tax digest

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1. Gomez v. Palomar GR No. L-23645, October 29, 1968 Facts: This petition assails the constitutionality of RA 1635 as amended which provides that to help raise funds for the Philippine Tuberculosis Society, no mail matter shall be accepted in the mails unless it bears the semi-postal stamps which bears the regular postage stamps plus the additional amount of five centavos for the said purpose. The additional charge of five centavos will constitute a special fund to be expended by the PTS. In September 1963, petitioner Benjamin Gomez mailed a letter at the post office of San Fernando, Pampanga but since it did not include the special anti-TB stamp, it was returned to Gomez. Petitioner then brought a declaratory suit in the CFI of Pampanga to test the constitutionality of the statute 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. Issue: W/N RA 1635 is unconstitutional for being violative of the equal protection clause and for not being levied for a public purpose. Ruling: The Court ruled that the five centavo charge levied is in the nature of an excise tax, laid upon the exercise of a privilege, namely the privilege of using the mails. 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.” It is also not violative of the equal protection clause that only tuberculous is singled out for the fund to the exclusion of other diseases. It is never the requirement of equal protection that all evils of the same genus be eradicated or none at all. It is for a public purpose as 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 to answer 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.

2. PAL v. Edu, Carbonell GR No. L-41383, August 15, 1988

Facts: The Philippine Airlines (PAL) is a corporation organized and existing under Philippine laws and is granted a franchise to operate its air transportation business. Under its franchise, PAL is granted tax exemption, and on the strength of the opinion of the Secretary of Justice (Op. No. 307, series of 1956), PAL has since 1956, not been paying motor vehicle registration fees. In 1971, Commissioner Elevate issued a regulation requiring all tax exempt entities, to pay motor vehicle registration fees. PAL paid Php 19,529.75 under protest. Subsequently, PAL’s counsel wrote to Commissioner Edu demanding refund of the amount saying that motor vehicle registration fees are in reality tax payment to which PAL is exempted to pay under its franchise. Issue: W/N motor vehicle registration fees are considered as taxes. Ruling: Yes. It is possible for an exaction to be either a tax or a regulation. License fees are charges looked to as a source of revenue as well as means of regulation as consequence of the exercise 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.

2 | T a x a t i o n I | 2017 Originally, vehicle registration fees were 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, Congress found the registration of vehicles a very convenient way of raising much needed revenues. Hence, presently motor vehicle registration fees are considered as taxes.

on the property inherited for any unpaid income taxes. By virtue of such lien, the Government has the right to subject the property in Pineda's possession, i.e., the P2, 500.00, to satisfy the income tax assessment in the sum of P760.28. After such payment, Pineda will have a right of contribution from his co-heirs, to achieve an adjustment of the proper share of each heir in the distributable estate.

4. Francia v. IAC

GR No. L-67649, June 28, 1988

3. CIR v. Pineda

GR No. L-22734, September 15, 1967 Facts: Anastasio Pineda died and was survived by his wife and children. The estate was divided and distributed to his heirs, with Atty. Manuel Pineda receiving a share of P2,500.00. After the estate proceedings were closed, the BIR investigated the estate tax liabilities and discovered that tax returns were not filed and hence, issued an assessment covering the years 1945 – 1947. The SC ruled that the right to assess and collect tax for the years 1945-1946 had already prescribed but affirmed the assessment and collection for 1947. The case was then remanded back to the CTA where it ruled that Pineda is liable only to the tax in proportion to his share. CIR appealed contending that Pineda must be liable to the whole tax due from the estate, and not merely his portion thereof. Issue: W/N Manuel Pineda can be held liable of the whole amount of the unpaid income tax. Ruling: Yes. Pineda is liable for the assessment as an heir and as a holder transferee of property belonging to the estate/taxpayer. As an heir, he is individually answerable for the part of the tax proportionate to the share he received from the inheritance. His liability, however, cannot exceed the amount of his share. As a holder of property belonging to the estate, Pineda is liable for the tax up to the amount of the property in his possession. Sec. 315 of the Tax Code creates a lien

Facts: Engracio Francia is the registered owner of a residential lot with a two-story house in Pasay City. In 1977, 125 out of the 328 square meters of the lot was expropriated by the Republic for more than 4,000 equivalent to its assessed value. Since 1963 up to 1977, Francia failed to pay real estate taes and hence, his property was sold at public auction to satisfy a tax delinquency of P2,400. Private respondent Ho Fernandez is the highest bidder. When Ho filed a petition for a new Certificate of Title, Francia filed a complaint to annul the auction sale but the CTA and IAC both ruled in favor of Ho. Issue: W/N the tax delinquency may be set off from the amount which the government owed to Francia Ruling: No. The court has consistently ruled that there can be no offsetting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government. Furthermore, the tax was due to the city government while the expropriation was effected by the national government. Also, the amount for the expropriation has long been deposited to the account of Francia long before the public auction of his property. He could have easily withdrawn the amount needed so that he could pay the tax obligation thus aborting the sale at public auction.

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5. Domingo v. Garlitos GR No. L-18994, June 29, 1963

Facts: On January 30, 1960, the Supreme Court declared as final and executory the order for the payment by the estate of Walter Scott Price of the estate and inheritance taxes, charges and penalties amounting to P40k in the case of Domingo v. Moscoso. In order to enforce the claims against the estate, the fiscal presented a petition for the execution of the judgment. The CFI of Leyte however denied the petition as execution is not justifiable as the Government is indebted to the estate in the amount of P262,200. The CFI of Leyte however ordered that the amount of taxes be taken from the P262k that the Government still owes from the estate. Issue: W/N set off may take place. Ruling: Yes. The Court which has jurisdiction over the estate has found that the claim of the estate against the Government has been recognized and an amount of P262,200 has already been appropriated for the purpose by a correspondent law. Under the above circumstances, both the claim of the Government for inheritance taxes and the claim of the intestate for services rendered have already become due and demandable as well as fully liquidated. Compensation, therefore, takes place by operation of law.

6. Philex Mining Corp v. CIR GR No. 125704, August 28, 1988

Facts: BIR sent a letter to Philex asking it to settle its excise tax liabilities in the amount of P 123, 821, 982.52. In its written reply, Philex protested and stated that it has pending claims for VAT input credit/refund for the taxes it paid in the amount of P 119, 977 plus interest, thus claiming set-off between its tax liabilities and tax claims.

BIR denied the request of Philex stating that the pending claim of the latter is yet to be determined and established with certainty. Due to this, Philex raised the issue with CTA which reduced the obligation but still ordered Philex to pay. While the case was pending before the SC, its VAT input/refund was credited such that it now contends before the SC that the BIR should, ipso jure, off-set its excise tax liabilities since both had already become due and demandable, as well as fully liquidated. Issue: W/N the excise tax liabilities and the VAT input credit/refund may be set-off on compensation. Ruling: No. It is already settled that taxes cannot be subject to compensation for the simple reason that the government and the taxpayer are not creditors and debtors of each other. There is a material distinction between a tax and a debt. Debts are due to the Government in its corporate capacity, while taxes are due to the Government in its sovereign capacity.

