the amount of inventories, the rate of turnover, the amount of accounts receivable, the
collection rate, the availability of credit to the business, and similar factors. Petitioner, by
adhering to the "Bardahl" formula, failed to impress the tax court with the required definiteness
envisioned by the statute.
Consolidated Mines, Inc., vs. CTA
G.R. Nos. L-18843 and L-18844
August 29, 1974
MAKALINTAL, C.J.

Transfer pricing is generally defined as the pricing of cross-border, intra-firm transactions

between related parties or associated enterprises. Typically, a transfer price occurs between a
taxpayer of a country with high income taxes and a related or associated enterprise of a country
with low income taxes.
.
While transfer pricing issue typically occurs in cross-border transactions, it can also occur in
domestic transactions. One context where transfer pricing issue occurs domestically is where
one associated enterprise, entitled to income tax exemptions, is being used to allocate income
away from a company subject to regular income taxes. is a domestic transfer pricing issue when
income are shifted in favor of a related company with special tax privileges such as Board of
Investments (BOI) Incentives and Philippine Economic Zone Authority (PEZA) fiscal incentives
or when expenses of a related company with special tax privileges are shifted to a related
company subject to regular income taxes or in other circumstances, when income and/or
expenses are shifted to a related party in order to minimize tax liabilities (see RR 2-2013
[January 23, 2013])

In computing net income there shall be allowed as deduction, in the case of mines, a
reasonable allowance for depletion thereof not to exceed the market value in the mine
of the product thereof which has been mined and sold during the year for which the
return is made. As an income tax concept, depletion is wholly a creation of the statue –
solely a matter of legislative grace. Hence, the taxpayer has the burden of justifying the
allowance of any deduction claimed.

From Atty. Ingles’ Reviewer:

Accrual basis is the default – meaning, you report income when earned and report
expense when incurred, i.e. when it’s legally due, demandable and enforceable.

From ehow.com:
Accrual accounting and cash basis accounting are the two most common accounting
methods used by U.S. companies.
Accrual accounting records transactions as they occur; cash basis accounting records
transactions only when cash changes hands. However, companies may select any
accounting method that accurately records financial transactions and is used
consistently.
Hybrid accounting methods usually combine aspects from both accrual and cash
basis accounting, according to company operations
FACTS:

- This is an example of a case wherein tax liabilities were minimized through transfer
pricing between two domestic corporations.
- Consolidated Mines has certain mining claims located in Masinloc, Zambales.
- Because it wanted to relieve itself of the work and expense necessary for developing the
claims, the Company, on July 9, 1934, entered into an agreement (Exhibit L) with
Benguet, a domestic anonymous partnership engaged in the production and marketing
of chromite, whereby the latter undertook to "explore, develop, mine, concentrate and
market" the pay ore in said mining claims.
- Consolidated filed a refund for overpayments of income taxes for the year 1951.
- However, after investigation of the BIR, instead of having a refund, the company was
instead assessed for deficiency income taxes for the years 1953, 1954 and 1956 with
5% surcharge and 1% monthly interest.
- After investigation, for the years 1951 and 1954 (1) the company had not accrued as an
expense the share in the company profits of Benguet Consolidated Mines as operator of
the Consolidated Mines, although for income tax purposes the Consolidated had
reported income and expenses on the accrual basis;
(2) depletion and depreciation expenses had been overcharged; and
(3) the claims for audit and legal fees and miscellaneous expenses for 1953 and 1954
had not been properly substantiated.;
and that
- for the year 1956 (1) the company had overstated its claim for depletion; and
- (2) certain claims for miscellaneous expenses were not duly supported by evidence.
- Consolidated and Benguet entered into a development agreement whereby
Consolidated, as the owner of several mining claims, allowed Benguet to explore,
develop, mine, concentrate and market the ore in the mining claims.
- Once profit is derived, expenditures from its own resources shall be charged against the
subsequent gross income of the properties.
- During the time Benguet is being reimbursed for all its expenditures, the net profits
- resulting from the operation of the claims shall be divided 90% of the net profits
pertaining to Benguet and 10% to Consolidated.
- After Benguet has been fully reimbursed for its expenditures, the net profits from the
operation shall be divided between Benguet and Consolidated share and share alike, it
being understood however, that the net profits as the term is used in this agreement
shall be computed by deducting from gross income all operating expenses and all
disbursements of any nature.
- By 1953, Benguet had completely recouped its advances.
- Consolidated used the accrual method of accounting in computing its income.
- One of its income is the amount paid to Benguet as mine operator, which amount is
computed as 50% of net income.
- Consolidated deducts as an expense 50% of cash receipts minus disbursements, but
does not deduct at the end of each calendar year what the Commissioner alleges is 50%
if and when the accounts receivable are actually paid.

ISSUE: Was there tax deficiency?

RULING: YES.

It is understood that research and development give rise to tax deductions. However in this
case, evidence on hand is insufficient to prove the cost of development alleged by the
Company.
It failed to establish the components of the amount it alleged: particular expenses made and
the corresponding amount of each were not stated, duly there was failure in the
determination as to whether the expenses were actually made and whether the items are
properly part of cost of mine development, or are actually depreciable items.

ON THE ACCOUNTING METHOD:

The Supreme Court found that Consolidated Mines did not use a ‘hybrid’ method to
determine its tax liability. Since Consolidated Mines had contracted with Benguet Mining as
to the operation and the expenses of some of its Zambales mines and the expenses thereof
was to be shouldered by Benguet Mines until it came to operation status and only to be
reimbursed, then the adjustments made by Consolidated Mine’s accountants was proper.
Moreover, as determined bu the SC, the determination of the tax liability was derived using
the accrual method.

In the determination of the total tax liability of Consolidated Mines, it was reduced from the
original assessment of the BIR since it was also determined that there were several
adjustments with regard to mining industry-specific rates such as ore depletion and the
actual mine costs that contribute to the assessment of the tax liability of petitio

ON DEPLETION:

The first issue raised by Consolidated is with respect to the rate of mine depletion used by
the CTA. The Tax Code provides that in computing net income there shall be allowed as
deduction, in the case of mines, a reasonable allowance for depletion thereof not to exceed
the market value in the mine of the product thereof which has been mined and sold during
the year for which the return is made. (Sec. 30(g) (1) (B). as an income tax concept,
depletion is wholly a creation of the statue – solely a matter of legislative grace.

Hence, the taxpayer has the burden of justifying the allowance of any deduction claimed.

As in connection with all other tax controversies, the burden of proof to show that a
disallowance of depletion by the Commissioner is incorrect or that an allowance made is
inadequate is upon the taxpayer, and this is true with respect to the value of the property
constituting the basis of the deduction.

This burden-of-proof rule has been frequently applied and a value claimed has been
disallowed for lack of evidence. Here, SC considered the evidence presented (testimony of
Eligio Garcia) and the Report to Stockholders which includes the Balance Sheet as of 1946),
geological report on the estimated amount of ore in the claims, etc.) it set forth a very
detailed computation of the depletion rate, determining the value of each component of the
formula of depletion, viz: Rate of Depletion Per Unit=Cost of Mine Property/Estimated Ore
Deposit of product Mined and sold – depletion is different from depreciation.

In determining the amount of cost depletion allowable the following three facts are essential:
1. The basis of the property, 2. The estimated total recoverable units in the property; and
3. The no. of units recovered during the taxable year in question.

As used as an element in cost depletion, basis means the dollar amount of the taxpayer’s
capital or investment in the property which he is entitled to recover tax free during the period
he is removing the mineral in the deposit. Duly the disposition was modified.
chapter 6
1. Tax Credit
1. CIR. vs. S.C Johnsons and son – 309 Scra
2. CIR vs. Procter and Gamble – April 15, 1988
3. Fort Bonifacio development Corp.vs. CIR (2012)

x------------x
 1. CIR. vs. S.C Johnsons and son – 309 Scra
.
COMMISSIONER OF INTERNAL REVENUE vs. S.C. JOHNSON AND SON, INC.
G.R. No. 127105, June 25, 1999

