Case Digests

TAXATION I - CASE DIGESTS First Semester, SY 2011-2012

Case Digests in Taxation Law Submitted By: Antonio, Evangeline B. Caoayan, Billy Bryan Dumaguing, Karina Mara Esguerra, Manilyn Vinluan, Veronica _Saint Louis University School of Law_

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Topic: Power to destroy vis-à-vis Power to Build SISON vs. ANCHETA G.R. No. L-59431 July 25, 1984 FACTS: The challenged posed is a suit for declaratory relief or prohibition on the validity of Section 1 of Batas PambansaBlg. 135. The assailed provision further amends Sec. 21 of the NIRC of 1977, which provides for the rate tax on residents or citizens on (a) taxable compensation income, (b) taxable net income, (c) royalties, prizes, and other winnings, (d) interests from bank deposits and yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangements, (e) dividends and share from individual partner in the net profits of taxable partnership, (f) adjusted gross income. Sison, as taxpayer, alleged that its provision (Section 1) unduly discriminated against him by the imposition of higher rates upon his income as a professional, that it amounts to class legislation, and that it transgresses against the equal protection and due process clauses of the Constitution as well as the rule requiring uniformity in taxation. ISSUE: Whether BP 135 violates the due process and equal protection clauses, and the rule on uniformity in taxation? RULING: There is a need for proof of such persuasive character as would lead to a conclusion that there was a violation of the due process and equal protection clauses. Absent such showing, the presumption of validity must prevail. Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation. Where the differentiation conforms to the practical dictates of justice and equity, similar to the standards of equal protection, it is not discriminatory within the meaning of the clause and is therefore uniform. Taxpayers may be classified into different categories, such as recipients of compensation income as against professionals. Recipients of compensation income are not entitled to make deductions for income tax purposes as there is no practically no overhead expense, while professionals and businessmen have no uniform costs or expenses necessary to produce their income. There is ample justification to adopt the gross system of income taxation to compensation income, while continuing the system of net income taxation as regards professional and business income.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS First Semester, SY 2011-2012

Topic: Power to destroy vis-à-vis Power to Build PHILIPPINE HEALTH CARE PROVIDERS VS. CIR G.R. NO. 167330 SEPTEMBER 18, 2009 FACTS: Philippine Health Care Providers, Inc. is a domestic corporation whose primary purpose is "[t]o establish, maintain, conduct and operate a prepaid group practice health care delivery system or a health maintenance organization to take care of the sick and disabled persons enrolled in the health care plan and to provide for the administrative, legal, and financial responsibilities of the organization." Individuals enrolled in its health care programs pay an annual membership fee and are entitled to various preventive, diagnostic and curative medical services provided by its duly licensed physicians, specialists and other professional technical staff participating in the group practice health delivery system at a hospital or clinic owned, operated or accredited by it. January 27, 2000: Commissioner of Internal Revenue (CIR) sent petitioner a formal demand letter and the corresponding assessment notices demanding the payment of deficiency taxes, including surcharges and interest, for the taxable years 1996 and 1997 in the total amount of P224,702,641.18. ISSUE: 1. W/N the Philippine Health Care Providers, Inc (HMO) was engaged in the business of insurance during the pertinent taxable years HELD: NO 

Section 2 (2) of PD20 1460 (otherwise known as the Insurance Code) enumerates what constitutes "doing an insurance business" or "transacting an insurance business:" a) making or proposing to make, as insurer, any insurance contract; b) making or proposing to make, as surety, any contract of suretyship as a vocation and not as merely incidental to any other legitimate business or activity of the surety; c) doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing of an insurance business within the meaning of this Code;

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d) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of this Code. No profit is derived from the making of insurance contracts, agreements or transactions or that no separate or direct consideration is received therefore, shall not be deemed conclusive to show that the making thereof does not constitute the doing or transacting of an insurance business

_Saint Louis University School of Law_

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Topic: Importance of Taxation & the Lifeblood Doctrine COMMISSIONER vs. ALGUE G.R. no. L-28890 February 17, 1988 FACTS: The Philippine Sugar Estate Development Company (PSEDC) appointed Algue Inc. as its agent, authorizing it to sell its land, factories, and oil manufacturing process. The Vegetable Oil Investment Corporation (VOICP) purchased PSEDC properties. For the sale, Algue received a commission of P125,000 and it was from this commission that it paid Guevara, et. al. organizers of the VOICP, P75,000 in promotional fees. In 1965, Algue received an assessment from the Commissioner of Internal Revenue in the amount of P83,183.85 as delinquency income tax for years 1958amd 1959. Algue filed a protest or request for reconsideration which was not acted upon by the Bureau of Internal Revenue(BIR). The counsel for Algue had to accept the warrant of distrait and levy. Algue, however, filed a petition for review with the Court of Tax Appeals. ISSUE: Whether the assessment was reasonable? RULING: Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. Every person who is able to pay must contribute his share in the running of the government. The Government, for his part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that is an arbitrary method of exaction by those in the seat of power. Tax collection, however, should be made in accordance with law as any arbitrariness will negate the very reason for government itself. For all the awesome power of the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate that the law has not been observed. Herein, the claimed deduction (pursuant to Section 30 [a] [1] of the Tax Code and Section 70 [1] of Revenue Regulation 2: as to compensation for personal services) had been legitimately by Algue Inc. It has further proven that the payment of fees was reasonable and necessary in light of the efforts exerted by the payees in inducing investors (in VOICP) to involve themselves in an experimental enterprise or a business requiring millions of pesos. The assessment was not reasonable.

_Saint Louis University School of Law_

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Topic: Importance of Taxation & the Lifeblood Doctrine NAPOCOR vs. CITY OF CABANATUAN G.R. No. 149110, April 9, 2003 Facts: NPC, a GOCC, created under CA 120 as amended, selling electric power, was assessed by the City of Cabanatuan for franchise tax pursuant to sec. 37 of Ordinance No. 165-92. NPC refused to pay the tax assessment on the grounds that the City of Cabanatuan has no authority to impose tax on government entities and also that it is exempted as a non-profitorganization. For its part, the City government alleged that NPC‘s exemption from local taxes has been repealed by sec. 193 of RA 7160. Issue: Whether NPC is liable to pay an annual franchise tax to the City government Held: One of the most significant provisions of the LGC is the removal of the blanket exclusion of instrumentalities and agencies of the national government from the coverage of local taxation. Although as a general rule, LGUs cannot impose taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities, this rule now admits an exception, i.e., when specific provisions of the LGC authorize the LGUs to impose taxes, fees or charges on the aforementioned entities. As commonly used, a franchise tax is "a tax on the privilege of transacting business in the state and exercising corporate franchises granted by the state." It is not levied on the corporation simply for existing as a corporation, upon its property or its income, but on its exercise of the rights or privileges granted to it by the government. Hence, a corporation need not pay franchise tax from the time it ceased to do business and exercise its franchise. It is within this context that the phrase "tax on businesses enjoying a franchise" in section 137 of the LGC should be interpreted and understood. Verily, to determine whether the petitioner is covered by the franchise tax in question, the following requisites should concur: (1) that petitioner has a "franchise" in the sense of a secondary or special franchise; and (2) that it is exercising its rights or privileges under this franchise within the territory of the respondent city government. NPC fulfills both requisites. To stress, a franchise tax is imposed based not on the ownership but on the exercise by the corporation of a privilege to do business. The taxable entity is the corporation which exercises the franchise, and not the individual

_Saint Louis University School of Law_

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stockholders. By virtue of its charter, petitioner was created as a separate and distinct entity from the NationalGovernment. It can sue and be sued under its own name, and can exercise all the powers of a corporation under the Corporation Code. We also do not find merit in the petitioner's contention that its tax exemptions under its charter subsist despite the passage of the LGC. As a rule, tax exemptions are construed strongly against the claimant. Exemptions must be shown to exist clearly and categorically, and supported by clear legal provisions. In the case at bar, the petitioner's sole refuge is section 13 of Rep. Act No. 6395 exempting from, among others, "all income taxes, franchise taxes and realty taxes to be paid to the National Government, its provinces, cities, municipalities and other government agencies and instrumentalities." It is worth mentioning that section 192 of the LGC empowers the LGUs, through ordinances duly approved, to grant tax exemptions, initiatives or reliefs.77 But in enacting section 37 of Ordinance No. 165-92 which imposes an annual franchise tax "notwithstanding any exemption granted by law or other special law," the respondent city governmentclearly did not intend to exempt the petitioner from the coverage thereof. Doubtless, the power to tax is the most effective instrument to raise needed revenues to finance and support myriad activities of the local government units for the delivery of basic services essential to the promotion of the general welfare and the enhancement of peace, progress, and prosperity of the people. As this Court observed in the Mactan case, "theoriginal reasons for the withdrawal of tax exemption privileges granted to government-owned or controlled corporations and all other units of government were that such privilege resulted in serious tax base erosion and distortions in the tax treatment of similarly situated enterprises." With the added burden of devolution, it is even more imperative forgovernment entities to share in the requirements of development, fiscal or otherwise, by paying taxes or other charges due from them.

_Saint Louis University School of Law_

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Topic: Objectives of Taxation: Regulation PHILIPPINE AIRLINES vs. EDU G.R. No. L- 41383 August 15, 1988 FACTS: PAL is a corporation organized and existing under the laws of the Philippines and engaged in the air transportation business under a legislative franchise, Act No. 42739, as amended by Republic Act Nos. 25) and 269.1 Under its franchise, PAL is exempt from the payment of taxes. On the strength of an opinion of the Secretary of Justice (Op. No. 307, series of 1956) PAL has, since 1956, not been paying motor vehicle registration fees. Sometime in 1971, however, appellee Commissioner Romeo F. Elevate issued a regulation requiring all tax exempt entities, among them PAL to pay motor vehicle registration fees. Despite PAL's protestations, the appellee refused to register the appellant's motor vehicles unless the amounts imposed under Republic Act 4136 were paid. The appellant thus paid, under protest, the amount of P19, 529.75 as registration fees of its motor vehicles. PAL demanding a refund of the amounts paid, invoking the ruling in Calalang v. Lorenzo (97 Phil. 212 [1951]) where it was held that motor vehicle registration fees are in reality taxes from the payment of which PAL is exempt by virtue of its legislative franchise. Appellee Edu denied the request for refund basing his action on the decision in Republic v. Philippine Rabbit Bus Lines, Inc., (32 SCRA 211, March 30, 1970) to the effect that motor vehicle registration fees are regulatory exceptional and not revenue measures and, therefore, do not come within the exemption granted to PAL under its franchise. Hence, PAL filed the complaint against Land Transportation Commission after paying under protest. ISSUE: Whether or not motor vehicle registration is considered tax? RULING: Yes, motor vehicle registration fees are now considered revenue or tax measures. This case reversed the doctrine in the Philippine Rabbit Bus Lines to the effect that registration fees are regulatory exactions and not revenues. Revised Motor Vehicle Law itself now regards those fees as taxes, for it provides that "no other taxes or fees than those prescribed in this Act shall be imposed," thus implying that the charges therein imposed—though called fees—are of the category of taxes. The provision is contained in section 70, of subsection (b), of the law, as amended by section 17 of Republic Act 587, which reads: Sec. 70(b) No other taxes or fees than those prescribed in this Act shall be imposed for the registration or operation or on the ownership of any motor vehicle, or for the _Saint Louis University School of Law_

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exercise of the profession of chauffeur, by any municipal corporation, the provisions of any city charter to the contrary notwithstanding: Provided, however, That any provincial board, city or municipal council or board, or other competent authority may exact and collect such reasonable and equitable toll fees for the use of such bridges and ferries, within their respective jurisdiction, as may be authorized and approved by the Secretary of Public Works and Communications, and also for the use of such public roads, as may be authorized by the President of the Philippines upon the recommendation of the Secretary of Public Works and Communications, but in none of these cases, shall any toll fee." be charged or collected until and unless the approved schedule of tolls shall have been posted levied, in a conspicuous place at such toll station. Fees may be properly regarded as taxes even though they also serve as an instrument of regulation. It is possible for an exaction to be both tax and regulation. License fees are charges looked to as a source of revenue as well as a means of regulation (Sonzinky v. U.S., 300 U.S. 506) This is true, for example, of automobile license fees. In such case, the fees may properly be regarded as taxes even though they also serve as an instrument of regulation. If the purpose is primarily revenue, or if revenue is at least one of the real and substantial purposes, then the exaction is properly called a tax. (1955 CCH Fed. tax Course, Par. 3101, citing Cooley on Taxation (2nd Ed.) 592, 593; Calalang v. Lorenzo. 97 Phil. 213-214) Lutz v. Araneta 98 Phil. 198.) These exactions are sometimes called regulatory taxes. (See Secs. 4701, 4711, 4741, 4801, 4811, 4851, and 4881, U.S. Internal Revenue Code of 1954, which classify taxes on tobacco and alcohol as regulatory taxes.) (Umali, Reviewer in Taxation, 1980, pp. 12-13, citing Cooley on Taxation, 2nd Edition, 591-593). Indeed, taxation may be made the implement of the state's police power. If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly called a tax (Umali, Id.) Such is the case of motor vehicle registration fees. The conclusions become inescapable in view of Section 70(b) of Rep. Act 587 quoted in the Calalang case. The same provision appears as Section 591-593) in the Land Transportation code. It is patent there from that the legislators had in mind a regulatory tax as the law refers to the imposition on the registration, operation or ownership of a motor vehicle as a "tax or fee." Though nowhere in Rep. Act 4136 does the law specifically state that the imposition is a tax, Section 591-593) speaks of "taxes." or fees ... for the registration or operation or on the ownership of any motor vehicle, or for the exercise of the profession of chauffeur ..." making the intent to impose a tax more apparent. Thus, even Rep. Act 5448 cited by the respondents, speak of an "additional" tax," where the law could have referred to an original tax and not one in addition to the tax already imposed on the registration, operation, or ownership of a motor vehicle under Rep. Act 41383. Simply put, if the exaction under Rep. Act 4136 were merely a regulatory fee, the imposition in Rep. Act 5448 need not be an "additional" tax. Rep. Act 4136 also speaks of other "fees," such as the special permit fees for certain types of motor vehicles (Sec. 10) and additional fees for change of registration (Sec. 11). These are not to be understood as taxes because such fees are very minimal to be revenue-raising. Thus, they are not mentioned by Sec. 591-593 of the Code as taxes like the motor vehicle registration fee _Saint Louis University School of Law_

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and chauffer‘s' license fee. Such fees are to go into the expenditures of the Land Transportation Commission. It is quite apparent that vehicle registration fees were originally simple exceptional intended only for rigidly purposes in the exercise of the State's police powers. Over the years, however, as vehicular traffic exploded in number and motor vehicles became absolute necessities without which modem life as we know it would stand still, Congress found the registration of vehicles a very convenient way of raising much needed revenues. A registration payment as ―fees,‖ their nature has become that of "taxes." In pursuant to the Land Transportation and Traffic Code, taxes can be intended for additional revenues of government even if one fifth or less of the amount collected is set aside for the operating expenses of the agency administering the program.

_Saint Louis University School of Law_

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Topic: Objectives of Taxation: Regulation TIO vs. VIDEOGRAM REGULATORY BOARD 151 S 208 FACTS: Petitioner, on his own behalf and purportedly on behalf of other videogram operators adversely affected, assailed the constitutionality of Presidential Decree No. 1987 entitled ―An Act Creating the Videogram Regulatory Board‖ with broad powers to regulate and supervise the videogram industry. Petitioner questioned the constitutionality of the decree on the grounds that: (a) Section 10 thereof, which imposes a tax of 30% on the gross receipts payable to the local government is a rider and the same is not germane to the subject matter thereof; (b) the tax imposed is harsh, confiscatory, oppressive and/or in unlawful restraint to trade in violation of the due process clause of the Constitution; (c) there is undue delegation of power. ISSUE: Whether

or

not

the

assailed

Decree

is

unconstitutional?

RULING: The power to impose taxes is one so unlimited in force and so searching in extent, that the courts scarcely venture to declare that it is subject to any restrictions whatever, except such as rest in the discretion of the authority which exercises it. In imposing a tax, the legislature acts upon its constituents. This is, in general, a sufficient security against erroneous and oppressive taxation. On the other hand, the levy of the 30% tax is for public purpose. It was imposed primarily to answer the need for regulating the video industry, particularly because of the rampant film piracy, the flagrant violation of intellectual property rights, and the proliferation of pornographic video tapes and while it was also an objective of the Decree to protect the movie industry, the tax remains a valid imposition. The public purpose of a tax may legally exist even if the motive which impelled the legislature to impose the tax was to favor one industry over the other. It is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held that inequities which result from a singling out of one particular class for taxation or exemption infringe no constitutional limitation. Taxation has been made the implement of the state‘s police power. With regard to the issue that the Decree contains an undue delegation of legislative power, there is really no delegation of the power to legislate but merely a conferment functions of authority or discretion as to its execution, enforcement, and implementation. It is important to note that only congressional power or competence, not the wisdom of the action taken, maybe the basis for declaring a statute invalid. The principle of separation of powers has in the main wisely allocated the respective _Saint Louis University School of Law_

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authority to each department and confined its jurisdiction to such a sphere. The attack on the validity of the challenged provision likewise insofar as there may be objections, even if valid and cogent on its wisdom cannot be sustained.

_Saint Louis University School of Law_

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Topic: Concept of Allowable Deductions: Deduction vs. Tax Credit COMMISSIONER OF INTERNAL REVENUE vs. CENTRAL LUZON DRUG CORPORATION G.R. No. 159647 April 15, 2005 FACTS: Respondent is a domestic corporation primarily engaged in retailing of medicines and other pharmaceutical products. Respondent granted twenty (20%) percent sales discount to qualified senior citizens on their purchases of medicines pursuant to Republic Act No. 7432 and its Implementing Rules and Regulations. For the said period, the amount allegedly representing the 20% sales discount granted by respondent to qualified senior citizens totaled P904,769.00. On April 15, 1997, respondent filed its Annual Income Tax Return for taxable year 1996 declaring therein that it incurred net losses from its operations. On January 16, 1998, respondent filed with petitioner a claim for tax refund/credit in the amount of P904,769.00 allegedly arising from the 20% sales discount granted by respondent to qualified senior citizens in compliance with R.A. 7432. Unable to obtain affirmative response from petitioner, respondent elevated its claim to the Court of Tax Appeals. The CTA, in its assailed resolution, ordered herein petitioner to issue a Tax Credit Certificate in favor of respondent. On appeal, the CA affirmed in toto the Resolution of the Court of Tax Appeals. ISSUE: Whether respondent, despite incurring a net loss, may still claim the 20 percent sales discount as a tax credit? RULING: Such credit can be claimed, even though an establishment operates at a loss. Since a tax credit is used to reduce directly the tax that is due, there ought to be a tax liability before the tax credit can be applied. Without that liability, any tax credit application will be useless. There will be no reason for deducting the latter when there is, to begin with, no existing obligation to the government. However, as will be presented shortly, the existence of a tax credit or its grant by law is not the same as the availment or use of such credit. While the grant is mandatory, the availment or use is not. If a net loss is reported by, and no other taxes are currently due from, a business establishment, there will obviously be no tax liability against which any tax credit can be applied. For the establishment to choose the immediate availment of a tax credit will be premature and impracticable. Nevertheless, the irrefutable fact remains that, under RA 7432, Congress has granted without conditions a tax credit benefit to all covered establishments. Although this tax credit benefit is available, it need not be used by losing ventures, since there is no tax liability that calls for its application. Neither can it be reduced to _Saint Louis University School of Law_

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nil by the quick yet callow stroke of an administrative pen, simply because no reduction of taxes can instantly be effected. By its nature, the tax credit may still be deducted from a future, not a present, tax liability, without which it does not have any use. In the meantime, it need not move. But it breathes.

_Saint Louis University School of Law_

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Topic: Inherent Limitations: Public Purpose PASCUAL vs. SECRETARY OF PUBLIC WORKS 110 SCRA 331 FACTS: Petitioner WenceslaoPascual, as Provincial Governor of Rizal, instituted this action for declaratory relief, with injunction, upon the ground that Republic Act No. 920, entitled "An Act Appropriating Funds for Public Works", approved on June 20, 1953, contained, in section 1-C (a) thereof, an item (43[h]) of P85,000.00 "for the construction, reconstruction, repair, extension and improvement" of Pasig feeder road terminals. The time of the passage and approval of said Act, the aforementioned feeder roads were "nothing but projected and planned subdivision roads, not yet constructed, . . . within the Antonio Subdivision . . . situated at . . . Pasig, Rizal", which projected feeder roads "do not connect any government property or any important premises to the main highway"; that the aforementioned Antonio Subdivision (as well as the lands on which said feeder roads were to be construed) were private properties of respondent Jose C. Zulueta, who, at the time of the passage and approval of said Act, was a member of the Senate of the Philippines. Respondent Zulueta, addressed a letter to the Municipal Council of Pasig, Rizal, offering to donate said projected feeder roads to the municipality of Pasig, Rizal; the offer was accepted by the council, subject to the condition "that the donor would submit a plan of the said roads and agree to change the names of two of them"; that no deed of donation in favor of the municipality of Pasig was, however, executed. ISSUE: Whether or not the contested item of Republic Act No. 920 be declared null and void. Whether or not the alleged deed of donation of the feeder roads in question be "declared unconstitutional and, therefor, illegal? RULING: It is a general rule that the legislature is without power to appropriate public revenue for anything but a public purpose. It is the essential character of the direct object of the expenditure which must determine its validity as justifying a tax, and not the magnitude of the interest to be affected nor the degree to which the general advantage of the community, and thus the public welfare, may be ultimately benefited by their promotion. Incidental to the public or to the state, which results from the promotion of private interest and the prosperity of private enterprises or business, does not justify their aid by the use public money. The rule is set forth in Corpus JurisSecundum in the following language: In accordance with the rule that the taxing power must be exercised for public purposes only, discussed supra sec. 14, money raised by taxation can be expended only for public purposes and not for the advantage of private individuals. Generally, under the _Saint Louis University School of Law_

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express or implied provisions of the constitution, public funds may be used only for public purpose. The right of the legislature to appropriate funds is correlative with its right to tax, and, under constitutional provisions against taxation except for public purposes and prohibiting the collection of a tax for one purpose and the devotion thereof to another purpose, no appropriation of state funds can be made for other than for a public purpose. The test of the constitutionality of a statute requiring the use of public funds is whether the statute is designed to promote the public interest, as opposed to the furtherance of the advantage of individuals, although each advantage to individuals might incidentally serve the public. The validity of a statute depends upon the powers of Congress at the time of its passage or approval, not upon events occurring, or acts performed, subsequently thereto, unless the latter consists of an amendment of the organic law, removing, with retrospective operation, the constitutional limitation infringed by said statute. Referring to the P85,000.00 appropriation for the projected feeder roads in question, the legality thereof depended upon whether said roads were public or private property when the bill, which, latter on, became Republic Act 920, was passed by Congress, or, when said bill was approved by the President and the disbursement of said sum became effective, or on June 20, 1953 (see section 13 of said Act). Inasmuch as the land on which the projected feeder roads were to be constructed belonged then to respondent Zulueta, the result is that said appropriation sought a private purpose, and hence, was null and void. The donation to the Government, over five (5) months after the approval and effectivity of said Act, made, according to the petition, for the purpose of giving a "semblance of legality", or legalizing, the appropriation in question, did not cure its aforementioned basic defect. Consequently, a judicial nullification of said donation need not precede the declaration of unconstitutionality of said appropriation. Again, Article 1421 of our Civil Code, like many other statutory enactments, is subject to exceptions. For instance, the creditors of a party to an illegal contract may, under the conditions set forth in Article 1177 of said Code, exercise the rights and actions of the latter, except only those which are inherent in his person, including therefore, his right to the annulment of said contract, even though such creditors are not affected by the same, except indirectly, in the manner indicated in said legal provision. Again, it is well-stated that the validity of a statute may be contested only by one who will sustain a direct injury in consequence of its enforcement. Yet, there are many decisions nullifying, at the instance of taxpayers, laws providing for the disbursement of public funds, upon the theory that "the expenditure of public funds by an officer of the State for the purpose of administering an unconstitutional act constitutes a misapplication of such funds," which may be enjoined at the request of a taxpayer.Although there are some decisions to the contrary, the prevailing view in the United States is stated in the American Jurisprudence as follows: In the determination of the degree of interest essential to give the requisite standing to attack the constitutionality of a statute, the general rule is that not only persons individually affected, but also taxpayers, have sufficient interest in preventing _Saint Louis University School of Law_

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the illegal expenditure of moneys raised by taxation and may therefore question the constitutionality of statutes requiring expenditure of public moneys. Hence, it is our considered opinion that the circumstances surrounding this case sufficiently justify petitioners action in contesting the appropriation and donation in question; that this action should not have been dismissed by the lower court; and that the writ of preliminary injunction should have been maintained.

_Saint Louis University School of Law_

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Topic: Inherent Limitation: Public Purpose LUTZ vs. ARANETA G.R. No. L-7859 December 22, 1955 FACTS: Promulgated in 1940, the law in question opens (section 1) with a declaration of emergency, due to the threat to our industry by the imminent imposition of export taxes upon sugar as provided in the Tydings-McDuffie Act, and the "eventual loss of its preferential position in the United States market"; wherefore, the national policy was expressed "to obtain a readjustment of the benefits derived from the sugar industry by the component elements thereof" and "to stabilize the sugar industry so as to prepare it for the eventuality of the loss of its preferential position in the United States market and the imposition of the export taxes." In section 2, Commonwealth Act 567 provides for an increase of the existing tax on the manufacture of sugar, on a graduated basis, on each picul of sugar manufactures; while section 3 levies on owners or persons in control of lands devoted to the cultivation of sugar cane and ceded to others for a consideration, on lease or otherwise. Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate of Antonio Jayme Ledesma, seeks to recover from the Collector of Internal Revenue the sum of P14,666.40 paid by the estate as taxes, under section 3 of the Act, for the crop years 1948-1949 and 1949-1950; alleging that such tax is unconstitutional and void, being levied for the aid and support of the sugar industry exclusively, which in plaintiff's opinion is not a public purpose for which a tax may be constitutionally levied. The action having been dismissed by the Court of First Instance, the plaintiffs appealed the case directly to this Court ISSUE: Whether or not taxes imposed by Commonwealth Act No. 567, otherwise known as the Sugar Adjustment Act is legal? RULING: As the protection and promotion of the sugar industry is a matter of public concern the Legislature may determine within reasonable bounds what is necessary for its protection and expedient for its promotion. Here, the legislative must be allowed full play, subject only to the test of reasonableness; and it is not contended that the means provided in section 6 of Commonwealth Act No. 567 bear no relation to the objective pursued or are oppressive in character. If objective and methods are alike constitutionally valid, no reason is seen why the state may not levy taxes to raise funds for their prosecution and attainment. Taxation may be made the implement of the state's police power.

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

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 20 First Semester, SY 2011-2012

Topic: Inherent Limitations: Public Purpose GOMEZ vs. PALOMAR G.R. No. L-23645 October 29, 1968 FACTS: On September l5, 1963 the petitioner Benjamin P. Gomez mailed a letter at the post office in San Fernando, Pampanga. Because this letter, addressed to a certain Agustin Aquino of 1014 Dagohoy Street, Singalong, Manila did not bear the special antiTB stamp required by the statute, it was returned to the petitioner. In view of this development, the petitioner brought suit for declaratory relief in the Court of First Instance of Pampanga, to test the constitutionality of the statute, as well as the implementing administrative orders issued, contending that it violates the equal protection clause of the Constitution as well as the rule of uniformity and equality of taxation. The lower court declared the statute and the orders unconstitutional. This appeal puts in issue the constitutionality of Republic Act 1635,as amended by Republic Act 2631,2 which provides as follows: To help raise funds for the Philippine Tuberculosis Society, the Director of Posts shall order for the period from August nineteen to September thirty every year the printing and issue of semi-postal stamps of different denominations with face value showing the regular postage charge plus the additional amount of five centavos for the said purpose, and during the said period, no mail matter shall be accepted in the mails unless it bears such semi-postal stamps: Provided, That no such additional charge of five centavos shall be imposed on newspapers. The additional proceeds realized from the sale of the semi-postal stamps shall constitute a special fund and be deposited with the National Treasury to be expended by the Philippine Tuberculosis Society in carrying out its noble work to prevent and eradicate tuberculosis. The respondent Postmaster General, in implementation of the law, thereafter issued four (4) administrative orders numbered 3 (June 20, 1958), 7 (August 9, 1958), 9 (August 28, 1958), and 10 (July 15, 1960). All these administrative orders were issued with the approval of the respondent Secretary of Public Works and Communications. ISSUE: Whether or not RA 1635 as amended by RA 2631 and the four Administrative orders violates the equal protection clause of the Constitution as well as the rule of uniformity and equality of taxation? RULING: It is settled that the legislature has the inherent power to select the subjects of taxation and to grant exemptions. This power has aptly been described as "of wide range and flexibility. Indeed, it is said that in the field of taxation, more than in other areas, the legislature possesses the greatest freedom in classification. The reason for _Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 21 First Semester, SY 2011-2012

this is that traditionally, classification has been a device for fitting tax programs to local needs and usages in order to achieve an equitable distribution of the tax burden. The classification is based on considerations of administrative convenience. For it is now a settled principle of law that consideration of practical administrative convenience and cost in the administration of tax laws afford adequate ground for imposing a tax on a well recognized and defined class. In the case of the anti-TB stamps, undoubtedly, the single most important and influential consideration that led the legislature to select mail users as subjects of the tax is the relative ease and convenience of collecting the tax through the post offices. The small amount of five centavos does not justify the great expense and inconvenience of collecting through the regular means of collection. On the other hand, by placing the duty of collection on postal authorities the tax was made almost self-enforcing, with as little cost and as little inconvenience as possible. The eradication of a dreaded disease is a public purpose, but if by public purpose the petitioner means benefit to a taxpayer as a return for what he pays, then it is sufficient answer to say that the only benefit to which the taxpayer is constitutionally entitled is that derived from his enjoyment of the privileges of living in an organized society, established and safeguarded by the devotion of taxes to public purposes. Any other view would preclude the levying of taxes except as they are used to compensate for the burden on those who pay them and would involve the abandonment of the most fundamental principle of government — that it exists primarily to provide for the common good. Nor is the rule of uniformity and equality of taxation infringed by the imposition of a flat rate rather than a graduated tax. A tax need not be measured by the weight of the mail or the extent of the service rendered. We have said that considerations of administrative convenience and cost afford an adequate ground for classification. The same considerations may induce the legislature to impose a flat tax which in effect is a charge for the transaction, operating equally on all persons within the class regardless of the amount involved.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 22 First Semester, SY 2011-2012