7. Caltex Phil v. COA GR No. 925585, May 8, 1992

Facts: In 1989, COA sent a letter to Caltex directing it to remit to OPSF its collection of the additional tax on petroleum authorized under PD 1956 and pending such remittance, all of its claims from the OPSF shall be held in abeyance. Petitioner requested COA for the early release of its reimbursement certificates from the OPSF covering claims with the Office of Energy Affairs. COA denied the same. Issue: W/N petitioner can avail of the right to offset any amount that it may be required under the law to remit to the OPSF against any amount that it may receive by way of reimbursement. Ruling: It is a settled rule that a taxpayer may not offset taxes due from the claims that he may have against the government. Taxes cannot be the subject of compensation because the government and

4 | T a x a t i o n I | 2017 taxpayer are not mutually debtors and creditors of each other and a claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off. The oil companies merely acted as agents for the government in the latter’s collection since taxes are passed unto the end-users, the consuming public.

9. PAL v. Edu, Carbonell GR No. L-41383, August 15, 1988 See no. 2, page 1.

10. Lutz v. Araneta 95 Phil 148

8. Vera v. Fernandez

GR No. L-31364, March 30, 1979 Facts: The BIR sought to claim the payment of taxes representing the estate's tax deficiencies intestate proceedings of Luis Tongoy. The administrator opposed arguing that the claim was already barred by the statute of limitation for under the RoC, all claims for money against the decedent, arising from contracts, express or implied, whether the same be due, not due, or contingent, all claims for funeral expenses and expenses for the last sickness of the decedent, and judgment for money against the decedent, must be filed within the time limited in the notice; otherwise they are barred forever. Issue: Does the rule bar recovery by the Government of unpaid taxes? Ruling: No. The reason for the more liberal treatment of claims for taxes against a decedent's estate in the form of exception from the application of the statute of non-claims, is not hard to find. Taxes are the lifeblood of the Government and their prompt and certain availability are imperious need. To safeguard such interest, neglect or omission of government officials entrusted with the collection of taxes should not be allowed to bring harm or detriment to the people, in the same manner as private persons may be made to suffer individually on account of his own negligence, the presumption being that they take good care of their personal affairs. This should not hold true to government officials with respect to matters not of their own personal concern. This is the philosophy behind the government's exception, as a general rule, from the operation of the principle of estoppel.

Facts: In 1940, Commonwealth Act No. 567, otherwise known as the Sugar Adjustment Act was promulgated. The law wanted to obtain a readjustment of benefits derived from the sugar industry and to stabilize the sugar industry. Walter Lutz, 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. He alleged that such tax is unconstitutional and void, being levied for the aid and support of the sugar industry exclusively, which in plaintiff's opinion is not a public purpose for which a tax may be constitutionally levied. His action was dismissed by the CFI and was appealed directly to the SC. Issue: W/N the taxes imposed by Commonwealth Act No. 567, otherwise known as the Sugar Adjustment Act are legal. Ruling: Yes. The Supreme Court held that the analysis of the Act, and particularly of section 6 will show that the tax is levied with a regulatory purpose, to provide means for the rehabilitation and stabilization of the threatened sugar industry. In other words, the act is primarily an exercise of the police power. Sugar production is one of the great industries of our nation and that it is a great source of the state's wealth. The protection of a large industry constituting one of the great sources of the state's wealth and therefore directly or indirectly affecting the welfare of so great a portion of the population of the State is affected to such an extent by public interests as to be within the police power of the sovereign. The

5 | T a x a t i o n I | 2017 protection and promotion of the sugar industry is a matter of public concern, it follows that the Legislature may determine within reasonable bounds what is necessary for its protection. Taxation may be made the implement of the state's police power. Even from the standpoint that the Act is a pure tax measure, it cannot be said that it constitutes expenditure of tax money for private purposes.

11. Pascual v. Sec of Public Works GR No. No. L-10405, December 29, 1960

Facts: Republic Act No. 920 was approved on June 20, 1953. It was act that would appropriate funds for the construction of Pasig feeder road terminals. Pascual instituted this action upon the ground that said appropriation was made by Congress because its members were made to believe that the projected feeder roads in question were "public roads and not private streets of a private subdivision". Pascual alleges that when the appropriation was approved the roads in question were private property owned by Senator Zulueta and that on Dec 12, 1953 Senator Zulueta donated parcels of land to the government in order to give a semblance of legality to the appropriation. Issue: W/N the appropriation was valid and was for public purpose Ruling: NO. 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. The legality of the appropriation depended upon whether said roads were public or private property when the bill, which, later on, became Republic Act 920, was passed by Congress, or, when said bill

was approved by the President. 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.

12. Pepsi-Cola v. Butuan City 24 SCRA 789

Facts: Ordinance 110 was enacted by the City of Butuan imposing a tax of P0.10 per case of 24 bottles of softdrinks or carbonated drinks. The tax was imposed upon dealers engeged in selling softdrinks or carbonated drinks. When Ordinance 110, the tax was imposed upon an agent or consignee of any person, association, partnership, company or corporation engaged in selling softdrinks or carbonated drinks, with “agent or consignee” being particularly defined on the inserted provision Section 3-A. In effect, merchants engaged in the sale of softdrinks, etc. are not subject to the tax unless they are agents or consignees of another dealer who must be one engaged in business outside the City. Pepsi-Cola Bottling Co. filed suit to recover sums paid by it to the city pursuant to the Ordinance, which it claims to be null and void. Issue: Whether the Ordinance is discriminatory. Ruling: The Ordinance, as amended, is discriminatory since only sales by “agents or consignees” of outside dealers would be subject to the tax. Sales by local dealers, not acting for or on behalf of other merchants, regardless of the volume of their sales , and even if the same exceeded those made by said agents or consignees of producers or merchants established outside the city, would be exempt from the tax. The classification made in the exercise of the authority to tax, to be valid must be reasonable, which would be satisfied if the classification is based upon substantial distinctions which makes real differences; these are germane to the purpose of legislation or ordinance; the classification applies not only to present conditions but also to future conditions substantially identical to those of the present; and the classification applies equally to all those who belong to the same class.

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13. Pepsi-Cola v. Municipality of Tanauan GR No. L-31156, February 27, 1976

Facts: Plaintiff-appellant Pepsi-Cola commenced a complaint with preliminary injunction 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 denominated as "municipal production tax" of the Municipality of Tanauan, Leyte, null and void. Ordinance 23 levies and collects from soft drinks producers and manufacturers a tax of onesixteenth (1/16) of a centavo for every bottle of soft drink corked, and Ordinance 27 levies and collects on soft drinks produced or manufactured within the territorial jurisdiction of this municipality a tax of ONE CENTAVO (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity. Aside from the undue delegation of authority, appellant contends that it allows double taxation, and that the subject ordinances are void for they impose percentage or specific tax. Issue: W/N the contentions of the appellant tenable? Ruling: No. On the issue of undue delegation of taxing power, it is settled that the power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter of right to every independent government, without being expressly conferred by the people. It is a power that is purely legislative and which the central legislative body cannot delegate either to the executive or judicial department of the government without infringing upon the theory of separation of powers. The exception, however, lies in the case of municipal corporations, to which, said theory does not apply. Legislative powers may be delegated to local governments in respect of matters of local concern. By necessary implication, the legislative power to create political corporations for purposes of local self-government carries with it the power to confer on such local governmental agencies the power to tax.