 Respondent, a domestic corporation organized and operating under the

Philippine laws, entered into a license agreement with SC Johnson and Son,
United States of America (USA), a non-resident foreign corporation based in the
U.S.A. pursuant to which the [respondent] was granted the right to use the
trademark, patents and technology owned by the latter including the right to
manufacture, package and distribute the products covered by the Agreement
and secure assistance in management, marketing and production from
SC Johnson and Son, U.S.A.
 The said License Agreement was duly registered with the Technology Transfer
Board of the Bureau of Patents, Trade Marks and Technology Transfer under
Certificate of Registration No. 8064
 For the use of the trademark or technology, [respondent] was obliged to pay
SC Johnson and Son, USA royalties based on a percentage of net sales and
subjected the same to 25% withholding tax on royalty payments which
[respondent] paid for the period covering July 1992 to May 1993 in the total
amount of P1,603,443.00
 Respondent filed with the International Tax Affairs Division (ITAD) of the BIR a
claim for refund of overpaid withholding tax on royalties arguing that, 'the
antecedent facts attending [respondent's] case fall squarely within the same
circumstances under which said MacGeorge and Gillete rulings were issued.
 Since the agreement was approved by the Technology Transfer Board, the
preferential tax rate of 10% should apply to the [respondent]. We therefore
submit that royalties paid by the [respondent] to SC Johnson and Son, USA is
only subject to 10% withholding tax pursuant to the most-favored nation
 clause of the RP-US Tax Treaty [Article 13, paragraph 2(b)(iii)] in relation to the
RP-West Germany Tax Treaty [Article 12(2)(b)]'
 S.C. Johnson & Son, Inc. (S.C. Johnson) then filed a petition for review before the
Court of Tax Appeals to claim a refund of the overpaid withholding tax on royalty
payments from July 1992 to May 1993.
 The Court of Tax Appeals rendered its decision in favor of S.C. Johnson and
ordered the Commissioner of Internal Revenue to issue a tax credit certificate for
overpaid withholding tax on royalty payments beginning July, 1992 to May,
1993.
 The Commissioner of Internal Revenue thus filed a petition for review with the
Court of Appeals which rendered the decision subject of this appeal on
November 7, 1996 finding no merit in the petition and affirming in toto the CTA
ruling.
 Petitioner contends that under Article 13(2)(b)(iii) of the RP-US Tax Treaty,
which is known as the "most favored nation" clause, the lowest rate of the
Philippine tax at 10% may be imposed on royalties derived by a resident of the
United States from sources within the Philippines only if the circumstances of
the resident of the United States are similar to those of the resident of West
Germany.
 Since the RP-US Tax Treaty contains no "matching credit" provision as that
provided under Article 24 of the RP-West Germany Tax Treaty, the tax on
royalties under the RP-US Tax Treaty is not paid under similar circumstances as
those obtaining in the RP-West Germany Tax Treaty. Even assuming that the
phrase "paid under similar circumstances" refers to the payment of royalties,
and not taxes, as held by the Court of Appeals, still, the "most favored nation"
clause cannot be invoked for the reason that when a tax treaty contemplates
circumstances attendant to the payment of a tax, or royalty remittances for that
matter, these must necessarily refer to circumstances that are tax-related.
 Finally, petitioner argues that since S.C. Johnson's invocation of the "most
favored nation" clause is in the nature of a claim for exemption from the
application of the regular tax rate of 25% for royalties, the provisions of the
treaty must be construed strictly against it.
 S.C. Johnson avers that the instant petition should be denied (1) because it
contains a defective certification against forum shopping as required under SC
Circular No. 28-91, that is, the certification was not executed by the petitioner
herself but by her counsel; and (2) that the "most favored nation" clause under
the RP-US Tax Treaty refers to royalties paid under similar circumstances as those
royalties subject to tax in other treaties; that the phrase "paid under similar
circumstances" does not refer to payment of the tax but to the subject matter of
the tax, that is, royalties, because the "most favored nation" clause is intended to
allow the taxpayer in one state to avail of more liberal provisions contained in
another tax treaty wherein the country of residence of such taxpayer is also a
party thereto, subject to the basic condition that the subject matter of taxation
in that other tax treaty is the same as that in the original tax treaty under which
the taxpayer is liable; thus, the RP-US Tax Treaty speaks of "royalties of the same
kind paid under similar circumstances".
 S.C. Johnson also contends that the Commissioner is estopped from insisting on
her interpretation that the phrase "paid under similar circumstances" refers to
the manner in which the tax is paid, for the reason that said interpretation is
embodied in Revenue Memorandum Circular which was already abandoned by
the Commissioner's predecessor in 1993; and was expressly revoked in BIR
Ruling No. 052-95 which stated that royalties paid to an American licensor are
subject only to 10% withholding tax pursuant to Art. 13(2)(b)(iii) of the RP-US Tax
Treaty in relation to the RP-West Germany Tax Treaty.
 Petitioner filed Reply alleging that the fact that the certification against forum
shopping was signed by petitioner's counsel is not a fatal defect as to warrant
 the dismissal of this petition since Circular No. 28-91 applies only to original
actions and not to appeals, as in the instant case.
 Moreover, the requirement that the certification should be signed by petitioner
and not by counsel does not apply to petitioner who has only the Office of the
Solicitor General as statutory counsel.
 Petitioner reiterates that even if the phrase "paid under similar circumstances"
embodied in the most favored nation clause of the RP-US Tax Treaty refers to
the payment of royalties and not taxes, still the presence or absence of a
"matching credit" provision in the said RP-US Tax Treaty would constitute a
material circumstance to such payment and would be determinative of the said
clause's application.
 Art 13 whatever of the RP-US Tax Treaty states, among other things, that:
Royalties derived by a resident of one of the Contracting States from sources within the
other Contracting State may be taxed by both Contracting States.
(iii)the lowest rate of Philippine tax that may be imposed on royalties of the
same kind paid under similar circumstances to a resident of a third State.

 Respondent S. C. Johnson and Son, Inc. claims that on the basis of the quoted provision,
it is entitled to the concessional tax rate of 10 percent on royalties based on Article
12(2)(b) of the RP-Germany Tax Treaty which provides:

10 percent of the gross amount of royalties arising from the use of, or the right to
use, any patent, trademark, design or model, plan, secret formula or process, or
from the use of or the right to use, industrial, commercial, or scientific
equipment, or for information concerning industrial, commercial or scientific
experience.

 Unlike the RP-US Tax Treaty, the RP-Germany Tax Treaty allows a tax credit of 20
percent of the gross amount of such royalties against German income and corporation
 tax for the taxes payable in the Philippines on such royalties where the tax rate is
reduced to 10 or 15 percent under such treaty.

 Article 24 of the RP-Germany Tax Treaty states —

Tax shall be determined in the case of a resident of the Federal Republic of
Germany as follows:
b)Subject to the provisions of German tax law regarding credit for foreign tax,
there shall be allowed as a credit against German income and corporation tax
payable in respect of the following items of income arising in the Republic of the
Philippines, the tax paid under the laws of the Philippines in accordance with this
Agreement on:
c) In the case of royalties for which the tax is reduced to 10 or 15 per cent
according to paragraph 2 of Article 12, 20 percent of the gross amount of
such royalties.
 According to petitioner, the taxes upon royalties under the RP-US Tax Treaty are not
paid under circumstances similar to those in the RP-West Germany Tax Treaty since
there is no provision for a 20 percent matching credit in the former convention and
private respondent cannot invoke the concessional tax rate on the strength of the most
favored nation clause in the RP-US Tax Treaty. Petitioner's position is explained thus:

"Under the foregoing provision of the RP-West Germany Tax Treaty, the
Philippine tax paid on income from sources within the Philippines is allowed as a
credit against German income and corporation tax on the same income. In the
case of royalties for which the tax is reduced to 10 or 15 percent according to
paragraph 2 of Article 12 of the RP-West Germany Tax Treaty, the credit shall be
20% of the gross amount of such royalty. To illustrate, the royalty income of a
German resident from sources within the Philippines arising from the use of, or
the right to use, any patent, trade mark, design or model, plan, secret formula or
process, is taxed at 10% of the gross amount of said royalty under certain
 conditions. The rate of 10% is imposed if credit against the German income and
corporation tax on said royalty is allowed in favor of the German resident. That
means the rate of 10% is granted to the German taxpayer if he is similarly
granted a credit against the income and corporation tax of West Germany. The
clear intent of the 'matching credit' is to soften the impact of double taxation by
different jurisdictions.