Topic: Inherent Limitations: Inherently Legislative PEPSI-COLA vs. MUNICIPALITY OF TANAUAN G.R No. L-31156 February 27, 1976 FACTS: Pepsi-Cola Bottling Company of the Philippines, Inc., commenced a complaint for the court to declare Section 2 of Republic Act No. 2264 otherwise known as the Local Autonomy Act, unconstitutional as an undue delegation of taxing authority as well as to declare Ordinances Nos. 23 and 27, series of 1962, of the municipality of Tanauan, Leyte, null and void. The parties entered into a Stipulation of Facts, the material portions of which state that, first, both Ordinances Nos. 23 and 27 embrace or cover the same subject matter and the production tax rates imposed therein are practically the same, and second, that the acting Municipal Treasurer of Tanauan, Leyte, as per his letter addressed to the Manager of the Pepsi-Cola Bottling Plant in said municipality, sought to enforce compliance by the latter of the provisions of said Ordinance No. 27, series of 1962. Municipal Ordinance No. 23, of Tanauan, Leyte, levies and collects "from soft drinks producers and manufacturers a tai of one-sixteenth (1/16) of a centavo for every bottle of soft drink corked." For the purpose of computing the taxes due, the person, firm, company or corporation producing soft drinks shall submit to the Municipal Treasurer a monthly report, of the total number of bottles produced and corked during the month. The tax imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal production tax.' ISSUE: Whether or not the Municipal Ordinances are valid? RULING: The plenary nature of the taxing power thus delegated, contrary to plaintiffappellant's pretense, would not suffice to invalidate the said law as confiscatory and oppressive. In delegating the authority, the State is not limited to the exact measure of that which is exercised by itself. When it is said that the taxing power may be delegated to municipalities and the like, it is meant that there may be delegated such measure of power to impose and collect taxes as the legislature may deem expedient. Thus, municipalities may be permitted to tax subjects which for reasons of public policy the State has not deemed wise to tax for more general purposes. Due process is usually violated where the tax imposed is for a private as distinguished from a public purpose; a tax is imposed on property outside the State, i.e., extraterritorial taxation; and arbitrary or oppressive methods are used in assessing and collecting taxes. But, a tax does not violate the due process clause, as applied to a particular taxpayer, although the purpose of the tax will result in an injury rather than a benefit to such taxpayer. Due process does not require that the property subject to the _Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 23 First Semester, SY 2011-2012

tax or the amount of tax to be raised should be determined by judicial inquiry, and a notice and hearing as to the amount of the tax and the manner in which it shall be apportioned are generally not necessary to due process of law.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 24 First Semester, SY 2011-2012

Topic: Inherent Limitations: Coverage, Object, Nature, Extent, Situs PEPSI-COLA vs. CITY OF BUTUAN G.R No. L-22814 August 28, 1968 FACTS: Pepsi‘s warehouse in the City of Butuan serves as a storage for its products the "Pepsi-Cola" soft drinks for sale to customers in the City of Butuan and all the municipalities in the Province of Agusan. These "Pepsi-Cola Cola" soft drinks are bottled in Cebu City and shipped to the Butuan City warehouse of plaintiff for distribution and sale in the City of Butuan and all municipalities of Agusan. . On August 16, 1960, the City of Butuan enacted Ordinance No. 110 which was subsequently amended by Ordinance No. 122. That Ordinance No. 110 as amended, imposes a tax on any person, association, etc., of P0.10 per case of 24 bottles of PepsiCola and the plaintiff paid under protest the amount of P4,926.63 from August 16 to December 31, 1960 and the amount of P9,250.40 from January 1 to July 30, 1961. The plaintiff then filed the foregoing complaint for the recovery of the total amount of P14,177.03 paid under protest and those that if may later on pay until the termination of this case on the ground that Ordinance No. 110 as amended of the City of Butuan is illegal, that the tax imposed is excessive and that it is unconstitutional. ISSUE: Whether or not Ordinance No. 122 is unconstitutional? RULING: It is true that the uniformity essential to the valid exercise of the power of taxation does not require identity or equality under all circumstances, or negate the authority to classify the objects of taxation. The classification made in the exercise of this authority, to be valid, must, however, be reasonable and this requirement is not deemed satisfied unless: (1) it is based upon substantial distinctions which make real differences; (2) these are germane to the purpose of the legislation or ordinance; (3) the classification applies, not only to present conditions, but, also, to future conditions substantially identical to those of the present; and (4) the classification applies equally all those who belong to the same class. These conditions are not fully met by the ordinance in question. Indeed, if its purpose was merely to levy a burden upon the sale of soft drinks or carbonated beverages, there is no reason why sales thereof by sealers other than agents or consignees of producers or merchants established outside the City of Butuan should be exempt from the tax.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 25 First Semester, SY 2011-2012

Topic: Tax Exemption of the Government LIGHT RAIL TRANSIT AUTHORITY vs. CENTRAL BOARD OF ASSESSMENT GR NO. 127316 October 12, 2000 FACTS: The LRTA is a government-owned and controlled corporation created and organized under Executive Order No. 603, dated July 12, 1980 primarily responsible for the construction, operation, maintenance and/or lease of light rail transit system in the Philippines, giving due regard to the reasonable requirements of the public transportation of the country'. By reason of Executive Order 603, LRTA acquired real properties constructed structural improvements, such as buildings, carriageways, passenger terminal stations, and installed various kinds of machinery and equipment and facilities for the purpose of its operations; For an effective maintenance, operation and management, it entered into a Contract of Management with the Meralco Transit Organization in which the latter undertook to manage, operate and maintain the Light Rail Transit System owned by the LRTA subject to the specific stipulations contained in said agreement, including payments of a management fee and real property taxes.That it commenced its operations in 1984, and that sometime that year, Respondent-Appellee City Assessor of Manila assessed the real properties of petitioner, consisting of lands, buildings, carriageways and passenger terminal stations, machinery and equipment which he considered real property under the Real Property Tax Code, to commence with the year 1985;That petitioner paid its real property taxes on all its real property holdings, except the carriageways and passenger terminal stations including the land where it is constructed on the ground that the same are not real properties under the Real Property Tax Code, and if the same are real property, these are for public use/purpose, therefore, exempt from realty taxation, which claim was denied by the RespondentAppellee City Assessor of Manila; and Petitioner, aggrieved by the action of the Respondent-Appellee City Assessor, filed an appeal with the Local Board of Assessment Appeals of Manila. Appellee, herein, after due hearing, in its resolution dated June 26, 1992, denied petitioner's appeal, and declared that carriageways and passenger terminal stations are improvements, therefore, are real property under the Code, and not exempt from the payment of real property tax. ISSUE: Whether or not petitioner is exempt from payment of real property taxes? RULING: In any event, there is another legal justification for upholding the assailed CA Decision. Under the Real Property Tax Code, real property "owned by the Republic of the Philippines or any of its political subdivisions and any government-owned or controlled corporation so exempt by its charter, provided, however, that this exemption _Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 26 First Semester, SY 2011-2012

shall not apply to real property of the abovenamed entities the beneficial use of which has been granted, for consideration or otherwise, to a taxable person." Executive Order No. 603, the charter of petitioner, does not provide for any real estate tax exemption in its favor. Its exemption is limited to direct and indirect taxes, duties or fees in connection with the importation of equipment not locally available, as the following provision shows: "ARTICLE 4 TAX AND DUTY EXEMPTIONS Sec. 8.Equipment, Machineries, Spare Parts and Other Accessories and Materials. - The importation of equipment, machineries, spare parts, accessories and other materials, including supplies and services, used directly in the operations of the Light Rails Transit System, not obtainable locally on favorable terms, out of any funds of the authority including, as stated in Section 7 above, proceeds from foreign loans credits or indebtedness, shall likewise be exempted from all direct and indirect taxes, customs duties, fees, imposts, tariff duties, compensating taxes, wharfage fees and other charges and restrictions, the provisions of existing laws to the contrary notwithstanding." Even granting that the national government indeed owns the carriageways and terminal stations, the exemption would not apply because their beneficial use has been granted to petitioner, a taxable entity. Taxation is the rule and exemption is the exception. Any claim for tax exemption is strictly construed against the claimant. LRTA has not shown its eligibility for exemption; hence, it is subject to the tax.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 27 First Semester, SY 2011-2012

Topic: Tax Exemption of the Government MACTAN CEBU INTERNATIONAL AIRPORT vs. MARCOS G.R. No. 120082 September 11, 1996 FACTS: MCIAA was created by virtue of Republic Act 6958. Since the time of its creation, MCIAA enjoyed the privilege of exemption from payment of realty taxes in accordance with Section 14 of its Charter. However on 11 October 1994, the Office of the Treasurer of Cebu, demanded for the payment of realty taxes on several parcels of land belonging to the petitioner. Petitioner objected to such demand for payment as baseless and unjustified. It also asserted that it is an instrumentality of the government performing a governmental functions, which puts limitations on the taxing powers of local government units. It nonetheless stands in the same footing as an agency or instrumentality of the national government by the very nature of its powers and functions. The City refused to cancel and set aside petitioner‘s realty tax account, insisting that the MCIAA is a government controlled corporation whose tax exemption privilege has been withdrawn by virtue of Sections 193 and 234 of the Local Government Code, and not an instrumentality of the government but merely a government owned corporation performing proprietary functions. MCIAA paid its tax account ―under protest‖ when City is about to issue a warrant of levy against the MCIAA‘s properties. On 29 December 1994, MCIAA filed a Petition of Declaratory Relief with the Cebu Regional Trial Court contending that the taxing power of local government units do not extend to the levy of taxes or fees on an instrumentality of the national government. It contends that by the nature of its powers and functions, it has the footing of an agency or instrumentality of the national government; which claim the City rejects. On 22 March 1995, the trial court dismissed the petition, citing that close reading of the LGC provides the express cancellation and withdrawal of tax exemptions of Government Owned and Controlled Corporations. MCIAA‘s motion for reconsideration having been denied by the trial court in its 4 May 1995 order, the petitioner filed the instant petition. ISSUE: Whether the MCIAA is exempted from realty taxes? RULING: Tax statutes are construed strictly against the government and liberally in favor of the taxpayer. But since taxes are paid for civilized society, or are the lifeblood of the nation, the law frowns against exemptions from taxation and statutes granting tax exemptions are thus construed strictissimijuris against the taxpayer and liberally in favor of the taxing authority. A claim of exemption from tax payments must be clearly shown and based on language in the law too plain to be mistaken. Elsewise stated, taxation is the rule, exemption therefrom is the exception. However, if the grantee of the exemption is a political subdivision or instrumentality, the rigid rule of construction _Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 28 First Semester, SY 2011-2012

does not apply because the practical effect of the exemption is merely to reduce the amount of money that has to be handled by the government in the course of its operations. Further, since taxation is the rule and exemption therefrom the exception, the exemption may be withdrawn at the pleasure of the taxing authority. The only exception to this rule is where the exemption was granted to private parties based on material consideration of a mutual nature, which then becomes contractual and is thus covered by the non-impairment clause of the Constitution. MCIAA is a ―taxable person‖ under its Charter (RA 6958), and was only exempted from the payment of real property taxes. The grant of the privilege only in respect of this tax is conclusive proof of the legislative intent to make it a taxable person subject to all taxes, except real property tax. Since Republic Act 7160 or the Local Government Code expressly provides that ―All general and special laws, acts, city charters, decrees, executive orders, proclamations and administrative regulations, or part of parts thereof which are inconsistent with any of the provisions of this Code are hereby repealed or modified accordingly.‖ With that repealing clause in the LGC, the tax exemption provided for in RA 6958 had been expressly repealed by the provisions of the LGC. Therefore, MCIAA has to pay the assessed realty tax of its properties effective after January 1, 1992 until the present.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 29 First Semester, SY 2011-2012

Topic: Tax Exemption of the Government MANILA INTERNATIONAL AIRPORT AUTHORIT vs. CITY OF PARAÑAQUE G.R. No. 155650 July 20, 2006 FACTS: Petitioner Manila International Airport Authority operates the Ninoy Aquino International Airport Complex in Parañaque City under Executive Order No. 903, issued on 21 July 1983 by then President Ferdinand E. Marcos. As operator of the international airport, MIAA administers the land, improvements and equipment within the NAIA Complex, including the runways and buildings. On 21 March 1997, the Office of the Government Corporate Counsel (OGCC) issued Opinion No. 061. The OGCC opined that the Local Government Code of 1991 withdrew the exemption from real estate tax granted to MIAA under Section 21 of the MIAA Charter. On 17 July 2001, the City of Parañaque, through its City Treasurer, issued notices of levy and warrants of levy on the Airport Lands and Buildings threatened to sell at public auction the Airport Lands and Buildings should MIAA fail to pay the real estate tax delinquency. On 1 October 2001, MIAA filed with the Court of Appeals an original petition for prohibition and also points out that Section 21 of the MIAA Charter specifically exempts MIAA from the payment of real estate tax. MIAA insists that it is also exempt from real estate tax under Section 234 of the Local Government Code because the Airport Lands and Buildings are owned by the Republic. To justify the exemption, MIAA invokes the principle that the government cannot tax itself. MIAA points out that the reason for tax exemption of public property is that its taxation would not inure to any public advantage, since in such a case the tax debtor is also the tax creditor. ISSUE: Whether the Airport Lands and Buildings of MIAA are exempt from real estate tax under existing laws? RULING: MIAA's Airport Lands and Buildings are exempt from real estate tax imposed by local governments. First, MIAA is not a government-owned or controlled corporation but an instrumentality of the National Government and thus exempt from local taxation. Second, the real properties of MIAA are owned by the Republic of the Philippines and thus exempt from real estate tax. Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify as a government-owned or controlled corporation. MIAA is a government instrumentality vested with corporate powers to perform efficiently its governmental functions. MIAA is like any other government instrumentality, the only difference is that MIAA is vested with corporate powers. _Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 30 First Semester, SY 2011-2012

Another rule is that a tax exemption is strictly construed against the taxpayer claiming the exemption. However, when Congress grants an exemption to a national government instrumentality from local taxation, such exemption is construed liberally in favor of the national government instrumentality. There is also no reason for local governments to tax national government instrumentalities for rendering essential public services to inhabitants of local governments. The only exception is when the legislature clearly intended to tax government instrumentalities for the delivery of essential public services for sound and compelling policy considerations. There must be express language in the law empowering local governments to tax national government instrumentalities. Any doubt whether such power exists is resolved against local governments. The Airport Lands and Buildings are devoted to public use because they are used by the public for international and domestic travel and transportation. The fact that the MIAA collects terminal fees and other charges from the public does not remove the character of the Airport Lands and Buildings as properties for public use. The operation by the government of a tollway does not change the character of the road as one for public use. Someone must pay for the maintenance of the road, either the public indirectly through the taxes they pay the government, or only those among the public who actually use the road through the toll fees they pay upon using the road. The tollway system is even a more efficient and equitable manner of taxing the public for the maintenance of public roads.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 31 First Semester, SY 2011-2012

Topic: Tax Exemption of the Government MIAAvs.COURT OF APPEALS, CITY OF PARAÑAQUE G.R. No. 155650 July 20, 2006 Facts: On 17 July 2001, the City of Parañaque, through its City Treasurer, issued notices of levy and warrants of levy on the Airport Lands and Buildings. The Mayor of the City of Parañaque threatened to sell at public auction the Airport Lands and Buildings should MIAA fail to pay the real estate tax delinquency. MIAA thus sought a clarification of OGCC Opinion No. 061. On 9 August 2001, the OGCC issued Opinion No. 147 clarifying OGCC Opinion No. 061. The OGCC pointed out that Section 206 of the Local Government Code requires persons exempt from real estate tax to show proof of exemption. MIAA also points out that Section 21 of the MIAA Charter specifically exempts MIAA from the payment of real estate tax. MIAA insists that it is also exempt from real estate tax under Section 234 of the Local Government Code because the Airport Lands and Buildings are owned by the Republic. To justify the exemption, MIAA invokes the principle that the government cannot tax itself. MIAA points out that the reason for tax exemption of public property is that its taxation would not inure to any public advantage, since in such a case the tax debtor is also the tax creditor. Respondents invoke Section 193 of the Local Government Code, which expressly withdrew the tax exemption privileges of "government-owned and-controlled corporations" upon the effectivity of the Local Government Code. Respondents also argue that a basic rule of statutory construction is that the express mention of one person, thing, or act excludes all others. An international airport is not among the exceptions mentioned in Section 193 of the Local Government Code. Thus, respondents assert that MIAA cannot claim that the Airport Lands and Buildings are exempt from real estate tax. Issue: Whether the Airport Lands and Buildings of MIAA are exempt from real estate tax under existing laws. If so exempt, then the real estate tax assessments issued by the City of Parañaque, and all proceedings taken pursuant to such assessments, are void. In such event, the other issues raised in this petition become moot. Ruling: We rule that MIAA's Airport Lands and Buildings are exempt from real estate tax imposed by local governments. First, MIAA is not a government-owned or controlled corporation but an instrumentality of the National Government and thus exempt from local _Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 32 First Semester, SY 2011-2012

taxation. Second, the real properties of MIAA are owned by the Republic of the Philippines and thus exempt from real estate tax. 1. MIAA is Not a Government-Owned or Controlled Corporation Respondents argue that MIAA, being a government-owned or controlled corporation, is not exempt from real estate tax. Respondents claim that the deletion of the phrase "any government-owned or controlled so exempt by its charter" in Section 234(e) of the Local Government Code withdrew the real estate tax exemption of government-owned or controlled corporations. The deleted phrase appeared in Section 40(a) of the 1974 Real Property Tax Code enumerating the entities exempt from real estate tax. 2. Airport Lands and Buildings of MIAA are Owned by the Republic a. Airport Lands and Buildings are of Public Dominion The Airport Lands and Buildings of MIAA are property of public dominion and therefore owned by the State or the Republic of the Philippines. No one can dispute that properties of public dominion mentioned in Article 420 of the Civil Code, like "roads, canals, rivers, torrents, ports and bridges constructed by the State," are owned by the State. The term "ports" includes seaports and airports. The MIAA Airport Lands and Buildings constitute a "port" constructed by the State. Under Article 420 of the Civil Code, the MIAA Airport Lands and Buildings are properties of public dominion and thus owned by the State or the Republic of the Philippines. Under Article 420 of the Civil Code, the Airport Lands and Buildings of MIAA, being devoted to public use, are properties of public dominion and thus owned by the State or the Republic of the Philippines. Article 420 specifically mentions "ports x xx constructed by the State," which includes public airports and seaports, as properties of public dominion and owned by the Republic. As properties of public dominion owned by the Republic, there is no doubt whatsoever that the Airport Lands and Buildings are expressly exempt from real estate tax under Section 234(a) of the Local Government Code. This Court has also repeatedly ruled that properties of public dominion are not subject to execution or foreclosure sale.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 33 First Semester, SY 2011-2012

Topic: Constitutional Limitations: Due Process Clause CREBA vs. THE SECRETARY OF AGRARIAN REFORM G.R. No. 183409 June 18, 2010 Facts: The Secretary of Agrarian Reform issued "Omnibus Rules and Procedures Governing Conversion of Agricultural Lands to Non-Agricultural Uses," which consolidated all existing implementing guidelines related to land use conversion. The aforesaid rules embraced all private agricultural lands regardless of tenurial arrangement and commodity produced, and all untitled agricultural lands and agricultural lands reclassified by Local Government Units (LGUs) into non-agricultural uses after 15 June 1988. Subsequently, on 30 March 1999, the Secretary of Agrarian Reform issued DAR AO No. 01-99, entitled "Revised Rules and Regulations on the Conversion of Agricultural Lands to Non-agricultural Uses," amending and updating the previous rules on land use conversion. Its coverage includes the following agricultural lands, to wit: (1) those to be converted to residential, commercial, industrial, institutional and other non-agricultural purposes; (2) those to be devoted to another type of agricultural activity such as livestock, poultry, and fishpond ─ the effect of which is to exempt the land from the Comprehensive Agrarian Reform Program (CARP) coverage; (3) those to be converted to non-agricultural use other than that previously authorized; and (4) those reclassified to residential, commercial, industrial, or other non-agricultural uses on or after the effectivity of Republic Act No. 66575 on 15 June 1988 pursuant to Section 206 of Republic Act No. 71607 and other pertinent laws and regulations, and are to be converted to such uses. To address the unabated conversion of prime agricultural lands for real estate development, the Secretary of Agrarian Reform further issued Memorandum No. 88 on 15 April 2008, which temporarily suspended the processing and approval of all land use conversion applications. By reason thereof, petitioner claims that there is an actual slow down of housing projects, which, in turn, aggravated the housing shortage, unemployment and illegal squatting problems to the substantial prejudice not only of the petitioner and its members but more so of the whole nation. Issues: 1. WHETHER [DAR AO NO. 01-02, AS AMENDED] VIOLATE[S] THE DUE PROCESS AND EQUAL PROTECTION CLAUSE[S] OF THE CONSTITUTION. 2. WHETHER MEMORANDUM NO. 88 IS A VALID EXERCISE OF POLICE POWER.9

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 34 First Semester, SY 2011-2012

Ruling: The petition was dismissed. The authority of the Secretary of Agrarian Reform to include "lands not reclassified as residential, commercial, industrial or other nonagricultural uses before 15 June 1988" in the definition of agricultural lands finds basis in jurisprudence. In Ros v. Department of Agrarian Reform,39 this Court has enunciated that after the passage of Republic Act No. 6657, agricultural lands, though reclassified, have to go through the process of conversion, jurisdiction over which is vested in the DAR. However, agricultural lands, which are already reclassified before the effectivity of Republic Act No. 6657 which is 15 June 1988, are exempted from conversion.40 It bears stressing that the said date of effectivity of Republic Act No. 6657 served as the cut-off period for automatic reclassifications or rezoning of agricultural lands that no longer require any DAR conversion clearance or authority.41 It necessarily follows that any reclassification made thereafter can be the subject of DAR‘s conversion authority. Having recognized the DAR‘s conversion authority over lands reclassified after 15 June 1988, it can no longer be argued that the Secretary of Agrarian Reform was wrongfully given the authority and power to include "lands not reclassified as residential, commercial, industrial or other non-agricultural uses before 15 June 1988" in the definition of agricultural lands. Such inclusion does not unduly expand or enlarge the definition of agricultural lands; instead, it made clear what are the lands that can be the subject of DAR‘s conversion authority, thus, serving the very purpose of the land use conversion provisions of Republic Act No. 6657.It is clear from the aforesaid distinction between reclassification and conversion that agricultural lands though reclassified to residential, commercial, industrial or other non-agricultural uses must still undergo the process of conversion before they can be used for the purpose to which they are intended. The petitioner‘s argument that DAR Memorandum No. 88 is unconstitutional, as it suspends the land use conversion without any basis, stands on hollow ground. It bears emphasis that said Memorandum No. 88 was issued upon the instruction of the President in order to address the unabated conversion of prime agricultural lands for real estate development because of the worsening rice shortage in the country at that time. Such measure was made in order to ensure that there are enough agricultural lands in which rice cultivation and production may be carried into. The issuance of said Memorandum No. 88 was made pursuant to the general welfare of the public, thus, it cannot be argued that it was made without any basis.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 35 First Semester, SY 2011-2012

Topic: Constitutional Limitations: Due Process Clause COCA-COLA BOTTLERS PHILIPPINES, INC. vs. CA and MS. LYDIA GERONIMO G.R. No. 110295 October 18, 1993 FACTS: Private respondent was the proprietress of Kindergarten Wonderland Canteen in Dagupan City. In August 1989, some parents of the students complained to her that the Coke and Sprite soft drinks sold by her contained fiber-like matter and other foreign substances. She brought the said bottles for examination to DOH and it was found out that the soft drinks ―are adulterated.‖ As a result, her per day sales of soft drinks severely plummeted that she had to close her shop on 12 December 1989 for losses. She demanded damages from petitioner before the RTC which dismissed the same on motion by petitioner based on the ground of Prescription. On appeal, the CA annulled the orders of the RTC. ISSUE: WON the action for damages by the proprietress against the soft drinks manufacturer should be treated as one for breach of implied warranty under article 1561 of the CC which prescribes after six months from delivery of the thing sold. RULING: Petition Denied. The SC agrees with the CA‘s conclusion that the cause of action in the case at bar is found on quasi-delict under Article 1146 of the CC which prescribes in four years and not on breach of warranty under article 1562 of the same code. This is supported by the allegations in the complaint which makes reference to the reckless and negligent manufacture of "adulterated food items intended to be sold for public consumption."

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 36 First Semester, SY 2011-2012

Topic: Constitutional Limitations: Due Process Clause VILLEGAS vs. HIU CHIONG TSAI PAO HO G.R No. L-29646 November 10, 1978 FACTS: On 22 February 1968, Ordinance 6537 was passed by the Municipal Board of Manila and signed by Manila Mayor Antonio J. Villegas on March 27, 1968. Ordinance 6537, entitled ―An ordinance making it unlawful for any person not a citizen of the Philippines to be employed in any place of employment or to be engaged in any kind of trade, business or occupation within the City of Manila without first securing an employment permit from the mayor of Manila; and for other purposes.‖ Law prohibits aliens from employment and trade in the City of Manila without the requisite mayor‘s permit). Exceptions to law are persons employed in the diplomatic or consular missions of foreign countries, or in the technical assistance programs of both the Philippine Government and any foreign government, and those working in their respective households, and members of religious orders or congregations, sect or denomination, who are not paid monetarily or in kind. Permit fee is P50. Penalty is imprisonment of 3 to 6 months or fine of P100-200, or both. On 4 May 1968, HiuChiong Tsai Pao Ho, who was employed in Manila, filed a petition, with the CFI Manila (Civil Case 72797), praying for (1) the issuance of the writ of preliminary injunction and restraining order to stop the implementation of the ordinance, and (2) judgment to declare the ordinance null and void. On 24 May 1968, Judge Francisco Arca (CFI Manila, Branch I) issued the writ of preliminary injunction and on 17 September 1968, the Judge rendered a decision declaring the ordinance null and void, and the preliminary injunction is made permanent. Mayor Villegas filed a petition for certiorari to review the decision of the CFI. ISSUES: 1. Whether or not there is a violation of due process and equal protection clauses? 2. Whether or not there was an illegal delegation of legislative powers? 3. Whether or not there is a violation of the principle of Uniformity of Taxation? RULING: 1. Due process and equal protection clauses The ordinance is arbitrary, oppressive and unreasonable, being applied only to aliens who are thus, deprived of their rights to life, liberty and property and therefore, violates the due process and equal protection clauses of the Constitution. Requiring a person, before he can be employed, to get a permit from the City Mayor of Manila, who may withhold or refuse it at will is tantamount to denying him the basic right of the people in the Philippines to engage in a means of livelihood. Once an alien is admitted by the State within its territory, he cannot be deprived of life without due process of _Saint Louis University School of Law_

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law, including the means of livelihood. The shelter of protection under the due process and equal protection clause is given to all persons, both aliens and citizens. 2. Police Power, illegal delegation of legislative powers The ordinance does not lay down any criterion or standard to guide the Mayor in the exercise of his discretion, thus conferring upon the mayor arbitrary and unrestricted powers. The ordinance does not provide a standard to guide or limit the mayor‘s action, expresses no purpose to be attained by requiring a permit, and enumerates no conditions for its grant or refusal. 3. Uniformity of Taxation, discriminatory and violative The ordinance‘s purpose is clearly to raise money under the guise of regulation by exacting P50 from aliens who have been cleared for employment. The amount is unreasonable and excessive because it fails to consider differences in situation among aliens required to pay it, i.e. being casual, permanent, full-time, part-time, rank-an-file or executive.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 38 First Semester, SY 2011-2012

Topic: Constitutional Limitations: Due Process Clause CITY OF BAGUIO vs. DE LEON Gr. No. 24756 October 31, 1968 FACTS: In this appeal, a lower court decision upholding the validity of an ordinance 1 of the City of Baguio imposing a license fee on any person, firm, entity or corporation doing business in the City of Baguio is assailed by defendant-appellant Fortunato de Leon. He was held liable as a real estate dealer with a property therein worth more than P10,000, but not in excess of P50,000, and therefore obligated to pay under such ordinance the P50 annual fee. That is the principal question. In addition, there has been a firm and unyielding insistence by defendant-appellant of the lack of jurisdiction of the City Court of Baguio, where the suit originated, a complaint having been filed against him by the City Attorney of Baguio for his failure to pay the amount of P300 as license fee covering the period from the first quarter of 1958 to the fourth quarter of 1962, allegedly, in spite of repeated demands. Nor was defendant-appellant agreeable to such a suit being instituted by the City Treasurer without the consent of the Mayor, which for him was indispensable. The lower court was of a different mind. It declared the above ordinance as amended, valid and subsisting, and held defendant- appellant liable for the fees therein prescribed as a real estate dealer. Hence, this appeal. Assume the validity of such ordinance, and there would be no question about the liability of defendant-appellant for the above license fee, it being shown in the partial stipulation of facts, that he was "engaged in the rental of his property in Baguio" deriving income therefrom during the period covered by the first quarter of 1958 to the fourth quarter of 1962. ISSUE: Whether or not the ordinance is valid? RULING: The challenged ordinance cannot be considered ultra vires as there is more than ample statutory authority for the enactment thereof. Nonetheless, its validity on constitutional grounds is challenged because of the allegation that it imposed double taxation, which is repugnant to the due process clause, and that it violated the requirement of uniformity. We do not view the matter thus. As to why double taxation is not violative of due process, Justice Holmes made clear in this language: "The objection to the taxation as double may be laid down or one side. . . . The 14th Amendment [the due process clause] no more forbids double taxation than it does doubling the amount of a tax, short of confiscation or proceedings unconstitutional on other grounds." With that decision rendered at a time when American sovereignty in the Philippines was recognized, it possesses more than just a persuasive effect. To some, it delivered the coup de grace to the bogey of double taxation as a constitutional bar to the exercise of the taxing power. It would seem _Saint Louis University School of Law_

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though that in the United States, as with us, its ghost, as noted by an eminent critic, still stalks the juridical stage. In a 1947 decision, however, 9 we quoted with approval this excerpt from a leading American decision: 10 "Where, as here, Congress has clearly expressed its intention, the statute must be sustained even though double taxation results." At any rate, it has been expressly affirmed by us that such an "argument against double taxation may not be invoked where one tax is imposed by the state and the other is imposed by the city . . ., it being widely recognized that there is nothing inherently obnoxious in the requirement that license fees or taxes be exacted with respect to the same occupation, calling or activity by both the state and the political subdivisions thereof. The above would clearly indicate how lacking in merit is this argument based on double taxation. Now, as to the claim that there was a violation of the rule of uniformity established by the Constitution. According to the challenged ordinance, a real estate dealer who leases property worth P50,000 or above must pay an annual fee of P100. If the property is worth P10,000 but not over P50,000, then he pays P50 and P24 if the value is less than P10,000. On its face, therefore, the above ordinance cannot be assailed as violative of the constitutional requirement of uniformity. A tax is considered uniform when it operates with the same force and effect in every place where the subject may be found." It is thus apparent from the above that in much the same way that the plea of double taxation is unavailing, the allegation that there was a violation of the principle of uniformity is inherently lacking in persuasiveness. There is no need to pass upon the other allegations to assail the validity of the above ordinance, it being maintained that the license fees therein imposed "is excessive, unreasonable and oppressive" and that there is a failure to observe the mandate of equal protection. A reading of the ordinance will readily disclose their inherent lack of plausibility.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 40 First Semester, SY 2011-2012

Topic: Constitutional Limitations: Due Process Clause SISON vs. ANCHETA G.R. No. L-59431 July 25, 1984 FACTS: The challenged posed is a suit for declaratory relief or prohibition on the validity of Section 1 of Batas PambansaBlg. 135. The assailed provision further amends Sec. 21 of the NIRC of 1977, which provides for the rate tax on residents or citizens on (a) taxable compensation income, (b) taxable net income, (c) royalties, prizes, and other winnings, (d) interests from bank deposits and yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangements, (e) dividends and share from individual partner in the net profits of taxable partnership, (f) adjusted gross income. Sison, as taxpayer, alleged that its provision (Section 1) unduly discriminated against him by the imposition of higher rates upon his income as a professional, that it amounts to class legislation, and that it transgresses against the equal protection and due process clauses of the Constitution as well as the rule requiring uniformity in taxation. ISSUE: Whether BP 135 violates the due process and equal protection clauses, and the rule on uniformity in taxation? RULING: There is a need for proof of such persuasive character as would lead to a conclusion that there was a violation of the due process and equal protection clauses. Absent such showing, the presumption of validity must prevail. Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation. Where the differentiation conforms to the practical dictates of justice and equity, similar to the standards of equal protection, it is not discriminatory within the meaning of the clause and is therefore uniform. Taxpayers may be classified into different categories, such as recipients of compensation income as against professionals. Recipients of compensation income are not entitled to make deductions for income tax purposes as there is no practically no overhead expense, while professionals and businessmen have no uniform costs or expenses necessary to produce their income. There is ample justification to adopt the gross system of income taxation to compensation income, while continuing the system of net income taxation as regards professional and business income.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 41 First Semester, SY 2011-2012