Also, there is no validity to the assertion that the delegated authority can be declared unconstitutional on the theory of double taxation. It must be observed that the delegating authority specifies the limitations and enumerates the taxes over which local taxation may not be exercised. The reason is that the State has exclusively reserved the same for its own prerogative. Moreover, double taxation, in general, is not forbidden by our fundamental law, so that double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental entity or by the same jurisdiction for the same purpose, but not in a case where one tax is imposed by the State and the other by the city or municipality. On the last issue raised, the ordinances do not partake of the nature of a percentage tax on sales, or other taxes in any form based thereon. The tax is levied on the produce (whether sold or not) and not on the sales. The volume capacity of the taxpayer's production of soft drinks is considered solely for purposes of determining the tax rate on the products, but there is not set ratio between the volume of sales and the amount of the tax.

14. Abakada Guro v. 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 uniformp ro v is o authorizing the President, upon recommendation of the Secretary of Finance, to raise

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15. Bagatsing v. Ramirez 74 S 306

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. 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.

Facts: In 1974, the Municipal Board of Manila enacted Ordinance 7522, regulating the operation of public markets and prescribing fees for the rentals of stalls and providing penalties for violation thereof. The Federation of Manila Market Vendors Inc. assailed the validity of the ordinance, alleging among others the non-compliance to the publication requirement under the Revised Charter of the City of Manila. Issue: WN the publication requirement was complied with. Ruling: The Revised Charter of the City of Manila is a special act since it relates only to the City of Manila, whereas the Local Tax Code id a general law because it applies universally to all local governments. Section 17 of the Charter speaks of “ordinance” in general. Whereas, Section 43 of the Local Tax Code relates to “ordinances levying or imposing taxes, fees or other charges” in particular. While the Charter requires publication, before the enactment of the ordinance and after approval thereof, in two daily newspapers of the general circulation in the city, the Local Tax Code only prescribes for publication widely circulated within the jurisdiction of the local government or by posting the ordinance in the local legislative hall or premises and in two other conspicuous places within the territorial jurisdiction of the local government. Being a general law with a special provision applicable in the case, the Local Tax Code prevails.

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16. National Development Co. (NDC) v. Commissioner GR No. L-53961, June 1987 Facts: The National Development Co. (NDC) entered into contracts in Tokyo with several Japanese shipbuilding companies for the construction of 12 ocean-going vessels. Initial payments were made in cash and through irrevocable letters of credit. When the vessels were completed and delivered to the NDC in Tokyo, the latter remitted to the shipbuilders the amount of US$ 4,066,580.70 as interest on the balance of the purchase price. No tax was withheld. The Commissioner then held NDC liable on such tax in the total amount of P5,115,234.74. The Bureau of Internal Revenue served upon the NDC a warrant of distraint and levy after negotiations failed. Issue: W/N the NDC is liable for deficiency tax. Ruling: The Japanese shipbuilders were liable on the interest remitted to them under Section 37 of the Tax Code. The NDC is not the one taxed. The imposition of the deficiency taxes on the NDS is a penalty for its failure to withhold the same from the Japanese shipbuilders. Such liability is imposed by Section 53(c) of the Tax Code. NDC was remiss in the discharge of its obligation of its obligation as the withholding agent of the government and so should be liable for its omission.

17. MIAA vs CITY OF PASAY (G.R. No. 163072)

FACTS:Petitioner Manila International Airport Authority (MIAA) operates and administers the Ninoy Aquino International Airport (NAIA) Complex under Executive Order No. 903 (EO 903), otherwise known as the Revised Charter of the Manila International Airport

Authority. EO 903 was issued on 21 July 1983 by then President Ferdinand E. Marcos. Under Sections 3 and 22 of EO 903, approximately 600 hectares of land, including the runways, the airport tower, and other airport buildings, were transferred to MIAA. The NAIA Complex is located along the border between Pasay City and Parañaque City. On 28 August 2001, MIAA received Final Notices of Real Property Tax Delinquency from the City of Pasay for the taxable years 1992 to 2001. The City of Pasay, through its City Treasurer, issued notices of levy and warrants of levy for the NAIA Pasay properties. MIAA received the notices and warrants of levy on 28 August 2001. ISSUE: Whether the NAIA Pasay properties of MIAA are exempt from real property tax. HELD: In Manila International Airport Authority v. Court of Appeals (2006 MIAA case), this Court already resolved the issue of whether the airport lands and buildings of MIAA are exempt from tax under existing laws. The 2006 MIAA case originated from a petition for prohibition and injunction which MIAA filed with the Court of Appeals, seeking to restrain the City of Parañaque from imposing real property tax on, levying against, and auctioning for public sale the airport lands and buildings located in Parañaque City. The only difference between the 2006 MIAA case and this case is that the 2006 MIAA case involved airport lands and buildings located in Parañaque City while this case involved airport lands and buildings located in Pasay City. The 2006 MIAA case and this case raised the same threshold issue: whether the local government can impose real property tax on the airport lands, consisting mostly of the runways, as well as the airport buildings, of MIAA. As held in the 2006 MIAA case, MIAA is not a government-owned or controlled corporation under Section 2(13) of the Introductory Provisions of the Administrative Code because it is not organized as a stock or non-stock corporation. Neither is MIAA a government-owned or controlled corporation under Section 16, Article XII of the 1987 Constitution because MIAA is not required to meet the test of

9 | T a x a t i o n I | 2017 economic viability. MIAA is a government instrumentality vested with corporate powers and performing essential public services pursuant to Section 2(10) of the Introductory Provisions of the Administrative Code. As a government instrumentality, MIAA is not subject to any kind of tax by local governments under Section 133(o) of the Local Government Code. The exception to the exemption in Section 234(a) does not apply to MIAA because MIAA is not a taxable entity under the Local Government Code. Such exception applies only if the beneficial use of real property owned by the Republic is given to a taxable entity.

18. NDC vs CEBU (G.R. No. 51593)

FACTS: Petitioner National Development Company (NDC) is a government-owned or controlled corporation (GOCC) authorized to engage in commercial, industrial, mining, agricultural and other enterprises necessary or contributory to economic development or important to public interest. It also operates, in furtherance of its objectives, subsidiary corporations one of which is the now defunct National Warehousing Corporation (NWC). On 10 August 1939, the President issued Proclamation No. 430[5] reserving Block No. 4, Reclamation Area No. 4, of Cebu City for warehousing purposes under the administration of NWC. Subsequently, in 1940, a warehouse was constructed thereon. On 4 October 1947, E.O. 93 dissolved NWC with NDC taking over its assets and functions. Commencing 1948, Cebu City (CEBU) assessed and collected from NDC real estate taxes on the land and the warehouse thereon. On 20 March 1970, NDC wrote the City Assessor demanding full refund of the real estate taxes paid to CEBU claiming that the land and the warehouse standing thereon belonged to the Republic and therefore exempt from taxation. CEBU did not acquiesce in the demand, hence, the present suit filed 25 October 1972 in the Court of First Instance of

Manila. CFI Manila decided in favor of NDC. The defendants appealed to the Court of Appeals which however certified the case to the SC as one involving pure questions of law, pursuant to Sec. 17, R.A. 296. ISSUE:

1. Whether NDC is exempt from payment of real estate taxes on the land reserved by the President for warehousing purposes as well as the warehouse constructed thereon. 2. Whether NDC may recover in refund unprotested real estate taxes it paid from 1948 to 1970.