ISSUE: WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT

SC JOHNSON AND SON, USA IS ENTITLED TO THE "MOST FAVORED NATION" TAX RATE OF
10% ON ROYALTIES AS PROVIDED IN THE RP-US TAX TREATY IN RELATION TO THE RP-WEST
GERMANY TAX TREATY.
HELD:
 NOT ENTITLED
 The court is not aware of any law or rule pertinent to the payment of royalties which
provides for the payment of royalties under dissimilar circumstances. The tax rates on
royalties and the circumstances of payment thereof are the same for all the recipients of
such royalties and there is no disparity based on nationality in the circumstances of such
payment.
 On the other hand, a cursory reading of the various tax treaties will show that there is
no similarity in the provisions on relief from or avoidance of double taxation as this is a
matter of negotiation between the contracting parties.
 The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines
has entered into for the avoidance of double taxation. The purpose of these
international agreements is to reconcile the national fiscal legislations of the contracting
parties in order to help the taxpayer avoid simultaneous taxation in two different
jurisdictions.
 More precisely, the tax conventions are drafted with a view towards the elimination
ofinternational juridical double taxation, which is defined as the imposition of
 comparable taxes in two or more states on the same taxpayer in respect of the same
subject matter and for identical periods.
 The apparent rationale for doing away with double taxation is to encourage the free
flow of goods and services and the movement of capital, technology and persons
between countries, conditions deemed vital in creating robust and dynamic economies.
 Double taxation usually takes place when a person is resident of a contracting state and
derives income from, or owns capital in, the other contracting state and both states
impose tax on that income or capital. In order to eliminate double taxation, a tax treaty
resorts to several methods. First, it sets out the respective rights to tax of the state of
source or situs and of the state of residence with regard to certain classes of income or
capital. In some cases, an exclusive right to tax is conferred on one of the contracting
states; however, for other items of income or capital, both states are given the right to
tax, although the amount of tax that may be imposed by the state of source is limited.
 The second method for the elimination of double taxation applies whenever the state
of source is given a full or limited right to tax together with the state of residence. In
this case, the treaties make it incumbent upon the state of residence to allow relief in
order to avoid double taxation.
 There are two methods of relief — the exemption method and the credit method. In
the exemption method, the income or capital which is taxable in the state of source or
situs is exempted in the state of residence, although in some instances it may be taken
into account in determining the rate of tax applicable to the taxpayer's remaining
income or capital.
 On the other hand, in the credit method, although the income or capital which is taxed
in the state of source is still taxable in the state of residence, the tax paid in the former is
credited against the tax levied in the latter. The basic difference between the two
methods is that in the exemption method, the focus is on the income or capital itself,
whereas the credit method focuses upon the tax.
 In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the
Philippines will give up a part of the tax in the expectation that the tax given up for this
 particular investment is not taxed by the other country. Thus the petitioner correctly
opined that the phrase "royalties paid under similar circumstances" in the most favored
nation clause of the US-RP Tax Treaty necessarily contemplated "circumstances that are
tax-related."
 In the case at bar, the state of source is the Philippines because the royalties are paid for
the right to use property or rights, i.e. trademarks, patents and technology, located
within the Philippines. The United States is the state of residence since the taxpayer, S.
C. Johnson and Son, U.S.A., is based there. Under the RP-US Tax Treaty, the state of
residence and the state of source are both permitted to tax the royalties, with a
restraint on the tax that may be collected by the state of source.
 The method employed to give relief from double taxation is the allowance of a tax credit
to citizens or residents of the United States against the United States tax, but such
amount shall not exceed the limitations provided by United States law for the taxable
year.
 Given the purpose underlying tax treaties and the rationale for the most favored
nation clause, the concessional tax rate of 10 percent provided for in the RP-Germany
Tax Treaty should apply only if the taxes imposed upon royalties in the RP-US Tax
Treaty and in the RP-Germany Tax Treaty are paid under similar circumstances.
 This would mean that private respondent must prove that the RP-US Tax Treaty grants
similar tax reliefs to residents of the United States in respect of the taxes imposable
upon royalties earned from sources within the Philippines as those allowed to their
German counterparts under the RP-Germany Tax Treaty.
 The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on
tax crediting. Article 24 of the RP-Germany Tax Treaty, supra, expressly allows
crediting against German income and corporation tax of 20% of the gross amount of
royalties paid under the law of the Philippines. On the other hand, Article 23 of the
RP-US Tax Treaty, which is the counterpart provision with respect to relief for double
taxation, does not provide for similar crediting of 20% of the gross amount of royalties
paid.
 In one case, the Supreme Court pointed out that laws are not just mere compositions,
but have ends to be achieved and that the general purpose is a more important aid to
the meaning of a law than any rule which grammar may lay down. The Vienna
Convention on the Law of Treaties states that a treaty shall be interpreted in good faith
in accordance with the ordinary meaning to be given to the terms of the treaty in their
context and in the light of its object and purpose
 The goal of double taxation conventions would be thwarted if such treaties did not
provide for effective measures to minimize, if not completely eliminate, the tax burden
laid upon the income or capital of the investor. Thus, if the rates of tax are lowered by
the state of source, in this case, by the Philippines, there should be a concomitant
commitment on the part of the state of residence to grant some form of tax relief,
whether this be in the form of a tax credit or exemption. Otherwise, the tax which
could have been collected by the Philippine government will simply be collected by
another state, defeating the object of the tax treaty since the tax burden imposed upon
the investor would remain unrelieved.
 The purpose of a most favored nation clause is to grant to the contracting party
treatment not less favorable than that which has been or may be granted to the "most
favored" among other countries.
 The most favored nation clause is intended to establish the principle of equality of
international treatment by providing that the citizens or subjects of the contracting
nations may enjoy the privileges accorded by either party to those of the most favored
nation.
 The essence of the principle is to allow the taxpayer in one state to avail of more
liberal provisions granted in another tax treaty to which the country of residence of
such taxpayer is also a party provided that the subject matter of taxation, in this case
royalty income, is the same as that in the tax treaty under which the taxpayer is liable.
The similarity in the circumstances of payment of taxes is a condition for the enjoyment
of most favored nation treatment precisely to underscore the need for equality of
treatment.
  Since the RP-US Tax Treaty does not give a matching tax credit of 20 percent for the
taxes paid to the Philippines on royalties as allowed under the RP-West Germany Tax
Treaty, private respondent cannot be deemed entitled to the 10 percent rate granted
under the latter treaty for the reason that there is no payment of taxes on royalties
under similar circumstances.
 It bears stress that tax refunds are in the nature of tax exemptions. As such they are
regarded as in derogation of sovereign authority and to be construed strictissimi
juris against the person or entity claiming the exemption. The burden of proof is upon
him who claims the exemption in his favor and he must be able to justify his claim by
the clearest grant of organic or statute law.
 Private respondent is claiming for a refund of the alleged overpayment of tax on
royalties; however, there is nothing on record to support a claim that the tax on
royalties under the RP-US Tax Treaty is paid under similar circumstances as the tax on
royalties under the RP-West Germany Tax Treaty.
 ON THE ISSUE OF THE CFNFS: Since the OSG is the only lawyer for the petitioner, which
is a government agency mandated under Section 35, Chapter 12, Title III, Book IV of the
1987 Administrative Code to be represented only by the Solicitor General, the
certification executed by the OSG in this case constitutes substantial compliance with
Circular No. 28-91.

x-----------------x
 2. CIR vs. Procter and Gamble – April 15,
1988
.
COMMISSIONER OF INTERNAL REVENUE vs. PROCTER & GAMBLE PHIL. MANUFACTURING
CORP.
G.R. No. 66838, April 15, 1988

 Private respondent, Procter and Gamble Philippine Manufacturing Corporation

(hereinafter referred to as PMC-Phil.), a corporation duly organized and existing
under and by virtue of the Philippine laws, is engaged in business in the
Philippines and is a wholly owned subsidiary of Procter and Gamble, U.S.A.
(hereinafter referred to as PMC-USA), a non-resident foreign corporation in the
Philippines, not engaged in trade and business therein.
 As such PMC-U.S.A. is the sole shareholder or stockholder of PMC-Phil., as PMC-
U.S.A. owns wholly or by 100% the voting stock of PMC-Phil. and is entitled to
receive income from PMC-Phil. in the form of dividends, if not rents or royalties.
In addition, PMC-Phil. has a legal personality separate and distinct from PMC-
U.S.A.
 For the taxable year ending June 30, 1974 PMC-Phil. realized a taxable net
income of P56,500,332.00 and accordingly paid the corresponding income tax
thereon equivalent to P25%-35% or P19,765,116.00
 After taxation its net profit was P36,735,216.00. Out of said amount it declared a
dividend in favor of its sole corporate stockholder and parent corporation PMC-
U.S.A. in the total sum of P17,707,460.00 which latter amount was subjected to
Philippine taxation of 35% or P6,197,611.23
 For the taxable year ending June 30, 1975 PMC-Phil. realized a taxable net
income of P8,735,125.00 which was subjected to Philippine taxation at the rate
of 25%-35% or P2,952,159.00, thereafter leaving a net profit of P5,782,966.00.
 As in the 2nd quarter of 1975, PMC-Phil. again declared a dividend in favor of
PMC-U.S.A. at the tax rate of 35% or P6,457,485.00.
 In July, 1977 PMC-Phil., invoking the tax-sparing credit provision in Section 24(b)
as the withholding agent of the Philippine government, with respect to the
dividend taxes paid by PMC-U.S.A., filed a claim with the petitioner,
Commissioner of Internal Revenue, for the refund of the 20 percentage-point
portion of the 35 percentage-point whole tax paid, arising allegedly from the
alleged "overpaid withholding tax at source or overpaid withholding tax in the
amount of P4,832,989.00"
 There being no immediate action by the BIR on PMC-Phils' letter-claim the latter
sought the intervention of the CTA when on July 13, 1977 it filed with herein
respondent court a petition for review praying that it be declared entitled to the
refund or tax credit claimed and ordering respondent therein to refund to it the
amount of P4,832,989.00, or to issue tax credit in its favor in lieu of tax refund.
On the other hand therein respondent, Commissioner of Internal Revenue, in his
answer, prayed for the dismissal of said petition and for the denial of the claim
for refund.
 CTA: ruled in favor of the herein petitioner, stating that PMC is entitled to the
sought refund or tax credit of the amount representing the overpaid withholding
tax at source and the payment

ISSUE: WHETHER OR NOT PRIVATE RESPONDENT IS ENTITLED TO THE PREFERENTIAL 15% TAX
RATE ON DIVIDENDS DECLARED AND REMITTED TO ITS PARENT CORPORATION
HELD:
 NO
 The errors of certain administrative officers should never be allowed to jeopardize the
government's financial position.
 The real party in interest being the mother corporation in the United States, it follows
that American entity is the real party in interest, and should have been the claimant in
this case.
 The law pertinent to the issue is Section 902 of the U.S. Internal Revenue Code, as
amended by Public Law 87-834, the law governing tax credits granted to U. S.
corporations on dividends received from foreign corporations, which to the extent
applicable reads:
"SEC. 902 — CREDIT FOR CORPORATE STOCKHOLDERS IN FOREIGN
CORPORATION. (a) Treatment of Taxes Paid by Foreign Corporation — For
purposes of this subject, a domestic corporation which owns at least 10 percent
of the voting stock of a foreign corporation from which it receives dividends in
any taxable year shall —
(1) to the extent such dividends are paid by such foreign corporation out
of accumulated profits [as defined in subsection (c) (1) (a)] of a year for which
such foreign corporation is not a less developed country corporation, be deemed
to have paid the same proportion of any income, war profits, or excess profits
taxes paid or deemed to be paid by such foreign corporation to any foreign
country or to any possession of the United States on or with respect to such
accumulated profits, which the amount of such dividends (determined without
regard to Section 78) bears to the amount of such accumulated profits in excess
of such income, war profits, and excess profits taxes (other than those deemed
paid); and
(2) to the extent such dividends are paid by such foreign corporation out of
accumulated profits [as defined in subsection (c) (1) (b)] of a year for which such
foreign corporation is a less developed country corporation, be deemed to have
paid the same proportion of any income, war profits, or excess profits taxes paid
or deemed to be paid by such foreign corporation to any foreign country or to
any possession of the United States on or with respect to such accumulated
 profits, which the amount of such dividends bears to the amount of such
accumulated profits.
(1) Accumulated profits defined. - For purposes of this section, the term
'accumulated profits' means with respect to any foreign corporation.
 The Secretary or his delegate shall have full power to determine from the accumulated
profits of what year or years such dividends were paid, treating dividends paid in the
first 20 days of any year as having been paid from the accumulated profits of the
preceding year or years (unless to his satisfaction shows otherwise), and in other
respects treating dividends as having been paid from the most recently accumulated
gains, profits, or earnings . . ."
 There is nothing in the aforecited provision that would justify tax return of the disputed
15% to the private respondent. The private respondent failed to meet certain conditions
necessary in order that the dividends received by the non-resident parent company in
the United States may be subject to the preferential 15% tax instead of 35%. Among
other things, the private respondent failed:
 to show the actual amount credited by the U.S. government against the
income tax due from PMC-U.S.A. on the dividends received from private
respondent;
 to present the income tax return of its mother company for 1975 when
the dividends were received; and
 to submit any duly authenticated document showing that the U.S.
government credited the 20% tax deemed paid in the Philippines.