Topic: Constitutional Limitations: Due Process Clause COMMISSIONER OF INTERNAL REVENUE vs. CA & FORTUNE TOBACCO CORP. G.R. No. 119322 June 4, 1996 FACTS: A task force was created on June 1, 1993 to investigate tax liabilities of manufacturers engaged in tax evasion schemes. On July 1, 1993, the CIR issued Rev. Memo Circ. No. 37-93 which reclassified certain cigarette brands manufactured by private respondent Fortune Tobacco Corp. (Fortune) as foreign brands subject to a higher tax rate. On August 3, 1993, Fortune questioned the validity of said reclassification as being violative of the right to due process and equal protection of laws. The CTA, on September 8, 1993 resolved that said reclassification was of doubtful legality and enjoined its enforcement. In the meantime, on August 3, 1993, Fortune was assessed deficiency income, ad valorem and VAT for 1992 with payment due within 30 days from receipt. On September 12, 1993, private respondent moved for reconsideration of said assessment. Meanwhile on September 7, 1993, the Commissioner filed a complaint with the DOJ against private respondent Fortune, its corporate officers and 9 other corporations and their respective corporate officers for alleged fraudulent tax evasion for non-payment of the correct income, ad valorem and VAT for 1992. The complaint was referred to the DOJ Task Force on revenue cases which found sufficient basis to further investigate the charges against Fortune. A subpoena was issued on September 8, 1993 directing private respondent to submit their counter-affidavits. But it filed a verified motion to dismiss or alternatively, a motion to suspend but was denied and thus treated as their counter-affidavit. All motions filed thereafter were denied. On January 4, 1994, private respondents filed a petition for certiorari and prohibition with prayer for preliminary injunction praying the CIR‘s complaint and prosecutor‘s orders be dismissed/set aside or alternatively, that the preliminary investigation be suspended pending determination by CIR of Fortune‘s motion for reconsideration/reinvestigation of the August 13, 1993 assessment of taxes due. The trial court granted the petition for a writ of preliminary injunction to enjoin the preliminary investigation on the complaint for tax evasion pending before the DOJ, ruling that the tax liability of private respondents first be settled before any complaint for fraudulent tax evasion can be initiated. ISSUE: Whether or not the basis of private respondent‘s tax liability should first be settled before any complaint for fraudulent tax evasion can be initiated? RULING: Fraud cannot be presumed.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 42 First Semester, SY 2011-2012

If there was fraud on willful attempt to evade payment of ad valorem taxes by private respondent through the manipulation of the registered wholesale price of the cigarettes, it must have been with the connivance of cooperation of certain BIR officials and employees who supervised and monitored Fortune‘s production activities to see to it that the correct taxes were paid. But there is no allegation, much less evidence, of BIR personnel‘s malfeasance at the very least, there is the presumption that BIR personnel performed their duties in the regular course in ensuring that the correct taxes were paid by Fortune. Before the tax liabilities of Fortune are finally determined, it cannot be correctly asserted that private respondents have willfully attempted to evade or defeat any tax under Secs. 254 and 256, 1997 NIRC. The fact that a tax is due must first be proved.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 43 First Semester, SY 2011-2012

Topic: Constitutional Limitations: Due Process Clause COMMISSIONER OF INTERNAL REVENUE vs. LHUILLIER PAWNSHOP, INC.. G.R. No. 150947 July 15, 2003 FACTS: CIR Jose U. Ong issued Revenue Memorandum Order No. 15-91 imposing a 5% lending investor‘s tax on pawnshops; thus: A restudy of P.D. [No.] 114 shows that the principal activity of pawnshops is lending money at interest and incidentally accepting a "pawn" of personal property delivered by the pawner to the pawnee as security for the loan. Clearly, this makes pawnshop business akin to lending investor‘s business activity which is broad enough to encompass the business of lending money at interest by any person whether natural or juridical. Such being the case, pawnshops shall be subject to the 5% lending investor‘s tax based on their gross income pursuant to Section 116 of the Tax Code, as amended. This RMO was clarified by Revenue Memorandum Circular No. 43-91. Since pawnshops are considered as lending investors, they also become subject to documentary stamp taxes prescribed in Title VII of the Tax Code. BIR Ruling No. 32588 is hereby revoked. Pursuant to these issuances, the BIR issued Assessment Notice No. 81-PT-13-9497-9-118 against Lhuillier demanding payment of deficiency percentage tax in the sum of P3,360,335.11 for 1994 inclusive of interest and surcharges. Lhuillier filed an administrative protest with the Office of the Revenue Regional Director contending that (1) neither the Tax Code nor the VAT Law expressly imposes 5% percentage tax on the gross income of pawnshops; (2) pawnshops are different from lending investors, which are subject to the 5% percentage tax under the specific provision of the Tax Code; (3) RMO No. 15-91 is not implementing any provision of the Internal Revenue laws but is a new and additional tax measure on pawnshops, which only Congress could enact; (4) RMO No. 15-91 impliedly amends the Tax Code and is therefore taxation by implication, which is proscribed by law; and (5) RMO No. 15-91 is a "class legislation" because it singles out pawnshops among other lending and financial operations. Lhuillier, on the other hand, maintains that before and after the amendment of the Tax Code by E.O. No. 273, which took effect on 1 January 1988, pawnshops and lending investors were subjected to different tax treatments. Pawnshops were required to pay an annual fixed tax of only P1,000, while lending investors were subject to a 5% percentage tax on their gross income in addition to their fixed annual taxes. Accordingly, during the period from April 1982 up to December 1990, the CIR consistently ruled that a pawnshop is not a lending investor and should not therefore be required to pay percentage tax on its gross income. ISSUE: Are pawnshops considered "lending investors" for the purpose of the imposition of the lending investor‘s tax? _Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 44 First Semester, SY 2011-2012

RULING: RMO No. 15-91 and RMC No. 43-91 were issued in accordance with the power of the CIR to make rulings and opinions in connection with the implementation of internal revenue laws, which was bestowed by then Section 245 of the NIRC of 1977, as amended by E.O. No. 273.6 Such power of the CIR cannot be controverted. However, the CIR cannot, in the exercise of such power, issue administrative rulings or circulars not consistent with the law sought to be applied. Indeed, administrative issuances must not override, supplant or modify the law, but must remain consistent with the law they intend to carry out. Only Congress can repeal or amend the law. While it is true that pawnshops are engaged in the business of lending money, they are not considered "lending investors" for the purpose of imposing the 5% percentage taxes. The definition of lending investors found in Section 157 (u) of the NIRC of 1986 is not found in the NIRC of 1977, as amended by E.O. No. 273, where Section 116 invoked by the CIR is found. However, both the NIRC of 1986 and the NIRC of 1977 dealt with pawnshops and lending investors differently. Verily then, it was the intent of Congress to deal with both subjects differently. Hence, we must likewise interpret the statute to conform with such legislative intent. Further, if pawnshops were covered within the term lending investor, there would have been no need to introduce such amendment to include owners of pawnshops. At any rate, such proposed amendment was not adopted. Instead, the approved bill which became R.A. No. 7716repealed Section 116 of NIRC of 1977, as amended, which was the basis of RMO No. 15-91 and RMC No. 43-91. Since Section 116 of the NIRC of 1977, which breathed life on the questioned administrative issuances, had already been repealed, RMO 15-91 and RMC 43-91, which depended upon it, are deemed automatically repealed. Hence, even granting that pawnshops are included within the term lending investors, the assessment from 27 May 1994 onward would have no leg to stand on. Adding to the invalidity of the RMC No. 43-91 and RMO No. 15-91 is the absence of publication. While the rule-making authority of the CIR is not doubted, like any other government agency, the CIR may not disregard legal requirements or applicable principles in the exercise of quasi-legislative powers. A legislative rule is in the nature of subordinate legislation, designed to implement a primary legislation by providing the details thereof. An interpretative rule, on the other hand, is designed to provide guidelines to the law which the administrative agency is in charge of enforcing. When an administrative rule is merely interpretative in nature, its applicability needs nothing further than its bare issuance, for it gives no real consequence more than what the law itself has already prescribed. When, on the other hand, the administrative rule goes beyond merely providing for the means that can facilitate or render least cumbersome the implementation of the law but substantially increases the burden of those governed, it behooves the agency to accord at least to those directly affected a chance to be heard, and thereafter to be duly informed, before that new issuance is given the force and effect of law. RMO No. 15-91 and RMC No. 43-91 cannot be viewed simply as implementing rules or corrective measures revoking in the process the previous rulings of past _Saint Louis University School of Law_

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Commissioners. Specifically, they would have been amendatory provisions applicable to pawnshops. Without these disputed CIR issuances, pawnshops would not be liable to pay the 5% percentage tax, considering that they were not specifically included in Section 116 of the NIRC of 1977, as amended. In so doing, the CIR did not simply interpret the law. The due observance of the requirements of notice, hearing, and publication should not have been ignored.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 46 First Semester, SY 2011-2012

Topic: Constitutional Limitations: Equal Protection Clause ABAKADA Guro Party List vs. Ermita G.R. No. 168056 September 1, 2005 FACTS: Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party List, et al., filed a petition for prohibition on May 27, 2005 questioning the constitutionality of Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the National Internal Revenue Code (NIRC). Section 4 imposes a 10% VAT on sale of goods and properties, Section 5 imposes a 10% VAT on importation of goods, and Section 6 imposes a 10% VAT on sale of services and use or lease of properties. These questioned provisions contain a uniform proviso authorizing the President, upon recommendation of the Secretary of Finance, to raise the VAT rate to 12%, effective January 1, 2006, after specified conditions have been satisfied. Petitioners argue that the law is unconstitutional. ISSUES: 1. Whether or not there is a violation of Article VI, Section 24 of the Constitution. 2. Whether or not there is undue delegation of legislative power in violation of Article VI Sec 28(2) of the Constitution. 3. Whether or not there is a violation of the due process and equal protection under Article III Sec. 1 of the Constitution. HELD: 1. Since there is no question that the revenue bill exclusively originated in the House of Representatives, the Senate was acting within its constitutional power to introduce amendments to the House bill when it included provisions in Senate Bill No. 1950 amending corporate income taxes, percentage, and excise and franchise taxes. 2. There is no undue delegation of legislative power but only of the discretion as to the execution of a law. This is constitutionally permissible. Congress does not abdicate its functions or unduly delegate power when it describes what job must be done, who must do it, and what is the scope of his authority; in our complex economy that is frequently the only way in which the legislative process can go forward.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 47 First Semester, SY 2011-2012

3. The power of the State to make reasonable and natural classifications for the purposes of taxation has long been established. Whether it relates to the subject of taxation, the kind of property, the rates to be levied, or the amounts to be raised, the methods of assessment, valuation and collection, the State‘s power is entitled to presumption of validity. As a rule, the judiciary will not interfere with such power absent a clear showing of unreasonableness, discrimination, or arbitrariness.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 48 First Semester, SY 2011-2012

Topic: Constitutional Limitations: Equal Protection Clause ASSOCIATION OF CUSTOMS BROKERS, INC. vs. THE MUNICIPAL BOARD 93PHIL107 FACTS: The disputed ordinance was passed by the Municipal Board of the City of Manila under the authority conferred by section 18 (p) of Republic Act No. 409. Said section confers upon the municipal board the power "to tax motor and other vehicles operating within the City of Manila the provisions of any existing law to the contrary notwithstanding." It is contended that this power is broad enough to confer upon the City of Manila the power to enact an ordinance imposing a property tax on motor vehicles operating within the city limits. The Association of Customs Brokers, Inc., which is composed of all brokers and public service operators of motor vehicles in the City of Manila, and G. Manlapit, Inc., a member of said association, also a public service operator of trucks in said City, challenge the validity of ordinance on the ground that (1) while it levies a so-called property tax it is in reality a license tax which is beyond the power of the Municipal Board of the City of Manila; (2) said ordinance offends against the rule of uniformity of taxation; and (3) it constitutes double taxation. The respondents, represented by the city fiscal, contend on their part that the challenged ordinance imposes a property tax which is within the power of the City of Manila to impose under its Revised Charter [Section 18 (p) of Republic Act No. 409], and that the tax in question does not violate the rule of uniformity of taxation, nor does it constitute double taxation. ISSUE: Whether or not the ordinance violates the rule on uniformity? RULING: While as a rule an ad valorem tax is a property tax, and this rule is supported by some authorities, the rule should not be taken in its absolute sense if the nature and purpose of the tax as gathered from the context show that it is in effect an excise or a license tax. Thus, it has been held that "If a tax is in its nature an excise, it does not become a property tax because it is proportioned in amount to the value of the property used in connection with the occupation, privilege or act which is taxed. Every excise necessarily must finally fall upon and be paid by property and so may be indirectly a tax upon property; but if it is really imposed upon the performance of an act, enjoyment of a privilege, or the engaging in an occupation, it will be considered an excise." It has also been held that "The character of a tax as a property tax or a license or occupation tax must be determined by its incidents, and from the natural and legal effect of the language employed in the act or ordinance, and not by the name by which it is described, or by the mode adopted in fixing its amount. If it is clearly a property tax, it will be so regarded, even though nominally and in form it is a license or occupation tax; and, on the other hand, if the tax is levied upon persons on account of _Saint Louis University School of Law_

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their business, it will be construed as a license or occupation tax, even though it is graduated according to the property used in such business, or on the gross receipts of the business." The ordinance in question falls under the foregoing rules. While it refers to property tax and it is fixed ad valorem yet we cannot reject the idea that it is merely levied on motor vehicles operating within the City of Manila with the main purpose of raising funds to be expended exclusively for the repair, maintenance and improvement of the streets and bridges in said city. This is precisely what the Motor VehicleLaw intends to prevent, for the reason that, under said Act, municipal corporations already participate in the distribution of the proceeds that are raised for the same purpose of repairing, maintaining and improving bridges and public highways. This prohibition is intended to prevent duplication in the imposition of fees for the same purpose. It is for this reason that we believe that the ordinance in question merely imposes a license fee although under the cloak of an ad valorem tax to circumvent the prohibition above adverted to. It is also our opinion that the ordinance infringes the rule of uniformity of taxation ordained by our Constitution. Note that the ordinance exacts the tax upon all motor vehicles operating within the City of Manila. It does not distinguish between a motor vehicle for hire and one which is purely for private use. Neither does it distinguish between a motor vehicle registered in the City of Manila and one registered in another place but occasionally comes to Manila and uses its streets and public highways. The distinction is important if we note that the ordinance intends to burden with the tax only those registered in the City of Manila as may be inferred from the word "operating" used therein. The word "operating" denotes a connotation which is akin to a registration, for under the Motor Vehicle Law no motor vehicle can be operated without previous payment of the registration fees. There is no pretense that the ordinance equally applies to motor vehicles who come to Manila for a temporary stay or for short errands, and it cannot be denied that they contribute in no small degree to the deterioration of the streets and public highways. The fact that they are benefited by their use they should also be made to share the corresponding burden. And yet such is not the case. This is an inequality which we find in the ordinance, and which renders it offensive to the Constitution.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 50 First Semester, SY 2011-2012

Topic: Constitutional Limitations: Equal Protection Clause SHELL vs. VAÑO G.R. No. L-6093 February 24, 1954 FACTS: The municipal council of Cordova, Cebu adopted Ordinance 10 (1946) imposing an annual tax of P150 on occupation or the exercise of the privilege of installation manager; Ordinance 9 (1947) imposing an annual tax of P40 for local deposits in drums of combustible and inflammable materials and an annual tax of P200 for tin can factories; and Ordinance 11 (1948) imposing an annual tax of P150 on tin can factories having a maximum annual output capacity of 30,000 tin cans. Shell Co., a foreign corporation, filed suit for the refund of the taxes paid by it, on the ground that the ordinances imposing such taxes are ultra vires. ISSUE: Whether Ordinance 10 is discriminatory and hostile because there is no other person in the locality who exercise such designation or occupation. RULING: NO. The mere fact that there is no other person in the locality who exercises such a ―designation‖ or calling does not make the ordinance discriminatory and hostile, inasmuch as it is and will be applicable to any person or firm who exercises such calling or occupation named or designated as ―installation manager.‖ Even if an installation manager is a salaried employee, still his employment is an occupation, and one occupation or line of business does not become exempt by being conducted with some other occupation or business for which such taxes have been paid and the occupation tax must be paid by each individual in a calling subject thereto.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 51 First Semester, SY 2011-2012

Topic: Constitutional Limitations: Equal Protection Clause KAPATIRAN vs. TAN G.R No. 109289 June 30, 1988 FACTS: 4 petitions, which have been consolidated because of the similarity of the main issues involved therein, seek to nullify Executive Order No. 273, issued by the President of the Philippines on 25 July 1987, to take effect on 1 January 1988, and which amended certain sections of the National Internal Revenue Code and adopted the value-added tax for being unconstitutional in that its enactment is not alledgedly within the powers of the President; that the VAT is oppressive, discriminatory, regressive, and violates the due process and equal protection clauses and other provisions of the 1987 Constitution. The Solicitor General prays for the dismissal of the petitions on the ground that the petitioners have failed to show justification for the exercise of its judicial powers, viz. (1) the existence of an appropriate case; (2) an interest, personal and substantial, of the party raising the constitutional questions; (3) the constitutional question should be raised at the earliest opportunity; and (4) the question of constitutionality is directly and necessarily involved in a justiciable controversy and its resolution is essential to the protection of the rights of the parties. According to the Solicitor General, only the third requisite — that the constitutional question should be raised at the earliest opportunity — has been complied with. He also questions the legal standing of the petitioners who, he contends, are merely asking for an advisory opinion from the Court, there being no justiciable controversy for resolution. Objections to taxpayers' suit for lack of sufficient personality standing, or interest are, however, in the main procedural matters. Considering the importance to the public of the cases at bar, and in keeping with the Court's duty, under the 1987 Constitution, to determine whether or not the other branches of government have kept themselves within the limits of the Constitution and the laws and that they have not abused the discretion given to them, the Court has brushed aside technicalities of procedure and has taken cognizance of these petitions. ISSUE: Whether or not E.O. 273 violated the equal protection clause? RULING: The sales tax adopted in EO 273 is applied similarly on all goods and services sold to the public, which are not exempt, at the constant rate of 0% or 10%. The disputed sales tax is also equitable. It is imposed only on sales of goods or services by persons engage in business with an aggregate gross annual sales exceeding P200,000.00. Small corner sari-sari stores are consequently exempt from its application. Likewise exempt from the tax are sales of farm and marine products, spared as they _Saint Louis University School of Law_

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are from the incidence of the VAT, are expected to be relatively lower and within the reach of the general public. The Court likewise finds no merit in the contention of the petitioner Integrated Customs Brokers Association of the Philippines that EO 273, more particularly the new Sec. 103 (r) of the National Internal Revenue Code, unduly discriminates against customs brokers. The phrase "except customs brokers" is not meant to discriminate against customs brokers. It was inserted in Sec. 103(r) to complement the provisions of Sec. 102 of the Code, which makes the services of customs brokers subject to the payment of the VAT and to distinguish customs brokers from other professionals who are subject to the payment of an occupation tax under the Local Tax Code. With the insertion of the clarificatory phrase "except customs brokers" in Sec. 103(r), a potential conflict between the two sections, (Secs. 102 and 103), insofar as customs brokers are concerned, is averted. At any rate, the distinction of the customs brokers from the other professionals who are subject to occupation tax under the Local Tax Code is based upon material differences, in that the activities of customs brokers partake more of a business, rather than a profession and were thus subjected to the percentage tax under Sec. 174 of the National Internal Revenue Code prior to its amendment by EO 273. EO 273 abolished the percentage tax and replaced it with the VAT. If the petitioner Association did not protest the classification of customs brokers then, the Court sees no reason why it should protest now. In any event, if petitioners seriously believe that the adoption and continued application of the VAT are prejudicial to the general welfare or the interests of the majority of the people, they should seek recourse and relief from the political branches of the government. The Court, following the time-honored doctrine of separation of powers, cannot substitute its judgment for that of the President as to the wisdom, justice and advisability of the adoption of the VAT. The Court can only look into and determine whether or not EO 273 was enacted and made effective as law, in the manner required by, and consistent with, the Constitution, and to make sure that it was not issued in grave abuse of discretion amounting to lack or excess of jurisdiction; and, in this regard, the Court finds no reason to impede its application or continued implementation.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 53 First Semester, SY 2011-2012

Constitutional Limitations: Equal Protection Clause TAN vs. DELROSARIO G.R. No. 109289 October 3, 1994 FACTS: A special civil actions for prohibition challenge the constitutionality of Republic Act No. 7496, also commonly known as the Simplified Net Income Taxation Scheme ("SNIT"), amending certain provisions of the National Internal Revenue Code and, in Petitioners claim to be taxpayers adversely affected by the continued implementation of the amendatory legislation. Petitioner intimates that Republic Act No. 7496 desecrates the constitutional requirement that taxation "shall be uniform and equitable" in that the law would now attempt to tax single proprietorships and professionals differently from the manner it imposes the tax on corporations and partnerships. ISSUE: Whether Republic Act No. 7496 is unconstitutional? RULING: The due process clause may correctly be invoked only when there is a clear contravention of inherent or constitutional limitations in the exercise of the tax power. No such transgression is so evident to us. The Court, first of all, should like to correct the apparent misconception that general professional partnerships are subject to the payment of income tax or that there is a difference in the tax treatment between individuals engaged in business or in the practice of their respective professions and partners in general professional partnerships. The fact of the matter is that a general professional partnership, unlike an ordinary business partnership (which is treated as a corporation for income tax purposes and so subject to the corporate income tax), is not itself an income taxpayer. The income tax is imposed not on the professional partnership, which is tax exempt, but on the partners themselves in their individual capacity computed on their distributive shares of partnership profits. Section 23 of the Tax Code, which has not been amended at all by Republic Act 7496, is explicit: Sec. 23.Tax liability of members of general professional partnerships. — (a) Persons exercising a common profession in general partnership shall be liable for income tax only in their individual capacity, and the share in the net profits of the general professional partnership to which any taxable partner would be entitled whether distributed or otherwise, shall be returned for taxation and the tax paid in accordance with the provisions of this Title. (b) In determining his distributive share in the net income of the partnership, each partner —

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 54 First Semester, SY 2011-2012

(1) Shall take into account separately his distributive share of the partnership's income, gain, loss, deduction, or credit to the extent provided by the pertinent provisions of this Code, and (2) Shall be deemed to have elected the itemized deductions, unless he declares his distributive share of the gross income undiminished by his share of the deductions. There is, then and now, no distinction in income tax liability between a person who practices his profession alone or individually and one who does it through partnership (whether registered or not) with others in the exercise of a common profession. Indeed, outside of the gross compensation income tax and the final tax on passive investment income, under the present income tax system all individuals deriving income from any source whatsoever are treated in almost invariably the same manner and under a common set of rules.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 55 First Semester, SY 2011-2012

Topic: Constitutional Limitations: Equal Protection Clause TIO vs. VIDEOGRAM REGULATORY BOARD 151 S 208 FACTS: Petitioner, on his own behalf and purportedly on behalf of other videogram operators adversely affected, assailed the constitutionality of Presidential Decree No. 1987 entitled ―An Act Creating the Videogram Regulatory Board‖ with broad powers to regulate and supervise the videogram industry. Petitioner questioned the constitutionality of the decree on the grounds that: (a) Section 10 thereof, which imposes a tax of 30% on the gross receipts payable to the local government is a rider and the same is not germane to the subject matter thereof; (b) the tax imposed is harsh, confiscatory, oppressive and/or in unlawful restraint to trade in violation of the due process clause of the Constitution; (c) there is undue delegation of power. ISSUE: Whether

or

not

the

assailed

Decree

is

unconstitutional?

RULING: The power to impose taxes is one so unlimited in force and so searching in extent, that the courts scarcely venture to declare that it is subject to any restrictions whatever, except such as rest in the discretion of the authority which exercises it. In imposing a tax, the legislature acts upon its constituents. This is, in general, a sufficient security against erroneous and oppressive taxation. On the other hand, the levy of the 30% tax is for public purpose. It was imposed primarily to answer the need for regulating the video industry, particularly because of the rampant film piracy, the flagrant violation of intellectual property rights, and the proliferation of pornographic video tapes and while it was also an objective of the Decree to protect the movie industry, the tax remains a valid imposition. The public purpose of a tax may legally exist even if the motive which impelled the legislature to impose the tax was to favor one industry over the other. It is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held that inequities which result from a singling out of one particular class for taxation or exemption infringe no constitutional limitation. Taxation has been made the implement of the state‘s police power. _Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 56 First Semester, SY 2011-2012

With regard to the issue that the Decree contains an undue delegation of legislative power, there is really no delegation of the power to legislate but merely a conferment functions of authority or discretion as to its execution, enforcement, and implementation. It is important to note that only congressional power or competence, not the wisdom of the action taken, maybe the basis for declaring a statute invalid. The principle of separation of powers has in the main wisely allocated the respective authority to each department and confined its jurisdiction to such a sphere. The attack on the validity of the challenged provision likewise insofar as there may be objections, even if valid and cogent on its wisdom cannot be sustained.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 57 First Semester, SY 2011-2012

Topic: Constitutional Limitations: Equal Protection Clause ORMOC SUGAR COMPANY vs. TREASURER OF ORMOCCITY G.R. No. L-23794 February 17, 1968 FACTS: On 29 January 1964, the Municipal Board of Ormoc City passed Ordinance 4, Series of 1964, imposing ―on any and all productions of centrifugal sugar milled at the Ormoc Sugar Company, Inc., in OrmocCity a municipal tax equivalent to one per centum (1%) per export sale to the United States of America and other foreign countries.‖ Payments for said tax were made, under protest, by Ormoc Sugar Company, Inc. on 20 March 1964 for P7,087.50 and on 20 April 1964 for P5,000.00, or a total of P12,087.50. On 1 June 1964, the company filed before the CFI Leyte, with service of a copy upon the Solicitor General, a complaint against the City of Ormoc as well as its Treasurer, Municipal Board and Mayor (Hon. Esteban C. Conejos), alleging that the ordinance is unconstitutional for being violative of the equal protection clause (Sec. 1[1], Art. III, Constitution) and the rule of uniformity of taxation (Sec. 22[1], Art.VI, Constitution), aside from being an export tax forbidden under Section 2287 of the Revised Administrative Code. It further alleged that the tax is neither a production nor a license tax which Ormoc City under Section 15-kk of its charter and under Section 2 of RA 2264, otherwise known as the Local Autonomy Act, is authorized to impose; and that the tax amounts to a customs duty, fee or charge in violation of paragraph 1 of Section 2 of RA 2264 because the tax is on both the sale and export of sugar. After pretrial and submission of the case on memoranda, the CFI, on 6 August 1964, rendered a decision that upheld the constitutionality of the ordinance and declared the taxing power of chartered city broadened by the Local Autonomy Act to include all other forms of taxes, licenses or fees not excluded in its charter. Appeal therefrom was directly taken to the Supreme Court. ISSUE: Whether or not the ordinance is violative of the equal protection of laws? RULING: The Constitution in the bill of rights provides: ―. . . nor shall any person be denied the equal protection of the laws.‖ (Sec. 1[1], Art. 111) In Felwa v. Salas, the Court ruled that the equal protection clause applies only to persons or things identically situated and does not bar a reasonable classification of the subject of legislation, and a classification is reasonable where (1) it is based on substantial distinctions which make real differences; (2) these are germane to the purpose of the law; (3) the classification _Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 58 First Semester, SY 2011-2012

applies not only to present conditions but also to future conditions which are substantially identical to those of the present; (4) the classification applies only to those who belong to the same class. Classification reasonable should in terms applicable to future conditions as well The Ordinance taxes only centrifugal sugar produced and exported by the Ormoc Sugar Company Inc. and none other. At the time of the taxing ordinance‘s enactment, Ormoc Sugar Company, it is true, was the only sugar central in the city of Ormoc. Still, the classification, to be reasonable, should be in terms applicable to future conditions as well. The taxing ordinance should not be singular and exclusive as to exclude any subsequently established sugar central, of the same class as the Central, from the coverage of the tax. As it is now, even if later a similar company is set up, it cannot be subject to the tax because the ordinance expressly points only to Ormoc Sugar Company as the entity to be levied upon. Interest on refund not due as collection was not arbitrary; Ordinance constitutional until declared otherwiseOrmoc Sugar Company, however, is not entitled to interest on the refund because the taxes were not arbitrarily collected (Collector of Internal Revenue v. Binalbagan). At the time of collection, the ordinance provided a sufficient basis to preclude arbitrariness, the same being then presumed constitutional until declared otherwise.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 59 First Semester, SY 2011-2012

Topic: Constitutional Limitations: Equal Protection Clause PHILIPPINE RURAL ELECTRIC COOPERATIVES ASSOCIATION, INC., vs. SECRETARY OF DEPARTMENT OF INTERIOR AND LOCAL GOVERNMENT GR. No. 143076 June 10, 2003 FACTS: On May 23, 2003, a class suit was filed by petitioners in their own behalf and in behalf of other electric cooperatives organized and existing under PD 269 which are members of petitioner Philippine Rural Electric Cooperatives Association, Inc. The other petitioners, electric cooperatives of Agusandel Norte, Iloilo 1, and Isabela 1 are nonstock, non-profit electric cooperatives organized and existing under PD 269, as amended, and registered with the National Electrification Administration. Under Sec. 39 of PD 269 electric cooperatives shall be exempt from the payment of all National Government, local government, and municipal taxes and fee, including franchise, fling recordation, license or permit fees or taxes and any fees, charges, or costs involved in any court or administrative proceedings in which it may be party. From 1971to 1978, in order to finance the electrification projects envisioned by PD 269, as amended, the Philippine Government, acting through the National Economic council and the NEA, entered into six loan agreements with the government of the United States of America, through the United States Agency for International Development with electric cooperatives as beneficiaries. The loan agreements contain similarly worded provisions on the tax application of the loan and any property or commodity acquired through the proceeds of the loan. Petitioners allege that with the passage of the Local Government Code their tax exemptions have been validly withdrawn. Particularly, petitioners assail the validity of Sec. 193 and 234 of the said code. Sec. 193 provides for the withdrawal of tax exemption privileges granted to all persons, whether natural or juridical, except cooperatives duly registered under RA 6938, while Sec. 234 exempts the same cooperatives from payment of real property tax. ISSUE: Does the Local Government Code violate the equal protection clause since the provisions unduly discriminate against petitioners who are duly registered cooperatives under PD 269, as amended, and no under RA 6938 or the Cooperatives Code of the Philippines?