HELD: 1. Section 3, par. (a), of the Assessment Law provides "SEC. 3. Property exempt from tax. The exemptions shall be as follows: (a) Property owned by the United States of America, the Commonwealth of the Philippines, any province, city, municipality or municipal district x x x x" To come within the ambit of the exemption provided in Art. 3, par. (a), of the Assessment Law, it is important to establish that the property is owned by the government or by its unincorporated agency, and once government ownership is determined, the nature of the use of the property, whether for proprietary or sovereign purposes, becomes immaterial. What appears to have been ceded to NWC (later transferred to NDC), is merely the administration of the property while the government retains ownership of what has been declared reserved for warehousing purposes under Proclamation No. 430. Incidentally, the parties never raised the issue of ownership from the court a quo to this Court. A reserved land is defined as a "[p]ublic land that has been withheld or kept back from sale or disposition." The land remains "absolute property of the government." The government "does not part with its title by reserving them (lands), but simply gives notice to all the world that it desires them for a certain purpose". Absolute disposition of land is not implied from reservation; it merely means "a withdrawal of a specified portion of the public domain from disposal under the land laws and the appropriation thereof, for the time being, to some particular use or purpose of the general government". As its title remains with the Republic, the reserved land is clearly covered by the tax exemption provision.

10 | T a x a t i o n I | 2017 However, as regards the warehouse constructed on a public reservation, a different rule should apply because "[t]he exemption of public property from taxation does not extend to improvements on the public lands made by pre-emptioners, homesteaders and other claimants, or occupants, at their own expense, and these are taxable by the state x x x x" Consequently, the warehouse constructed on the reserved land by NWC (now under administration by NDC), indeed, should properly be assessed real estate tax as such improvement does not appear to belong to the Republic. 2. Since the reservation is exempt from realty tax, the erroneous tax payments collected by CEBU should be refunded to NDC. This is in consonance with Sec. 40, par. (a) of the former Real Property Tax Code which exempted from taxation real property owned by the Republic of the Philippines or any of its political subdivisions, as well as any GOCC so exempt by its charter.

19. Mactan Cebu International Airport Authority v Marcos (1996)

FACTS: Petitioner was created by virtue of RA 6958. Section 1 thereof states that the authority shall be exempt from realty taxes imposed by the National Government or any of its political subdivisions, agencies and instrumentalities. However, the Treasurer of Cebu City demanded payment for realty taxes from petitioner. Petitioner filed a declaratory relief before the Regional Trial Court. The trial court dismissed the petitioner ruling that the Local Government Code withdrew the tax exemption granted to Government owned and controlled corporation. ISSUE: Whether the city of Cebu has the power to impose taxes on petitioner RULING:Yes. Taxation is the rule and exemption is the exception, the exemption may thus be withdrawn at the pleasure of the taxing authority. As to tax exemptions or incentives granted to or presently enjoyed by natural or juridical persons, including government- owned

and controlled corporations, section 193 of the LGC prescribes the general rule, viz, they are withdrawn upon the effectivity of the LGC, except those granted to local water districts, cooperatives, duly registered under RA 6938, non stock and nonprofit hospitals and educational institutions and unless otherwise provided in the LGC.

20. Republic vs. Paranaque (GR No. 191109)

FACTS: This is a petition for review on certiorari assailing the Order of the Regional Trial Court, Branch 195,Paranaque City (RTC), which ruled that petitioner Philippine Reclamation Authority (PRA) is a government-owned and controlled corporation (GOCC), a taxable entity, and, therefore, not exempt from payment of real property taxes. The Public Estates Authority (PEA) is a government corporation created by virtue of P.D. No. 1084 to provide a coordinated, economical and efficient reclamation of lands, and the administration and operation of lands belonging to, managed and/or operated by, the government with the object of maximizing their utilization and hastening their development consistent with public interest. By virtue of its mandate, PRA reclaimed several portions of the foreshore and offshore areas of Manila Bay, including those located in Parañaque City. Parañaque City Treasurer issued Warrants of Levy on PRA’s reclaimed properties based on the assessment for delinquent real property for tax years 2001 and 2002. PRA asserted that: -

It is not a GOCC under the Administrative Code, nor is it a GOCC under Section 16, Article XII of the 1987Constitution because it is not required to meet the test of economic viability.

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It is a government instrumentality vested with corporate powers and performing an essential publicservice. Although it has a capital stock divided into shares, it may not be classified as a stock corporationbecause it lacks the second requisite of a

11 | T a x a t i o n I | 2017 stock corporation: to distribute dividends and allotment ofsurplus and profits to its stockholders. -

It may not be classified as a non-stock corporation because it has no members and it is not organized forcharitable, religious, educational, professional, cultural, recreational, fraternal, literary, scientific, social,civil service, or similar purposes, like trade, industry, agriculture and like chambers as provided in Section88 of the Corporation Code.

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It was not created to compete in the market place as there was no competing reclamation company operated by the private sector. Also, while PRA is vested with corporate powers under P.D. No. 1084, such circumstance does not make it a corporation but merely an incorporated instrumentality and that themere fact that an incorporated instrumentality of the National Government holds title to real propertydoes not make said instrumentality a GOCC.

City of Parañaque (respondent) argued that: - PRA since its creation consistently represented itself to be a GOCC. PRA’s very own charter (P.D. No. 1084) declared it to be a GOCC and that it has entered into several thousands of contracts where itrepresented itself to be a GOCC. In fact, PRA admitted in its original and amended petitions and pretrialbrief filed with the RTC of Parañaque City that it was a GOCC. -

It argues that PRA is a stock corporation with an authorized capital stock divided into 3 million no parvalue shares, out of which 2 million shares have been subscribed and fully paid up. Section 193 of the LGCof 1991 has withdrawn tax exemption privileges granted to or presently enjoyed by all persons, whethernatural or juridical, including GOCCs.

ISSUE: Whether or not petitioner is an incorporated instrumentality of the national government and is, therefore, exempt from payment of real property tax under sections 234(a) and 133(o) of Republic Act 7160 or the Local Government Code vis-à-vis Manila International Airport Authority v. Court of Appeals.

HELD: Yes it is a Government Instrumentality. However, it is not a GOCC. When the law vests in a government instrumentality corporate powers, the instrumentality does not necessarily become a corporation. Unless the government instrumentality is organized as a stock or non-stock corporation, it remains a government instrumentality vested with corporate powers and performing an essential public service pursuant to Section 2(10) of the Introductory Provisions of the Administrative Code. Being an incorporated government instrumentality, it is exempt from payment of real property tax. Furthermore, the Court agrees with PRA that the subject reclaimed lands are still part of the public domain, owned by the State and, therefore, exempt from payment of real estate taxes.

21. REPUBLIC (DOTC) vs MANDALUYONG Facts: The subject of this petition for review on certiorari is the writ of possession issued in favor of respondent City of real properties forming part of the EDSA Metro Rail Transit (MRT) III. Petitioner Republic of the Philippines (Republic) is represented in this suit by the Department of Transportation and Communications (DOTC On 8 August 1997, the DOTC entered into a Revised and Restated Agreement to Build, Lease and Transfer a Light Rail System for EDSA (BLT) with Metro Rail Transit Corporation Limited (Metro Rail), a foreign corporation. Under the BLT Agreement, Metro Rail shall be responsible for the design, construction, equipping, completion, testing, and commissioning of the Light Rail Transit System-LRTS Phase I (EDSA MRT III). The DOTC shall operate the same but ownership of the EDSA MRT III shall remain with Metro Rail during the Revenue and Construction periods. Metro Rail assigned all its rights and obligations under the BLT Agreement to Metro Rail Transit Corporation (MRTC), a domestic corporation.