x----------------x
 3. Fort Bonifacio development Corp.vs. CIR
(2012)
.
FORT BONIFACIO DEVELOPMENT CORP. vs. COMMISSIONER OF INTERNAL REVENUE
G.R. No. 173425, September 4, 2012

 Petitioner Fort Bonifacio Development Corporation (FBDC) is a duly registered

domestic corporation engaged in the development and sale of real property.
 The Bases Conversion Development Authority (BCDA), a wholly owned
government corporation created under Republic Act (RA) No. 7227, owns 45% of
petitioner's issued and outstanding capital stock; while the Bonifacio Land
Corporation, a consortium of private domestic corporations, owns the remaining
55%.
 By virtue of RA 7227 and Executive Order No. 40, petitioner purchased from the
national government a portion of the Fort Bonifacio reservation, now known as
the Fort Bonifacio Global City
 RA 7716 restructured the Value-Added Tax (VAT) system by amending certain
provisions of the old National Internal Revenue Code(NIRC). RA 7716 extended
the coverage of VAT to real properties held primarily for sale to customers or
held for lease in the ordinary course of trade or business.
 Petitioner submitted to the Bureau of Internal Revenue (BIR) Revenue District
No. 44, Taguig and Pateros, an inventory of all its real properties, the book value
of which aggregated P71,227,503,200.Based on this value, petitioner claimed
that it is entitled to a transitional input tax credit of P5,698,200,256, pursuant to
Section 105 12 of the old NIRC.
 In October 1996, petitioner started selling Global City lots to interested
buyers. Petitioner generated a total amount of P3,685,356,539.50 from its sales
and lease of lots, on which the output VAT payable was
 P368,535,653.95. Petitioner paid the output VAT by making cash payments to
the BIR totalling P359,652,009.47 and crediting its unutilized input tax credit on
purchases of goods and services of P8,883,644.48.
 Realizing that its transitional input tax credit was not applied in computing its
output VAT for the first quarter of 1997, petitioner on November 17, 1998 filed
with the BIR a claim for refund of the amount of P359,652,009.47 erroneously
paid as output VAT for the said period.
 CTA: NO REFUND. Under Revenue Regulations No. 7-95, implementing Section
105 of the Tax Code as amended by E.O. 273, the basis of the presumptive input
tax, in the case of real estate dealers, is the improvements, such as buildings,
roads, drainage systems, and other similar structures, constructed on or after
January 1, 1988.Petitioner, by submitting its inventory listing of real properties
only on September 19, 1996, failed to comply with the aforesaid revenue
regulations mandating that for purposes of availing the presumptive input tax
credits under its Transitory Provisions, "an inventory as of December 31, 1995, of
such goods or properties and improvements showing the quantity, description,
and amount should be filed with the RDO no later than January 31, 1996. . . ."
 "the benefit of transitional input tax credit comes with the condition that
business taxes should have been paid first." In this case, since petitioner
acquired the Global City property under a VAT-free sale transaction, it cannot
avail of the transitional input tax credit.
 The CTA likewise pointed out that under Revenue Regulations No. (RR) 7-95,
implementing Section 105 of the oldNIRC, the 8% transitional input tax credit
should be based on the value of the improvements on land such as buildings,
roads, drainage system and other similar structures, constructed on or after
January 1, 1998, and not on the book value of the real property.
 CA: affirmed the decision of the CTA. The CA agreed that petitioner is not
entitled to the 8% transitional input tax credit since it did not pay any VAT when
it purchased the Global City property.
  The CA opined that transitional input tax credit is allowed only when business
taxes have been paid and passed-on as part of the purchase price.
 Petitioner claims that it is entitled to recover the amount of P359,652,009.47
erroneously paid as output VAT for the first quarter of 1997 since its transitional
input tax credit of P5,698,200,256 is more than sufficient to cover its output VAT
liability for the said period.
 Petitioner contends that there is nothing in Section 105 of the old NIRC to
support such conclusion.Petitioner further argues that RR 7-95, which limited the
8% transitional input tax credit to the value of the improvements on the land, is
invalid because it goes against the express provision of Section 105 of the
old NIRC, in relation to Section 100 of the same Code, as amended by RA 7716.
 Respondents, on the other hand, maintain that petitioner is not entitled to a
transitional input tax credit because no taxes were paid in the acquisition of the
Global City property. Respondents assert that prior payment of taxes is inherent
in the nature of a transitional input tax.

ISSUE: WHETHER PETITIONER IS ENTITLED TO A REFUND OF P359,652,009.47 ERRONEOUSLY

PAID AS OUTPUT VAT FOR THE FIRST QUARTER OF 1997
HELD:
 YES
 JUSTICE ABAD CONCURRED WITH THIS DECISION. IT’S LONG BUT THAT’S HOW THAT
BOY ALWAYS WRITES HIS CONCURRING OPINIONS. YOU COULD READ IT IF YOU WANT.
SANA HINDI TANUNGIN NI SIR. BUT I’LL INCLUDE THE DISSENTING OPINION, WHICH IS
LONGER THAN THE DECISION ITSELF. WTF, JUSTICE CARPIO, WTF. *.*

SEC. 105.Transitional input tax credits. — A person who becomes liable to

value-added tax or any person who elects to be a VAT-registered personshall,
subject to the filing of an inventory as prescribed by regulations, be allowed
input tax on his beginning inventory of goods, materials and supplies
equivalent to 8% of the value of such inventory or the actual value-added tax
 paid on such goods, materials and supplies, whichever is higher, which shall be
creditable against the output tax.