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 60 First Semester, SY 2011-2012

RULING: No. The guaranty of the equal protection clause is not violated by a law based on a reasonable classification. Classification, to be reasonable must (a) rest on substantial classifications; (b) germane to the purpose of the law; (c) not limited to the existing conditions only; and (d) apply equally to all members of the same class. We hold that there is reasonable classification under the Local Government Code to justify the different tax treatment between electric cooperatives covered by PD 269 and electric cooperatives under RA 6938. First, substantial distinctions exist between cooperatives under PD 269 and those under RA 6938. In the former, the government is the one that funds those so-called electric cooperatives, while in the latter, the members make equitable contribution as source of funds. Second, the classification of tax-exempt entities in the Local Government Code is germane to the purpose of the law. The Constitutional mandate that ―every local government unit shall enjoy local autonomy,‖ does not mean that the exercise of the power by the local governments is beyond the regulation of Congress. Sec. 193 of the LGC is indicative of the legislative intent to vet broad taxing powers upon the local government units and to limit exemptions from local taxation to entities specifically provided therein. Finally, Sec. 193 and 234 of the LGC permit reasonable classification as these exemptions are not limited to existing conditions and apply equally to all members of the same class. It is ingrained in jurisprudence that the constitutional prohibition on the impairment of the obligations of contracts does not prohibit every change in existing laws. To fall within the prohibition, the change must not only impair the obligation of the existing contract, but the impairment must be substantial. Moreover, to constitute impairment, the law must affect a change in the rights of the parties with reference to each other and not with respect to non-parties. The quoted provision under the loan agreement does not purport to grant any tax exemption in favor of any party to the contract, including the beneficiaries thereof. The provisions simply shift the tax burden, if any, on the transactions under the loan agreements to the borrower and/or beneficiary of the loan. Thus, the withdrawal by the Local Government Code under Sec. 193 and 234 of the tax exemptions previously enjoyed by petitioners does not impair the obligation of the borrower, the lender or the beneficiary under the loan agreements as, in fact, no tax exemption is granted therein.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 61 First Semester, SY 2011-2012

Topic: Constitutional Limitations: Equal Protection Clause SANTOS vs. PEOPLE PF THE PHILIPPINES G.R. 173176 August 26, 2008 FACTS: On 19 May 2005, then Bureau of Internal Revenue Commissioner Guillermo L. Parayno, Jr. wrote to the Department of Justice Secretary Raul M. Gonzales a letter regarding the possible filing of criminal charges against petitioner. Allegedly petitioner, in her Annual Income Tax Return for taxable year 2002 filed with the BIR, declared an income of P8,033,332.70 derived from her talent fees solely from ABS-CBN. Initial documents gathered from the BIR offices and those given by petitioner's accountant and third parties, however, confirmed that petitioner received in 2002 income in the amount of at least P14,796,234.70, not only from ABS-CBN, but also from other sources, such as movies and product endorsements. The estimated tax liability arising from petitioner's under declaration amounted to P1,718,925.52, including incremental penalties; the non-declaration by petitioner of an amount equivalent to at least 84.18% of the income declared in her return was considered a substantial under declaration of income, which constituted prima facie evidence of false or fraudulent return under Section 248(B) of the NIRC, as amended. ISSUE: Whether a resolution of a CTA division denying a motion to quash is a proper subject of an appeal to the CTA EN BANC under sec. 11 of RA 9282 amending sec 18 of RA 1125? RULING: The court ruled in the negative. Section 18 of Republic Act No. 1125, as amended by Republic Act No. 9282, provides; ―No civil proceedings involving matters arising under the National Internal Revenue Code, the Tariff and Customs Code or the Local Government Code shall be maintained, except as herein provided, until and unless an appeal has been previously filed with the CTA and disposed of in accordance with the provisions of this Act. A party adversely affected by a resolution of a Division of the CTA on a motion for reconsideration or new trial, may file a petition for review with the CTA en banc.‖ The provision speaks of resolutions that constitutes final disposition of the case. As a General rule, the denial of a motion to quash is an interlocutory order which is not _Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 62 First Semester, SY 2011-2012

theproper subject of an appeal or a petition for certiorari. There is no dispute that a court order denying a motion to quash is interlocutory. The denial of the motion to quash means that the criminal information remains pending with the court, which must proceed with the trial to determine whether the accused is guilty of the crime charged therein. Equally settled is the rule that an order denying a motion to quash, being interlocutory is not immediately appealable, nor can it be the subject of a petition for certiorari. Such order may only be reviewed in the ordinary course of law by an appeal from the judgment after trial.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 63 First Semester, SY 2011-2012

Topic: Freedom of Religion: Free Exercise Clause AMERICAN BIBLE SOCIETY vs. CITY OF MANILA G.R. No. L-9637 April 30, 1957 FACTS: Plaintiff's Philippine agency has been distributing and selling bibles and/or gospel portions thereof throughout the Philippines and translating the same into several Philippine dialects. On May 29 1953, the acting City Treasurer of the City of Manila informed plaintiff that it was conducting the business of general merchandise since November, 1945, without providing itself with the necessary Mayor's permit and municipal license, in violation of Ordinance No. 3000, as amended, and Ordinances Nos. 2529, 3028 and 3364, and required plaintiff to secure, within three days, the corresponding permit and license fees, together with compromise covering the period from the 4th quarter of 1945 to the 2nd quarter of 1953, in the total sum of P5,821.45. Plaintiff protested against this requirement, but the City Treasurer demanded that plaintiff deposit and pays under protest the sum of P5, 891.45, if suit was to be taken in court regarding the same. To avoid the closing of its business as well as further fines and penalties in the premises on October 24, 1953, plaintiff paid to the defendant under protest the said permit and license fees in the aforementioned amount, giving at the same time notice to the City Treasurer that suit would be taken in court to question the legality of the ordinances under which, the said fees were being collected which was done on the same date by filing the complaint that gave rise to this action. In its complaint plaintiff prays that judgment be rendered declaring the said Municipal Ordinance No. 3000, as amended, and Ordinances Nos. 2529, 3028 and 3364 illegal and unconstitutional, and that the defendant be ordered to refund to the plaintiff the sum of P5, 891.45 paid under protest, together with legal interest thereon, and the costs, plaintiff further praying for such other relief and remedy as the court may deem just equitable. Defendant answered the complaint, maintaining in turn that said ordinances were enacted by the Municipal Board of the City of Manila by virtue of the power granted to it by section 2444, subsection (m-2) of the Revised Administrative Code, superseded on June 18, 1949, by section 18, subsection (1) of Republic Act No. 409, known as the Revised Charter of the City of Manila. ISSUE: Whether or not the ordinances were unconstitutional and provide for religious censorship and restrain the free exercise and enjoyment of its religious profession?

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 64 First Semester, SY 2011-2012

RULING: Section 1, subsection (7) of Article III of the Constitution of the Republic of the Philippines, provides that: No law shall be made respecting an establishment of religion, or prohibiting the free exercise thereof, and the free exercise and enjoyment of religious profession and worship, without discrimination or preference, shall forever be allowed. No religion test shall be required for the exercise of civil or political rights. Article III, section 1, clause (7) of the Constitution of the Philippinesaforequoted, guarantees the freedom of religious profession and worship. "Religion has been spoken of as a profession of faith to an active power that binds and elevates man to its Creator".It has reference to one's views of his relations to His Creator and to the obligations they impose of reverence to His being and character, and obedience to His Will. The constitutional guaranty of the free exercise and enjoyment of religious profession and worship carries with it the right to disseminate religious information. Any restraints of such right can only be justified like other restraints of freedom of expression on the grounds that there is a clear and present danger of any substantive evil which the State has the right to prevent". In the case at bar the license fee herein involved is imposed upon appellant for its distribution and sale of bibles and other religious literature. It may be true that in the case at bar the price asked for the bibles and other religious pamphlets was in some instances a little bit higher than the actual cost of the same but this cannot mean that appellant was engaged in the business or occupation of selling said "merchandise" for profit. For this reason, we believe that the provisions of City of Manila Ordinance No. 2529, as amended, cannot be applied to appellant, for in doing so it would impair its free exercise and enjoyment of its religious profession and worship as well as its rights of dissemination of religious beliefs. With respect to Ordinance No. 3000, as amended, which requires the Mayor's permit before any person can engage in any of the businesses, trades or occupations enumerated therein, we do not find that it imposes any charge upon the enjoyment of a right granted by the Constitution, nor tax the exercise of religious practices. It seems clear, therefore, that Ordinance No. 3000(mayor‘s permit) cannot be considered unconstitutional, even if applied to plaintiff Society. But as Ordinance No. 2529( license fee) of the City of Manila, as amended, is not applicable to plaintiffappellant and defendant-appellee is powerless to license or tax the business of plaintiff Society involved herein for, as stated before, it would impair plaintiff's right to the free exercise and enjoyment of its religious profession and worship, as well as its rights of dissemination of religious beliefs, We find that Ordinance No. 3000, as amended is also inapplicable to said business, trade or occupation of the plaintiff.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 65 First Semester, SY 2011-2012

Topic: Freedom of Religion: Free Exercise Clause TOLENTINO vs. THE SECRETARY OF FINANCE G.R. No. 115455 August 25, 1994 FACTS: The valued-added tax is levied on the sale, barter or exchange of goods and properties as well as on the sale or exchange of services. It is equivalent to 10% of the gross selling price or gross value in money of goods or properties sold, bartered or exchanged or of the gross receipts from the sale or exchange of services. Republic Act No. 7716 seeks to widen the tax base of the existing VAT system and enhance its administration by amending the National Internal Revenue Code. ISSUES: a. Whether or not the law violates the provision of the constitution regarding the freedom of religion and its exercise thereof? b. Whether or not the law violates the provisions of the constitution regarding the Uniformity, Equitability and Progressivity of Taxation? RULING: a. Claims of Freedom of Thought and Religious Freedom

The case of American Bible Society v. City of Manila is cited by both the PBS and the PPI in support of their contention that the law imposes censorship. There, this Court held that an ordinance of the City of Manila, which imposed a license fee on those engaged in the business of general merchandise, could not be applied to the appellant's sale of bibles and other religious literature. This Court relied on Murdock v. Pennsylvania in which it was held that, as a license fee is fixed in amount and unrelated to the receipts of the taxpayer, the license fee, when applied to a religious sect, was actually being imposed as a condition for the exercise of the sect's right under the Constitution. For that reason, it was held, the license fee "restrains in advance those constitutional liberties of press and religion and inevitably tends to suppress their exercise." But, in this case, the fee in although a fixed amount (P1,000), is not imposed for the exercise of a privilege but only for the purpose of defraying part of the cost of registration. The registration requirement is a central feature of the VAT system. It is designed to provide a record of tax credits because any person who is subject to the payment of the VAT pays an input tax, even as he collects an output tax on sales made or services rendered. The registration fee is thus a mere administrative fee, one not imposed on the exercise of a privilege, much less a constitutional right.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 66 First Semester, SY 2011-2012

For the foregoing reasons, we find the attack on Republic Act No. 7716 on the ground that it offends the free speech, press and freedom of religion guarantees of the Constitution to be without merit. For the same reasons, we find the claim of the Philippine Educational Publishers Association (PEPA) in G.R. No. 115931 that the increase in the price of books and other educational materials as a result of the VAT would violate the constitutional mandate to the government to give priority to education, science and technology (Art. II, sec. 17) to be untenable. b. Claims of Progressivity, Denial of Due Process, Equal Protection, and Impairment of Contracts

There is basis for passing upon claims that on its face the statute violates the guarantees of freedom of speech, press and religion. The possible "chilling effect" which it may have on the essential freedom of the mind and conscience and the need to assure that the channels of communication are open and operating importunately demand the exercise of this Court's power of review. There is, however, no justification for passing upon the claims that the law also violates the rule that taxation must be progressive and that it denies petitioners' right to due process and the equal protection of the laws. The reason for this different treatment has been cogently stated by an eminent authority on constitutional law thus: "When freedom of the mind is imperiled by law, it is freedom that commands a moments of respect; when property is imperiled it is the lawmakers' judgment that commands respect. This dual standard may not precisely reverse the presumption of constitutionality in civil liberties cases, but obviously it does set up a hierarchy of values within the due process clause." What Congress is required by the Constitution to do is to "evolve a progressive system of taxation." This is a directive to Congress, just like the directive to it to give priority to the enactment of laws for the enhancement of human dignity and the reduction of social, economic and political inequalities or for the promotion of the right to "quality education". These provisions are put in the Constitution as moral incentives to legislation, not as judicially enforceable rights. To sum it all up, we hold that the procedural requirements of the Constitution have been complied with by Congress in the enactment of the statute; that judicial inquiry whether the formal requirements for the enactment of statutes - beyond those prescribed by the Constitution - have been observed is precluded by the principle of separation of powers; that the law does not abridge freedom of speech, expression or the press, nor interfere with the free exercise of religion, nor deny to any of the parties the right to an education; and that, in view of the absence of a factual foundation of record, claims that the law is regressive, oppressive and confiscatory and that it violates vested rights protected under the Contract Clause are prematurely raised and do not justify the grant of prospective relief by writ of prohibition.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 67 First Semester, SY 2011-2012

Topic: Constitutional Limitations: Uniformity, Equitability, Progressivity of Taxation CITY OF BAGUIO vs. DE LEON Gr. No. 24756 October 31, 1968 FACTS: In this appeal, a lower court decision upholding the validity of an ordinance 1 of the City of Baguio imposing a license fee on any person, firm, entity or corporation doing business in the City of Baguio is assailed by defendant-appellant Fortunato de Leon. He was held liable as a real estate dealer with a property therein worth more than P10,000, but not in excess of P50,000, and therefore obligated to pay under such ordinance the P50 annual fee. That is the principal question. In addition, there has been a firm and unyielding insistence by defendant-appellant of the lack of jurisdiction of the City Court of Baguio, where the suit originated, a complaint having been filed against him by the City Attorney of Baguio for his failure to pay the amount of P300 as license fee covering the period from the first quarter of 1958 to the fourth quarter of 1962, allegedly, in spite of repeated demands. Nor was defendant-appellant agreeable to such a suit being instituted by the City Treasurer without the consent of the Mayor, which for him was indispensable. The lower court was of a different mind. It declared the above ordinance as amended, valid and subsisting, and held defendant- appellant liable for the fees therein prescribed as a real estate dealer. Hence, this appeal. Assume the validity of such ordinance, and there would be no question about the liability of defendant-appellant for the above license fee, it being shown in the partial stipulation of facts, that he was "engaged in the rental of his property in Baguio" deriving income therefrom during the period covered by the first quarter of 1958 to the fourth quarter of 1962. ISSUE: Whether or not the ordinance is valid? RULING: The challenged ordinance cannot be considered ultra vires as there is more than ample statutory authority for the enactment thereof. Nonetheless, its validity on constitutional grounds is challenged because of the allegation that it imposed double taxation, which is repugnant to the due process clause, and that it violated the requirement of uniformity. We do not view the matter thus. As to why double taxation is not violative of due process, Justice Holmes made clear in this language: "The objection to the taxation as double may be laid down or _Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 68 First Semester, SY 2011-2012

one side. . . . The 14th Amendment [the due process clause] no more forbids double taxation than it does doubling the amount of a tax, short of confiscation or proceedings unconstitutional on other grounds." With that decision rendered at a time when American sovereignty in the Philippines was recognized, it possesses more than just a persuasive effect. To some, it delivered the coup de grace to the bogey of double taxation as a constitutional bar to the exercise of the taxing power. It would seem though that in the United States, as with us, its ghost, as noted by an eminent critic, still stalks the juridical stage. In a 1947 decision, however, 9 we quoted with approval this excerpt from a leading American decision: 10 "Where, as here, Congress has clearly expressed its intention, the statute must be sustained even though double taxation results." At any rate, it has been expressly affirmed by us that such an "argument against double taxation may not be invoked where one tax is imposed by the state and the other is imposed by the city . . ., it being widely recognized that there is nothing inherently obnoxious in the requirement that license fees or taxes be exacted with respect to the same occupation, calling or activity by both the state and the political subdivisions thereof. The above would clearly indicate how lacking in merit is this argument based on double taxation. Now, as to the claim that there was a violation of the rule of uniformity established by the Constitution. According to the challenged ordinance, a real estate dealer who leases property worth P50,000 or above must pay an annual fee of P100. If the property is worth P10,000 but not over P50,000, then he pays P50 and P24 if the value is less than P10,000. On its face, therefore, the above ordinance cannot be assailed as violative of the constitutional requirement of uniformity. A tax is considered uniform when it operates with the same force and effect in every place where the subject may be found." It is thus apparent from the above that in much the same way that the plea of double taxation is unavailing, the allegation that there was a violation of the principle of uniformity is inherently lacking in persuasiveness. There is no need to pass upon the other allegations to assail the validity of the above ordinance, it being maintained that the license fees therein imposed "is excessive, unreasonable and oppressive" and that there is a failure to observe the mandate of equal protection. A reading of the ordinance will readily disclose their inherent lack of plausibility.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 69 First Semester, SY 2011-2012

TOPIC:Prohibition against impairment of obligation of contracts CASSANOVA vs. HORD 8 PHIL 125 FACTS: On January 1897, the Spanish government granted to the Plaintiff certain mines in the Province of Ambos, Camarines, of which mines the Plaintiff is now the owner. The said mines were granted by virtue of the royal decree of the 14th of May, 1967 which provided among others, that the grantee shall pay annually a fixed tax of 40 escudos and a further tax of 3% on the gross earnings. Furthermore, the decree also provided that no other taxes than those mentioned shall be imposed upon mining and metallurgical industries. However, the defendant Collector of Internal Revenue, considered the questioned mining concessions to fall within the provisions of Sec. 134 of the Internal Revenue Act which imposes on all valid perfected mining concessions granted prior to April 11, 1899, an annual tax of P100 and an ad valorem tax equal to 3% of the actual market value of the gross output. The defendant accordingly imposed upon these properties the tax mentioned and thereafter the plaintiff paid under protest. The plaintiff brought this action against the defendant to recover the sum paid under protest. Judgment was rendered in favor of the defendant and from that judgment plaintiff appealed. ISSUE: Whether or not Sec. 134 of the Internal Revenue Act is valid. HELD: No. This is because it is violative of the provision of Sec. 5 of the Act of Congress of July 1, 1902, which provides that no law impairing the obligation of contracts shall be enacted. It seems that the Deed covering this particular mining concessions constituted a contract between the Spanish government and the Plaintiff, the obligation of which was impaired by the enactment of Sec. 134 of the Internal Revenue Act, thereby infringing the provisions of said Act of Congress. Therefore, the said provision of law is void.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 70 First Semester, SY 2011-2012

Topic: Non-impairment Clause CAGAYAN ELECTRIC POWER & LIGHT CO., INC. vs COMMISSIONER OF INTERNAL REVENUE G.R. No. L-60126 September 25, 1985 FACTS: The petitioner is the holder of a legislative franchise, Republic Act No. 3247, under which its payment of 3% tax on its gross earnings from the sale of electric current is "in lieu of all taxes and assessments of whatever authority upon privileges, earnings, income, franchise, and poles, wires, transformers, and insulators of the grantee, from which taxes and assessments the grantee is hereby expressly exempted" On June 27, 1968, Republic Act No. 5431 amended section 24 of the Tax Code by making liable for income tax all corporate taxpayers not specifically exempt under paragraph (c) (1) of said section and section 27 of the Tax Code notwithstanding the "provisions of existing special or general laws to the contrary". Thus, franchise companies were subjected to income tax in addition to franchise tax. However, in petitioner's case, its franchise was amended by Republic Act No. 6020, effective August 4, 1969, by authorizing the petitioner to furnish electricity to the municipalities of Villanueva and Jasaan, Misamis Oriental in addition to Cagayan de Oro City and the municipalities of Tagoloan and Opol. The amendment reenacted the tax exemption in its original charter or neutralized the modification made by Republic Act No. 5431 more than a year before. By reason of the amendment to section 24 of the Tax Code, the Commissioner of Internal Revenue in a demand letter dated February 15, 1973 required the petitioner to pay deficiency income taxes for 1968-to 1971. The petitioner contested the assessments. The Commissioner cancelled the assessments for 1970 and 1971 but insisted on those for 1968 and 1969. ISSUE: Whether or not the imposing of the franchise tax is valid? RULING: We hold that Congress could impair petitioner's legislative franchise by making it liable for income tax from which heretofore it was exempted by virtue of the exemption provided for in section 3 of its franchise. The Constitution provides that a franchise is subject to amendment, alteration or repeal by the Congress when the public interest so requires. Section 1 of petitioner's franchise, Republic Act No. 3247, provides that it is subject to the provisions of the Constitution and to the terms and conditions established _Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 71 First Semester, SY 2011-2012

in Act No. 3636 whose section 12 provides that the franchise is subject to amendment, alteration or repeal by Congress. Republic Act No. 5431, in amending section 24 of the Tax Code by subjecting to income tax all corporate taxpayers not expressly exempted therein and in section 27 of the Code, had the effect of withdrawing petitioner's exemption from income tax. The Tax Court acted correctly in holding that the exemption was restored by the subsequent enactment on August 4, 1969 of Republic Act No. 6020 which reenacted the said tax exemption. Hence, the petitioner is liable only for the income tax for the period from January 1 to August 3, 1969 when its tax exemption was modified by Republic Act No. 5431. It is relevant to note that franchise companies, like the Philippine Long Distance Telephone Company, have been paying income tax in addition to the franchise tax. However, it cannot be denied that the said 1969 assessment appears to be highly controversial. The Commissioner at the outset was not certain as to petitioner's income tax liability. It had reason not to pay income tax because of the tax exemption in its franchise. For this reason, it should be liable only for tax proper and should not be held liable for the surcharge and interest.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 72 First Semester, SY 2011-2012

Topic: Constitutional Limitations: Non-impairment Clause MERALCO vsPROVINCE OF LAGUNA G.R. No. 131359 May 5, 1999 FACTS: On various dates certain Municipalities of the Province of Laguna issued resolutions granting franchise in favor of petitioner MERALCO for the supply of electric light heat and power within their concerned areas. National Electrification Administration on January light and power service in the Municipality of Calamba Laguna. Pursuant to the Provisions of the LGC of 1991 the respondent province enacted ―Laguna Provincial Ordinance no. 01-92 effective January 1 1993, proving: ―sec. 2.09 Franchise Tax- there is hereby imposed a tax on businesses enjoying a franchise, at a rate of 50% of 1% of the gross annual receipts which shall include both cash sales and sales on account realized during the preceding calendar year within this province including the territorial limits on any city located in the province‖. On the basis of this ordinance respondent provincial Treasurer sent a demand letter to MERALCO for its corresponding tax payment. Under protest MERALCO paid the tax in the amount of 19 Million Pesos. A claim for refund was thereafter sent by Meralco to Provincial Treasurer of Laguna claiming that the franchise tax that it has paid and continued to pay to the National Government pursuant to PD 551 already included franchise tax imposed by the Provincial Tax Ordinance. MERALCO contended that the imposition of a franchise tax under Sec 2.09 of LPO 01-92 contravened the provisions of section 1 of PD 551. ISSUE: Whether the imposition of a franchise tax under sec 2.09 of LPO 01-92 is violative of the non-impairment clause of the Constitution and sec 1 of PD 551? RULING: Under the now prevailing Constitution, where there is neither a grant nor a prohibition by statute, the tax power must be deemed to exist although Congress may provide statutory limitations and guidelines. The basic rationale for the current rule is to safeguard the viability and self-sufficiency of local government units by directly granting them general and broad tax powers. Nevertheless, the fundamental law did not intend the delegation to be absolute and unconditional; the constitutional objective obviously is to ensure that, while the local government units are being strengthened _Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 73 First Semester, SY 2011-2012

and made more autonomous,the legislature must still see to it that (a) the taxpayer will not be over-burdened or saddled with multiple and unreasonable impositions; (b) each local government unit will have its fair share of available resources; (c) the resources of the national government will not be unduly disturbed; and (d) local taxation will be fair, uniform, and just. While the Court has, not too infrequently, referred to tax exemptions contained in special franchises as being in the nature of contracts and a part of the inducement for carrying on the franchise, these exemptions, nevertheless, are far from being strictly contractual in nature. Contractual tax exemptions, in the real sense of the term and where the non-impairment clause of the Constitution can rightly be invoked, are those agreed to by the taxing authority in contracts, such as those contained in government bonds or debentures, lawfully entered into by them under enabling laws in which the government, acting in its private capacity, sheds its cloak of authority and waives its governmental immunity. Truly, tax exemptions of this kind may not be revoked without impairing the obligations of contracts. These contractual tax exemptions, however, are not to be confused with tax exemptions granted under franchises. A franchise partakes the nature of a grant which is beyond the purview of the non-impairment clause of the Constitution. Indeed, Article XII, Section 11, of the 1987 Constitution, like its precursor provisions in the 1935 and the 1973 Constitutions, is explicit that no franchise for the operation of a public utility shall be granted except under the condition that such privilege shall be subject to amendment, alteration or repeal by Congress as and when the common good so requires.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 74 First Semester, SY 2011-2012

Topic: Constitutional Limitations: Non-impairment Clause RADIO COMMUNICATIONS OF THE PHILIPPINES, INC. vs. PROVINCIAL ASSESOR OF SOUTH COTABATO G.R. No. 144486 April 13, 2005 FACTS: In 1957, Republic Act No. 2036 granted RCPI a fifty-year franchise. Thereafter, the municipal treasurer of Tupi, South Cotabato assessed RCPI real property taxes from 1981 to 1985. The municipal treasurer demanded that RCPI pay P166,810 as real property tax on its radio station building in Barangay Kablon, as well as on its machinery shed, radio relay station tower and its accessories, and generating sets, based on the following tax declarations. RCPI protested the assessment before the Local Board of Assessment Appeals. RCPI claimed that all its assessed properties are personal properties and thus exempt from the real property tax. Assuming that the assessed properties are real property, they are still exempt from real property taxes. Section 3 of Presidential Decree No. 464 states that to be taxable, the machinery should be attached to the real estate and essential for manufacturing, commercial, mining, industrial, or agricultural purposes. RCPI claimed that the assessed properties are not used for manufacturing, commercial, mining, industrial, or agricultural purposes. Besides, the assessed properties are attached to a building on a lot not owned by RCPI. RCPI also pointed out that its franchise exempts RCPI from ―paying any and all taxes of any kind, nature or description in exchange for its payment of tax equal to one and one-half per cent on all gross receipts from the business conducted under its franchise.‖ RCPI further claimed that any deviation from its franchise would violate the non-impairment of contract clause of the Constitution. Finally, RCPI stated that the value of the properties assessed has depreciated since their acquisition in the 1960s. ISSUE: Whether or not the assessment of the Provincial assessor was violative of the non-impairment clause? RULING: As found by the appellate court, RCPI‘s radio relay station tower, radio station building, and machinery shed are real properties and are thus subject to the real property tax. Section 14 of RA 2036, as amended by RA 4054, states that ―in consideration of the franchise and rights hereby granted and any provision of law to the contrary notwithstanding, the grantee shall pay the same taxes as are now or may _Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 75 First Semester, SY 2011-2012

hereafter be required by law from other individuals, copartnerships, private, public or quasi-public associations, corporations or joint stock companies, on real estate, buildings and other personal property‖ The clear language of Section 14 states that RCPI shall pay the real estate tax. The ―in lieu of all taxes‖ clause in Section 14 of RA 2036, as amended by RA 4054, cannot exempt RCPI from the real estate tax because the same Section 14 expressly states thatRCPI ―shall pay the same taxes x xxonreal estate, buildings x xx.‖ The ―in lieu of all taxes‖ clause in the third sentence of Section 14 cannot negate the first sentence of the same Section 14, which imposes the real estate tax on RCPI. The Court must give effect to both provisions of the same Section 14. This means that the real estate tax is an exception to the ―in lieu of all taxes‖ clause. Subsequent legislations have radically amended the ―in lieu of all taxes‖ clause in franchises of public utilities. As RCPI correctly observes, the Local Government Code of 1991 ―withdrew all the tax exemptions existing at the time of its passage — including that of RCPI‘s‖ with respect to local taxes like the real property tax. Also, Republic Act No. 7716 abolished the franchise tax on telecommunications companies effective 1 January 1996. To replace the franchise tax, RA 7716 imposed a 10 percent valueadded-tax on telecommunications companies under Section 102 of the National Internal Revenue Code.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 76 First Semester, SY 2011-2012

Topic: Constitutional Limitations: Non-impairment Clause THE CITY GOVERNMENT OF QUEZON CITYvs BAYANTEL G.R. No. 162015 March 6, 2006 FACTS: Bayantel is a legislative franchise holder under Republic Act No. 3259to establish and operate radio stations for domestic telecommunications, radiophone, broadcasting and telecasting. On July 20, 1992, barely few months after the LGC took effect, Congress enacted Rep. Act No. 7633, amending Bayantel‘s original franchise. It is undisputed that within the territorial boundary of Quezon City, Bayantel owned several real properties on which it maintained various telecommunications facilities. In 1993, the government of Quezon City, pursuant to the taxing power vested on local government units by Section 5, Article X of the 1987 Constitution, infra, in relation to Section 232 of the LGC, supra, enacted City Ordinance No. SP-91, S-93, otherwise known as the Quezon City Revenue Code imposing, under Section 5 thereof, a real property tax on all real properties in Quezon City, and, reiterating in its Section 6, the withdrawal of exemption from real property tax under Section 234 of the LGC. Conformably with the City‘s Revenue Code, new tax declarations for Bayantel‘s real properties in Quezon City were issued by the City Assessor and were received by Bayantel on August 13, 1998. ISSUE: Whether or not the Quezon City Revenue Code violated the non-impairment of contracts? RULING: The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be exercised by local legislative bodies, no longer merely be virtue of a valid delegation as before, but pursuant to direct authority conferred by Section 5, Article X of the Constitution. Under the latter, the exercise of the power may be subject to such guidelines and limitations as the Congress may provide which, however, must be consistent with the basic policy of local autonomy. Indeed, the grant of taxing powers to local government units under the Constitution and the LGC does not affect the power of Congress to grant exemptions to certain persons, pursuant to a declared national policy. The legal effect of the constitutional grant to local governments simply means that in interpreting statutory

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 77 First Semester, SY 2011-2012

provisions on municipal taxing powers, doubts must be resolved in favor of municipal corporations. As we see it, then, the issue in this case no longer dwells on whether Congress has the power to exempt Bayantel‘s properties from realty taxes by its enactment of Rep. Act No. 7633 which amended Bayantel‘s original franchise. The more decisive question turns on whether Congress actually did exempt Bayantel‘s properties at all by virtue of Section 11 of Rep. Act No. 7633. Admittedly, Rep. Act No. 7633 was enacted subsequent to the LGC. Perfectly aware that the LGC has already withdrawn Bayantel‘s former exemption from realty taxes, Congress opted to pass Rep. Act No. 7633 using, under Section 11 thereof, exactly the same defining phrase "exclusive of this franchise" which was the basis for Bayantel‘s exemption from realty taxes prior to the LGC. In plain language, Section 11 of Rep. Act No. 7633 states that "the grantee, its successors or assigns shall be liable to pay the same taxes on their real estate, buildings and personal property, exclusive of this franchise, as other persons or corporations are now or hereafter may be required by law to pay." The Court views this subsequent piece of legislation as an express and real intention on the part of Congress to once again remove from the LGC‘s delegated taxing power, all of the franchisee‘s (Bayantel‘s) properties that are actually, directly and exclusively used in the pursuit of its franchise.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 78 First Semester, SY 2011-2012

Topic: Constitutional Limitations: Tax Exemption of traditional Exemptees REV. FR. CASIMIRO LLADOC vs. COMMISSIONER OF INTERNAL G.R. No. L-19201 June 16, 1965 FACTS: Sometime in 1957, the M.B. Estate, Inc., of BacolodCity, donated P10,000.00 in cash to Rev. Fr. Crispin Ruiz, then parish priest of Victorias, Negros Occidental, and predecessor of herein petitioner, for the construction of a new Catholic Church in the locality. The total amount was actually spent for the purpose intended. On March 3, 1958, the donor M.B. Estate, Inc., filed the donor's gift tax return. Under date of April 29, 1960, the respondent Commissioner of Internal Revenue issued an assessment for donee's gift tax against the Catholic Parish of Victorias, Negros Occidental, of which petitioner was the priest. The tax amounted to P1,370.00 including surcharges, interests of 1% monthly from May 15, 1958 to June 15, 1960, and the compromise for the late filing of the return. Petitioner lodged a protest to the assessment and requested the withdrawal thereof. The protest and the motion for reconsideration presented to the Commissioner of Internal Revenue were denied. The petitioner appealed to the Court of Tax Appeals on November 2, 1960. In the petition for review, the Rev. Fr. CasimiroLladoc claimed, among others, that at the time of the donation, he was not the parish priest in Victorias; that there is no legal entity or juridical person known as the "Catholic Parish Priest of Victorias," and, therefore, he should not be liable for the donee's gift tax. It was also asserted that the assessment of the gift tax, even against the Roman Catholic Church, would not be valid, for such would be a clear violation of the provisions of the Constitution. ISSUE: Whether or not petitioner should be liable for the assessed donee's gift tax on the P10,000.00 donated for the construction of the VictoriasParishChurch? RULING: The Constitution of the Philippines, exempts from taxation cemeteries, churches and parsonages or convents, appurtenant thereto, and all lands, buildings, and improvements used exclusively for religious purposes. The exemption is only from the payment of taxes assessed on such properties enumerated, as property taxes, as contra distinguished from excise taxes.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 79 First Semester, SY 2011-2012

In the present case, what the Collector assessed was a donee's gift tax; the assessment was not on the properties themselves. It did not rest upon general ownership; it was an excise upon the use made of the properties, upon the exercise of the privilege of receiving the properties. A gift tax is not a property tax, but an excise tax imposed on the transfer of property by way of gift inter vivos, the imposition of which on property used exclusively for religious purposes, does not constitute an impairment of the Constitution. As well observed by the learned respondent Court, the phrase "exempt from taxation," as employed in the Constitution should not be interpreted to mean exemption from all kinds of taxes. And there being no clear, positive or express grant of such privilege by law, in favor of petitioner, the exemption herein must be denied.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 80 First Semester, SY 2011-2012

Topic: Constitutional Limitations: Tax Exemption of traditional Exemptees Abra Valley College v. Aquino GR L-39086 15 June 1988 FACTS:Petitioner, an educational corporation and institution of higher learning duly incorporated with the Securities and Exchange Commission in 1948, filed a complaint to annul and declare void the ―Notice of Seizure‘ and the ―Notice of Sale‖ of its lot and building located at Bangued, Abra, for non-payment of real estate taxes and penalties amounting to P5,140.31. Said ―Notice of Seizure‖ by respondents Municipal Treasurer and Provincial Treasurer, defendants below, was issued for the satisfaction of the said taxes thereon. The parties entered into a stipulation of facts adopted and embodied by the trial court in its questioned decision. The trial court ruled for the government, holding that the second floor of the building is being used by the director for residential purposes and that the ground floor used and rented by Northern Marketing Corporation, a commercial establishment, and thus the property is not being used exclusively for educational purposes. Instead of perfecting an appeal, petitioner availed of the instant petition for review on certiorari with prayer for preliminary injunction before the Supreme Court, by filing said petition on 17 August 1974. ISSUE:Whether or not the lot and building are used exclusively for educational purposes. HELD: NO.Section 22, paragraph 3, Article VI, of the then 1935 Philippine Constitution, expressly grants exemption from realty taxes for cemeteries, churches and parsonages or convents appurtenant thereto, and all lands, buildings, and improvements used exclusively for religious, charitable or educational purposes. Reasonable emphasis has always been made that the exemption extends to facilities which are incidental to and reasonably necessary for the accomplishment of the main purposes. The use of the school building or lot for commercial purposes is neither contemplated by law, nor by jurisprudence. In the case at bar, the lease of the first floor of the building to the Northern Marketing Corporation cannot by any stretch of the imagination be considered incidental to the purpose of education. The test of exemption from taxation is the use of the property for purposes mentioned in the Constitution. The decision of the CFI Abra (Branch I) is affirmed subject to the modification that half of the assessed tax be returned to the petitioner. The modification is derived from the fact that the ground floor is being used for commercial purposes (leased) and the second floor being used as incidental to education (residence of the director).