12 | T a x a t i o n I | 2017 On July 15,2000, Metro Rail turned over the EDSA MRT III System to the DOTC for its operation. The City Assessors of Mandaluyong City, Quezon City, Makati City and Pasay City fixed the current and market value of EDSA MRT III at P32.75 Billion.On 4 June 2001, the Office of the City Assessor of Mandaluyong issued Tax Declaration No. D-01306267 in the name of MRTC. Subsequently on 18 June 2001, the said Office of the City Assessor of Mandaluyong City demanded payment of real property taxes due under the aforesaid tax declaration. Another demand was made on MRTC placing the deficiency real estate tax due to the City of Mandaluyong at P769,784,981.52. Several Notice of Delinquency was issued to MRTC. The City Treasurer issued and served a Warrant of Levy upon MRTC with the corresponding Notices of Levy. On 5 December 2005, petitioner Republic filed a case for Declaration of Nullity of Real Property Tax Assessment and Warrant of Levy with a prayer for a TRO and Writ of Preliminary Injunction before the RTC (branch 208) of Mandaluyong City. On 22 March 2006, the RTC denied both petitioner Republics and MRTCs applications for TRO. The issue on the validity of tax assessment however is pending before that court. Petitioner Republic filed a petition for certiorari before the Court of Appeals challenging the denial of both the TRO and injunction by RTC Branch 208. A public auction was conducted. For lack of bidders, the real properties were forfeited in favor of the City of Mandaluyong. Petitioner Republic filed a petition for certiorari before the Court of Appeals challenging the denial of both the TRO and injunction by RTC Branch 208. On 11 April 2008, respondent filed an ex parte petition praying for the issuance of a writ of possession before RTC Branch 213 of Mandaluyong. On 30 July 2008, the RTC Branch 213 granted the petition for the issuance of a writ of possession. A subsequent motion for

reconsideration filed by petitioner was denied for lack of merit. While MRTC appealed said order to the Court of Appeals, petitioner Republic filed the instant case raising a question of law, i.e. the propriety of the issuance of a writ of possession. To support its main thesis that the RTC Branch 213 erred in issuing a writ of possession, petitioner claims that since EDSA MRT properties are beneficially owned by DOTC, it should not have been assessed for payment of real property taxes. Being a governmental entity, it is exempt from payment of real property tax under Section 234 of the Local Government Code. Therefore, no tax delinquency exist authorizing respondent to sell the subject properties through public auction. It then follows that respondent has no legal right to a writ of possession. Respondent does not contest petitioners immunity from local taxes. In fact, it has assessed MRTC, and not petitioner, for real property tax. This case is, ultimately, between a local governments power to tax and the national governments privilege of tax exemption. That issue needs full hearing and deliberation, as indeed, the issue pends before the RTC, at first instance. Such trial of facts and issues must proceed. It should not be pre-empted by the present petition that deals with precisely the herein respondents intended end result. ISSUE: Whether or not the writ issued by the RTC in favor of the respondent is premature and without force and effect. RULING: Yes. A writ of possession is a mere incident in the transfer of title. In the instant case, it stemmed from the exercise of alleged ownership by respondent over EDSA MRT III properties by virtue of a tax delinquency sale. The issue of whether the auction sale should be enjoined is still pending before the Court of Appeals. Pending determination, it is premature for respondent to have conducted the auction sale and caused the transfer of title over the real properties to its name. The denial by the RTC to issue an injunction or TRO does not automatically give respondent the liberty to proceed with the actions sought to be enjoined, especially so in this case where a certiorari petition assailing the denial is still being deliberated in the Court of Appeals. All the more it is premature for the RTC to issue a writ of

13 | T a x a t i o n I | 2017 petition assailing the denial is still being deliberated in the Court of Appeals. All the more it is premature for the RTC to issue a writ of possession where the ownership of the subject properties is derived from an auction sale, the validity of which is still being threshed out in the Court of Appeals. The RTC should have held in abeyance the issuance of a writ of possession. At this juncture, the writ issued is premature and has no force and effect. The petition is GRANTED. The decision of RTC branch 213 of Mandaluyong City issuing the writ of possession is vacated and set aside.

22. GSIS vs Group Mgt. Corp. Et. Al. (JUNE 8, 2011)

FACTS: This case revolves around the petitions of the Lapu-Lapu Development & Housing Corporation (LLDHC), Group Management Corporation (GMC) and the Government Service Insurance System (GSIS). The three entities consistently filed cases for the same subject lots from April 30, 1980, until this case. The cases were filed before both the RTC of Lapu-Lapu City, where the subject lots are situated in, and the RTC of Manila. LLDHC entered into a Project and Loan Agreement with GSIS on February 4, 1974, involving seventy-eight lots situated in Barrio, Marigondon, Lapu-Lapu City. GSIS agreed to a 25 million peso loan with LLDHC, the owner of the lots. LLDHC failed to fulfill all of its obligations regarding the lots, which included the real estate mortgage in favor of GSIS, and so, GSIS closed the mortgage. Being the only bidder in the public auction sale, GSIS won over the subject lots, and in time secured its ownership over the lots with the transfer certificate of titles issued to its name. GMC offered to purchase on installment the

subject lots with a collective area specified as 423,177 square meters from GSIS, with the amount of 1,100,000 pesos. GSIS accepted the offer through a Deed of Conditional Sale on February 26, 1980. GMC then learned that the subject lots was only 298,504 square meters and requested GSIS to reduce the price according to the actual proportion of the land. This proposal was approved with an Amendment to the Deed of Conditional Sale, which reflected the agreement of GSIS and GMC. LLDHC filed a complaint against GSIS before the RTC of Manila on April 23, 1980 for Foreclosure with Writ of Mandatory Injunction, known as Civil Case No. R-82-3429. GMC filed a complaint also against GSIS on November 3, 1989, known as Civil Case No. 2203-L, for Specific Performance with Damages before the RTC of Lapu-Lapu City. GSIS, in its defense, submitted a COA Memorandum dated April 3, 1989 disallowing in audit the sale of the subject to the court, stating that there were “apparent inherent irregularities,” and that GMC bought the property at a value much lower than GSIS’ purchasing price. On February 24, 1992, with regard to Civil Case No. 2203-L, the RTC of Lapu-Lapu City decided in favor of GMC, and that GSIS was to execute order of the court pertaining to damages, and actions needed to finalize the deed of absolute sale with GMC. On May 10, 1994, the RTC of Manila also rendered its judgment that, aside from court orders, all claims and counterclaims by the parties against each other are dismissed in Civil Case No. R-82-3429. LLDHC now used the Manila RTC decision as a means to file a Petition for Annulment of Judgment of the Lapu-Lapu RTC Decision in Civil Case No. 2203-L, named CA-GR SP No. 34696, which was dismissed by the Court of Appeals. After this was a series of filing petitions to appeal the judgment. Throughout the years, eventually, the three parties approached the Supreme Court, where, in G.R. No. 167000, GSIS seeks to reverse and set aside the decision made on November 25, 2004 and January 20, 2005, and to annul and set aside the March 1, 2004 and May 7 2004 orders from the Lapu-Lapu RTC in Civil Case No. 2203-L. And in G.R. No. 169971, GMC seeks to reverse and set aside the Decision made in September 23, 2005 and to annul and set aside the March 11, 2004 Lapu-Lapu RTC decision. Issues: Whether or not the decisions of the Manila RTC in Civil Case No. R-82-3429 shall be executory, despite the decision of Lapu-Lapu RTC