 There is nothing in the above-quoted provision to indicate that prior payment of taxes is
necessary for the availment of the 8% transitional input tax credit. Obviously, all that is
required is for the taxpayer to file a beginning inventory with the BIR.
 To require prior payment of taxes, as proposed in the Dissent is not only tantamount
to judicial legislation but would also render nugatory the provision in Section 105 of
the old NIRC that the transitional input tax credit shall be "8% of the value of [the
beginning] inventory or the actual [VAT] paid on such goods, materials and supplies,
whichever is higher" because the actual VAT (now 12%) paid on the goods, materials,
and supplies would always be higher than the 8% (now 2%) of the beginning inventory
which, following the view of Justice Carpio, would have to exclude all goods,
materials, and supplies where no taxes were paid. (OOOOH HE THREW SHADE AT J.
CARPIO CAT FIGHT!)
 Limiting the value of the beginning inventory only to goods, materials, and supplies,
where prior taxes were paid, was not the intention of the law. Otherwise, it would have
specifically stated that the beginning inventory excludes goods, materials, and supplies
where no taxes were paid.
 If the intent of the law were to limit the input tax to cases where actual VAT was paid,
it could have simply said that the tax base shall be the actual value-added tax paid.
Instead, the law as framed contemplates a situation where a transitional input tax
credit is claimed even if there was no actual payment of VAT in the underlying
transaction. In such cases, the tax base used shall be the value of the beginning
inventory of goods, materials and supplies.
 Prior payment of taxes is not required to avail of the transitional input tax credit
because it is not a tax refund per se but a tax credit. Tax credit is not synonymous to
tax refund. Tax refund is defined as the money that a taxpayer overpaid and is thus
returned by the taxing authority.
 Tax credit, on the other hand, is an amount subtracted directly from one's total tax
liability. It is any amount given to a taxpayer as a subsidy, a refund, or an incentive to
encourage investment. Thus, unlike a tax refund, prior payment of taxes is not a
prerequisite to avail of a tax credit
 Commissioner of Internal Revenue v. Central Luzon Drug Corp: prior payment of taxes
is not required in order to avail of a tax credit. While a tax liability is essential to
the availment or use of any tax credit, prior tax payments are not. On the contrary, for
the existence or grant solely of such credit, neither a tax liability nor a prior tax payment
is needed. The Tax Code is in fact replete with provisions granting or allowing tax
credits, even though no taxes have been previously paid.
 Under Section 110, a VAT (Value-Added Tax) — registered person engaging in
transactions — whether or not subject to the VAT — is also allowed a tax credit that
includes a ratable portion of any input tax not directly attributable to either activity. This
input tax may either be the VAT on the purchase or importation of goods or services
that is merely due from — not necessarily paid by — such VAT-registered person in the
course of trade or business; or the transitional input tax determined in accordance with
Section 111(A).
 The latter type may in fact be an amount equivalent to only eight percent of the value of
a VAT-registered person's beginning inventory of goods, materials and supplies, when
such amount — as computed — is higher than the actual VAT paid on the said
items. Tax credit refers to an input tax that is either due only or given a value by mere
comparison with the VAT actually paid — then later prorated. No tax is actually paid
prior to the availment of such credit.
 More important, a VAT-registered person whose sales are zero-rated or effectively zero-
rated may, under Section 112(A), apply for the issuance of a tax credit certificate for the
amount of creditable input taxes merely due — again not necessarily paid to — the
government and attributable to such sales, to the extent that the input taxes have not
been applied against output taxes. Where a taxpayer is engaged in zero-rated or
effectively zero-rated sales and also in taxable or exempt sales, the amount of
 creditable input taxes due that are not directly and entirely attributable to any one of
these transactions shall be proportionately allocated on the basis of the volume of
sales. Indeed, in availing of such tax credit for VAT purposes, this provision — as well as
the one earlier mentioned — shows that the prior payment of taxes is not a requisite.
 It may be argued that Section 28(B)(5)(b) of the Tax Code is another illustration of a tax
credit allowed, even though no prior tax payments are not required. Specifically, in this
provision, the imposition of a final withholding tax rate on cash and/or property
dividends received by a nonresident foreign corporation from a domestic corporation is
subjected to the condition that a foreign tax credit will be given by the domiciliary
country in an amount equivalent to taxes that are merely deemed paid. Although true,
this provision actually refers to the tax credit as a condition only for the imposition of
a lower tax rate, not as adeduction from the corresponding tax liability. Besides, it is
not our government but the domiciliary country that credits against the income tax
payable to the latter by the foreign corporation, the tax to be foregone or spared.
 Under the treaties in which the tax credit method is used as a relief to avoid double
taxation, income that is taxed in the state of source is also taxable in thestate of
residence, but the tax paid in the former is merely allowed as a credit against the tax
levied in the latter. Apparently, payment is made to the state of source, not the state
of residence. No tax, therefore, has been previously paid to the latter.
 It is evident that prior tax payments are not indispensable to the availment of a tax
credit. Thus, the CA correctly held that the availment under RA 7432 did not require
prior tax payments by private establishments concerned.
 NO TO carrying-over of tax credits under the said special law to succeeding taxable
periods, and even their application against internal revenue taxes, did not necessitate
the existence of a tax liability.
 A tax liability is certainly important in the availment or use, not the existence or grant, of
a tax credit. Regarding this matter, a private establishment reporting a net loss in its
financial statements is no different from another that presents a net income. Both are
entitled to the tax credit provided for under RA 7432, since the law itself accords that
 unconditional benefit. However, for the losing establishment to immediately apply such
credit, where no tax is due, will be an improvident usance.
 In this case, when petitioner realized that its transitional input tax credit was not applied
in computing its output VAT for the 1st quarter of 1997, it filed a claim for refund to
recover the output VAT it erroneously or excessively paid for the 1st quarter of 1997. In
filing a claim for tax refund, petitioner is simply applying its transitional input tax
credit against the output VAT it has paid. Hence, it is merely availing of the tax credit
incentive given by law to first time VAT taxpayers. As we have said in the earlier case
of Fort Bonifacio, the provision on transitional input tax credit was enacted to benefit
first time VAT taxpayers by mitigating the impact of VAT on the taxpayer.
 Thus, contrary to the view of Justice Carpio, the granting of a transitional input tax credit
in favor of petitioner, which would be paid out of the general fund of the government,
would be an appropriation authorized by law, specifically Section 105 of the oldNIRC.
 The purpose behind the transitional input tax credit is not confined to the transition
from sales tax to VAT.There is hardly any constricted definition of "transitional" that will
limit its possible meaning to the shift from the sales tax regime to the VAT regime. Such
transition does not take place merely by operation of law, E.O. No. 273 or Rep. Act No.
7716 in particular. It could also occur when one decides to start a business. Section 105
states that the transitional input tax credits become available either to (1) a person who
becomes liable to VAT; or (2) any person who elects to be VAT-registered. The clear
language of the law entitles new trades or businesses to avail of the tax credit once they
become VAT-registered.
 It is not always true that the acquisition of such goods, materials and supplies entail the
payment of taxes on the part of the new business. In fact, this could occur as a matter of
course by virtue of the operation of various provisions of the NIRC, and not only on
account of a specially legislated exemption.FOR EXAMPLE: If the goods or properties are
not acquired from a person in the course of trade or business, the transaction would not
be subject to VAT under Section 105. The sale would be subject to capital gains taxes
 under Section 24 (D), but since capital gains is a tax on passive income it is the seller, not
the buyer, who generally would shoulder the tax.
o If the goods or properties are acquired through donation, the acquisition would
not be subject to VAT but to donor's tax under Section 98 instead. It is the donor
who would be liable to pay the donor's tax, and the donation would be exempt if
the donor's total net gifts during the calendar year does not exceed
P100,000.00.
o If the goods or properties are acquired through testate or intestate succession,
the transfer would not be subject to VAT but liable instead for estate tax under
Title III of the New NIRC. If the net estate does not exceed P200,000.00, no
estate tax would be assessed.
 The transitional input tax credit operates to benefit newly VAT-registered persons,
whether or not they previously paid taxes in the acquisition of their beginning inventory
of goods, materials and supplies. During that period of transition from non-VAT to VAT
status, the transitional input tax credit serves to alleviate the impact of the VAT on the
taxpayer. At the very beginning, the VAT-registered taxpayer is obliged to remit a
significant portion of the income it derived from its sales as output VAT.
 The transitional input tax credit mitigates this initial diminution of the taxpayer's
income by affording the opportunity to offset the losses incurred through the
remittance of the output VAT at a stage when the person is yet unable to credit input
VAT payments.
 If indeed the transitional input tax credit is premised on the previous payment of VAT,
then it does not make sense to afford the taxpayer the benefit of such credit based on
"8% of the value of such inventory" should the same prove higher than the actual VAT
paid. This intent that the CTA alluded to could have been implemented with ease had
the legislature shared such intent by providing the actual VAT paid as the sole basis for
the rate of the transitional input tax credit.
  AS TO RR7-95: In the Resolution dated October 2, 2009, in the related case of Fort
Bonifacio, we ruled that Section 4.105-1 of RR 7-95, insofar as it limits the transitional
input tax credit to the value of the improvement of the real properties, is a nullity.
 As mandated by Article 7 of the Civil Code, an administrative rule or regulation cannot
contravene the law on which it is based. RR 7-95 is inconsistent with Section 105
insofar as the definition of the term "goods" is concerned. This is a legislative act
beyond the authority of the CIR and the Secretary of Finance.
 The rules and regulations that administrative agencies promulgate, which are the
product of a delegated legislative power to create new and additional legal provisions
that have the effect of law, should be within the scope of the statutory authority
granted by the legislature to the objects and purposes of the law, and should not be in
contradiction to, but in conformity with, the standards prescribed by law.
 To be valid, an administrative rule or regulation must conform, not contradict, the
provisions of the enabling law. An implementing rule or regulation cannot modify,
expand, or subtract from the law it is intended to implement. Any rule that is not
consistent with the statute itself is null and void.
 While administrative agencies, such as the Bureau of Internal Revenue, may issue
regulations to implement statutes, they are without authority to limit the scope of the
statute to less than what it provides, or extend or expand the statute beyond its
terms, or in any way modify explicit provisions of the law.

DISSENTING: JUSTICE CARPIO

 HE ALSO DISSENTED IN Fort Bonifacio Development Corporation v. Commissioner of
Internal Revenue, penned by Justice Ynares-Santiago. Ayawnyasa refund bhe.