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 81 First Semester, SY 2011-2012

Topic: Constitutional Limitations: Tax Exemption of traditional Exemptees Herrera vs. The Quezon City Board Of Assessment Appeals G.R. No. L-15270 September 30, 1961 FACTS: Petitioners Jose and Ester Herrera were authorized by the Director of the Bureau of Hospitals to establish and operate the St. Catherine's Hospital. In 1953, the petitioners sent a letter to the Quezon City Assessor requesting exemption from payment of real estate tax on the lot, building and other improvements comprising the hospital stating that the same was established for charitable and humanitarian purposes and not for commercial gain which was granted effective the years 1953 to 1955. Subsequently, however, in a letter dated August 10, 1955 the Quezon City Assessor notified the petitioners that the aforesaid properties were re-classified from exempt to "taxable" and thus assessed for real property taxes effective 1956. The petitioners appealed the assessment to the Quezon City Board of Assessment Appeals, which, affirmed the decision of the City Assessor. A motion for reconsideration thereof was denied. From this decision, the petitioners instituted the instant appeal. The building involved in this case is principally used as a hospital. From the evidence presented by petitioners, it is made to appear that there are two kinds of charity patients (a) those who come for consultation only ("out-charity patients"); and (b) those who remain in the hospital for treatment ("lying-in-patients"). Petitioners also operate within the premises of the hospital the "St. Catherine's School of Midwifery" which was granted government recognition by the Secretary of Education. The students practice in the St. Catherine's Hospital, as well as in the St. Mary's Hospital, which is also owned by the petitioners. A separate set of accounting books is maintained by the school for midwifery distinct from that kept by the hospital. However, the petitioners have refused to submit a separate statement of accounts of the school. ISSUE: Whether or not the said properties are used exclusively for charitable or educational purposes which are exempt from real property tax HELD: YES. The Court of Tax Appeals decided the issue in the negative, upon the ground that the St. Catherine's Hospital has a pay ward for ... pay-patients, who are charged for the use of the private rooms, operating room, laboratory room, delivery room, etc., _Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 82 First Semester, SY 2011-2012

like other hospitals operated for profit and that petitioners and their family occupy a portion of the building for their residence. It should be noted, however, that, according to the very statement of facts made in the decision appealed from, of the thirty-two (32) beds in the hospital, twenty (20) are for charity-patients; that the income realized from pay-patients is spent for improvement of the charity wards; and that petitioners, Dr. Ester Ochangco Herrera, as directress of said hospital, does not receive any salary, although its resident physician gets a monthly salary of P170.00. It is well settled, in this connection, that the admission of pay-patients does not detract from the charitable character of a hospital, if all its funds are devoted exclusively to the maintenance of the institution as a public charity. In other words, where rendering charity is its primary object, and the funds derived from payments made by patients able to pay are devoted to the benevolent purposes of the institution, the mere fact that a profit has been made will not deprive the hospital of its benevolent character. Moreover, the exemption in favor of property used exclusively for charitable or educational purposes is not limited to property actually indispensable therefor but extends to facilities which are incidental to and reasonably necessary for the accomplishment of said purposes, such as, in the case of hospitals, a school for training nurses, a nurses' home, property use to provide housing facilities for interns, resident doctors, superintendents, and other members of the hospital staff, and recreational facilities for student nurses, interns and residents. Within the purview of the Constitutional exemption from taxation, the St. Catherine's Hospital is, therefore, a charitable institution, and the fact that it admits pay-patients does not bar it from claiming that it is devoted exclusively to benevolent purposes, it being admitted that the income derived from pay-patients is devoted to the improvement of the charity wards, which represent almost two-thirds (2/3) of the bed capacity of the hospital, aside from "out-charity patients" who come only for consultation.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 83 First Semester, SY 2011-2012

Topic: Constitutional Limitations: Tax Exemption of traditional Exemptees Bishop of Nueva Segovia vs. Provincial Board of Ilocos Norte GR 27588, 31 December 1927 FACTS: The Roman Catholic Apostolic Church is the owner of a parcel of land in San Nicolas, Ilocos Norte. On the south side is a part of the Church yard, the convent and an adjacent lost used for a vegetable garden in which there is a stable and a well for the use of the convent. In the center is the remainder of the churchyard and the Church. On the north side is an old cemetery with its two walls still standing, and a portion where formerly stood a tower. The provincial board assessed land tax on lots comprising the north and south side, which the church paid under protest. The plaintiff filed this action for the recovery of the sum paid by to the defendants by way of land tax, alleging that the collection of this tax is illegal. The lower court absolved the defendants from the complaint in regard to the lot adjoining convent and declared that the tax collected on the lot, which formerly was the cemetery and on the portion where the lower stood, was illegal. Both parties appealed from this judgment. ISSUE: Whether or not the subject lots are exempted from taxation. HELD: YES. The exemption in favor of the convent in the payment of land tax refers to the home of the priest who presides over the church and who has to take care of himself in order to discharge his duties. The exemption includes not only the land actually occupied by the Church but also the adjacent ground destined to the ordinary incidental uses of man. A vegetable garden, thus, which belongs to a convent, where its use is limited to the necessity of the priest, comes under the exemption. Further, land used as a lodging house by the people who participate in religious festivities, which constitutes an incidental use in religious functions, likewise comes within the exemption. It cannot be taxed according to its former use, i.e. a cemetery. The judgment appealed from is reversed in all it parts and it is held that both lots are exempt from land tax and the defendants are ordered to refund to plaintiff whatever was paid as such tax, without any special pronouncement as to costs.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 84 First Semester, SY 2011-2012

Topic: Constitutional Limitations: Tax Exemption of traditional Exemptees LUNG CENTER OF THE PHILIPPINES vs. QUEZON CITY G.R. No. 144104 June 29, 2004 FACTS: The petitioner, a non-stock and non-profit entity is the registered owner of a parcel of land where erected in the middle of the aforesaid lot is a hospital known as the Lung Center of the Philippines. A big space at the ground floor is being leased to private parties, for canteen and small store spaces, and to medical or professional practitioners who use the same as their private clinics for their patients whom they charge for their professional services. Almost one-half of the entire area on the left side of the building along Quezon Avenue is vacant and idle, while a big portion on the right side, at the corner of Quezon Avenue and Elliptical Road, is being leased for commercial purposes to a private enterprise known as the Elliptical Orchids and Garden Center. On June 7, 1993, both the land and the hospital building of the petitioner were assessed for real property taxes in the amount of P4, 554,860 by the City Assessor of Quezon City but the former filed a Claim for Exemption from real property taxes with the City Assessor, predicated on its claim that it is a charitable institution. ISSUE: Whether or not the petitioner‘s real properties are exempted from realty tax exemptions. HELD: Even if the petitioner is a charitable institution, those portions of its real property that are leased to private entities are not exempt from real property taxes as these are not actually, directly and exclusively used for charitable purposes. What is meant by actual, direct and exclusive use of the property for charitable purposes is the direct and immediate and actual application of the property itself to the purposes for which the charitable institution is organized. Hence, a claim for exemption from tax payments must be clearly shown and based on language in the law too plain to be mistaken. Under Section 2 of Presidential Decree No. 1823, the petitioner does not enjoy any property tax exemption privileges for its real properties as well as the building constructed thereon. If the intentions were otherwise, the same should have been among the enumeration of tax exempt privileges under Section 2. Accordingly, the portions occupied by the hospital used for its patients are exempt from real property taxes while those leased to private entities are not exempt from such taxes.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 85 First Semester, SY 2011-2012

Topic: Constitutional Limitations: Tax Exemption of Non-stock non-profit Educational Institutions Commissioner of Internal Revenue v. Court of Appeals and YMCA FACTS:

G.R.No.L-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. On July 2, 1984, the Commissioner of Internal Revenue (CIR) issued an assessment to private respondent, in the total amount of P415,615.01 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 dated October 8, 1985. 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 on March 14, 1989. In due course, the CTA issued this ruling in favor of the YMCA. ISSUE: Whether or not the YMCA is exempted from rental income derived from the lease of its properties RULING: NO.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 "xxx 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 xxx". The Court agrees with the commissioner. 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.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 86 First Semester, SY 2011-2012

Topic: Constitutional Limitations: Origin of Revenue, Appropriation and Tarriff Bills ABAKADA Guro Party List vs. Ermita G.R. No. 168056 September 1, 2005 FACTS: Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party List, et al., filed a petition for prohibition on May 27, 2005 questioning the constitutionality of Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the National Internal Revenue Code (NIRC). Section 4 imposes a 10% VAT on sale of goods and properties, Section 5 imposes a 10% VAT on importation of goods, and Section 6 imposes a 10% VAT on sale of services and use or lease of properties. These questioned provisions contain a uniform proviso authorizing the President, upon recommendation of the Secretary of Finance, to raise the VAT rate to 12%, effective January 1, 2006, after specified conditions have been satisfied. Petitioners argue that the law is unconstitutional. ISSUES: Whether or not there is a violation of Article VI, Section 24 of the Constitution. Whether or not there is undue delegation of legislative power in violation of Article VI Sec 28(2) of the Constitution. RULING: 1. Since there is no question that the revenue bill exclusively originated in the House of Representatives, the Senate was acting within its constitutional power to introduce amendments to the House bill when it included provisions in Senate Bill No. 1950 amending corporate income taxes, percentage, and excise and franchise taxes. 2. There is no undue delegation of legislative power but only of the discretion as to the execution of a law. This is constitutionally permissible. Congress does not abdicate its functions or unduly delegate power when it describes what job must be done, who must do it, and what is the scope of his authority; in our complex economy that is frequently the only way in which the legislative process can go forward. 3. The power of the State to make reasonable and natural classifications for the purposes of taxation has long been established. Whether it relates to the subject of taxation, the kind of property, the rates to be levied, or the amounts to be raised, the methods of assessment, valuation and collection, the State‘s power is entitled to presumption of validity. As a rule, the judiciary will not interfere with such power absent a clear showing of unreasonableness, discrimination, or arbitrariness.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 87 First Semester, SY 2011-2012

Topic: Forms of Escape from Taxation REPUBLIC OF THE PHILIPPINES vs. HEIRS OF CESAR JALANDONI, ET AL. G.R. No. L-18384 September 20, 1965 FACTS: Isabel Ledesma died intestate leaving real properties situated in the provinces of Negros Occidental and Rizal and in the cities of Manila and Baguio, and personal properties consisting of shares of stock in various domestic corporations. She left as heirs her husband Bernardino and three children, namely, Cesar, Angeles and Delfin. Cesar, one of the heirs, filed an estate and inheritance tax return and this return also shows that no testamentary or intestate proceedings were instituted. On the basis of this return the Bureau of Internal Revenue made an assessment as estate and inheritance taxes, respectively, stating therein that the assessment was "to be considered partial pending investigation of the return." These sums were paid by Cesar. After a preliminary investigation was made of the properties reported in the abovementioned return, a second assessment was made by the Bureau of Internal Revenue as deficiency estate and inheritance taxes, respectively, for which reason a demand was made on Bernardino stating therein that the same was still "to be considered partial pending further investigation of the return," which amounts were paid by Bernardino. The third assessment was made against the estate wherein the heirs were required to pay the amounts of P29,995.30 and P49,842.05 as deficiency estate and inheritance taxes, respectively, including accrued interests, with the warning that failure on their part to pay the same would subject them to the payment of surcharge, interest, and penalty for late payment of the tax. ISSUE: Whether or not the heirs of the deceased have committed any act indicative of an intention to evade the payment of the inheritance or estate taxes due the government HELD: Record shows that the three lots alleged to have been excluded in the return were already declared in the earlier return submitted by Bernardino Jalandoni as part of his property and his wife for purposes of income tax, there is reason to believe that their omission from the return submitted by Cesar Jalandoni was merely due to an honest mistake or inadvertence as properly explained by appellants. We can hardly dispute this conclusion as it would be stretching too much the imagination if we would find that, because of such inadvertence, which appears to be inconsequential, the heirs of the deceased deliberately omitted from the return the three lots with the only

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 88 First Semester, SY 2011-2012

purpose of defrauding the government after declaring therein as asset of the estate property worth P1,324,555.80. The same thing may be said with regard to the alleged undervaluation of certain sugar and rice lands reported by Cesar Jalandoni for the same can at most be considered as the result of an honest difference of opinion and not necessarily an intention to commit fraud. Finally, SC finds it unreasonable to impute with regard to the appraisal made by appellants of the shares of stock of the deceased simply because Cesar Jalandoni placed in his return an aggregate market value instead of mentioning the book value declared by said corporations in the returns filed by them with the Bureau of Internal Revenue. The fact that the value given in the returns did not tally with the book value appearing in the corporate books is not in itself indicative of fraud especially when it is taken into consideration the circumstance that said book value only became known several months after the death of the deceased. Moreover, it is a known fact that stock securities frequently fluctuate in value and a mere difference of opinion in relation thereto cannot serve as proper basis for assessing an intention to defraud the government. Having reached the conclusion that the heirs of the deceased have not committed any act indicative of an intention to evade the payment of the inheritance or estate taxes due the government, as evidenced by their willingness in the past to pay all the taxes properly assessed against them, it is evident that the instant claim of appellee has already prescribed under Section 331 of the National Internal Revenue Code. And with this conclusion, a discussion of the other errors assigned by appellants would seem to be unnecessary.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 89 First Semester, SY 2011-2012

Topic: Forms of Escape from Taxation YUTIVO SONS HARDWARE COMPANY vs. COURT OF TAX APPEALS G.R. No. L-13203 January 28, 1961 FACTS: Petitioner was engaged, prior to the last world war, in the importation and sale of hardware supplies and equipment. After the liberation, it resumed its business and bought a number of cars and trucks from General Motors Overseas, an American corporation licensed to do business in the Philippines. As importer, GM paid sales tax prescribed by sections 184, 185 and 186 of the Tax Code on the basis of its selling price to Yutivo. Said tax being collected only once on original sales, Yutivo paid no further sales tax on its sales to the public. On June 13, 1946, the Southern Motors, Inc. (SM) was organized to engage in the business of selling cars, trucks and spare parts. Its original authorized capital stock was P1,000,000 divided into 10,000 shares with a par value of P100 each. After the incorporation of SM and until the withdrawal of GM from the Philippines in the middle of 1947, the cars and tracks purchased by Yutivo from GM were sold by Yutivo to SM which, in turn, sold them to the public in the Visayas and Mindanao. When General Motors Overseas Corporation (GM) decided to withdraw from the Philippines in the middle of 1947, the U.S. manufacturer of GM cars and trucks appointed Yutivo as importer for the Visayas and Mindanao, and Yutivo continued its previous arrangement of selling exclusively to Southern Motors, Inc. (SM). In the same way that GM used to pay sales taxes based on its sales to Yutivo, the latter, as importer, paid sales tax prescribed on the basis of its selling price to SM, and since such sales tax, as already stated, is collected only once on original sales, SM paid no sales tax on its sales to the public. The Collector of Internal Revenue made an assessment upon Yutivo and demanded from the latter P1,804,769.85 as deficiency sales tax plus surcharge. The assessment was disputed by the petitioner. ISSUES: 1. Whether or not fraud is present. 2. Whether or not imposition of 5% fraud surcharge is correct. 3. Whether or not sales tax already paid by Yutivo should first be deducted from the selling price of SM in computing the sales tax due on each vehicle HELD: 1. NO. _Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 90 First Semester, SY 2011-2012

The Court inclined to rule that the Court of Tax Appeals was not justified in finding that SM was organized for no other purpose than to defraud the Government of its lawful revenues. In the first place, this corporation was organized in June, 1946 when it could not have caused Yutivo any tax savings. The sales tax liability of Yutivo did not arise until July 1, 1947 when it became the importer and simply continued its practice of selling to SM. The decision, therefore, of the Tax Court that SM was organized purposely as a tax evasion device runs counter to the fact that there was no tax to evade. In the second place, SM was organized and it operated, under circumstance that belied any intention to evade sales taxes. The transactions between Yutivo and SM, however, have always been in the open, embodied in private and public documents, constantly subject to inspection by the tax authorities. In the third place, sections 184 to 186 of the said Code provides that the sales tax shall be collected "once only on every original sale, barter, exchange . . , to be paid by the manufacturer, producer or importer." In this connection, it should be stated that a taxpayer has the legal right to decrease the amount of what otherwise would be his taxes or altogether avoid them by means which the law permits. 2. NO. The Court found merit in petitioner's contention that the Court of Tax Appeals erred in the imposition of the 5% fraud surcharge because no element of fraud is present. Pursuant to Section 183 of the National Internal Revenue Code the 50% surcharge should be added to the deficiency sales tax "in case a false or fraudulent return is willfully made." Although the sales made by SM are in substance by Yutivo this does not necessarily establish fraud nor the willful filing of a false or fraudulent return. 3. NO The Court likewise found that the Tax Court erred in computing the alleged deficiency sales tax on the selling price of SM without previously deducting therefrom the sales tax due thereon. The sales tax provisions impose a tax on original sales measured by "gross selling price" or "gross value in money". These terms, as interpreted by the respondent Collector, do not include the amount of the sales tax, if invoiced separately. This is the exact amount which, according to Presiding Judge Nable of the Court of Tax Appeals, Yutivo would pay, exclusive of the surcharges.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 91 First Semester, SY 2011-2012

Topic: Forms of Escape from Taxation COMMISSIONER OF INTERNAL REVENUE vs. NORTON and HARRISON COMPANY .G.R. No. L-17618

August 31, 1964

FACTS: Under date of July 27, 1948. Norton and Jackbilt entered into an agreement whereby Norton was made the sole and exclusive distributor of concrete blocks manufactured by Jackbilt. Pursuant to this agreement, whenever an order for concrete blocks was received by the Norton & Harrison Co. from a customer, the order was transmitted to Jackbilt which delivered the merchandise direct to the customer. Payment for the goods is, however, made to Norton, which in turn pays Jackbilt the amount charged the customer less a certain amount, as its compensation or profit. In the case of the sale of 420 pieces of concrete blocks to the American Builders on April 1, 1952, the purchaser paid to Norton the sum of P189.00 the purchase price. Out of this amount Norton paid Jackbilt P168.00, the difference obviously being its compensation. As per records of Jackbilt, the transaction was considered a sale to Norton. It was under this procedure that the sale of concrete blocks manufactured by Jackbilt was conducted until May 1, 1953, when the agency agreement was terminated and a management agreement between the parties was entered into. The management agreement provided that Norton would sell concrete blocks for Jackbilt, for a fixed monthly fee of P2,000.00, which was later increased to P5,000.00. The Commissioner of Internal Revenue, after conducting an investigation, assessed the respondent Norton & Harrison for deficiency sales tax and surcharges in the amount of P32,662.90, making as basis thereof the sales of Norton to the Public. In other words, the Commissioner considered the sale of Norton to the public as the original saleand not the transaction from Jackbilt. ISSUE: Whether the basis of the computation of the deficiency sales tax should be the sale of the blocks to the public and not to Norton. HELD: If the income of Norton should be considered separate from the income of Jackbilt, then each would declare such earning separately for income tax purposes and thus pay lesser income tax. The combined taxable Norton-Jackbilt income would subject Norton to a higher tax. Based upon the 1954-1955 income tax return of Norton and Jackbilt , and assuming that both of them are operating on the same fiscal basis and _Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 92 First Semester, SY 2011-2012

their returns are accurate, we would have the following result: Jackbilt declared a taxable net income of P161,202.31 in which the income tax due was computed at P37,137.00; whereas Norton declared as taxable, a net income of P120,101.59, on which the income tax due was computed at P25,628.00. The total of these liabilities is P50,764.84. On the other hand, if the net taxable earnings of both corporations are combined, during the same taxable year, the tax due on their total which is P281,303.90 would be P70,764.00. So that, even on the question of income tax alone, it would be to the advantages of Norton that the corporations should be regarded as separate entities.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 93 First Semester, SY 2011-2012

Topic: Forms of Escape from Taxation PHILIPPINE ACETYLENE CO., INC. vs. CIR and COURT OF TAX APPEALS G.R. No. L-19707August 17, 1967 FACTS: The petitioner is a corporation engaged in the manufacture and sale of oxygen and acetylene gases. It made various sales of its products to the National Power Corporation and to the Voice of America an agency of the United States Government. The sales to the NPC amounted to P145, 866.70, while those to the VOA amounted to P1,683, on account of which the respondent Commission of Internal Revenue assessed against, and demanded from, the petitioner the payment of P12,910.60 as deficiency sales tax and surcharge, pursuant to the Sec.186 of the National Internal Revenue Code. The petitioner denied liability for the payment of the tax on the ground that both the NPC and the VOA are exempt from taxation. ISSUE: Whether or not petitioner is exempt from paying tax on sales it made to the: 1) NPC 2) VOA HELD: 1) NO. SC holds that the tax imposed by section 186 of the National Internal Revenue Code is a tax on the manufacturer or producer and not a tax on the purchaser except probably in a very remote and inconsequential sense. Accordingly its levy on the sales made to tax-exempt entities like the NPC is permissible. 2) NO. Only sales made "for exclusive use in the construction, maintenance, operation or defense of the bases," in a word, only sales to the quartermaster, are exempt under Article V from taxation. Sales of goods to any other party even if it be an agency of the United States, such as the VOA, or even to the quartermaster but for a different purpose, are not free from the payment of the tax.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 94 First Semester, SY 2011-2012

Topic: Forms of Escape from Taxation Commissioner vs. American Rubber GR L-19667, 29 November 1966 FACTS: American Rubber Company sold its rubber products locally and as prescribed by the Commissioner‘s regulation, the company declared the same for tax purposes in which the Commissioner accordingly assessed. The company paid under protest the corresponding sales taxes thereon, claiming exemption under Section 188 (b) of the Tax Code, and subsequently claimed refund. With the Commissioner refusing to do so, the case was brought before the Court of Tax Appeals, which upheld the Commissioner‘s stand that the company is not entitled to recover the sales tax that had been separately billed to its customers, and paid by the latter. ISSUE: Whether the company can recover the sales tax paid. HELD: NO. The sales tax is by law imposed directly, not on the thing sold, but on the act (sale) of the manufacturer, producer, or importer, who is exclusively made liable for its timely payment. Where the tax money paid by the company came from is really no concern of the Government, but solely a matter between the company and its customers. Once recovered, the company must hold the refunded taxes in trust for the individual purchasers who advanced payment thereof, and whose names must appear in company records. Herein, the company sales between 24 August 1956 (approval of RA 1612) to 22 June 1957 (when RA 1856 restored the exemption of agricultural products ―whether in their original form or not‖) were properly taxed. Such amount corresponding to the period is not recoverable.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 95 First Semester, SY 2011-2012

Topic: Forms of Escape from Taxation COMMISSIONER OF INTERNAL REVENUE vs. JOHN GOTAMCO & SONS, INC. and THE COURT OF TAX APPEALS FACTS:

G.R. No. No. L-31092 February 27, 1987

The World Health Organization (WHO for short) is an international organization which has a regional office in Manila. An agreement was entered into between the Republic of the Philippines and the said Organization on July 22, 1951. Section 11 of that Agreement provides, inter alia, that "the Organization, its assets, income and other properties shall be: (a) exempt from all direct and indirect taxes.‖ The WHO decided to construct a building to house its own offices, as well as the other United Nations offices stationed in Manila. A bidding was held for the building construction. The WHO informed the bidders that the building to be constructed belonged to an international organization exempted from the payment of all fees, licenses, and taxes, and that therefore their bids "must take this into account and should not include items for such taxes, licenses and other payments to Government agencies." Thereafter, the construction contract was awarded to John Gotamco& Sons, Inc. (Gotamco for short). Subsequently, the Commissioner of Internal Revenue sent a letter of demand to Gotamco demanding payment of for the 3% contractor's tax plus surcharges on the gross receipts it received from the WHO in the construction of the latter's building. WHO. The WHO issued a certification that the bid of John Gotamco&Sons, should be exempted from any taxes in connection with the construction of the World Health Organization office building because such can be considered as an indirect tax to WHO. However, The Commissioner of Internal Revenue contends that the 3% contractor's tax is not a direct nor an indirect tax on the WHO, but a tax that is primarily due from the contractor, and thus not covered by the tax exemption agreement. ISSUE: Whether or not the said 3% contractor‘s tax imposed upon petitioner is covered by the ―direct and indirect tax exemption‖ granted to WHO by the government. HELD: YES. The 3% contractor‘s tax imposed upon petitioner is covered by the ―direct and indirect tax exemption‖ granted to WHO. Hence, petitioner cannot be held liable for such contractor‘s tax. The Supreme Court explained that direct taxes are those that are _Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 96 First Semester, SY 2011-2012

demanded from the very person who, it is intended or desired, should pay them; while indirect taxes are those that are demanded in the first instance from one person in the expectation and intention that he can shift the burden to someone else. While it is true that the contractor's tax is payable by the contractor, However in the last analysis it is the owner of the building that shoulders the burden of the tax because the same is shifted by the contractor to the owner as a matter of self-preservation. Thus, it is an indirect tax against the WHO because, although it is payable by the petitioner, the latter can shift its burden on the WHO. It is the WHO that will pay the tax indirectly through the contractor and it certainly cannot be said that 'this tax has no bearing upon the World Health Organization. Accordingly, finding no reversible error committed by the respondent Court of Tax Appeals, the Supreme Court affirmed the appealed decision.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 97 First Semester, SY 2011-2012

Topic: Forms of Escape from Taxation MACEDA vs. MACARAIG, JR., et al. G.R. No. No. 88291 May 31, 1991 and G.R. No. No. 88291 June 8, 1993 FACTS: Commonwealth Act No. 120 created the NPC as a public corporation to undertake the development of hydraulic power and the production of power from other sources. Several laws were enacted granting NPC tax and duty exemption privileges such as taxes, duties, fees, imposts, charges and restrictions of the Republic of the Philippines, its provinces, cities and municipalities "directly or indirectly," on all petroleum products used by NPC in its operation. However P.D. No. 1931 withdrew all tax exemption privileges granted in favour of government-owned or controlled corporations including their subsidiaries but empowered the President and/or the then Minister of Finance, upon recommendation of the FIRB to restore, partially or totally, the exemption withdrawn. BIR ruled that the exemption privilege enjoyed by NPC under said section covers only taxes for which it is directly liable and not on taxes which are only shifted to it. In 1986, BIR Commissioner Tan, Jr. states that all deliveries of petroleum products to NPC are tax exempt, regardless of the period of delivery. Thereafter, the FIRB issued several Resolutions in different occasions restoring the tax and duty exemption privileges of NPC indefinite period due to the restoration of the tax exemption privileges of NPC, NPC applied with the BIR for a "refund of Specific Taxes paid on petroleum products. On August 6, 1987, the Secretary of Justice, Opinion opined that "the power conferred upon Fiscal Incentives Review Board constitute undue delegation of legislative power and, therefore, unconstitutional. However, respondents Finance Secretary and the Executive Secretary declared that "NPC under the provisions of its Revised Charter retains its exemption from duties and taxes imposed on the petroleum products purchased locally and used for the generation of electricity. Thereafter investigations were made for the refund of the tax payments of the NPC which includes Millions of pesos Tax refund. Petitioner, as member of the Philippine Senate introduced as Resolution Directing the Senate Blue Ribbon Committee, In Aid of Legislation, to conduct a Formal and Extensive Inquiry into the Reported Massive Tax Manipulations and Evasions by Oil Companies, particularly Caltex (Phils.) Inc., Pilipinas Shell and Petrophil, Which Were Made Possible By Their Availing of the Non-Existing Exemption of National Power Corporation (NPC) from Indirect Taxes, Resulting Recently in Their Obtaining A Tax Refund Totalling P1.55 Billion From the Department of Finance. ISSUE:

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 98 First Semester, SY 2011-2012

Whether or not respondent NPC is legally entitled to the questioned tax and duty refunds. HELD: YES. In G.R. No. No. 88291 the Supreme Court ruled in favour of exempting NPC to the said taxes. Also in G.R. No. No. 88291 the Supreme Court ruled in favour of respondents. NPC under the provisions of its Revised Charter retains its exemption from duties and taxes imposed on the petroleum products purchased locally and used for the generation of electricity. Presidential Decree No. 938 amended the tax exemption of NPC by simplifying the same law in general terms. It succinctly exempts NPC from "all forms of taxes, duties, fees, imposts, as well as costs and service fees including filing fees, appeal bonds, supersedeas bonds, in any court or administrative proceedings." the NPC electric power rates did not carry the taxes and duties paid on the fuel oil it used. The point is that while these levies were in fact paid to the government, no part thereof was recovered from the sale of electricity produced. As a consequence, as of our most recent information, some P1.55 B in claims represents amounts for which the oil suppliers and NPC are "out-of-pocket. There would have to be specific order to the Bureaus concerned for the resumption of the processing of these claims.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 99 First Semester, SY 2011-2012

Topic: Forms of Escape from Taxation COMMISSIONER OF INTERNAL REVENUE vs. PLDT G.R. No. 140230December 15, 2005 FACTS: PLDT is a grantee of a franchise under Republic Act (R.A.) No. 7082 to install, operate and maintain a telecommunications system throughout the Philippines.For equipment, machineries and spare parts it imported for its business on different dates from October 1, 1992 to May 31, 1994, PLDT paid the BIR the amount of P164,510,953.00, broken down as follows: (a) compensating tax of P126,713,037.00; advance

sales

tax

of

P12,460,219.00

and other internal

revenue

taxes

of

P25,337,697.00. For similar importations made between March 1994 to May 31, 1994, PLDT paid P116,041,333.00 value-added tax (VAT). PLDT filed on December 2, 1994 a claimfor tax credit/refund of the VAT, compensating taxes, advance sales taxes and other taxes it had been paying ―in connection with its importation of various equipment, machineries and spare parts needed for its operations‖. With its claim not having been acted upon by the BIR, PLDT filed with the CTA a petition for review therein seeking a refund of, or the issuance of a tax credit certificate in, the amount of P280,552,286.00, representing compensating taxes, advance sales taxes, VAT and other internal revenue taxes alleged to have been erroneously paid on its importations from October 1992 to May 1994. The CTA granted the PLDT‘s petition. The CA dismissed the BIR‘s petition, thereby effectively affirming the CTA‘s judgment. ISSUE: Whether or not respondent is exempt from the payment of VAT, compensating taxes, advance sales taxes and other BIR taxes on its importations by virtue of the

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 100 First Semester, SY 2011-2012

provision in its franchise that the 3% franchise tax on its gross receipts shall be in lieu of all taxes on its franchise or earnings thereof. HELD: NO. There can be no serious argument that PLDT, vis-à-vis its payment of internal revenue taxes on its importations in question, is effectively claiming exemption from taxes not falling under the category of direct taxes. The claim covers VAT, advance sales tax and compensating tax. It bears to stress that the liability for the payment of the indirect taxes lies only with the seller of the goods or services, not in the buyer thereof. Thus, one cannot invoke one‘s exemption privilege to avoid the passing on or the shifting of the VAT to him by the manufacturers/suppliers of the goods he purchased. Hence, it is important to determine if the tax exemption granted to a taxpayer specifically includes the indirect tax which is shifted to him as part of the purchase price, otherwise it is presumed that the tax exemption embraces only those taxes for which the buyer is directly liable. As may be noted, the clause ―in lieu of all taxes‖ in Section 12 of RA 7082 is immediately followed by the limiting or qualifying clause ―on this franchise or earnings thereof‖, suggesting that the exemption is limited to taxes imposed directly on PLDT since taxes

pertaining to PLDT‘s franchise or earnings are its direct liability.