14 | T a x a t i o n I | 2017 in Civil Case No. 2203-L. Whether or not the decision in CA GR SP No. 84382 and GSIS Petition in 167000 are barred by Res Judicata. Whether or not due process was given to the parties/entities involved in the case. Whether or not GSIS can be immune to acting out the orders of the court. Ruling: The petition in G.R. No. 167000 was denied by the court, and the petition in G.R. No. 169971 is granted. Ratio Decidendi: The decision of the Lapu-Lapu RTC in Civil Case No. 2203-L does not in any way affect the orders from the Manila RTC in Civil Case No. R-82-3429, since the former has been finalized on January 28, 1995, while the latter became final on May 30, 1997. Procedural due process was extended to all parties, that there was no immediate dismissal of their cases before they were heard by the respective courts, even if they have already had a rendered decision. However, the Supreme Court also recognized the doctrine of “Finality of Judgment,” where the decisions, once final and executed cannot be appealed, unless of circumstances that happen after the finalization, void judgments, correction of clerical errors and nunc pro tunc entries. The decision in CA GR SP No. 84382 and GSIS Petition in 167000 are barred by Res Judicata, which is one of the reasons why G.R. No. 167000 was denied. GSIS acted jure gestonis, entering into a contract, and being solely liable for their irresponsibility. They are not immune from acting out the orders of the court.

23.

REYES v. ALMANZOR

GR Nos. L-49839-46, April 26, 1991 196 SCRA 322

FACTS: Petitioners JBL Reyes et al. owned a parcel of land in Tondo which are leased and occupied as dwelling units by tenants who were paying monthly rentals of not exceeding P300. Sometimes in 1971 the Rental Freezing Law was passed prohibiting for one year from its effectivity, an increase in monthly rentals of dwelling units where rentals do not exceed three hundred pesos (P300.00), so that the Reyeses were precluded from raising the rents and from ejecting the tenants. In 1973, respondent City Assessor of Manila re-classified and reassessed the value of the subject properties based on the schedule of market values, which entailed an increase in the corresponding tax rates prompting petitioners to file a Memorandum of Disagreement averring that the reassessments made were "excessive, unwarranted, inequitable, confiscatory and unconstitutional" considering that the taxes imposed upon them greatly exceeded the annual income derived from their properties. They argued that the income approach should have been used in determining the land values instead of the comparable sales approach which the City Assessor adopted. ISSUE: Is the approach on tax assessment used by the City Assessor reasonable? HELD: No. The taxing power has the authority to make a reasonable and natural classification for purposes of taxation but the government's act must not be prompted by a spirit of hostility, or at the very least discrimination that finds no support in reason. It suffices then that the laws operate equally and uniformly on all persons under similar circumstances or that all persons must be treated in the same manner, the conditions not being different both in the privileges conferred and the liabilities imposed. Consequently, it stands to reason that petitioners who are burdened by the government by its Rental Freezing Laws (then R.A. No. 6359 and P.D. 20) under the principle of social justice should not now be

15 | T a x a t i o n I | 2017 penalized by the same government by the imposition of excessive taxes petitioners can ill afford and eventually result in the forfeiture of their properties.

24. CREBA v. The Hon. Executive Secretary Alberto Romulo, et al G.R. No. 160756. March 9, 2010 Facts: Petitioner Chamber of Real Estate and Builders’ Associations, Inc. (CREBA), an association of real estate developers and builders in the Philippines, questioned the validity of Section 27(E) of the Tax Code which imposes the minimum corporate income tax (MCIT) on corporations. Under the Tax Code, a corporation can become subject to the MCIT at the rate of 2% of gross income, beginning on the 4th taxable year immediately following the year in which it commenced its business operations, when such MCIT is greater than the normal corporate income tax. If the regular income tax is higher than the MCIT, the corporation does not pay the MCIT. CREBA argued, among others, that the use of gross income as MCIT base amounts to a confiscation of capital because gross income, unlike net income, is not realized gain. CREBA also sought to invalidate the provisions of RR No. 2-98, as amended, otherwise known as the Consolidated Withholding Tax Regulations, which prescribe the rules and procedures for the collection of CWT on sales of real properties classified as ordinary assets, on the grounds that these regulations:

-Use gross selling price (GSP) or fair market value (FMV) as basis for determining the income tax on the sale of real estate classified as ordinary assets, instead of the entity’s net taxable income as provided for under the Tax Code; - Mandate the collection of income tax on a per transaction basis, contrary to the Tax Code provision which imposes income tax on net income at the end of the taxable period; - Go against the due process clause because the government collects income tax even when the net income has not yet been determined; gain is never assured by mere receipt of the selling price; and - Contravene the equal protection clause because the CWT is being charged upon real estate enterprises, but not on other business enterprises, more particularly, those in the manufacturing sector, which do business similar to that of a real estate enterprise. Issues: (1) Is the imposition of MCIT constitutional? (2) Is the imposition of CWT on income from sales of real properties classified as ordinary assets constitutional? Held: (1) Yes. The imposition of the MCIT is constitutional. An income tax is arbitrary and confiscatory if it taxes capital, because it is income, and not capital, which is subject to income tax. However, MCIT is imposed on gross income which is computed by deducting from gross sales the capital spent by a corporation in the sale of its goods, i.e., the cost of goods and other direct expenses from gross sales. Clearly, the capital is not being taxed. Various safeguards were incorporated into the law imposing MCIT. Firstly, recognizing the birth pangs of businesses and the reality of the need to recoup initial major capital expenditures, the MCIT is imposed only on the 4th taxable year immediately following the year in which the corporation commenced its operations. Secondly, the law allows the carry-forward of any excess of the MCIT

16 | T a x a t i o n I | 2017 paid over the normal income tax which shall be credited against the normal income tax for the three immediately succeeding years. Thirdly, since certain businesses may be incurring genuine repeated losses, the law authorizes the Secretary of Finance to suspend the imposition of MCIT if a corporation suffers losses due to prolonged labor dispute, force majeure and legitimate business reverses. (2) Yes. Despite the imposition of CWT on GSP or FMV, the income tax base for sales of real property classified as ordinary assets remains as the entity’s net taxable income as provided in the Tax Code, i.e., gross income less allowable costs and deductions. The seller shall file its income tax return and credit the taxes withheld by the withholding agent-buyer against its tax due. If the tax due is greater than the tax withheld, then the taxpayer shall pay the difference. If, on the other hand, the tax due is less than the tax withheld, the taxpayer will be entitled to a refund or tax credit. The use of the GSP or FMV as basis to determine the CWT is for purposes of practicality and convenience. The knowledge of the withholding agent-buyer is limited to the particular transaction in which he is a party. Hence, his basis can only be the GSP or FMV which figures are reasonably known to him. Also, the collection of income tax via the CWT on a per transaction basis, i.e., upon consummation of the sale, is not contrary to the Tax Code which calls for the payment of the net income at the end of the taxable period. The taxes withheld are in the nature of advance tax payments by a taxpayer in order to cancel its possible future tax obligation. They are installments on the annual tax which may be due at the end of the taxable year. The withholding agent-buyer’s act of collecting the tax at the time of the transaction, by withholding the tax due from the income payable, is the very essence of the withholding tax method of tax collection.