 It is hornbook doctrine that a taxpayer cannot claim a refund or credit of a tax that
was never paid because the law never imposed the tax in the first place, as in the
present case. A tax refund or credit assumes a tax was previously paid, which means
there was a law that imposed the tax. The source of the tax refund or credit is the tax
 that was previously paid, and this previously paid tax is simply being returned to the
taxpayer due to double, excessive, erroneous, advance or creditable tax payment.
 Without such previous tax payment as source, the tax refund or credit will be an
expenditure of public funds for the exclusive benefit of a specific private individual or
entity. This violates the fundamental principle, as ruled by this Court in several
cases, that public funds can be used only for a public purpose.
 Any tax refund or credit in favor of a specific taxpayer for a tax that was never paid will
have to be sourced from government funds. This is clearly an expenditure of public
funds for a private purpose. Congress cannot validly enact a law transferring
government funds, raised through taxation, to the pocket of a private individual or
entity.
 Even if only a tax credit is granted, it will still be an expenditure of public funds for the
benefit of a private purpose in the absence of a prior tax payment as source of the tax
credit. The tax due from a taxpayer is a public fund. If the taxpayer is allowed to keep a
part of the tax as a tax credit even in the absence of a prior tax payment as source, it is
in fact giving a public fund to a private person for a private benefit. This is a clear
violation of the constitutional doctrine that taxes can only be used for a public purpose.
 Moreover, such refund or credit without prior tax payment is an expenditure of public
funds without an appropriation law. This violates Section 29 (1), Article VI of the
Constitution, which mandates that "No money shall be paid out of the Treasury except
in pursuance of an appropriation made by law."
 Without any previous tax payment as source, a tax refund or credit will be paid out of
the general funds of the government, a payment that requires an appropriation law.
The Tax Code, particularly its provisions on the VAT, is a revenue measure, not an
appropriation law
 The VAT is a tax on transactions. However, a tax credit is allowed for taxes previously
paid when the same goods and services are sold further in the chain of transactions. The
purpose of this tax crediting system is to prevent double taxation in the subsequent
sale of the same product and services that were already previously taxed.
 The tax burden actually falls on the buyer who is allowed by law a tax credit or refund in
the subsequent sale of the same goods and services. The 8% transitional input VAT was
introduced to ease the transition from the old VAT to the expanded VAT system that
included more goods and services, requiring new documentation not required under the
old VAT system. To simplify the transition, the law allows an 8% presumptive input VAT
on goods and services newly covered by the expanded VAT system. In short, the law
grants the taxpayer an 8% input VAT without need of substantiating the same, on the
legal presumption that the VAT imposed by law prior to the expanded VAT system had
been paid, regardless of whether it was actually paid.
 Not a single centavo of VAT was paid, or could have been paid, by anyone in the sale by
the National Government to petitioner of the Global City land for two basic
reasons. First, the National Government is not subject to any tax, including VAT, when
the law authorizes it to sell government property like the Global City land. Second, in
1995 the old VAT law did not yet impose VAT on the sale of land and thus no VAT on the
sale of land could have been paid by anyone.
 Petitioner bought the Global City land from the National Government in 1995, and this
sale was of course exempt from any kind of tax, including VAT. The National
Government did not pass on to petitioner any previous sales tax or VAT as part of the
purchase price of the Global City land. Thus, petitioner is not entitled to claim any
transitional input VAT refund or credit when petitioner subsequently sells the Global
City land. In short, since petitioner will not be subject to double taxation on its
subsequent sale of the Global City land, petitioner is not entitled to a tax refund or
credit under the VAT system.
 The law creates a presumption of payment of the transitional input VAT without need
of substantiating the same, provided the VAT is imposed on the previous sale. Thus, in
order to be entitled to a tax refund or credit, petitioner must point to the existence of
a law imposing the tax for which a refund or credit is sought. Since land was not yet
subject to VAT or any other input business tax at the time of the sale of the Global City
land in 1995, the 8% transitional input VAT could never be presumed to have been paid.
 Hence, petitioner's argument must fail since the transitional input VAT requires a
transaction where a tax has been imposed by law.
 Moreover, the ponente insists that no prior payment of tax is required to avail of the
transitional input tax since it is not a tax refund per se but a tax credit.
The ponente claims that in filing a claim for tax refund the petitioner is simply applying
its transitional input tax credit against the output VAT it has paid.
 I disagree. YES HE DISAGREES.
 Availing of a tax credit and filing for a tax refund are alternative options allowed by
the Tax Code. The choice of one option precludes the other. A taxpayer may either (1)
apply for a tax refund by filing for a written claim with the BIR within the prescriptive
period, or (2) avail of a tax credit subject to verification and approval by the BIR. A claim
for tax credit requires that a person who becomes liable to VAT for the first time must
submit a list of his inventories existing on the date of commencement of his status as a
VAT-registered taxable person. Both claims for a tax refund and credit are in the nature
of a claim for exemption and should be construed in strictissimi juris against the person
or entity claiming it. The burden of proof to establish the factual basis or the sufficiency
and competency of the supporting documents of the claim for tax refund or tax credit
rests on the claimant.
 In the present case, petitioner actually filed with the BIR a claim for tax refund in the
amount of P347,741,695.74. In filing a claim for tax refund, petitioner has the burden to
show that prior tax payments were made, or at the very least, that there is an existing
law imposing the input tax. Similarly, in a claim for input tax credit, a VAT taxpayer
must submit his beginning inventory showing previously paid business taxes on his
purchase of goods, materials and supplies. In both claims, prior tax payments should
have been made.
 Thus, in claiming for a tax refund or credit, prior tax payment must be clearly
established and duly proven by a VAT taxpayer in order to be entitled to the claim.
In a claim for transitional input tax credit, as in the present case, the VAT taxpayer
 must point to a law imposing the input VAT, without need of proving such input VAT
was actually paid.
 Section 4.105-1 of RR 7-95 and its Transitory Provisions provide that the basis of the 8%
transitional input VAT is the value of the improvements on the land and not the value of
the taxpayer's land or real properties. This Revenue Regulation finds statutory basis in
Section 105 of the old NIRC, which provides that input VAT is allowed on the taxpayer's
"beginning inventory of goods, materials and supplies."
 Thus, the presumptive input VAT refers to the input VAT paid on "goods, materials or
supplies" sold by suppliers to the taxpayer, which the taxpayer used to introduce
improvements on the land.
 Since the Global City land was not yet subject to VAT at the time of the sale in 1995, the
Global City land cannot be considered as part of the beginning inventory under Section
105.Clearly, the 8% transitional input tax credit should only be applied to
improvements on the land but not to the land itself.
 A taxpayer like petitioner cannot claim any input VAT on its purchase today of land from
the National Government, even when VAT on land for real estate dealers is already in
effect. With greater reason, petitioner cannot claim any input VAT for its 1995 purchase
of government land when VAT on land was still non-existent and petitioner, as a real
estate dealer, was still not subject to VAT on its sale of land.
 In short, if petitioner cannot claim a tax refund or credit if the same transaction
happened today when there is already a VAT on sales of land by real estate developers,
then with more reason petitioner cannot claim a tax refund or credit when the
transaction happened in 1995 when there was still no VAT on sales of land by real
estate developers.
 AND TO SUMMARIZE:
o violation of Section 4 (2) of the Government Auditing Code of the Philippines,
which mandates that public funds shall be used only for a public purpose;
 o violation of Section 29 (1), Article VI of the Constitution, which mandates that
no money in the National Treasury, which includes tax collections, shall be spent
unless there is an appropriation law authorizing such expenditure; and
o violation of the fundamental concept of the VAT system, as found in Section 105
of the oldNIRC, that before there can be a VAT refund or credit there must be a
previously paid input VAT that can be deducted from the output VAT because
the purpose of the VAT crediting system is to prevent double taxation.

x----x
 2. timing of withholding
1. Cir vs. Procter and Gamble – April 15, 1998
2. Filipinas Synthetic Fiber Corp vs. CA
3. CIR vs. Wander Philippines
4. CIR vs. PAL – 2006

5. Citibank vs CA. – 1997

FACTS:

1. Citibank N.A Philippine Branch (Citibank) is a foreign corporation doing business in the
Philippines.
2. In 1979 and 1980, its tenants withheld and paid to the BIR the following taxes on rents due to
Citibank pursuant to Section 1(c ) of the Expanded withholding tax regulations.
3. Citibank filed its corporate income tax returns for the year ended December 31,1979,
showing a net loss of P74,854,916 and its tax credits totaled P6,257,780.00, even without
including the amounts withheld on rental income.
4. The taxes thus withheld by the tenants from rentals paid to Citibank in 1979 were not
included as tax credits although a rental income amounting to P7,796,811.00 was included in
its income declared for the year ended December 31,1979.
5. For the year ended December 31,1980, Citibank corporate income tax returns showed a net
loss of P77,071,790.00 for income tax purposes.
6. Its available tax credit at the end of 1980 was not utilized or applied.
7. The said available tax credits did not include the amounts withheld by citibanks tenants from
rental payments in 1980 but the rental payments for that year were declared as part of its
gross income includedin its annual income tax returns.
8. Citibank submitted its claim for refund of the aforesaid amount P568,989.85 and a petition
for review with the court of tax appeals concerning subject claim for tax refund.
9. CTA: adjudged citibanks entitlement to the tax refund spught for, representing the 5% tax
withheld and paid on Citibanks rental income for 1979 and 1980.
10. CA: ruled that the %% tax withheld by tenants form the rental income of Citibank for the
years 1979 ad 1980 was in accordance with Section1 (c) of the Expanded withholding tax
regulation and did not involve illegally or erroneously collected taxes.
11. Respondent court denied the motion for reconsideration of the petitioner-bank.

Issue:

Whether or not income taxes remitted partially on a periodic or quarterly basis should be credited
or refunded to the taxpayer on the basis of the taxpayer’s final adjusted returns.
 Held:

In several cases, we have already ruled that income taxes remitted partially on a periodic or
quarterly basis should be credited or refunded to the taxpayer on the basis of the taxpayer’s final
adjusted returns, not on such periodic or quarterly basis. When applied to taxpayers filing income tax
returns on a quarterly basis, the date of payment mentioned in Sec. 230 must be deemed to be
qualified by Sec. 68 and 69 of the present. Tax Code. It may be observed that although quarterly taxes
due are required to be paid within 60 days from the close of each quarter, the fact that the amount
shall be deducted from the tax due for the succeeding quarter shows that until a final adjustment
return shall have been filed, the taxes paid in the preceding quarters are merely partial taxes due from
a corporation. Neither amount can serve as the final figure to quantify what is due the government nor
what should be refunded to be corporation. This interpretation may be gleaned from the last
paragraph of Sec. 69 of the Tax Code which provides that the refundable amount, in case a refund is
due a corporation, is that amount which is shown on its final adjustment return and not on its
quarterly returns.

6. CIR vs. Malayan Insurance Co – 21 scra

FACTS:

1. Malayan Insurance Company, Inc. a domestic corporation which has reinsurance contract
with Orion Insurance Company, ltd. Of London a non-redsident foreign corporation,
2. Filed the latter’s income tax return for 1958 and paid the tax due thereon, in the sum of
P958.00.
3. Finding later on that Orion had commissioned another domestic entity, FILIPINAS, which
filed the income tax return on Orion’s behalf in the amount of P778. For the same year
(1958),
4. Malayan requested the CIR for the refund of the P158.00 it had paid.
5. When no action was taken, Malayan filed a petition in the CTA for the same purpose.
6. CIR alleged that in 1958 petitioner ceded to Orion reinsurance premiums amounting to
P64,327.36, which is subject to withholding tax in the sum of P15,416.96, even if petition is
ot be credited with the sum of P958.00 there would still be P14,458.96 due from the latter.
7. Therefore, respondent asked the court that the petition be dismissed and order the petitioner
to pay P14, 458.96 with penalties.
8. CTA: decided in favor of MALAYAN and ordered the refund of P458
9. Petitioner CIR appealed contending that the payment by FILIPINAS of the supposed tax on
the income derived by Orion from Philippine sources did not relieve MALAYAN of its
obligation to withhold and pay the withholding tax on the reinsurance premiums it had ceded
to Orion.
ISSUE:

Whether or not the claim for refund of the amount of P958.00 which was allegedly paid
erroneously should be granted.
RULING:

No. it must be noted that Section 53 (b) of the NIRC is not only broad and all-embracing, but also
compulsory. This is evident form paragraph (c) of the sae section 53 of the tax code which makes the
withholding agent personally liable for payment of the tax treated therein. And this has to be so, for it
must be realized that the withholding provision of Section 53 (b) is a device without which the Philippine
Government may not be able to collect the proper and correct tax on incomes derived form sources in the
Philippines by aliens who are outside of the taxing jurisdiction of this country.

The casue of action of the Commissioner against MALAYAN is not for collection of income tax,
but for the enforcement of the withholding provision of Section 53 of the tax code – the compliance with
which obligation is imposed on the withholding agent, not upon the taxpayer. Whether or not the
taxpayer, orion, has a duly authorized representative in this country is beside the point. There is no
showing that any of the reinsurance premiums ceded by MALAYAN to Orion ever passed to the hands of
FILIPINAS, the representative of Orion.