Accordingly, indirect taxes, not being taxes on PLDT‘s franchise or earnings, are outside the purview of the ―in lieu‖ provision. All told, the Court fails to see how Section 12 of RA 7082 operates as granting PLDT blanket exemption from payment of indirect taxes, which, in the ultimate analysis, are not taxes on its franchise or earnings. PLDT has not shown its eligibility for the desired exemption.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 101 First Semester, SY 2011-2012

Topic: Forms of Escape from Taxation SILKAIR (SINGAPORE) PTE, LTD. vs.COMMISSIONER OF INTERNAL REVENUE G.R. No. 173594

February 6, 2008

FACTS: Petitioner, Silkair (Singapore) Pte. Ltd. (Silkair), a corporation organized under the laws of Singapore which has a Philippine representative office, is an online international air carrier operating the Singapore-Cebu-Davao-Singapore, SingaporeDavao-Cebu-Singapore, and Singapore-Cebu-Singapore routes. On December 19, 2001, Silkair filed with the Bureau of Internal Revenue (BIR) a written application for the refund of P4,567,450.79 excise taxes it claimed to have paid on its purchases of jet fuel from Petron Corporation from January to June 2000. As the BIR had not yet acted on the application as of December 26, 2001, Silkair filed a Petition for Reviewbefore the CTA. By Decision of May 27, 2005, the CTA denied Silkair‘s petition on the ground that as the excise tax was imposed on Petron Corporation as the manufacturer of petroleum products, any claim for refund should be filed by the latter; and where the burden of tax is shifted to the purchaser, the amount passed on to it is no longer a tax but becomes an added cost of the goods purchased. ISSUE: Whether or not petitioner is the proper party to claim for refund or tax credit HELD: NO. The proper party to question, or seek a refund of, an indirect tax is the statutory taxpayer, the person on whom the tax is imposed by law and who paid the same even if he shifts the burden thereof to another. Section 130 (A) (2) of the NIRC provides that "[u]nless otherwise specifically allowed, the return shall be filed and the excise tax paid by the manufacturer or producer before removal of domestic products from place of production." Thus, Petron Corporation, not Silkair, is the statutory taxpayer which is entitled to claim a refund based on Section 135 of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement between RP and Singapore. Even if Petron Corporation passed on to Silkair the burden of the tax, the additional amount billed to Silkair for jet fuel is not a tax but part of the price which Silkair had to pay as a purchaser.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 102 First Semester, SY 2011-2012

The exemption granted under Section 135 (b) of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement between RP and Singapore cannot, without a clear showing of legislative intent, be construed as including indirect taxes. Statutes granting tax exemptions must be construed in strictissimijuris against the taxpayer and liberally in favor of the taxing authority, and if an exemption is found to exist, it must not be enlarged by construction.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 103 First Semester, SY 2011-2012

Topic: Forms of Escape from Taxation CONTEX CORPORATION vs. COMMISSIONER OF INTERNAL REVENUE G.R. No. 151135 July 2, 2004 FACTS: Petitioner is a duly registered with the Subic Bay Metropolitan Authority (SBMA) as a Subic Bay Freeport Enterprise, pursuant to the provisions of Republic Act No. 7227. As an SBMA-registered firm, petitioner is exempt from all local and national internal revenue taxes except for the preferential tax provided for in Section 12 (c) of Rep. Act No. 7227. Petitioner also registered with the Bureau of Internal Revenue (BIR) as a non-VAT taxpayer. From January 1, 1997 to December 31, 1998, petitioner purchased various supplies and materials necessary in the conduct of its manufacturing business. The suppliers of these goods shifted unto petitioner the 10% VAT on the purchased items, which led the petitioner to pay input taxes in the amounts of P539,411.88 and P504,057.49 for 1997 and 1998, respectively. Acting on the belief that it was exempt from all national and local taxes, including VAT, pursuant to Rep. Act No. 7227, petitioner filed two applications for tax refund or tax credit of the VAT it paid, which were denied. Unfazed by the denial, it filed another application for tax refund/credit. When no response was forthcoming from the BIR Regional Director, petitioner then elevated the matter to the Court of Tax Appeals, which granted the petitioner a partial refund. The Court of Appeals reversed the decision of the CTA. ISSUE: Whether or not petitioner is entitled to a tax credit or tax refund of the VAT paid on its purchases of supplies and raw materials for the years 1997 and 1998. HELD: NO. While it is true that the petitioner should not have been liable for the VAT inadvertently passed on to it by its supplier since such is a zero-rated sale on the part of the supplier, the petitioner is not the proper party to claim such VAT refund. Since the transaction is deemed a zero-rated sale, petitioner‘s supplier may claim an Input VAT credit with no corresponding Output VAT liability. Congruently, no Output VAT may be passed on to the petitioner. It may not be amiss to re-emphasize that the petitioner is registered as a NONVAT taxpayer and thus, is exempt from VAT. As an exempt VAT taxpayer, it is not allowed any tax credit on VAT (input tax) previously paid. In fine, even if assuming that _Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 104 First Semester, SY 2011-2012

exemption from the burden of VAT on petitioner‘s purchases did exist, petitioner is still not entitled to any tax credit or refund on the input tax previously paid as petitioner is an exempt VAT taxpayer. Rather, it is the petitioner‘s suppliers who are the proper parties to claim the tax credit and accordingly refund the petitioner of the VAT erroneously passed on to the latter.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 105 First Semester, SY 2011-2012

Topic: Forms of Escape from Taxation

COMMISSIONER OF INTERNAL REVENUE vs. SEAGATE TECHNOLOGY (PHILIPPINES) G.R. No. 153866. February 11, 2005 FACTS: Respondent is registered with the Philippine Export Zone Authority (PEZA) and has been issued PEZA Certificate No. 97-044 pursuant to Presidential Decree No. 66, as amended, to engage in the manufacture of recording components primarily used in computers for export. Such registration was made on 6 June 1997. It is also a VATregistered entity and VAT returns for the period 1 April 1998 to 30 June 1999 have been filed. An administrative claim for refund of VAT input taxes in the amount of P28,369,226.38 with supporting documents was filed on 4 October 1999. No final action has been received by respondent from petitioner on its claim for VAT refund. The Court of Tax Appeals rendered a decision granting the claim for refund. The CA affirmed the Decision of the CTA granting the claim for refund or issuance of a tax credit certificate (TCC) in favor of respondent in the reduced amount of P12,122,922.66. This sum represented the unutilized but substantiated input VAT paid on capital goods purchased for the period covering April 1, 1998 to June 30, 1999. ISSUE: Whether or not respondent is entitled to the refund or issuance of Tax Credit Certificate in the amount of P12,122,922.66 representing alleged unutilized input VAT paid on capital goods purchased for the period April 1, 1998 to June 30, 1999. HELD: YES. No doubt, as a PEZA-registered enterprise within a special economic zone, respondent is entitled to the fiscal incentives and benefits provided for in either PD 66 or EO 226. It shall, moreover, enjoy all privileges, benefits, advantages or exemptions under both Republic Act Nos. (RA) 7227 and 7844. From the above-cited laws, it is immediately clear that petitioner enjoys preferential tax treatment. It is not subject to internal revenue laws and regulations and is even entitled to tax credits. The VAT on capital goods is an internal revenue tax from which petitioner as an entity is exempt. Although the transactions involving such tax _Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 106 First Semester, SY 2011-2012

are not exempt, petitioner as a VAT-registered person, however, is entitled to their credits. To summarize, special laws expressly grant preferential tax treatment to business establishments registered and operating within an ecozone, which by law is considered as a separate customs territory. As such, respondent is exempt from all internal revenue taxes, including the VAT, and regulations pertaining thereto. It has opted for the income tax holiday regime, instead of the 5 percent preferential tax regime. As a matter of law and procedure, its registration status entitling it to such tax holiday can no longer be questioned. Its sales transactions intended for export may not be exempt, but like its purchase transactions, they are zero-rated. No prior application for the effective zero rating of its transactions is necessary. Being VAT-registered and having satisfactorily complied with all the requisites for claiming a tax refund of or credit for the input VAT paid on capital goods purchased, respondent is entitled to such VAT refund or credit.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 107 First Semester, SY 2011-2012

Topic: Forms of Escape from Taxation

COMMISSIONER OF INTERNAL REVENUE vs. THE ESTATE OF BENIGNO P. TODA, JR G.R. No. 147188 September 14, 2004 FACTS: 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 and subsequently 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. The BIR sent an assessment noticeand 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. The CTA held that the Commissioner failed to prove that CIC committed fraud to deprive the government of the taxes due it. 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: Whether or not respondent committed fraud with intent to evade the tax on the sale of the properties of Cibeles Insurance Corporation. HELD: YES. 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," "willfull," 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. Here, it is obvious that the objective of _Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 108 First Semester, SY 2011-2012

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. 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 198635 (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.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 109 First Semester, SY 2011-2012

Topic: Forms of Escape from Taxation JOHN HAY vs. LIM G.R. No. 119775. October 24, 2003 FACTS: On March 13, 1992, Republic Act No. 7227, otherwise known as the "Bases Conversion and Development Act of 1992," was enacted with the declared policy of accelerating "the sound and balanced conversion into alternative productive uses of the Clark and Subic military reservations and their extensions" -including the John Hay Station. To this end, R.A. No. 7227 created public respondent BCDA,the Subic SEZ and the Subic Bay Metropolitan Authority. On July 5, 1994, then President Ramos, on the request of the SangguniangPanlungsod of Baguio City, issued Proclamation No. 420 establishing the John Hay SEZ. On April 25, 1995, petitioners filed their Petition for prohibition, mandamus and declaratory relief assailing (1) the constitutionality of Proclamation No. 420 and (2) the legality of the Memorandum of Agreement and Joint Venture Agreement previously entered into between public respondent BCDA and private respondents Tuntex (B.V.I.) Co., Ltd. (TUNTEX) and AsiaworldInternationale Group, Inc. (ASIAWORLD). ISSUE: Whether or not John Hay Special Economic Zone enjoys exemption for taxes as well as other financial incentives granted to the Subic Special Economic Zone. HELD: It is clear that under Section 12 of R.A. No. 7227 it is only the Subic SEZ which was granted by Congress with tax exemption, investment incentives and the like. There is no express extension of the aforesaid benefits to other SEZs still to be createdat the time via presidential proclamation. While the grant of economic incentives may be essential to the creation and success of SEZs, free trade zones and the like, the grant thereof to the John Hay SEZ cannot be sustained. The incentives under R.A. No. 7227 are exclusiveonly to the Subic SEZ, hence, the extension of the same to the John Hay SEZ finds no support therein. More importantly, the nature of most of the assailed privileges is one of tax exemption. It is the legislature, unless limited by a provision of the 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. 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.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 110 First Semester, SY 2011-2012

Topic: Administrative Issuance by the BIR Commissioner of Internal Revenue vs. Courts of Tax Appeal, et al G.R. No. 115349 April 18, 1997 FACTS: Ateneo de Manila is an educational institution with auxiliary units and branches all over the Philippines. One such auxiliary unit is the Institute of Philippine Culture (IPC), which has no legal personality separate and distinct from that of private respondent. The IPC is a Philippine unit engaged in social science studies of Philippine society and culture. Occasionally, it accepts sponsorships for its research activities from international organizations, private foundations and government agencies. On July 8, 1983, private respondent received from petitioner Commissioner of Internal Revenue a demand letter dated June 3, 1983, assessing private respondent the sum of P174,043.97 for alleged deficiency contractor's tax the value of which was later on, upon private respondent‘s request for reinvestigation, reduced to P46,516.41. Unsatisfied, Private respondent filed in the Court of Tax Appeals a petition for review of the said letter-decision of the petitioner which rendered a decision in its favour and ordered the tax assessment cancelled. ISSUE: Whether or not Ateneo de Manila University, through its auxiliary unit or branch — the Institute of Philippine Culture — is performing the work of an independent contractor and, thus, subject to the three percent contractor's tax levied by then Section 205 of the National Internal Revenue Code HELD: NO. The Supreme Court held that Ateneo de Manila University is not subject to the contractor‘s tax. It explained that to fall under its coverage, Section 205 of the National Internal Revenue Code requires that the independent contractor be engaged in the business of selling its services. The Court, however, found no evidence that Ateneo's Institute of Philippine Culture ever sold its services for a fee to anyone or was ever engaged in a business apart from and independently of the academic purposes of the university. Moreover, the Court of Tax Appeals accurately and correctly declared that the ―funds received by the Ateneo de Manila University are technically not a fee. They may however fall as gifts or donations which are tax-exempt" as shown by private respondent's compliance with the requirement of Section 123 of the National Internal Revenue Code providing for the exemption of such gifts to an educational institution.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 111 First Semester, SY 2011-2012

Topic: Constitutional Limitations: Origin of Revenue, Appropriation and Tarriff Bills ABAKADA GURO PARTY LIST vs. ERMITA G.R. No. 168056, July 5, 2005 FACTS: Motions for Reconsideration filed by petitioners, ABAKADA Guro party List Officer and et al., insist that the bicameral conference committee should not even have acted on the no pass-on provisions since there is no disagreement between House Bill Nos. 3705 and 3555 on the one hand, and Senate Bill No. 1950 on the other, with regard to the no pass-on provision for the sale of service for power generation because both the Senate and the House were in agreement that the VAT burden for the sale of such service shall not be passed on to the end-consumer. As to the no pass-on provision for sale of petroleum products, petitioners argue that the fact that the presence of such a no pass-on provision in the House version and the absence thereof in the Senate Bill means there is no conflict because ―a House provision cannot be in conflict with something that does not exist.‖ Escudero, et. al., also contend that Republic Act No. 9337 grossly violates the constitutional imperative on exclusive origination of revenue bills under Section 24 of Article VI of the Constitution when the Senate introduced amendments not connected with VAT. Petitioners Escudero, et al., also reiterate that R.A. No. 9337‘s stand- by authority to the Executive to increase the VAT rate, especially on account of the recommendatory power granted to the Secretary of Finance, constitutes undue delegation of legislative power. They submit that the recommendatory power given to the Secretary of Finance in regard to the occurrence of either of two events using the Gross Domestic Product (GDP) as a benchmark necessarily and inherently required extended analysis and evaluation, as well as policy making. Petitioners also reiterate their argument that the input tax is a property or a property right. Petitioners also contend that even if the right to credit the input VAT is merely a statutory privilege, it has already evolved into a vested right that the State cannot remove. ISSUE: Whether or not the R.A. No. 9337 or the Vat Reform Act is constitutional? RULING: The Court is not persuaded. Article VI, Section 24 of the Constitution provides that All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local application, and private bills shall originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments. The Court reiterates that in making his recommendation to the President on the existence of either of the two conditions, the Secretary of Finance is not acting as the alter ego of the President or even her subordinate. He is acting as the agent of the _Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 112 First Semester, SY 2011-2012

legislative department, to determine and declare the event upon which its expressed will is to take effect. The Secretary of Finance becomes the means or tool by which legislative policy is determined and implemented, considering that he possesses all the facilities to gather data and information and has a much broader perspective to properly evaluate them. His function is to gather and collate statistical data and other pertinent information and verify if any of the two conditions laid out by Congress is present. In the same breath, the Court reiterates its finding that it is not a property or a property right, and a VAT-registered person‘s entitlement to the creditable input tax is a mere statutory privilege. As the Court stated in its Decision, the right to credit the input tax is a mere creation of law. More importantly, the assailed provisions of R.A. No. 9337 already involve legislative policy and wisdom. So long as there is a public end for which R.A. No. 9337 was passed, the means through which such end shall be accomplished is for the legislature to choose so long as it is within constitutional bounds.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 113 First Semester, SY 2011-2012

Topic: Sources of Tax Laws: Administrative Issuance by the BIR PHILIPPINE BANK OF COMMERCE vs. COMMISSIONER OF IINTERNAL REVENUE GR 112024 January 28, 1999 FACTS: Petitioner, PB COM, a commercial banking corporation filed its quarterly income tax returns for the first and second quarters of 1985, reported profits, and paid the total income tax of P5,016,954.00 by applying PBCom‘s tax credit memos for P3,401,701.00 and P1,615,253.00, respectively. Subsequently, however, PBCom suffered net loss of P25,317,228.00, thereby showing no income tax liability in its Annual Income Tax Returns for the year-ended December 31, 1985. For the succeeding year, ending December 31, 1986, the petitioner likewise reported a net loss of P14,129,602.00, and thus declared no tax payable for the year. However during these two years, PBCom earned rental income from leased properties. The lessees withheld and remitted to the BIR withholding creditable taxes of P282,795.50 in 1985 and P234,077.69 in 1986. On August 7, 1987, petitioner requested the Commissioner of Internal Revenue, among others, for a tax credit of P5,016,954.00 representing the overpayment of taxes in the first and second quarters of 1985. Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable taxes withheld by their lessees from property rentals in 1985 for P282,795.50 and in 1986 for P234,077.69. Pending the investigation of the respondent Commissioner of Internal Revenue, petitioner instituted a Petition for Review on November 18, 1988 before the Court of Tax Appeals (CTA). The petition was docketed as CTA Case No. 4309 entitled: ―Philippine Bank of Communications vs. Commissioner of Internal Revenue.‖ The CTA decided in favor of the BIR on the ground that the Petition was filed out of time as the same was filed beyond the two-year reglementary period. A motion for Reconsideration was denied and the appeal to Court of Appeals was likewise denied. Thus, this appeal to Supreme Court. ISSUES: a. Whether or not Revenue Regulations No. 7-85 which alters the reglementary period from two years to ten years is valid. b. Whether or not the petition for tax refund had already prescribed. RULING: a. The Court held that the Revenue Regulations 7-85 altering the 2-year prescriptive period imposed by law to 10-year prescriptive period is invalid. It ruled _Saint Louis University School of Law_

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that administrative issuances are merely interpretations and not expansions of the provisions of law, thus, in case of inconsistency, the law prevails over them., furthermore administrative agencies have no legislative power. When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive period of two years to ten years on claims of excess quarterly income tax payments, such circular created a clear inconsistency with the provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply interpret the law; rather it legislated guidelines contrary to the statute passed by Congress. It bears repeating that Revenue memorandum-circulars are considered administrative rulings which are issued from time to time by the Commissioner of Internal Revenue. It is widely accepted that the interpretation placed upon a statute by the executive officers, whose duty is to enforce it, is entitled to great respect by the courts. Nevertheless, such interpretation is not conclusive and will be ignored if judicially found to be erroneous. Thus, courts will not countenance administrative issuances that override, instead of remaining consistent and in harmony with, the law they seek to apply and implement. Further, fundamental is the rule that the State cannot be put in estoppel by the mistakes or errors of its officials or agents. As pointed out by the respondent courts, the nullification of RMC No. 7-85 issued by the Acting Commissioner of Internal Revenue is an administrative interpretation which is not in harmony with Sec. 230 of 1977 NIRC, for being contrary to the express provision of a statute. Hence, his interpretation could not be given weight for to do so would, in effect, amend the statute. b. With regard to the second issue the court ruled that by implication of the above, claim for refund had already prescribed. Since the petition had been filed beyond the prescriptive period, the same has already prescribed. The fact that the final adjusted return show an excess tax credit does not automatically entitle taxpayer claim for refund without any express intent. Thus the petition was denied.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 115 First Semester, SY 2011-2012

Topic: Sources of Tax Laws: Tax Treaties COMMISSIONER OF INTERNAL REVENUE VS. PROCTER & GAMBLE PHILIPPINES GR L-66838 15 April 1988 FACTS: Procter and Gamble Philippines is a wholly owned subsidiary of Procter and Gamble USA (PMC-USA), a non-resident foreign corporation in the Philippines, not engaged in trade and business therein. PMC-USA is the sole shareholder of PMC Philippines and is entitled to receive income from PMC Philippines in the form of dividends, if not rents or royalties. For the taxable years 1974 and 1975, PMC Philippines filed its income tax return and also declared dividends in favor of PMC-USA. In 1977, PMC Philippines, invoking the tax-sparing provision of Section 24 (b) as the withholding agent of the Philippine Government with respect to dividend taxes paid by PMC-USA, filed a claim for the refund of 20 percentage point portion of the 35 percentage whole tax paid with the Commissioner of Internal Revenue. ISSUE: Whether PMC Philippines is entitled to the 15% preferential tax rate on dividends declared and remitted to its parent corporation? RULING: The issue raised is one made for the first time before the Supreme Court. Under the same underlying principle of prior exhaustion of administrative remedies, on the judicial level, issues not raised in the lower court cannot be generally raised for the first time on appeal. Nonetheless, it is axiomatic that the state can never be allowed to jeopardize the government‘s financial position. The submission of the Commissioner that PMC Philippines is but a withholding agent of the government and therefore cannot claim reimbursement of alleged overpaid taxes, is completely meritorious. The real party in interest is PMC-USA, which should prove that it is entitled under the US Tax Code to a US Foreign Tax Credit equivalent to at least 20 percentage points spared or waived as otherwise considered or deemed paid by the Government. Herein, the claimant failed to show or justify the tax return of the disputed 15% as it failed to show the actual amount credited by the US Government against the income tax due from PMC-USA on the dividends received from PMC Philippines; to present the income tax return of PMC-USA for 1975 when the dividends were received; and to submit duly authenticated document showing that the US government credited the 20% tax deemed paid in the Philippines.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 116 First Semester, SY 2011-2012

Topic: Sources of Tax Laws: Tax Treaties COMMISSIONER OF IINTERNAL REVENUE vs. SC JOHNSON & SON INC. G.R. No. 147188 June 25, 1999 FACTS: Respondent is a domestic corporation organized and operating under the Philippine Laws, entered into a licensed agreement with the SC Johnson and Son, USA, a non-resident foreign corporation based in the USA pursuant to which the respondent was granted the right to use the trademark, patents and technology owned by the later 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 USA. For the use of 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. On October 29, 1993, 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 respondents case fall squarely within the same circumstances under which said MacGeorge and Gillette rulings were issued. Since the agreement was approved by the Technology Transfer Board, the preferential tax rate of 10% should apply to the respondent. So, royalties paid by the respondent to SC Johnson and Son, USA is only subject to 10% withholding tax. The Commissioner did not act on said claim for refund. Private respondent SC Johnson & Son, Inc. then filed a petition for review before the CTA, to claim a refund of the overpaid withholding tax on royalty payments from July 1992 to May 1993. On May 7, 1996, the CTA rendered its decision in favor of SC Johnson and ordered the CIR to issue a tax credit certificate in the amount of P163,266.00 representing overpaid withholding tax on royalty payments beginning July 1992 to May 1993. The CIR thus filed a petition for review with the CA 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. ISSUE: Whether

or

not

tax

refunds

are

considered

as

RULING:

_Saint Louis University School of Law_

tax

exemptions?

TAXATION I - CASE DIGESTS 117 First Semester, SY 2011-2012

It bears stress that tax refunds are in the nature of tax exemptions. As such they are registered as in derogation of sovereign authority and to be construed strictissimijuris 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 Treaty is paid under similar circumstances as the tax on royalties under the RP-West Germany Tax Treaty.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 118 First Semester, SY 2011-2012

Topic: The Concept of Income CONWI vs. COMMISSIONER OF INTERNAL REVENUE 213SCRA483 FACTS: Petitioners are Filipino citizens and employees of Procter and Gamble Philippines with an office located at Ayala Ave. Makati. The corporation is a subsidiary of P&G based at Ohio USA. For the year 1970 and 1971, petitioners were assigned outside the Phil with their compensation paid in US dollars. When they filed their income tax returns for the year 1970, they‘ve computed the tax by applying the dollar-to-peso conversion based on the floating rate provided by the BIR. However, on 1973, they filed an amended tax return using the par value of the peso provided by Sec.40 of RA 265. They claim for a refund due to overpayment. Petitioners argued that since the dollar earnings does not fall within the classification of foreign exchange transaction; there occurred no actual inward remittances therefore NOT included in Central Bank Circular No. 289. CB no. 289 provides for specific instances when the par value of the peso shall not be the conversion rate. Therefore, they can base their conversion using the par value of the peso. The Commissioner of the BIR denied the claim of petitioners stating that the basis must be the prevailing free market rate of exchange and not the par value. CB No. 289 speaks of receipts for export products, receipts of sale of foreign exchange and investment but not income tax. The CTA also held that petitioner‘s dollar earnings are receipts derived from foreign exchange transactions. ISSUES: a. Whether or not petitioner‘s dollar earnings are receipts derived from foreign exchange transactions? b. Whether or not the proper rate of conversion is the prevailing free market rate of exchange? c. Whether or not petitioners are exempt to pay tax for such income since there were no remittance/ acceptance of their salaries in UD Dollars into the Philippines? RULING: a. No. Income may be defined as an amount of money coming to a person or corporation within a specified time, whether as payment for services, interest or profit from investment. Unless otherwise specified, it means cash or its equivalent. Income can also be though of as flow of the fruits of one's labor. Petitioners are correct in _Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 119 First Semester, SY 2011-2012

claiming that their dollar earnings are not receipts derived from foreign exchange transactions. For a foreign exchange transaction is simply that-foreign exchange being ―the conversion of an amount of money of one country into an equivalent amount of money of another country. When petitioners were assigned to the foreign subsidiaries of P&G, they were earning in their assigned nation‘s currency and were also spending in said currency. There was no conversion from one currency to another. b. Yes. Central Bank Circular no. 289 does not contemplate income tax payments. It shows that the subject matter involved therein are exports products, invisibles, receipts of foreign exchange, foreign exchange payments, new foreign borrowing and investments-nothing by way of income tax .Petitioners erred in concluding that CB Circ No. 289 does not apply to them. Therefore, the conversion should be the prevailing free market rate of exchange. c. No. Even if there was no remittance and acceptance of their salaries and wages in US Dollars into the Philippines, they are still bound to pay the tax. Petitioners forgot that they are citizens of the Philippines, and their income, within or without, and in this case wholly without or outside the Philippines, are subject to income tax. The petitions were denied for lack of merit.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 120 First Semester, SY 2011-2012

Topic: Concept of Income: Income vs. Capital MADRIGAL vs. RAFFERTY G.R. No. 12287 August 7, 1918 FACTS: Vicente Madrigal and Susana Paterno were legally married prior to January 1, 1914. The marriage was contracted under the provisions of law concerning conjugal partnerships . On February 25, 1915, Madrigal filed a sworn declaration on the prescribed form with the Collector of Internal Revenue, showing, as his total net income for the year 1914, the sum of P296,302.73. Subsequently Madrigal submitted the claim that the said amount did not represent his income for the year 1914, but was in fact the income of the conjugal partnership existing between himself and his wife, and that in computing and assessing the additional income tax provided by the Act of Congress of October 3, 1913, the income declared by Vicente Madrigal should be divided into two equal parts, one-half to be considered the income of Madrigal and the other half the income of Susana Paterno. After payment under protest, and after the protest of Madrigal had been decided adversely by the Collector of Internal Revenue, action was begun by Madrigal and his wife in the Court of First Instance of Manila against the Collector of Internal Revenue and the Deputy Collector of Internal Revenue for the recovery of the sum of P3,786.08, alleged to have been wrongfully and illegally assessed and collected by the defendants from the plaintiff, under the provisions of the Act of Congress known as the Income Tax Law. The burden of the complaint was that if the income tax for the year 1914 had been correctly and lawfully computed there would have been due and payable by each of the plaintiffs the sum of P2,921.09, which taken together amounts to a total of P5,842.18 instead of P9,668.21, erroneously and unlawfully collected from the plaintiff Vicente Madrigal, with the result that plaintiff Madrigal has paid ' as income tax for the year 1914, P3,786.08, in excess of the sum lawfully due and payable. The dispute between the plaintiffs and the defendants concerned the additional tax provided for in the Income Tax Law. The trial court in an exhausted decision found in favor of defendants, without costs. ISSUE: Whether or not the additional income tax should be divided into two equal part because of the conjugal partnership existing between the spouses? RULING: Income as contrasted with capital or property is to be the test. The essential difference between capital and income is that capital is a fund; income is a flow. A fund _Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 121 First Semester, SY 2011-2012

of property existing at an instant of time is called capital. A flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is called income. Capital is wealth, while income is the service of wealth. The husband, as the head and legal representative of the household and general custodian of its income, should make and render the return of the aggregate income of himself and wife, and for the purpose of levying the income tax it is assumed that he can ascertain the total amount of said income. They are jointly and separately liable for such return and for the payment of the tax. The single or married status of the person claiming the specific exemption shall be determined as of the time of claiming such exemption if such claim be made within the year for which return is made, otherwise the status at the close of the year. With these general observations relative to the Income Tax Law in force in the Philippine Islands, we turn for a moment to consider the provisions of the Civil Code dealing with the conjugal partnership. Recently in two elaborate decisions in which a long line of Spanish authorities were cited, this court, in speaking of the conjugal partnership, decided that "prior to the liquidation, the interest of the wife, and in case of her death, of her heirs, is an interest inchoate, a mere expectancy, which constitutes neither a legal nor an equitable estate, and does not ripen into title until there appears that there are assets in the community as a result of the liquidation and settlement. Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the property of her husband Vicente Madrigal during the life of the conjugal partnership. She has an interest in the ultimate property rights and in the ultimate ownership of property acquired as income after such income has become capital. Susana Paterno has no absolute right to one-half the income of the conjugal partnership. Not being seized of a separate estate, Susana Paterno cannot make a separate return in order to receive the benefit of the exemption which would arise by reason of the additional tax. As she has no estate and income, actually and legally vested in her and entirely distinct from her husband's property, the income cannot properly be considered the separate income of the wife for the purposes of the additional tax. Moreover, the Income Tax Law does not look on the spouses as individual partners in an ordinary partnership. The husband and wife are only entitled to the exemption of P8,000, specifically granted by the law. The higher schedules of the additional tax directed at the incomes of the wealthy may not be partially defeated by reliance on provisions in our Civil Code dealing with the conjugal partnership and having no application to the Income Tax Law. The aims and purposes of the Income Tax Law must be given effect