On the alleged violation of the equal protection clause, the taxing power has the authority to make reasonable classifications for purposes of taxation. Inequalities which result from singling out a particular class for taxation, or exemption, infringe no constitutional limitation. The real estate industry is, by itself, a class and can be validly treated differently from other business enterprises. What distinguishes the real estate business from other manufacturing enterprises, for purposes of the imposition of the CWT, is not their production processes but the prices of their goods sold and the number of transactions involved. The income from the sale of a real property is bigger and its frequency of transaction limited, making it less cumbersome for the parties to comply with the withholding tax scheme. On the other hand, each manufacturing enterprise may have tens of thousands of transactions with several thousand customers every month involving both minimal and substantial amounts.

25. GOMEZ V PALOMAR See number 1

26. Manila Race Horses Trainers Association Inc v. Manuel de la Fuente Gr. No L-2947 January 11, 1951 Facts: The Manila Race Horses Association is a non-stock corporation duly organized and existing under and by virtue of the law of the Philippines. The association alleges that they are owners of boarding stables for race horses and that their rights as such are affected by Ordinance No. 3065 of the City of Manila. The association avers that the ordinance in question is discriminatory and savors of class legislation, since the ordinance ought to tax only boarding stables for race horses and that the other owners of other kinds of horses are taxed less or not at all.

17 | T a x a t i o n I | 2017 Issue: Whether or not the said ordinance in taxing only boarding stables for race horses makes the ordinance invalid on the ground that it makes arbitrary classification Held: No. The ordinance makes no arbitrary classification hence it is a valid ordinance. Ratio: In one case the Supreme Court stated that there is equality and uniformity in taxation if all articles or kinds of property of the same class are taxed at the same rate. From the viewpoint of economics and public policy the taxing of boarding stables for race horses to the exclusion of boarding stables for horses dedicated to other purpose is not indefensible. Race horses are devoted to gambling if legalized, their owners derive fat income and the public hardly any profit from horse racing, and this business demands relatively heavy police supervision. Taking everything into account, the differentiation against which the association complains conforms to the practical dictates of justice and equity and is not discriminatory within the meaning of the Constitution.

27. Casanovas v Hord

RULING: No, the concessions granted by the Government of Spain to the plaintiff, constitute contracts between the parties; that section 134 of the Internal Revenue Law impairs the obligation of these contracts, and is therefore void as to them. The deed constituted a contract between the Spanish Government and Casanovas. Furthermore, the section conflicts with Section 60 of the Act of Congress of July 1, 1902, which indicate that concessions can be cancelled only by reason of illegality in the procedure by which they were obtained, or for failure to comply with the conditions prescribed as requisites for their retention in the laws under which they were granted. The grounds were not shown nor claimed in the case.

28. Cagayan Electric Power & Light Co. Inc. v CIR (1985) GR No. L-60126, September 25, 1985

FACTS: Cagayan Electric is a holder of a legislative franchise under RA 3247 where payment of 3% tax on gross earning is in lieu of all taxes and assessments upon privileges. In 1968, RA 5431 amended the franchise by making all corporate taxpayers liable for income tax. In 1969, through RA 6020, its franchise was extended to two other towns and the tax exemption was reenacted. The commissioner required the company to pay deficiency income taxes for the intervening period (1968-1969). ISSUE: Is CEPALCO liable for the tax?

FACTS: In January 1897, the Spanish Government, in accordance with the provisions of the royal decree of May14,1867, granted J. Casanovas certain mines in the Province of Ambos Camarines. They were so considered by the Collector of Internal Revenue and were by him said to fall within the provisions of Section 134 of Act 1189 which imposes an annual tax and an ad valorem tax on all valid perfected mining concessions granted prior to April 11th, 1899. The Commissioner, JNO S. Hord, imposed upon these properties the tax mentioned in Section 134, which Casanovas paid under protest. ISSUE: Is Section 134 valid?

RULING: Yes. Congress could impair the company’s legislative franchise by making it liable for income tax. The Constitution provides that a franchise is subject to amendment, alteration or repeal by the Congress when the public interest so requires. However, it cannot be denied that the said 1969 assessment appears to be highly controversial. It had reason not to pay income tax because of the tax exemption its franchise. For this reason, it should be liable only for tax proper and should not be held liable for surcharge and interest.

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29. American Bible Society v. City of Manila Gr. No L-9637 April 30, 1957 Facts: American Bible Society (Society for short) is a foreign, nonstock, non-profit, religious, missionary corporation duly registered and doing business in the PH through its PH agency. In the course of its ministry, the Society has been distributing and selling bible’s and gospel portions throughout PH and translating the same into several PH dialects. On May of 1953, the acting City Treasurer of the City of Manila informed the Society that it was conducting business of general merchandise since November of 1945 without providing itself with the necessary Mayor’s permit and municipal license in violation of the Ordinance No. 3000 (as amended). It also informed the Society that it is required to secure the permits and licenses covering the period of the 4th quarter of 1945 to the 2nd quarter of 1953, in the total sum of Php 5,821.45 as provided for in Ordinance No. 2529,3028 and 3364. The Society objected but the City Treasurer demanded that the Society should deposit and pay under protest. To avoid the closing of its business as well as further fines and penalties, the Society paid such said amount. On the same day, the Society filed a complaint that gave rise to this action. In its complaint the Society prays that judgment be rendered declaring the said ordinances as illegal and unconstitutional. The Society tried to establish that it never made any profit from the sales of its bibles, which are disposed of for as low as one third of its costs. The Society anchored their opposition that the ordinance is in contrast of the constitutional guaranty of the free exercise and enjoyment of religious profession and worship as provided for in the Constitution. The society further prayed that the amount unduly collected from them be returned.

Issue: Whether or not the above ordinances are illegal and unconstitutional. Held : No, the said ordinances are constitutional but they are just inapplicable to the Society. The City of Manila is ordered to return to the Society the amount it unduly collected. Ratio: The Supreme Court held that such ordinances cannot be declared unconstitutional but it is only not applicable to the Society. The SC held that the City of Manila is powerless to license or tax the business of the Society for it would impair the Society’s right to the free exercise and enjoyment of its religious profession and worship. It is to be noted that such right includes the right of dissemination of religious beliefs. As quoted by the SC: “ When we balance the constitutional rights of owners of property against those of the people to enjoy freedom of press and religion, as we must here, we remain mindful of the fact that the latter occupy a preferred position”. Lastly, the SC said that it cannot be said the Society were engaged in the commercial rather than a religious venture, even on the fact it disposed the bibles with price ( for as low as one third of its costs). Their activities could not be described as embraced in the occupation of selling books and pamphlets.

30. Abra Valley College v. Aquino June 15,1988

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 5,140.31. Said “Notice of Seizure” by respondents Municipal Treasurer and Provincial Treasurer, defendants, was issued for the satisfaction of the said taxes thereon.

19 | T a x a t i o n I | 2017 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: 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.ﾝ 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).