7. Banco Filipino Savings and Mortgage Bank vs. CA

FACTS:

1. IN its BIR form no. 1702 for fiscal year 1995, Banco Filipino Savings and Mortgage Bank
declared a net operating loss of P211,476,241.00 and total tax credit of P13,103,918.00,
representing the prior years excess tax credit of P11,481,342.00 and creditable withholding taxes
of P1,622,576.00.
2. Petitioner filed as administrative claim for refund of creditable taxes withheld.
3. CIR failed to act on its claim. Petitioner filed a petition for review with CTA, it attached to its
petition several documents:
a. Certificate of income tax withheld on compensation for the year 1995 executed by Oscar
Lozano covering P720.00 as tax withheld on rental income paid to petitioner.
b. Monthly remittance return of Income taxes withheld under BIR Form No. 1743W issued
by petitioner, indicating various amounts it withheld and remitted to the BIR.
4. CIR answered, interposing special and affirmative defenses.
5. CTA: granted only a portion of petitioner’s claim for refund. CTA allowed the refund of
P18,884.40 as these are covered by the BIR Form while the refund for P1,603,691 was not
allowed because this was not in BIR Form.
6. Petitioner filed a petition for review with CA but the CA dismissed the same. MR was also
denied.
ISSUE:

Whether the CA erred in affirming the disallowance by the CTA of P1,603,691 of petitioners
claim for tax refund.

RULING:

No. There are 3 conditions for the grant of a claim for refund of creditable withholding tax:

1. the claim is filed with the CIR w/n the 2 year period from the date of payment of the tax;
 2. It is shown on the return of the recipient that the income payment received was declared as
part of the gross income;
3. The fact of withholding is established by a copy of a statement duly issued by the payer to the
payee showing the amount paid and the amount of the tax withheld therefrom.
The document which may be accepted as evidence of the third condition, that is, the fact of
withholding, must emanate from the payor itself, and not merely from the payee, and must
indicate the name of the payer, the income payment basis of the tax withheld, the amount of the
tax withheld and the nature of the tax paid.

At the time material to this case, the requisite information regarding withholding taxes
from the sale of acquired assets can be found in BIR Form No. 1743.1. it is a written statement
issued by the payor as withholding agent showing the income or other payments made by the said
withholding agent during a quarter or year and the amount of the tax deducted and withheld
therefrom. It readily identifies the payer, the income payment and the tax withheld.

In the present case, the disputed portions of petitioners claim for refund is supported
merely by Exhibits C through Z and Exhibit II. Exhibit C through Z were issued by petitioner as payee
purportedly acting as withholding agent, and not by the alleged payors in the transactions covered by the
documents. Moreover, the documents do not identify the payors involved or the nature of the transaction.
They do not indicate the amount and nature of the income payments upon which the tax was computed or
the nature of the transactions form which the income payments were denied specifically whether it
resulted form the sale of petitioners acquired assets

8. Benguet Corp vs. CIR  2006

3. Petitioner Benguet Corporation is a domestic corporation duly organized and existing under
Philippine laws.
4. On January 16, 1992, it received from respondent Commissioner of Internal Revenue [5] a letter
dated January 10, 1992 demanding payment of P6,188,672.50, as unremitted withholding taxes
on compensation of petitioners executives for specified months from 1988 to 1991, [6] excluding
penalties for late payment.[7]
5. In said letter, respondent stated that all the payment orders (POs) and confirmation receipts (CRs)
reflected in petitioners annual return submitted to respondents Accounting Division were found to
be fake, that is, not issued by the Bureau of Internal Revenue (BIR).[8]
6. petitioner protested the assessment by stating that it had promptly remitted its withholding taxes
within their due dates.[9]
7. Without answering petitioners protest, the BIR Collection Service issued and served a warrant
of distraint and/or levy to enforce collection of the assessment in the increased amount
of P10,314,579.51,
8. Petitioner subsequently filed a written request for the lifting of the warrants and posted a surety
bond for P10,500,000 to guarantee payment of the assessment. Consequently, the warrants were
lifted.[12]
9. Respondent informed petitioner in a letter dated April 3, 1992 that the demand letter previously
sent was considered final and unappealable.[13]
10. Thus, on April 23, 1992, petitioner filed a petition for review with urgent petition for issuance of
injunction to restrain tax collection pending appeal before the CTA.[14]
11. The CTA granted petitioners request for the issuance of injunction.[15]
 10. Petitioner alleged that it was not delinquent in the payment of the withholding taxes on
the compensation of its executives, as in fact the same had been duly remitted to the BIR through its
confidential payroll agent, L.C. Diaz and Company.[16] The latter remitted the withholding taxes through
25 MBTC managers checks totaling P6,188,673.21.[17] It stressed that these payments were evidenced by
official POs and CRs issued by the BIRs authorized employees and agent banks.[18]

11. Respondent, on the other hand, aside from asserting that the POs and CRs reflected in
petitioners annual return were spurious, argued that the checks issued by petitioner for the payment of the
withholding taxes on compensation were actually used for the purchase of loose documentary stamps by
various taxpayers other than the petitioner as discovered by respondents Special Projects Team.[20]

12. the CTA dismissed the petition and ordered petitioner to pay respondent the total amount
of P10,314,579.50.[21]The CA affirmed the decision of the CTA.[22]

Both the CTA and CA ruled that there were no valid remittances of the withholding taxes. They
found that, although the POs and CRs presented by petitioner were genuine,[23] the best evidence of
payment were the checks remitted by petitioner through L.C. Diaz and Company. The dorsal side of these
checks contained handwritten notes that they were used by different individuals and entities to purchase
documentary stamps.[24] These notes were supported by the reports prepared by the BIRs Special Projects
Team.

ISSUE:

were there valid remittances to respondent by petitioner of its withholding taxes during the
specified period? Stated otherwise, the question is what should be considered as the best evidence of
payment (or non-payment) of the withholding taxes: the POs and CRs which indicated that payment was
made as insisted by petitioner, or the dorsal notes on the checks and reports of the BIR team that no such
payments were made (as ruled by the CTA and CA)?

RULING:

When checks are used for payments in settling obligations, the best evidence are
the checks themselves. x x x [Considering] that the POs and CRs of petitioner, although
seemingly genuine, do not appear in respondents files/records,[27] the best evidence in
proving petitioners alleged payments are the MBTC checks x x x. A careful scrutiny of
these checks, however, revealed that they were not used to pay withholding taxes. The
checks themselves confirm respondents Special Projects Teams findings that they were
 used to purchase documentary stamps from the BIR. For on the dorsal sides of the subject
checks [are] handwritten notes that they were used to pay documentary stamps. As to
how many pieces of documentary stamps were purchased for each denominations
of P5.00 or P3.00, and even their respective serial numbers were also indicated at the
back of each check

That petitioners MBTC checks, Exhibits A to A-24 are undeniably clear proofs
of payments of documentary stamps, is corroborated by findings or written reports
submitted by the Special Projects Team. x x x [The] report of Mr. Manuel J. Bello,
Revenue Collection Agent, stating, among others that the following MBTC checks
x x x were all personally handed to him by Mrs. Maria Bulaclac O. Aniel, District
Collection Supervisor, RDO No. 33 x x x as payment for documentary stamps tax.

Therefore, even if respondent also admitted that the checks were for the account of
petitioner, said checks entered the coffers of the government not as [petitioners]
payments for withholding taxes, but as somebody elses payments for loose documentary
stamps. No evidence was adduced as to how and why this happened.[28]

Petitioner contends that no witness ever identified the notes on the checks nor testified as to their
veracity; therefore they were hearsay evidence with no probative value.[29] It avers that whatever anomaly
occurred with the checks happened while they were already in the possession of the BIR or its agent
banks.[30] It also denounces the BIR reports as hearsay.[31]

There is no merit in the petition.

By arguing that the POs and CRs should be believed over the BIR reports and the annotations at
the back of the checks, petitioner is actually raising before us questions of fact. This is not allowed. A
question of fact involves an examination of the probative value of the evidence presented. It exists when
doubt arises as to the truth or falsehood of alleged facts.[35]

The CTA and CA gave credence to the annotations and reports and, these being questions
of fact, we hold that their findings are conclusive. This Court is not mandated to examine and appreciate
anew any evidence already presented below. Petitioner has not advanced strong reasons why we should
delve into the facts. The findings of the CTA, as affirmed by the CA, are supported by substantial
evidence.

Petitioner, as a withholding agent, is burdened by law with a public duty to collect the tax for the
government. However, its payroll agent, L.C. Diaz and Company, failed to remit to the BIR the
withholding taxes on compensation. Hence, no valid payment of the withholding taxes was actually made
by petitioner. Codal provisions on withholding tax are mandatory and must be complied with by the
withholding agent.[37] It follows that petitioner is liable to pay the disputed assessment.
 1. Intercontinental Broadcasting Corp vs. Amarilla
On various dates, petitioner employed the following persons at its Cebu station: Candido C. Quiñones, Jr.;
on February 1, 1975;3 Corsini R. Lagahit, as Studio Technician, also on February 1, 1975;4 Anatolio G.
Otadoy, as Collector, on April 1, 1975;5 and Noemi Amarilla, as Traffic Clerk, on July 1, 1975.6 On
March 1, 1986,