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 122 First Semester, SY 2011-2012

Topic: Philippine Income Tax System: Schedular System vs. Global System SISON vs. ANCHETA G.R. No. L-59431 July 25, 1984 FACTS: The challenged posed is a suit for declaratory relief or prohibition on the validity of Section 1 of Batas PambansaBlg. 135. The assailed provision further amends Sec. 21 of the NIRC of 1977, which provides for the rate tax on residents or citizens on (a) taxable compensation income, (b) taxable net income, (c) royalties, prizes, and other winnings, (d) interests from bank deposits and yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangements, (e) dividends and share from individual partner in the net profits of taxable partnership, (f) adjusted gross income. Sison, as taxpayer, alleged that its provision (Section 1) unduly discriminated against him by the imposition of higher rates upon his income as a professional, that it amounts to class legislation, and that it transgresses against the equal protection and due process clauses of the Constitution as well as the rule requiring uniformity in taxation. ISSUE: Whether BP 135 violates the due process and equal protection clauses, and the rule on uniformity in taxation? RULING: There is a need for proof of such persuasive character as would lead to a conclusion that there was a violation of the due process and equal protection clauses. Absent such showing, the presumption of validity must prevail. Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation. Where the differentiation conforms to the practical dictates of justice and equity, similar to the standards of equal protection, it is not discriminatory within the meaning of the clause and is therefore uniform. Taxpayers may be classified into different categories, such as recipients of compensation income as against professionals. Recipients of compensation income are not entitled to make deductions for income tax purposes as there is no practically no overhead expense, while professionals and businessmen have no uniform costs or expenses necessary to produce their income. There is ample justification to adopt the gross system of income taxation to compensation income, while continuing the system of net income taxation as regards professional and business income.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 123 First Semester, SY 2011-2012

Topic: Source of Income: Services COMMISSIONER OF INTERNAL REVENUE vs. MARUBENI CORP. G.R. No. 137377 December 18, 2001 FACTS: Respondent Marubeni Corporation is a foreign corporation organized and existing under the laws of Japan. It is engaged in general import and export trading, financing and the construction business. It is duly registered to engage in such business in the Philippines and maintains a branch office in Manila. Sometime in November 1985, petitioner Commissioner of Internal Revenue issued a letter of authority to examine the books of accounts of the Manila branch office of respondent corporation for the fiscal year ending March 1985. In the course of the examination, petitioner found respondent to have undeclared income from two (2) contracts in the Philippines, both of which were completed in 1984. One of the contracts was with the National Development Company (NDC) in connection with the construction and installation of a wharf/port complex at the Leyte Industrial Development Estate in the municipality of Isabel, province of Leyte. The other contract was with the Philippine Phosphate Fertilizer Corporation (Philphos) for the construction of an ammonia storage complex also at the Leyte Industrial Development Estate. On March 1, 1986, petitioner's revenue examiners recommended an assessment for deficiency income, branch profit remittance, contractor's and commercial broker's taxes. Respondent questioned this assessment in a letter dated June 5, 1986. ISSUE: Whether or not the CIR need to assess and collect the tax despite the tax amnesty availed of by the respondent? RULING: The main controversy in this case lies in the interpretation of the exception to the amnesty coverage of E.O. Nos. 41 and 64. There are three (3) types of taxes involved herein — income tax, branch profit remittance tax and contractor's tax. These taxes are covered by the amnesties granted by E.O. Nos. 41 and 64. Petitioner claims, however, that respondent is disqualified from availing of the said amnesties because the latter falls under the exception in Section 4 (b) of E.O. No. 41. A tax amnesty, much like a tax exemption, is never favored nor presumed in law. If granted, the terms of the amnesty, like that of a tax exemption, must be construed strictly against the taxpayer and liberally in favor of the taxing authority. For the right of taxation is inherent in government. The State cannot strip itself of the most essential _Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 124 First Semester, SY 2011-2012

power of taxation by doubtful words. He who claims an exemption (or an amnesty) from the common burden must justify his claim by the clearest grant of organic or state law. It cannot be allowed to exist upon a vague implication. If a doubt arises as to the intent of the legislature, that doubt must be resolved in favor of the state.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 125 First Semester, SY 2011-2012

Topic: Source of Income: Interest Income NATIONAL DEVELOPMENT COMPANY vs. COMMISSIONER OF INTERNAL REVENUE G.R. No. L-53961 June 30, 1987 FACTS: The National Development Company entered into contracts in Tokyo with several Japanese shipbuilding companies for the construction of twelve ocean-going vessels. The purchase price was to come from the proceeds of bonds issued by the Central Bank. Initial payments were made in cash and through irrevocable letters of credit. Fourteen promissory notes were signed for the balance by the NDC and, as required by the shipbuilders, guaranteed by the Republic of the Philippines. Pursuant thereto, the remaining payments and the interests thereon were remitted in due time by the NDC to Tokyo. The vessels were eventually completed and delivered to the NDC in Tokyo. The NDC remitted to the shipbuilders in Tokyo the total amount of US$4,066,580.70 as interest on the balance of the purchase price. No tax was withheld. The Commissioner then held the NDC liable on such tax in the total sum of P5,115,234.74. Negotiations followed but failed. The BIR thereupon served on the NDC a warrant of distraint and levy to enforce collection of the claimed amount. The NDC went to the Court of Tax Appeals. The BIR was sustained by the CTA except for a slight reduction of the tax deficiency in the sum of P900.00, representing the compromise penalty. ISSUE: Whether or not NDC is liable on tax? RULING: There is no basis for saying that the interest payments were obligations of the Republic of the Philippines and that the promissory notes of the NDC were government securities exempt from taxation under Section 29(b)of the Tax Code. The law invoked by the petitioner as authorizing the issuance of securities is R.A. No. 1407, which in fact is silent on this matter. C.A. No. 182 as amended by C.A. No. 311 does carry such authorization but, like R.A. No. 1407, does not exempt from taxes the interests on such securities. It is also incorrect to suggest that the Republic of the Philippines could not collect taxes on the interest remitted because of the undertaking signed by the Secretary of Finance in each of the promissory notes that: Upon authority of the President of the Republic of the Philippines, the undersigned, for value received, hereby absolutely and unconditionally guarantee, on _Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 126 First Semester, SY 2011-2012

behalf of the Republic of the Philippines, the due and punctual payment of both principal and interest of the above note. There is nothing in the above undertaking exempting the interests from taxes. Petitioner has not established a clear waiver therein of the right to tax interests. Tax exemptions cannot be merely implied but must be categorically and unmistakably expressed. Any doubt concerning this question must be resolved in favor of the taxing power. Nowhere in the said undertaking does the court find any inhibition against the collection of the disputed taxes. In fact, such undertaking was made by the government in consonance with and certainly not against the following provisions of the Tax Code. Manifestly, the said undertaking of the Republic of the Philippines merely guaranteed the obligations of the NDC but without diminution of its taxing power under existing laws. In suggesting that the NDC is merely an administrator of the funds of the Republic of the Philippines, the petitioner closes its eyes to the nature of this entity as a corporation. As such, it is governed in its proprietary activities not only by its charter but also by the Corporation Code and other pertinent laws. The petitioner also forgets that it is not the NDC that is being taxed. The tax was due on the interests earned by the Japanese shipbuilders. It was the income of these companies and not the Republic of the Philippines that was subject to the tax the NDC did not withhold. In effect, therefore, the imposition of the deficiency taxes on the NDC is a penalty for its failure to withhold the same from the Japanese shipbuilders.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 127 First Semester, SY 2011-2012

Topic: Taxability of Compensation Income and the Application of Employer’s Convenience Rule HENDERSON vs. COMMISSIONER OF INTERNAL REVENUE 1SCRA649 FACTS: The spouses Arthur Henderson and Marie B. Henderson filed with the Bureau of Internal Revenue returns of annual net income for the years 1948 to 1952, inclusive. In due time the taxpayers received from the Bureau of Internal Revenue assessment notices Nos. 15840-48, 25450-49, 15255-50, 25705-51 and 22527-52 and paid the amounts assessed. After investigation and verification, the Bureau of Internal Revenue reassessed the taxpayers' income for the years 1948 to 1952, and demanded payment of the deficiency taxes. 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. After hearing conducted by the Conference Staff of the Bureau of Internal Revenue the Staff recommended to the Collector of Internal Revenue that the assessments made 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. 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, which was modified 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. The Court rendered judgment holding "that the inherent nature of petitioner's employment as president of the American International Underwriters of the Philippines, Inc. does not require him to occupy the apartments supplied by his employercorporation;" 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 _Saint Louis University School of Law_

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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. ISSUE: Whether or not the taxpayers are entitled to a refund? RULING: The taxpayers' claim is supported by the evidence. The total amount of P3,249.32 "for manager's residential expense" in 1948 should be treated as rentals for apartments and utilities and should not form part of the ratable value subject to tax. The computation made by the taxpayers is correct. Adding to the amount of P29,573.79, their net income per return, the amounts of P6,500, the bonus received in 1948, and P4,800, the taxable ratable value of the allowances, brings up their gross income to P40,873.79. Deducting therefrom the amount of P2,500 for personal exemption, the amount of P38,373.79 is the amount subject to income tax. The income tax due on this amount is P6,957.19 only. Deducting the amount of income tax due, P6,957.19, from the amount already paid, P8,562.47, the amount of P1,605.28 is the amount refundable to the taxpayers. Add this amount to P569.33, P1,294.00, P354.00 and P2,164.00, refundable to the taxpayers for 1949, 1950, 1951 and 1952, and the total is P5,986.61. The Collector of Internal Revenue is ordered to refund to the taxpayers the sum of P5,986.61, without pronouncement as to costs.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 129 First Semester, SY 2011-2012

Topic: Interest Income from Bank Deposits and Deposit Substitute COMMISSIONER OF INTERNAL REVENUE vs. COURT OF APPEALS G.R. No. 108576 January 20, 1999 FACTS: In the 1930s, Don Andres Soriano, formed the corporation "A. Soriano Y Cia", predecessor of ANSCOR, with a P1,000,000.00 capitalization divided into 10,000 common shares at a par value of P100/share. ANSCOR is wholly owned and controlled by the family of Don Andres, who are all non-resident aliens. In 1937, Don Andres subscribed to 4,963 shares of the 5,000 shares originally issued. In 1945, ANSCOR's authorized capital stock was increased to P2,500,000.00 divided into 25,000 common shares with the same par value of the additional 15,000 shares, only 10,000 was issued which were all subscribed by Don Andres, after the other stockholders waived in favor of the former their pre-emptive rights to subscribe to the new issues. This increased his subscription to 14,963 common shares. A day after Don Andres died, ANSCOR increased its capital stock to P20M and in 1966 further increased it to P30M.In the same year, stock dividends worth 46,290 and 46,287 shares were respectively received by the Don Andres estate and Doña Carmen from ANSCOR. Hence, increasing their accumulated shareholdings to 138,867 and 138,864 common shares each. Doña Carmen requested a ruling from the United States Internal Revenue Service, inquiring if an exchange of common with preferred shares may be considered as a tax avoidance scheme. In1968, ANSCOR reclassified its existing 300,000 common shares into 150,000 common and 150,000 preferred shares. The IRS opined that the exchange is only a recapitalization scheme and not tax avoidance. Consequently, Doña Carmen exchanged her whole 138,864 common shares for 138,860 of the newly reclassified preferred shares. The estate of Don Andres in turn, exchanged 11,140 of its common shares, for the remaining 11,140 preferred shares, thus reducing its (the estate) common shares to 127,727. 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 31 and redemption of stocks. The Bureau of Internal Revenue (BIR) made the corresponding assessments despite the claim of ANSCOR that it availed of the tax amnesty under Presidential Decree (P.D.) 23 which were amended by P.D.'s 67 and 157.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 130 First Semester, SY 2011-2012

Subsequently, ANSCOR filed a petition for review with the CTA assailing the tax assessments on the redemptions and exchange of stocks. 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 the provisions of law? RULING: The test of taxability under the exempting clause of Section 83(b) is, whether income was realized through the redemption of stock dividends. The redemption converts into money the stock dividends which become a realized profit or gain and consequently, the stockholder's separate property. Profits derived from the capital invested cannot escape income tax. As realized income, the proceeds of the redeemed stock dividends can be reached by income taxation regardless of the existence of any business purpose for the redemption. After considering the manner and the circumstances by which 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. The reclassification by ANSCOR of its shares into common and preferred resulted to no change in the proportional interest after the exchange. There was no cash flow. Both stocks had the same par value. A common stock represents the residual ownership interest in the corporation. It is a basic class of stock ordinarily and usually issued without extraordinary rights or privileges and entitles the shareholder to a pro rata division of profits. Preferred stocks are those which entitle the shareholder to some priority on dividends and asset distribution. In this case, the exchange of shares, without more, produces no realized income to the subscriber. There is only a modification of the subscriber's rights and privileges — which is not a flow of wealth for tax purposes. The issue of taxable dividend may arise only once a subscriber disposes of his entire interest and not when there is still maintenance of proprietary interest. Therefore, 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.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 131 First Semester, SY 2011-2012

Topic: Income from Installment Transactions BANAS vs. COURT OF APPEALS G.R. No. 102967 February 10, 2000 FACTS: In the succeeding years, until 1979, petitioner reported a uniform income of two hundred thirty thousand, eight hundred seventy-seven (P230,877.00) pesos as gain from sale of capital asset. In his 1980 income tax amnesty return, petitioner also reported the same amount of P230,877.00 as the realized gain on disposition of capital asset for the year. On April 11, 1978, then Revenue Director Mauro Calaguio authorized tax examiners, Rodolfo Tuazon and Procopio Talon to examine the books and records of petitioner for the year 1976. They discovered that petitioner had no outstanding receivable from the 1976 land sale to AYALA and concluded that the sale was cash and the entire profit should have been taxable in 1976 since the income was wholly derived in 1976. Tuazon and Talon filed their audit report and declared a discrepancy of two million, ninety-five thousand, nine hundred fifteen (P2,095,915.00) pesos in petitioner's 1976 net income. They recommended deficiency tax assessment for two million, four hundred seventy-three thousand, six hundred seventy-three (P2,473,673.00) pesos. ISSUE: Whether respondent court erred in finding that petitioner's income from the sale of land in 1976 should be declared as a cash transaction in his tax return for the same year (because the buyer discounted the promissory note issued to the seller on future installment payments of the sale, on the same day of the sale)? RULING: As a general rule, the whole profit accruing from a sale of property is taxable as income in the year the sale is made. But, if not all of the sale price is received during such year, and a statute provides that income shall be taxable in the year in which it is "received," the profit from an installment sale is to be apportioned between or among the years in which such installments are paid and received. Sec. 43 and Sec. 175 says that among the entities who may use the abovementioned installment method is a seller of real property who disposes his property on installment, provided that the initial payment does not exceed 25% of the selling price. They also state what may be regarded as installment payment and what constitutes _Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 132 First Semester, SY 2011-2012

initial payment. Initial payment means the payment received in cash or property excluding evidences of indebtedness due and payable in subsequent years, like promissory notes or mortgages, given of the purchaser during the taxable year of sale. Initial payment does not include amounts received by the vendor in the year of sale from the disposition to a third person of notes given by the vendee as part of the purchase price which are due and payable in subsequent years. Such disposition or discounting of receivable is material only as to the computation of the initial payment. If the initial payment is within 25% of total contract price, exclusive of the proceeds of discounted notes, the sale qualifies as an installment sale, otherwise it is a deferred sale. Although the proceed of a discounted promissory note is not considered part of the initial payment, it is still taxable income for the year it was converted into cash. The subsequent payments or liquidation of certificates of indebtedness is reported using the installment method in computing the proportionate income to be returned, during the respective year it was realized. Non-dealer sales of real or personal property may be reported as income under the installment method provided that the obligation is still outstanding at the close of that year. If the seller disposes the entire installment obligation by discounting the bill or the promissory note, he necessarily must report the balance of the income from the discounting not only income from the initial installment payment. Where an installment obligation is discounted at a bank or finance company, a taxable disposition results, even if the seller guarantees its payment, continues to collect on the installment obligation, or handles repossession of merchandise in case of default. This rule prevails in the United States. Since our income tax laws are of American origin, interpretations by American courts an our parallel tax laws have persuasive effect on the interpretation of these laws. Thus, by analogy, all the more would a taxable disposition result when the discounting of the promissory note is done by the seller himself. Clearly, the indebtedness of the buyer is discharged, while the seller acquires money for the settlement of his receivables. Logically then, the income should be reported at the time of the actual gain. For income tax purposes, income is an actual gain or an actual increase of wealth. Although the proceeds of a discounted promissory note is not considered initial payment, still it must be included as taxable income on the year it was converted to cash. When petitioner had the promissory notes covering the succeeding installment payments of the land issued by AYALA, discounted by AYALA itself, on the same day of the sale, he lost entitlement to report the sale as a sale on installment since, a taxable disposition resulted and petitioner was required by law to report in his returns the income derived from the discounting. What petitioner did is tantamount to an attempt to circumvent the rule on payment of income taxes gained from the sale of the land to AYALA for the year 1976.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 133 First Semester, SY 2011-2012

Topic: Concept of Allowable Deductions: Deduction vs. Tax Credit BICOLANDIA DRUG CORP. vs. COMMISSIONER OF INTERNAL REVENUE G.R. No. 142299 June 22, 2006 FACTS: Petitioner Bicolandia Drug Corporation is a domestic corporation principally engaged in the retail of pharmaceutical products. Petitioner has a drugstore located in Naga City under the name and business style of "Mercury Drug." Pursuant to the provisions of R.A. No. 7432, entitled "An Act to Maximize the Contribution of Senior Citizens to Nation Building, Grant Benefits and Special Privileges and for Other Purposes," also known as the "Senior Citizens Act," and Revenue Regulations No. 2-94, petitioner granted to qualified senior citizens a 20% sales discount on their purchase of medicines covering the period from July 19, 1993 to December 31, 1994. When petitioner filed its corresponding corporate annual income tax returns for taxable years 1993 and 1994, it claimed as a deduction from its gross income the respective amounts of P80,330 and P515,000 representing the 20% sales discount it granted to senior citizens. On March 28, 1995, however, alleging error in the computation and claiming that the aforementioned 20% sales discount should have been treated as a tax credit pursuant to R.A. No. 7432 instead of a deduction from gross income, petitioner filed a claim for refund or credit of overpaid income tax for 1993 and 1994, amounting to P52,215 and P334,750, respectively. ISSUE: Whether or not the Senior Citizens Discount is deductible from Gross Income? RULING: Sec. 4.Privileges for the Senior citizens. – The senior citizens shall be entitled to the following: .. the grant of twenty percent (20%) discount from all establishments relative to utilization of transportation services, hotels and similar lodging establishments, restaurants and recreation centers and purchase of medicines anywhere in the country: Provided, That private establishments may claim the cost as tax credit. The term "cost" in the above provision refers to the amount of the 20% discount extended by a private establishment to senior citizens in their purchase of medicines. This amount shall be applied as a tax credit, and may be deducted from the tax liability of the entity concerned. If there is no current tax due or the establishment reports a _Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 134 First Semester, SY 2011-2012

net loss for the period, the credit may be carried over to the succeeding taxable year. This is in line with the interpretation of this Court in Commissioner of Internal Revenue v. Central Luzon Drug Corporation wherein it affirmed that R.A. No. 7432 allows private establishments to claim as tax credit the amount of discounts they grant to senior citizens. The Court notes that petitioner, while praying for the reinstatement of the CTA Resolution, dated December 7, 1998, directing the issuance of tax certificates in favor of petitioner for the respective amounts of P45,574.63 and P135,906.48 representing overpaid income tax for 1993 and 1994, asks for the refund of the same. In this regard, petitioner‘s claim for refund must be denied. The law expressly provides that the discount given to senior citizens may be claimed as a tax credit, and not a refund. Thus, where the words of a statute are clear, plain and free from ambiguity, it must be given its literal meaning and applied without attempted interpretation.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 135 First Semester, SY 2011-2012

Topic: Itemized Deductions: Reasonableness Test COMMISSIONER OF INTERNAL REVENUE v. GENERAL FOODS INC. G.R. No. 143672 April 24, 2003 FACTS: Respondent corporation, which is engaged in the manufacture of beverages such as ―Tang,‖ ―Calumet‖ and ―Kool-Aid,‖ filed its income tax return ON July 14, 1985 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.‖ However, 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 for such exclusions from such a gargantuan expense for the advertisement of a singular product is unreasonable. For sure such expenditure was meant not only to generate present sales but more for future and prospective benefits. Hence, ―abnormally large expenditures for advertising are usually to be spread over the period of years during which the benefits of the expenditures are received‖. 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: ISSUE: Whether or not the subject media advertising expense for ―Tang‖ incurred by respondent corporation was an ordinary and necessary expense fully deductible under the NIRC? RULING: It is a governing principle in taxation that tax exemptions must be construed in strictissimijuris against the taxpayer and liberally in favor of the taxing authority; and he who claims an exemption must be able to justify his claim by the clearest grant of organic or statute law. An exemption from the common burden cannot be permitted to exist upon vague implications. Deductions for income tax purposes partake of the nature of tax exemptions; hence, if tax exemptions are strictly construed, then deductions must also be strictly construed. Supreme Court held that the P9, 461,246 claimed as media advertising expense for ―Tang‖ alone was almost one-half of its total claim for ―marketing expenses.‖ It was _Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 136 First Semester, SY 2011-2012

almost double the amount of respondent corporation‘s P4, 640,636 general and administrative expenses. The Court of Appeals committed reversible error when it declared the subject media advertising expense to be deductible as an ordinary and necessary expense on the ground that ―it has not been established that the item being claimed as deduction is excessive.‖ It is not incumbent upon the taxing authority to prove that the amount of items being claimed is unreasonable. The burden of proof to establish the validity of claimed deductions is on the taxpayer. In the present case, that burden was not discharged satisfactorily.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 137 First Semester, SY 2011-2012

Topic: Itemized Deductions: Reasonableness Test C.M. HOSKIN vs. COMMISSIONER OF INTERNAL REVENUE G.R No. L-24059 November 28, 1969 FACTS: The petitioner company is engaged in the real estate business as brokers, managing agents and administrators. It was founded by Mr. C.M. Hoskins who owned 996 shares out of its 1,000 shares. The other 4 shares were owned by other officers of the corporation. At the time that this controversy arose, Hoskin was the President, Chairman of the Board of Directors, stockholder and was also a salesman-broker of the company which entitled him to salaries and bonuses including 50% of the supervision fees that was collected by the company from its clients (amounting to Php99,977.91). The CIR disallowed the deduction made by the petitioner in its income tax return of the amount representing the supervision fees. ISSUE: Whether or not the supervision fees distributed by petitioner should be considered as taxable earnings? RULING: The payment by the taxpayer to its controlling stockholder of 50% of its supervision fees is not deductible ordinary and necessary expense and should be treated as distribution of earnings and profits of the taxpayer. The amount was inordinately large. Bonus to employees made in good faith and as additional compensation are deductible, PROVIDED, such payment, when added to the stipulated salaries, do not exceed a reasonable compensation for the services rendered. The conditions precedent to the deduction of bonuses are as follows: (a) the payment of the bonuses is in fact compensation; (b) it must be for personal services actually rendered; and (c) the bonuses, when added to the salaries, are reasonable. Although there‘s no fixed test in determining what is reasonable, some tests used are as follows: Amount and quality of the services performed; ii. Good faith; iii. Character of the taxpayer‘s business; iv. Volume and amount of its earnings; v. locality, type and extent of the services rendered; vi. Salary policy; vii.Size of the business; viii.Employee‘s qualifications and contributions to the business; and ix.General economic condition. For income tax purposes, the employer cannot legally such bonuses as deductible unless they are shown to be reasonable.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 138 First Semester, SY 2011-2012

The question of allowing or disallowing as deductible expenses the amounts paid to corporate officers by way of bonus is determined by the CIR exclusively for income tax purposes. Although admittedly, it is the corporation‘s discretion to fix the amounts to be paid to its corporate officers, this right is NOT absolute. It cannot be used for the purpose of evading payment of taxes. The corporation was practically of a sole proprietorship of Hoskin. Hoskin had virtually absolute control of the company and as he has chosen to conduct his business as a corporation, he has also bound himself with the corporate norms and obligations. He is bound to pay income tax imposed on corporations and may not diminish his tax liability by way of corporate resolutions authorizing payment of inordinately large commissions and fees to its controlling stockholder.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 139 First Semester, SY 2011-2012

Topic: Itemized Deductions: Substantiation Rule and Cohan Rule GANCAYCO vs. COMMISSIONER OF INTERNAL REVENUE 1SCRA980 FACTS: On May 10, 1950, Gancayco filed his income tax return for the year 1949. Two days later, respondent Collector of Internal Revenue issued the corresponding notice advising him that his income tax liability for that year amounted P9, 793.62, which he paid on May 15, 1950. A year later, on May 14, 1951, respondent wrote the communication, notifying Gancayco, inter alia, that, upon investigation, there was still due from him, a defficiency income tax for the year 1949, the sum of P29, 554.05. Gancayco sought a reconsideration, which was partly granted by respondent, who in a letter dated April 8, 1953 informed petitioner that his income tax defficiency for 1949 amounted to P16, 860.31. Gancayco urged reconsideration but no action taken on this request, although he had sent several communications calling respondent's attention thereto. On April 15, 1956, respondent issued a warrant of distraint and levy against the properties of Gancayco for the satisfaction of his deficiency income tax liability, and accordingly, the municipal treasurer of Catanauan, Quezon issued on May 29, 1956, a notice of sale of said property at public auction on June 19, 1956. Upon petition of Gancayco filed on June 16, 1956, the Court of Tax Appeal issued a resolution ordering the cancellation of the sale and directing that the same be readvertised at a future date, in accordance with the procedure established by the National Internal Revenue Code. Thereafter Gancayco received from the municipal treasurer of Catanauan, Quezon, another notice of auction sale of his properties, to take place on August 29, 1956. On motion of Gancayco, the Court of Tax Appeals, by resolution dated August 27, 1956, "cancelled" the aforementioned sale and enjoined respondent and the municipal treasurer of Catanauan, Quezon, from proceeding with the same. After appropriate proceedings, the Court of Tax Appeals rendered, on November 14, 1957, the decision requiring him to pay P16,860.31, plus surcharge and interest, by way of deficiency income tax for the year 1949. ISSUE: Whether or not Gancayco is entitled to a deduction from his taxable gross income? RULING:

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 140 First Semester, SY 2011-2012

NO, deductions are expenses and losses incurred in connection with the realization of gross income. Deductions are kinds of legislative grace and allowable by reason of specific provisions and not presumed. Under the SUBSTANTIATION DOCTRINE, all business expense deductions must be substantiated with: a) receipts or adequate record; b) amount of expense; c) date qnd place of expense; d) purpose of expense; and e) professional or business relationship expenses. Referring to the item of P27,459, for farming expenses allegedly incurred by Gancayco, there was no evidence has been presented as to the nature of the said "farming expenses" other than the bare statement of petitioner that they were spent for the "development and cultivation of (his) property". No specification has been made as to the actual amount spent for purchase of tools, equipment or materials, or the amount spent for improvement. Respondent claims that the entire amount was spent exclusively for clearing and developing the farm which were necessary to place it in a productive state. It is not, therefore, an ordinary expense but a capital expenditure. Accordingly, it is not deductible but it may be amortized, in accordance with section 75 of Revenue Regulations No. 2, Section 31 of the Revenue Code which provides that in computing net income, no deduction shall in any case be allowed in respect of any amount paid out for new buildings or for permanent improvements, or betterments made to increase the value of any property or estate. In representation expense, it must be ordinary, reasonable and necessary; must be directly connected or related to or in furtherance of the conduct of his trade, business or exercise of profession; it must not be contrary to law, morals, public policy or public order; it must not exceed the ceiling that must be prescribed by the Sec. of Finance and must be supported by official receipts and adequate records. Gancayco's claim for representation expenses aggregated P31, 753.97, of which P22, 820.52 was allowed, and P8, 933.45 disallowed. Such disallowance is justified by the record, for, apart from the absence of receipts, invoices or vouchers of the expenditures in question, petitioner could not specify the items constituting the same, or when or on whom or on what they were incurred. The case of Cohan v. Commissioner, 39 F (2d) 540, cited by petitioner is not in point, because in that case there was evidence on the amounts spent and the persons entertained and the necessity of entertaining them, although there were no receipts and vouchers of the expenditures involved therein. Such is not the case of petitioner herein.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 141 First Semester, SY 2011-2012

Topic: Interests: Interest on Tax Delinquencies COMMISSIONER OF INTERNAL REVENUE VS.ITOGON-SUYOC MINES, INC G.R No. L-25299 JULY 29, 1969 FACTS: Respondent corporation paid the mount of Php 13,155.20 as first installment on its reported income tax liability for the fiscal year 1959-1960. But it turned out that instead of deriving a net gain, it sustained a net loss during the said fiscal year. Accordingly, it filed an amended income tax return and a claim for the refund of the sum of Php 13,155.20, which sum it subsequently deducted from its income tax liability for the succeeding fiscal year 1960-1961. However, petitioner charged respondent an interest in the amount of Php 1,512.83 on the ground that no deduction on such refund should be allowed before its approval. Such assessment representing interest was nevertheless set aside in the decision of the Court of Tax Appeals. ISSUE: Whether or not respondent corporation should not be absolved from liability to pay the sum of Php 1,512.83 for delinquency in the payment of income tax for the fiscal year 1960-1961? RULING: The imposition of interest on the sum of Php 1,512.83 by petitioner is not supported by law. The National Internal Revenue Code provides that interest upon the amount determined as a deficiency shall be assessed and shall be paid upon notice and demand from the Commissioner of Internal Revenue at the rate therein specified. It is made clear however, in an earlier provision found in the same section that if in any preceding year, the taxpayer was entitled to a refund of any amount due as tax, such amount, if not yet refunded, may be deducted from the tax to be paid. Respondent was entitled to a refund. Instead of waiting for the sum involved to be delivered to it, it deducted the said amount from the tax that it had to pay. That it had a right to do according to the law. What is sought to be avoided is for the taxpayer to make use of funds that should have been paid to the government. Here, in view of the overpayment for the fiscal year 1959-1960, the sum of Php 13,155.20 had already formed part of the public funds. It cannot be said therefore, that respondent taxpayer was guilty of any delay enabling it to utilize a sum of money that should have been in the government treasury.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 142 First Semester, SY 2011-2012

Topic: Ordinary Assets vs. Capital Assets CHINA BANKING CORPORATION vs. COURT OF APPEALS G.R. No. 125508 July 19, 2000 FACTS: Sometime in 1980, petitioner China Banking Corporation made a 53% equity investment in the First CBC Capital Ltd., a Hongkong subsidiary engaged in financing and investment with "deposit-taking" function. The investment amounted to P16,227,851.80, consisting of 106,000 shares with a par Value of P100 per share. In the course of the regular examination of the financial books and investment portfolios of petitioner conducted by BangkoSentral in 1986, it was shown that First CBC Capital Ltd., has become insolvent. With the approval of BangkoSentral, petitioner wrote-off as being worthless its investment in First CBC Capital Ltd., in its 1987 Income Tax Return and treated it as a bad debt or as an ordinary loss deductible from its gross income. Respondent Commissioner of internal Revenue disallowed the deduction and assessed petitioner for income tax deficiency in the amount of P8,533,328.04, inclusive of surcharge, interest and compromise penalty. The disallowance of the deduction was made on the ground that the investment should not be classified as being "worthless" and that, although the Hongkong Banking Commissioner had revoked the license of First CBC Capital as a "deposit-taping" company, the latter could still exercise, however, its financing and investment activities. Assuming that the securities had indeed become worthless, respondent Commissioner of Internal Revenue held the view that they should then be classified as "capital loss," and not as a bad debt expense there being no indebtedness to speak of between petitioner and its subsidiary. Petitioner contested the ruling of respondent Commissioner before the CTA. The tax court sustained the Commissioner, holding that the securities had not indeed become worthless and ordered petitioner to pay its deficiency income tax for 1987 of P8,533,328.04 plus 20% interest per annum until fully paid. When the decision was appealed to the Court of Appeals, the latter upheld the CTA. In its instant petition for review on certiorari, petitioner bank assails the CA decision. ISSUE: Whether or not an equity investment is a capital asset? RULING: An equity investment is a capital, not ordinary, asset of the investor the sale or exchange of which results in either a capital gain or a capital loss. The gain or the loss is ordinary when the property sold or exchanged is not a capital asset. A capital asset is defined negatively in Section 33(1) of the NIRC; viz: 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 _Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 143 First Semester, SY 2011-2012

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 twenty-nine; or real property used in the trade or business of the taxpayer.‖ A capital gain or a capital loss normally requires the concurrence of two conditions for it to result: (1) There is a sale or exchange; and (2) the thing sold or exchanged is a capital asset. When securities become worthless, there is strictly no sale or exchange but the law deems the loss anyway to be "a loss from the sale or exchange of capital assets.‖A similar kind of treatment is given, by the NIRC on the retirement of certificates of indebtedness with interest coupons or in registered form, short sales and options to buy or sell property where no sale or exchange strictly exists.[6] In these cases, the NIRC dispenses, in effect, with the standard requirement of a sale or exchange for the application of the capital gain and loss provisions of the code. Capital losses are allowed to be deducted only to the extent of capital gains, i.e., gains derived from the sale or exchange of capital assets, and not from any other income of the taxpayer. In the case at bar, First CBC Capital , Ltd., the investee corporation, is a subsidiary corporation of petitioner bank whose shares in said investee corporation are not intended for purchase or sale but as an investment. Unquestionably then, any loss therefrom would be a capital loss, not an ordinary loss, to the investor. To sum things up, the equity investment in shares of stock held by CBC of approximately 53% in its Hongkong subsidiary, the First CBC Capital, Ltd., is not an indebtedness, and it is a capital, not an ordinary, asset. Assuming that the equity investment of CBC has indeed become "worthless," the loss sustained is a capital, not an ordinary, loss. The capital loss sustained by CBC can only be deducted from capital gains if any derived by it during the same taxable year that the securities have become "worthless."

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 144 First Semester, SY 2011-2012

Topic: Installment Sales vs. Deferred Sales BANAS vs. COURT OF APPEALS G.R No. 102967 February 10, 2000 FACTS: In the succeeding years, until 1979, petitioner reported a uniform income of two hundred thirty thousand, eight hundred seventy-seven (P230,877.00) pesos as gain from sale of capital asset. In his 1980 income tax amnesty return, petitioner also reported the same amount of P230,877.00 as the realized gain on disposition of capital asset for the year. On April 11, 1978, then Revenue Director Mauro Calaguio authorized tax examiners, Rodolfo Tuazon and Procopio Talon to examine the books and records of petitioner for the year 1976. They discovered that petitioner had no outstanding receivable from the 1976 land sale to AYALA and concluded that the sale was cash and the entire profit should have been taxable in 1976 since the income was wholly derived in 1976. Tuazon and Talon filed their audit report and declared a discrepancy of two million, ninety-five thousand, nine hundred fifteen (P2,095,915.00) pesos in petitioner's 1976 net income. They recommended deficiency tax assessment for two million, four hundred seventy-three thousand, six hundred seventy-three (P2,473,673.00) pesos. ISSUE: Whether respondent court erred in finding that petitioner's income from the sale of land in 1976 should be declared as a cash transaction in his tax return for the same year? RULING: As a general rule, the whole profit accruing from a sale of property is taxable as income in the year the sale is made. But, if not all of the sale price is received during such year, and a statute provides that income shall be taxable in the year in which it is "received," the profit from an installment sale is to be apportioned between or among the years in which such installments are paid and received. Sec. 43 and Sec. 175 says that among the entities who may use the abovementioned installment method is a seller of real property who disposes his property on installment, provided that the initial payment does not exceed 25% of the selling price. They also state what may be regarded as installment payment and what constitutes initial payment. Initial payment means the payment received in cash or property excluding evidences of indebtedness due and payable in subsequent years, like promissory notes or mortgages, given of the purchaser during the taxable year of sale. Initial payment does not include amounts received by the vendor in the year of sale from the disposition to a third person of notes given by the vendee as part of the purchase price which are due and payable in subsequent years. Such disposition or discounting of receivable is material only as to the computation of the initial payment. If _Saint Louis University School of Law_

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the initial payment is within 25% of total contract price, exclusive of the proceeds of discounted notes, the sale qualifies as an installment sale, otherwise it is a deferred sale. Although the proceed of a discounted promissory note is not considered part of the initial payment, it is still taxable income for the year it was converted into cash. The subsequent payments or liquidation of certificates of indebtedness is reported using the installment method in computing the proportionate income to be returned, during the respective year it was realized. Non-dealer sales of real or personal property may be reported as income under the installment method provided that the obligation is still outstanding at the close of that year. If the seller disposes the entire installment obligation by discounting the bill or the promissory note, he necessarily must report the balance of the income from the discounting not only income from the initial installment payment. Where an installment obligation is discounted at a bank or finance company, a taxable disposition results, even if the seller guarantees its payment, continues to collect on the installment obligation, or handles repossession of merchandise in case of default. This rule prevails in the United States. Since our income tax laws are of American origin, interpretations by American courts an our parallel tax laws have persuasive effect on the interpretation of these laws. Thus, by analogy, all the more would a taxable disposition result when the discounting of the promissory note is done by the seller himself. Clearly, the indebtedness of the buyer is discharged, while the seller acquires money for the settlement of his receivables. Logically then, the income should be reported at the time of the actual gain. For income tax purposes, income is an actual gain or an actual increase of wealth. Although the proceeds of a discounted promissory note is not considered initial payment, still it must be included as taxable income on the year it was converted to cash. When petitioner had the promissory notes covering the succeeding installment payments of the land issued by AYALA, discounted by AYALA itself, on the same day of the sale, he lost entitlement to report the sale as a sale on installment since, a taxable disposition resulted and petitioner was required by law to report in his returns the income derived from the discounting. What petitioner did is tantamount to an attempt to circumvent the rule on payment of income taxes gained from the sale of the land to AYALA for the year 1976.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 146 First Semester, SY 2011-2012

Topic: The Tests Applied to Partnership, Co-ownerships and Estates AFISCO INSURANCE CORPORATION vs. COURT OF APPEALS G.R. No. 112675 January 25, 1999 FACTS: The petitioners are 41 non-life insurance corporations, organized and existing under the laws of the Philippines. Upon issuance by them of Erection, Machinery Breakdown, Boiler Explosion and Contractors' All Risk insurance policies, the petitioners on August 1, 1965 entered into a Quota Share Reinsurance Treaty and a Surplus Reinsurance Treaty with the MunchenerRuckversicherungs-Gesselschaft , a non-resident foreign insurance corporation. The reinsurance treaties required petitioners to form a pool. Accordingly, a pool composed of the petitioners was formed on the same day. On April 14, 1976, the pool of machinery insurers submitted a financial statement and filed an "Information Return of Organization Exempt from Income Tax" for the year ending in 1975, on the basis of which it was assessed by the Commissioner of Internal Revenue deficiency corporate taxes in the amount of P1,843,273.60, and withholding taxes in the amount of P1,768,799.39 and P89,438.68 on dividends paid to Munich and to the petitioners, respectively. These assessments were protested by the petitioners through its auditors Sycip, Gorres, Velayo and Co. On January 27, 1986, the Commissioner of Internal Revenue denied the protest and ordered the petitioners, assessed as "Pool of Machinery Insurers," to pay deficiency income tax, interest, and with holding tax. ISSUE: Whether or not the remittances to petitioners and MUNICHRE of their respective shares of reinsurance premiums, pertaining to their individual and separate contracts of reinsurance, were "dividends" subject to tax? RULING: YES. In the instant case, the pool is a taxable entity distinct from the individual corporate entities of the ceding companies. The tax on its income is obviously different from the tax on the dividends received by the said companies. Clearly, there is no double taxation here. The tax exemptions claimed by petitioners cannot be granted, since their entitlement thereto remains unproven and unsubstantiated. It is axiomatic in the law of taxation that taxes are the lifeblood of the nation. Hence, "exemptions therefrom are highly disfavored in law and he who claims tax exemption must be able to justify his claim or right." Petitioners have failed to discharge this burden of proof. The sections of the 1977 NIRC which they cite are inapplicable, because these were not yet in effect when the income was earned and when the subject information return for the year ending 1975 was filed.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 147 First Semester, SY 2011-2012

Referring, to the 1975 version of the counterpart sections of the NIRC, the Court still cannot justify the exemptions claimed. Section 255 provides that no tax shall ". . . be paid upon reinsurance by any company that has already paid the tax . . ." This cannot be applied to the present case because, as previously discussed, the pool is a taxable entity distinct from the ceding companies; therefore, the latter cannot individually claim the income tax paid by the former as their own. On the other hand, Section 24 (b) (1) pertains to tax on foreign corporations; hence, it cannot be claimed by the ceding companies which are domestic corporations. Nor can Munich, a foreign corporation, be granted exemption based solely on this provision of the Tax Code, because the same subsection specifically taxes dividends, the type of remittances forwarded to it by the pool. Although not a signatory to the Pool Agreement, Munich is patently an associate of the ceding companies in the entity formed, pursuant to their reinsurance treaties which required the creation of said pool. Under its pool arrangement with the ceding companies; Munich shared in their income and loss. This is manifest from a reading of Article 3 and 10 of the QuotaShare Reinsurance treaty and Articles 3 and 10 of the Surplus Reinsurance Treaty. The foregoing interpretation of Section 24 (b) (1) is in line with the doctrine that a tax exemption must be construed strictissimijuris, and the statutory exemption claimed must be expressed in a language too plain to be mistaken. Finally the petitioners' claim that Munich is tax-exempt based on the RP- West German Tax Treaty is likewise unpersuasive, because the internal revenue commissioner assessed the pool for corporate taxes on the basis of the information return it had submitted for the year ending 1975, a taxable year when said treaty was not yet in effect. 54 Although petitioners omitted in their pleadings the date of effectivity of the treaty, the Court takes judicial notice that it took effect only later, on December 14, 1984.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 148 First Semester, SY 2011-2012

Topic: The Tests Applied to Partnership, Co-ownerships and Estates EVANGELISTA, vs. COMMISSIONER OF INTERNAL REVENUE G.R. No. L-9996 October 15, 1957 FACTS: Petitioners were engaged in realty business, renting and leasing properties they have bought. On September 24, 1954 respondent Collector of Internal Revenue demanded the payment of income tax on corporations, real estate dealer's fixed tax and corporation residence tax for the years 1945-1949, Said letter of demand and corresponding assessments were delivered to petitioners on December 3, 1954, whereupon they instituted the present case in the Court of Tax Appeals, with a prayer that "the decision of the respondent contained in his letter of demand dated September 24, 1954" be reversed, and that they be absolved from the payment of the taxes in question, with costs against the respondent. ISSUE: Whether petitioners are subject to the tax on corporations provided for in section 24 of Commonwealth Act. No. 466, otherwise known as the National Internal Revenue Code, as well as to the residence tax for corporations and the real estate dealers fixed tax? RULING: Article 1767 of the Civil Code of the Philippines provides: By the contract of partnership two or more persons bind themselves to contribute money, properly, or industry to a common fund, with the intention of dividing the profits among themselves. Pursuant to the article, the essential elements of a partnership are two, namely: (a) an agreement to contribute money, property or industry to a common fund; and (b) intent to divide the profits among the contracting parties. The first element is undoubtedly present in the case at bar, for, admittedly, petitioners have agreed to, and did, contribute money and property to a common fund. Hence, the issue narrows down to their intent in acting as they did. Upon consideration of all the facts and circumstances surrounding the case, the court is fully satisfied that their purpose was to engage in real estate transactions for monetary gain and then divide the same among themselves. Although, taken singly, they might not suffice to establish the intent necessary to constitute a partnership, the collective effect of these circumstances is such as to leave no room for doubt on the existence of said intent in petitioners herein. Only one or two of the aforementioned circumstances were present in the cases cited by petitioners herein, and, hence, those cases are not in point. Petitioners insist, however, that they are mere co-owners, not copartners, for, in consequence of the acts performed by them, a legal entity, with a personality independent of that of its members, did not come into existence, and some of the

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 149 First Semester, SY 2011-2012

characteristics of partnerships are lacking in the case at bar. This pretense was correctly rejected by the Court of Tax Appeals. Section 24 of said Code exempts from the aforementioned tax "duly registered general partnerships which constitute precisely one of the most typical forms of partnerships in this jurisdiction. Likewise, as defined in section 84(b) of said Code, "the term corporation includes partnerships, no matter how created or organized." This qualifying expression clearly indicates that a joint venture need not be undertaken in any of the standard forms, or in conformity with the usual requirements of the law on partnerships, in order that one could be deemed constituted for purposes of the tax on corporations. Again, pursuant to said section 84(b), the term "corporation" includes, among other, joint accounts, and "associations," none of which has a legal personality of its own, independent of that of its members. For purposes of the tax on corporations, our National Internal Revenue Code, includes these partnerships — with the exception only of duly registered general copartnerships — within the purview of the term "corporation." It is, therefore, clear to our mind that petitioners herein constitute a partnership, insofar as said Code is concerned and are subject to the income tax for corporations. As regards the residence of tax for corporations, section 2 of Commonwealth Act No. 465 provides in part: Entities liable to residence tax.-Every corporation, no matter how created or organized, whether domestic or resident foreign, engaged in or doing business in the Philippines shall pay an annual residence tax of five pesos and an annual additional tax which in no case, shall exceed one thousand pesos, in accordance with the following schedule: . . . The term 'corporation' as used in this Act includes joint-stock company, partnership, joint account,association or insurance company, no matter how created or organized. Considering that the pertinent part of this provision is analogous to that of section 24 and 84 (b) of our National Internal Revenue Code (commonwealth Act No. 466), and that the latter was approved on June 15, 1939, the day immediately after the approval of said Commonwealth Act No. 465 (June 14, 1939), it is apparent that the terms "corporation" and "partnership" are used in both statutes with substantially the same meaning. Consequently, petitioners are subject, also, to the residence tax for corporations. Lastly, the records show that petitioners have habitually engaged in leasing the properties above mentioned for a period of over twelve years, and that the yearly gross rentals of said properties from June 1945 to 1948 ranged from P9,599 to P17,453. Thus, they are subject to the tax provided in section 193 (q) of our National Internal Revenue Code, for "real estate dealers," inasmuch as, pursuant to section 194 (s) thereof: 'Real estate dealer' includes any person engaged in the business of buying, selling, exchanging, leasing, or renting property or his own account as principal and holding himself out as a full or part time dealer in real estate or as an owner of rental property or properties rented or offered to rent for an aggregate amount of three thousand pesos or more a year.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 150 First Semester, SY 2011-2012

Topic: Rules applicable to Passive Income: Tax Sparing Rule COMMISSIONER OF INTERNAL REVENUE vs. PROCTER & GAMBLE PHILIPPINES G.R. No. L-66838 April 15, 1988 FACTS: Procter and Gamble Philippines is a wholly owned subsidiary of Procter and Gamble USA (PMC-USA), a non-resident foreign corporation in the Philippines, not engaged in trade and business therein. PMC-USA is the sole shareholder of PMC Philippines and is entitled to receive income from PMC Philippines in the form of dividends, if not rents or royalties. For the taxable years 1974 and 1975, PMC Philippines filed its income tax return and also declared dividends in favor of PMC-USA. In 1977, PMC Philippines, invoking the tax-sparing provision of Section 24 (b) as the withholding agent of the Philippine Government with respect to dividend taxes paid by PMC-USA, filed a claim for the refund of 20 percentage point portion of the 35 percentage whole tax paid with the Commissioner of Internal Revenue. ISSUE: Whether PMC Philippines is entitled to the 15% preferential tax rate on dividends declared and remitted to its parent corporation? RULING: The issue raised is one made for the first time before the Supreme Court. Under the same underlying principle of prior exhaustion of administrative remedies, on the judicial level, issues not raised in the lower court cannot be generally raised for the first time on appeal. Nonetheless, it is axiomatic that the state can never be allowed to jeopardize the government‘s financial position. The submission of the Commissioner that PMC Philippines is but a withholding agent of the government and therefore cannot claim reimbursement of alleged overpaid taxes, is completely meritorious. The real party in interest is PMC-USA, which should prove that it is entitled under the US Tax Code to a US Foreign Tax Credit equivalent to at least 20 percentage points spared or waived as otherwise considered or deemed paid by the Government. Herein, the claimant failed to show or justify the tax return of the disputed 15% as it failed to show the actual amount credited by the US Government against the income tax due from PMC-USA on the dividends received from PMC Philippines; to present the income tax return of PMC-USA for 1975 when the dividends were received; and to submit duly authenticated document showing that the US government credited the 20% tax deemed paid in the Philippines.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 151 First Semester, SY 2011-2012

Topic: Improperly Accumulated Earnings Tax CYANAMID PHILIPPINES, INC. vs. COURT OF APPEALS GR No. 108067 January 20, 2000 FACTS: Petitioner is a domestic corporation and 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. On February 7, 1985, the CIR sent an assessment letter to petitioner and demanded the payment of deficiency income tax for taxable year 1981. Petitioner, through its external accountant, Sycip, Gorres, Velayo& Co., claimed, among others, that the surtax(25%- 3.7M) for the undue accumulation of earnings was not proper because the said profits were retained to increase petitioner‘s working capital and it would be used for reasonable business needs of the company. Petitioner contended that it availed of the tax amnesty under Executive Order No. 41, hence enjoyed amnesty from civil and criminal prosecution granted by the law. CIR refused to allow the cancellation of the assessment notices. It stated that the amnesty applies only to assessments issued after August 21, 1986. In the instant case, the assessment was issued on January 30, 1985. Petitioner appealed to CTA. During the pendency of the case, however, both parties agreed to compromise the 1981 deficiency income tax assessment. Petitioner paid a reduced amount as compromise settlement. However, the surtax on improperly accumulated profits remained unresolved. 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) petitioner accumulated its earnings and profits for reasonable business requirements to meet working capital needs and retirement of indebtedness; (b) petitioner is a wholly owned subsidiary of American Cyanamid Company, a corporation organized under the laws of the State of Maine, USA, 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. CTA denied the petition. CA affirmed CTA, hence the petition. ISSUE: Is the petitioner liable to the surtax on accumulated earnings? RULING: Yes. Section 25 of the old National Internal Revenue Code of 1977 states: "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 _Saint Louis University School of Law_

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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, nonbank 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. The provision 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. 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. Available income covered expenses or indebtedness for that year, and there appeared no reason to expect an impending ‗working capital deficit‘ which could have necessitated an increase in working capital, as rationalized by petitioner. In order to determine whether profits are accumulated for the reasonable needs of the business to avoid the surtax upon shareholders, it must be shown that the controlling intention of the taxpayer is manifested at the time of accumulation, not intentions declared subsequently, which are mere afterthoughts. Furthermore, the accumulated profits must be used within a reasonable time after the close of the taxable year. In the instant case, petitioner did not establish, by clear and convincing evidence, that such accumulation of profit was for the immediate needs of the business. Hence, the findings of CIR are sustained. Unless rebutted, all presumptions generally are indulged in favor of the correctness of the CIR‘s assessment against the taxpayer.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 153 First Semester, SY 2011-2012

Topic: Special Corporations: Gross Philippine Billings BRITISH OVERSEAS AIRWAYS CORP. vs. COMMISSIONER OF INTERNAL REVENUE G.R. Nos. L-65773-74 April 30, 1987 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. 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, 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. On 7 May 1968, petitioner Commissioner of Internal Revenue 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. 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. ISSUE: Whether the British Overseas Airways Corporation, a foreign airline company which does not maintain any flight operations to and from the Philippines, is liable for Philippine income taxation in respect of "sales of air tickets" in the Philippines through a general sales agent, relating to the carriage of passengers and cargo between two points both outside the Philippines? RULING: A "resident foreign corporation" or a foreign corporation engaged in trade or business in the Philippines or having an office or place of business in the Philippines is subject to Philippine income taxation only in respect of income derived from sources within the Philippines. Section 24 (b) (2) of the National Internal Revenue Code as _Saint Louis University School of Law_

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amended by Republic Act No. 2343, approved 20 June 1959, as it existed up to 3 August 1969. Clearly, whether the foreign corporate taxpayer is doing business in the Philippines and therefore a resident foreign corporation, or not doing business in the Philippines and therefore a non-resident foreign corporation, it is liable to income tax only to the extent that it derives income from sources within the Philippines. The circumstance that a foreign corporation is resident in the Philippines yields no inference that all or any part of its income is Philippine source income. Similarly, the non-resident status of a foreign corporation does not imply that it has no Philippine source income. Conversely, the receipt of Philippine source income creates no presumption that the recipient foreign corporation is a resident of the Philippines. The critical issue, for present purposes, is therefore whether or not BOAC is deriving income from sources within the Philippines. For purposes of income taxation, it is well to bear in mind that the "source of income" relates not to the physical sourcing of a flow of money or the physical situs of payment but rather to the "property, activity or service which produced the income. Income derived from the purchase and sale of personal property shall be treated as derived entirely from the country in which sold. The word 'sold' includes 'exchange.' The 'country' in which 'sold' ordinarily means the place where the property is marketed. This Section does not apply to income from the sale of personal property produced (in whole or in part) by the taxpayer within and sold without the Philippines or produced (in whole or in part) by the taxpayer without and sold within the Philippines. International carriers issuing for compensation passage documentation in the Philippines for uplifts from any point in the world to any other point in the world, are not charged any Philippine income tax on their Philippine billings (i.e., billings in respect of passenger or cargo originating from the Philippines). Under this new approach, international carriers who service ports or points in the Philippines are treated in exactly the same way as international carriers not servicing any port or point in the Philippines. Thus, the source of income rule applicable, as above discussed, to transportation or other services rendered partly within and partly without the Philippines, or wholly without the Philippines, has been set aside. In place of Philippine income taxation, the Tax Code now imposes this 21/2 per cent tax computed on the basis of billings in respect of passengers and cargo originating from the Philippines regardless of where embarkation and debarkation would be taking place. This 2-1/2 per cent tax is effectively a tax on gross receipts or an excise or privilege tax and not a tax on income. Thereby, the Government has done away with the difficulties attending the allocation of income and related expenses, losses and deductions. Because taxes are the very lifeblood of government, the resulting potential "loss" or "gain" in the amount of taxes collectible by the state is sometimes, with varying degrees of consciousness, considered in choosing from among competing possible characterizations under or interpretations of tax statutes. It is hence perhaps useful to point out that the determination of the appropriate characterization here ---- that of contracts of air carriage rather than sales of airline tickets ---- entails no down-the-road loss of income tax revenues to the Government. In lieu thereof, the Government takes in revenues generated by the 2-1/2 per cent tax on the gross Philippine billings or receipts of international carriers. _Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 155 First Semester, SY 2011-2012

Topic: Tax Returns and Other Administrative Requirements PASEO REALTY AND DEVELOPMENT CORP. vs. COURT OF APPEALS G.R. No. 119286 October 13, 2004 FACTS: Paseo Realty and Development Corporation, a domestic corporation engaged in the lease of two parcels of land at Paseo de Roxas in Makati City. On April 16, 1990, petitioner filed its Income Tax Return for the calendar year 1989 declaring a gross income of P1,855,000.00, deductions of P1,775,991.00, net income of P79,009.00, an income tax due thereon in the amount of P27,653.00, prior year‘s excess credit of P146,026.00, and creditable taxes withheld in 1989 of P54,104.00 or a total tax credit of P200,130.00 and credit balance of P172,477.00. In a resolution dated October 21, 1993 Respondent Court reconsidered its decision of July 29, 1993 and dismissed the petition for review, stating that it has ―overlooked the fact that the petitioner‘s 1989 Corporate Income Tax Return (Exh. ―A‖) indicated that the amount of P54,104.00 subject of petitioner‘s claim for refund has already been included as part and parcel of the P172,477.00 which the petitioner automatically applied as tax credit for the succeeding taxable year 1990.‖ Petitioner filed a Motion for Reconsideration which was denied by respondent Court on March 10, 1994. Petitioner filed a Petition for Review dated April 3, 1994with the Court of Appeals. Resolving the twin issues of whether petitioner is entitled to a refund of P54,104.00 representing creditable taxes withheld in 1989 and whether petitioner applied such creditable taxes withheld to its 1990 income tax liability, the appellate court held that petitioner is not entitled to a refund because it had already elected to apply the total amount of P172,447.00, which includes the P54,104.00 refund claimed, against its income tax liability for 1990. The appellate court elucidated on the reason for its dismissal of petitioner‘s claim for refund ISSUE: Whether or not the alleged excess taxes paid by a corporation during a taxable year should be refunded or credited against its tax liabilities for the succeeding year? RULING: The petition must be denied. As a matter of principle, it is not advisable for this Court to set aside the conclusion reached by an agency such as the CTA which is, by the very nature of its functions, dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the subject, unless there has been an abuse or improvident exercise of its authority. This interdiction finds particular application in this case since the CTA, after careful consideration of the merits of the Commissioner of Internal Revenue‘s motion _Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 156 First Semester, SY 2011-2012

for reconsideration, reconsidered its earlier decision which ordered the latter to refund the amount of P54,104.00 to petitioner. Its resolution cannot be successfully assailed based, as it is, on the pertinent laws as applied to the facts. Petitioner‘s 1989 tax return indicates an aggregate creditable tax of P172,477.00, representing its 1988 excess credit of P146,026.00 and 1989 creditable tax of P54,104.00 less tax due for 1989, which it elected to apply as tax credit for the succeeding taxable year.19 According to petitioner, it successively utilized this amount when it obtained refunds in CTA Case No. 4439 and CTA Case No. 4528 and applied its 1990 tax liability, leaving a balance of P54,104.00, the amount subject of the instant claim for refund. The confusion as to petitioner‘s entitlement to a refund could altogether have been avoided had it presented its tax return for 1990. Such return would have shown whether petitioner actually applied its 1989 tax credit of P172,477.00, which includes the P54,104.00 creditable taxes withheld for 1989 subject of the instant claim for refund, against its 1990 tax liability as it had elected in its 1989 return, or at least, whether petitioner‘s tax credit of P172,477.00 was applied to its approved refunds as it claims. As clearly shown from the above-quoted provisions, in case the corporation is entitled to a refund of the excess estimated quarterly income taxes paid, the refundable amount shown on its final adjustment return may be credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding year. The carrying forward of any excess or overpaid income tax for a given taxable year is limited to the succeeding taxable year only. Taxation is a destructive power which interferes with the personal and property rights of the people and takes from them a portion of their property for the support of the government. And since taxes are what we pay for civilized society, or are the lifeblood of the nation, the law frowns against exemptions from taxation and statutes granting tax exemptions are thus construed strictissimijurisagainst the taxpayer and liberally in favor of the taxing authority. A claim of refund or exemption from tax payments must be clearly shown and be based on language in the law too plain to be mistaken. Elsewise stated, taxation is the rule, exemption therefrom is the exception.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 157 First Semester, SY 2011-2012

Topic: Taxation of Income Trusts MIGUEL J. OSSORIO PENSION FOUNDATION, INC vs. CA and CIR G.R. No. 162175 June 28, 2010 FACTS: The Miguel J. Ossorio Pension Foundation, Incorporated (petitioner or MJOPFI) filed this Petition for Certiorari1with Prayer for the Issuance of a Temporary Restraining Order and/or Writ of Preliminary Injunction to reverse the Court of Appeals‘ (CA) Decision dated 30 May 2003 in CA-G.R. SP No. 61829 as well as the Resolutiondated 7 November 2003 denying the Motion for Reconsideration. In the assailed decision, the CA affirmed the Court of Tax Appeals‘ (CTA) Decisiondated 24 October 2000. The CTA denied petitioner‘s claim for refund of withheld creditable tax of P3,037,500 arising from the sale of real property of which petitioner claims to be a co-owner as trustee of the employees‘ trust or retirement funds. ISSUE: 1. Whether petitioner or the Employees‘ Trust Fund is estopped from claiming that the Employees‘ Trust Fund is the beneficial owner of 49.59% of the MBP lot and that VMC merely held 49.59% of the MBP lot in trust for the Employees‘ Trust Fund. 2. If petitioner or the Employees‘ Trust Fund is not estopped, whether they have sufficiently established that the Employees‘ Trust Fund is the beneficial owner of 49.59% of the MBP lot, and thus entitled to tax exemption for its share in the proceeds from the sale of the MBP lot. HELD: We grant the petition. The law expressly allows a co-owner (first co-owner) of a parcel of land to register his proportionate share in the name of his co-owner (second co-owner) in whose name the entire land is registered. The second co-owner serves as a legal trustee of the first coowner insofar as the proportionate share of the first co-owner is concerned. The first co-owner remains the owner of his proportionate share and not the second co-owner in whose name the entire land is registered. Thus, this case turns on whether petitioner can sufficiently establish that petitioner, as trustee of the Employees‘ Trust Fund, has a common agreement with VMC and VFC that petitioner, VMC and VFC shall jointly purchase the MBP lot and put the title to the MBP lot in the name of VMC for the benefit petitioner, VMC and VFC. We rule that petitioner, as trustee of the Employees‘ Trust Fund, has more than sufficiently established that it has an agreement with VMC and VFC to purchase jointly the MBP lot and to register the MBP lot solely in the name of VMC for the benefit of petitioner, VMC and VFC.

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 158 First Semester, SY 2011-2012

Documents acknowledged before notaries public are public documents and public documents are admissible in evidence without necessity of preliminary proof as to their authenticity and due execution. They have in their favor the presumption of regularity, and to contradict the same, there must be evidence that is clear, convincing and more than merely preponderant. The BIR failed to present any clear and convincing evidence to prove that the notarized Memorandum of Agreement is fictitious or has no legal effect. Likewise, VMC, the registered owner, did not repudiate petitioner‘s share in the MBP lot. Further, City trust, a reputable banking institution, has prepared a Portfolio Mix Analysis for the years 1994 to 1997 showing that petitioner invested P5,504,748.25 in the MBP lot. Absent any proof that the Cityt rust bank records have been tampered or falsified, and the BIR has presented none, the Portfolio Mix Analysis should be given probative value. The trustor-beneficiary is not estopped from proving its ownership over the property held in trust by the trustee when the purpose is not to contest the disposition or encumbrance of the property in favor of an innocent third-party purchaser for value. The BIR, not being a buyer or claimant to any interest in the MBP lot, has not relied on the face of the title of the MBP lot to acquire any interest in the lot. There is no basis for the BIR to claim that petitioner is estopped from proving that it co-owns, as trustee of the Employees‘ Trust Fund, the MBP lot. Article 1452 of the Civil The income from the trust fund investments is therefore exempt from the payment of income tax and consequently from the payment of the creditable withholding tax on the sale of their real property. Since petitioner has proven that the income from the sale of the MBP lot came from an investment by the Employees' Trust Fund, petitioner, as trustee of the Employees‘ Trust Fund, is entitled to claim the tax refund ofP3,037,500 which was erroneously paid in the sale of the MBP lot. Respondent Commissioner of Internal Revenue is directed to refund petitioner Miguel J. Ossorio Pension Foundation, Incorporated, as trustee of the Employees‘ Trust Fund, the amount of P3,037,500, representing income tax erroneously paid.

_Saint Louis University School of Law_