1. the government sequestered the station, including its properties, funds and other assets, and
took over its management and operations from its owner, Roberto Benedicto.7
2. However, in December 1986, the government and Benedicto entered into a temporary
agreement under which the latter would retain its management and operation.
3. On November 3, 1990, the Presidential Commission on Good Government (PCGG) and
Benedicto executed a Compromise Agreement,8 where Benedicto transferred and assigned all
his rights, shares and interests in petitioner station to the government. The PCGG submitted
the Agreement to the Sandiganbayan in Civil Case No. 0034 entitled "Republic of the
Philippines v. Roberto S. Benedicto, et al."9
4. the four (4) employees retired from the company and received, on staggered basis, their
retirement benefits under the 1993 Collective Bargaining Agreement (CBA) between
petitioner and the bargaining unit of its employees.
5. In the meantime, a P1,500.00 salary increase was given to all employees of the company,
current and retired, effective July 1994.
6. However, when the four retirees demanded theirs, petitioner refused and instead informed
them via a letter that their differentials would be used to offset the tax due on their retirement
benefits in accordance with the National Internal Revenue Code (NIRC).
7. The four (4) retirees filed separate complaints13 against IBC TV-13 Cebu and Station
Manager Louella F. Cabañero for unfair labor practice and non-payment of backwages before
the NLRC,
8. The complainants averred that their retirement benefits are exempt from income tax under
Article 32 of the NIRC. Sections 28 and 72 of the NIRC, which petitioner relied upon in
withholding their differentials, do not apply to them since these provisions deal with the
applicable income tax rates on foreign corporations and suits to recover taxes based on false
or fraudulent returns. They pointed out that, under Article VIII of the CBA, only those
employees who reached the age of 60 were considered retired, and those under 60 had the
option to retire, like Quiñones and Otadoy who retired at ages 58 and 51, respectively.
9. For its part, petitioner averred that under Section 21 of the NIRC, the retirement benefits
received by employees from their employers constitute taxable income. While retirement
benefits are exempt from taxes under Section 28(b) of said Code, the law requires that such
benefits received should be in accord with a reasonable retirement plan duly registered with
the Bureau of Internal Revenue (BIR) after compliance with the requirements therein
enumerated. Since its retirement plan in the 1993 CBA was not approved by the BIR,
complainants were liable for income tax on their retirement benefits. Petitioner claimed that it
was mandated to withhold the income tax due from the retirement benefits of said
complainants. It was not estopped from correcting the mistakes of its former officers. Under
the law, complainants are obliged to return what had been mistakenly delivered to them.15
10. In reply, complainants averred that they availed of the optional retirement because of
petitioner’s inducement that there would be no tax deductions. Petitioner IBC did not commit
any mistake in not withholding the taxes due on their retirement benefits as shown by the fact
that the PCCG, the Commission on Audit (COA) and the Bureau of Internal Revenue (BIR)
did not even require them to explain such mistake. They pointed out that petitioner paid their
 retirement benefits on a staggered basis, and nonetheless failed to deduct any amount as
taxes.16
11. On February 14, 2000, the Labor Arbiter rendered judgment in favor of the retirees.
However, the Labor Arbiter ruled that the claims of Quiñones and Otadoy had prescribed.
The retirement benefits of complainants Lagahit and Amarilla, on the other hand, were
exempt from income tax under Section 28(b) of the NIRC. However, the differentials due to
the two complainants were computed three years backwards due to the law on prescription.
12. Petitioner appealed the decision of the Labor Arbiter to the NLRC, Otadoy and Quiñones no
longer appealed the decision.
13. On May 21, 2002, the NLRC rendered its decision dismissing the appeal and affirming that of
the Labor Arbiter. The NLRC held that the benefits of the retirement plan under the CBAs
between petitioner and its union members were subject to tax as the scheme was not approved
by the BIR. However, it had also been the practice of petitioner to give retiring employees
their retirement pay without tax deductions and there was no justifiable reason for the
respondent to deviate from such practice. The NLRC concluded that petitioner was deemed to
have assumed the tax liabilities of the complainants on their retirement benefits, hence, had
no right to deduct taxes from their salary differentials.
14. Aggrieved, petitioner elevated the decision before the CA On December 3, 2003, the CA
rendered judgment dismissing the petition for lack of merit.

The appellate court declared that the salary differentials of the respondents are part of their
taxable gross income, considering that the CBA was not approved, much less submitted to the
BIR. However, petitioner could not withhold the corresponding tax liabilities of respondents due
to the then existing CBA, providing that such retirement benefits would not be subjected to any
tax deduction, and that any such taxes would be for its account. The appellate court relied on the
allegations of respondents in their Position Paper before the Labor Arbiter which petitioner failed
to refute.

ISSUE:

(1) whether the retirement benefits of respondents are part of their gross income; and

(2) whether petitioner is estopped from reneging on its agreement with respondent to pay for the taxes on
said retirement benefits.

RULING:

We agree with petitioner’s contention that, under the CBA, it is not obliged to pay for the taxes on the
respondents’ retirement benefits. We have carefully reviewed the CBA and find no provision where
petitioner obliged itself to pay the taxes on the retirement benefits of its employees.

We also agree with petitioner’s contention that, under the NIRC, the retirement benefits of respondents
are part of their gross income subject to taxes. Section 28 (b) (7) (A) of the NIRC of 198623

Revenue Regulation No. 12-86, the implementing rules of the foregoing provisions, provides:
 (b) Pensions, retirements and separation pay. – Pensions, retirement and separation pay
constitute compensation subject to withholding tax, except the following:

(1) Retirement benefit received by official and employees of private firms under a reasonable
private benefit plan maintained by the employer, if the following requirements are met:

(i) The retirement plan must be approved by the Bureau of Internal Revenue;

(ii) The retiring official or employees must have 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
retirement; and

(iii) The retiring official or employee shall not have previously availed of the privilege
under the retirement benefit plan of the same or another employer.

However, we agree with respondents’ contention that petitioner did not withhold the taxes due on their
retirement benefits because it had obliged itself to pay the taxes due thereon. This was done to induce
respondents to agree to avail of the optional retirement scheme.

Respondents received their retirement benefits from the petitioner in three staggered installments without
any tax deduction for the simple reason that petitioner had remitted the same to the BIR with the use of its
own funds conformably with its agreement with the retirees. It was only when respondents demanded the
payment of their salary differentials that petitioner alleged, for the first time, that it had failed to present
the 1993 CBA to the BIR for approval, rendering such retirement benefits not exempt from taxes;
consequently, they were obliged to refund to it the amounts it had remitted to the BIR in payment of their
taxes. Petitioner used this "failure" as an afterthought, as an excuse for its refusal to remit to the
respondents their salary differentials. Patently, petitioner is estopped from doing so. It cannot renege on
its commitment to pay the taxes on respondents’ retirement benefits on the pretext that the "new
management" had found the policy disadvantageous.

It must be stressed that the parties are free to enter into any contract stipulation provided it is not illegal or
contrary to public morals. When such agreement freely and voluntarily entered into turns out to be
advantageous to a party, the courts cannot "rescue" the other party without violating the constitutional
right to contract. Courts are not authorized to extricate the parties from the consequences of their acts.
Thus, the fact that the contract stipulations of the parties may turn out to be financially disadvantageous to
them will not relieve them of their obligation under the agreement.25

An agreement to pay the taxes on the retirement benefits as an incentive to prospective retirees and for
them to avail of the optional retirement scheme is not contrary to law or to public morals.

The well-entrenched rule is that estoppel may arise from a making of a promise if it was intended that the
promise should be relied upon and, in fact, was relied upon, and if a refusal to sanction the perpetration of
fraud would result to injustice. The mere omission by the promisor to do whatever he promises to do is
sufficient forbearance to give rise to a promissory estoppel.26
 SO ORDERED.

x------------------x

Allan 2. Rizal Commercial Banking Corp vs. CIR  2011

Rizal Commercial Banking Corp. v. Commissioner of Internal Revenue, G.R. No.

170257, [September 7, 2011

Facts:

 On August 15, 1996, RCBC received Letter of Authority No. 133959 issued by
then Commissioner of Internal Revenue (CIR)Liwayway Vinzons-Chato,
 authorizing a special audit team to examine the books of accounts and other
accounting records for all internal revenue taxes from January 1, 1994 to
December 31, 1995.

 On January 23, 1997, RCBC executed two Waivers of the Defense of

Prescription Under the Statute of Limitations of theNational Internal Revenue
Code covering the internal revenue taxes due for the years 1994 and 1995,
effectively extending the period of the Bureau of Internal Revenue (BIR) to
assess up to December 31, 2000. Subsequently, on January 27, 2000, RCBC
received a Formal Letter of Demand together with Assessment Notices from the
BIR.

 RCBC filed a protest on February 24, 2000 and later submitted the relevant
documentary evidence to support it. Much later on November 20, 2000, it filed a
petition for review before the CTA.

 First Division of the Court of Tax Appeals (CTA-First Division) promulgated its
Decision which partially granted the petition for review. It, however, upheld the
assessment for deficiency final tax on FCDU onshore income.

 The CTA-En Banc, in its assailed Decision, denied the petition for lack of merit.
As to the deficiency onshore tax, it held that because the payor-borrower was
merely designated by law to withhold and remit the said tax, it would then follow
that the tax should be imposed on RCBC as the payee-bank.

Issue: Whether petitioner, as payee-bank, can be held liable for deficiency onshore tax,
which is mandated by law to be collected at source in the form of a final withholding tax.

Held: Yes. Based on the foregoing, the liability of the withholding agent is independent
from that of the taxpayer. The former cannot be made liable for the tax due because it is
the latter who earned the income subject to withholding tax. The withholding agent is
liable only insofar as he failed to perform his duty to withhold the tax and remit the same
to the government. The liability for the tax, however, remains with the taxpayer because
the gain was realized and received by him.

While the payor-borrower can be held accountable for its negligence in performing its
duty to withhold the amount of tax due on the transaction, RCBC, as the taxpayer and
the one which earned income on the transaction, remains liable for the payment of tax
as the taxpayer shares the responsibility of making certain that the tax is properly
withheld by the withholding agent, so as to avoid any penalty that may arise from the
non-payment of the withholding tax due.

RCBC cannot evade its liability for FCDU Onshore Tax by shifting the blame on the
payor-borrower as the withholding agent.

x-----------------x

12. accounting periods

1. United International Picture AB vs.CIR  2012
2. ING bank N.V. vs.CIR  2015
3. CIR vs. Norton Harrison Company  1964
4. CIR vs. Menguito  2008
5. CIR vs. Filinvest Development Corp  2011
13. Transfer Pricing
1. Consolidated Mines vs. CTA - 1974
2. BPI family savings bank vs CA – 2000
3. CIR vs BPI – 2009
14. Tax Treaty Relief
1. Deutsh Bank AG Manila Branch. vs CIR - 2013