31. Lung Center of the Philippines vs. Quezon City and Constantino Rosas G.R. No. 144104, June 29, 2004

Facts: The Petitioner is a non-stock, non-profit entity which owns a parcel of land in Quezon City. Erected in the middle of the aforesaid lot is a hospital known as the Lung Center of the Philippines. The ground floor is being leased to a canteen, medical professionals whom use the same as their private clinics, as well as to other private parties. The right portion of the lot is being leased for commercial purposes to the Elliptical Orchids and Garden Center. The petitioner accepts paying and nonpaying patients. It also renders medical services to outpatients, both paying and non-paying. Aside from its income from paying patients, the petitioner receives annual subsidies from the government. Petitioner filed a Claim for Exemption from realty taxes amounting to about Php4.5 million, predicating its claim as a charitable institution. The city assessor denied the Claim. When appealed to the QC-Local Board of Assessment, the same was dismissed. The decision of the QCLBAA was affirmed by the Central Board of Assessment Appeals, despite the Petitioners claim that 60% of its hospital beds are used exclusively for charity. Issue: Whether or not the Petitioner is entitled to exemption from realty taxes notwithstanding the fact that it admits paying clients and leases out a portion of its property for commercial purposes. Ruling: The Court held that the petitioner is indeed a charitable institution based on its charter and articles of incorporation. As a general principle, a charitable institution does not lose its character as such and its exemption from taxes simply because it derives income from paying patients, whether out-patient or confined in the hospital, or receives subsidies from the government, so long as the money received is devoted or used altogether to the charitable object which it is intended to achieve; and no money inures to the private benefit of

20 | T a x a t i o n I | 2017 the persons managing or operating the institution. Despite this, the Court held that the portions of 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. (strictissimi juris) Moreover, P.D. No. 1823 only speaks of tax exemptions as regards to: • income and gift taxes for all donations, contributions, endowments and equipment and supplies to be imported by authorized entities or persons and by the Board of Trustees of the Lung Center of the Philippines for the actual use and benefit of the Lung Center; and, • taxes, charges and fees imposed by the Government or any political subdivision or instrumentality thereof with respect to equipment purchases (expression unius est exclusion alterius/expressium facit cessare tacitum).

32. Commissioner of Internal Revenue vs. St Luke's Medical Center G.R. Nos. 195909 & 195960, September 26, 2012

Facts: St. Luke’s Medical Center, Inc. (St. Luke’s) is a hospital organized as a non-stock and non-profit corporation. St. Luke’s accepts both paying and non-paying patients. The BIR assessed St. Luke’s deficiency taxes for 1998 comprised of deficiency income tax, value-added tax, and withholding tax. The BIR claimed that St. Luke’s should be liable for income tax at a preferential rate of 10% as provided for by Section 27(B). Further, the BIR claimed that St. Luke’s was actually operating for profit in 1998 because only 13% of its revenues came from charitable purposes. Moreover, the hospital’s board of trustees, officers and employees directly benefit from its profits and assets. On the other hand, St. Luke’s maintained that it is a non-stock and nonprofit institution for charitable and social welfare purposes exempt

from income tax under Section 30(E) and (G) of the NIRC. It argued that the making of profit per se does not destroy its income tax exemption. Issue: The sole issue is whether St. Luke’s is liable for deficiency income tax in 1998 under Section 27(B) of the NIRC, which imposes a preferential tax rate of 10^ on the income of proprietary non-profit hospitals. Ruling: Section 27(B) of the NIRC does not remove the income tax exemption of proprietary non-profit hospitals under Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) on the other hand, can be construed together without the removal of such tax exemption. Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary non-profit educational institutions and (2) proprietary non-profit hospitals. The only qualifications for hospitals are that they must be proprietary and non-profit. “Proprietary” means private, following the definition of a “proprietary educational institution” as “any private school maintained and administered by private individuals or groups” with a government permit. “Non-profit” means no net income or asset accrues to or benefits any member or specific person, with all the net income or asset devoted to the institution’s purposes and all its activities conducted not for profit. “Non-profit” does not necessarily mean “charitable.” In Collector of Internal Revenue v. Club Filipino Inc. de Cebu, this Court considered as non-profit a sports club organized for recreation and entertainment of its stockholders and members. The club was primarily funded by membership fees and dues. If it had profits, they were used for overhead expenses and improving its golf course. The club was nonprofit because of its purpose and there was no evidence that it was engaged in a profitmaking enterprise. The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not charitable. The Court defined “charity” in Lung Center of the Philippines v. Quezon City as “a gift, to be applied consistently with

21 | T a x a t i o n I | 2017 existing laws, for the benefit of an indefinite number of persons, either by bringing their minds and hearts under the influence of education or religion, by assisting them to establish themselves in life or [by] otherwise lessening the burden of government.” However, despite its being a tax exempt institution, any income such institution earns from activities conducted for profit is taxable, as expressly provided in the last paragraph of Sec. 30. To be a charitable institution, however, an organization must meet the substantive test of charity in Lung Center. The issue in Lung Center concerns exemption from real property tax and not income tax. However, it provides for the test of charity in our jurisdiction. Charity is essentially a gift to an indefinite number of persons which lessens the burden of government. In other words, charitable institutions provide for free goods and services to the public which would otherwise fall on the shoulders of government. Thus, as a matter of efficiency, the government forgoes taxes which should have been spent to address public needs, because certain private entities already assume a part of the burden. This is the rationale for the tax exemption of charitable institutions. The loss of taxes by the government is compensated by its relief from doing public works which would have been funded by appropriations from the Treasury. The Constitution exempts charitable institutions only from real property taxes. In the NIRC, Congress decided to extend the exemption to income taxes. However, the way Congress crafted Section 30(E) of the NIRC is materially different from Section 28(3), Article VI of the Constitution. Section 30(E) of the NIRC defines the corporation or association that is exempt from income tax. On the other hand, Section 28(3), Article VI of the Constitution does not define a charitable institution, but requires that the institution “actually, directly and exclusively” use the property for a charitable purpose. To be exempt from real property taxes, Section 28(3), Article VI of the Constitution requires that a charitable institution use the property

“actually, directly and exclusively” for charitable purposes. To be exempt from income taxes, Section 30(E) of the NIRC requires that a charitable institution must be “organized and operated exclusively” for charitable purposes. Likewise, to be exempt from income taxes, Section 30(G) of the NIRC requires that the institution be “operated exclusively” for social welfare. However, the last paragraph of Section 30 of the NIRC qualifies the words “organized and operated exclusively” by providing that: Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code. In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution conducts “any” activity for profit, such activity is not tax exempt even as its not-for-profit activities remain tax exempt. Thus, even if the charitable institution must be “organized and operated exclusively” for charitable purposes, it is nevertheless allowed to engage in “activities conducted for profit” without losing its tax exempt status for its not-for-profit activities. The only consequence is that the “income of whatever kind and character” of a charitable institution “from any of its activities conducted for profit, regardless of the disposition made of such income, shall be subject to tax.” Prior to the introduction of Section 27(B), the tax rate on such income from forprofit activities was the ordinary corporate rate under Section 27(A). With the introduction of Section 27(B), the tax rate is now 10%. The Court finds that St. Luke’s is a corporation that is not “operated exclusively” for charitable or social welfare purposes insofar as its revenues from paying patients are concerned. This ruling is based not only on a strict interpretation of a provision granting tax exemption, but also on the clear and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an institution be “operated exclusively” for charitable or social welfare purposes to be completely exempt from income tax. An institution

22 | T a x a t i o n I | 2017 under Section 30(E) or (G) does not lose its tax exemption if it earns income from its for-profit activities. Such income from for-profit activities, under the last paragraph of Section 30, is merely subject to income tax, previously at the ordinary corporate rate but now at the preferential 10% rate pursuant to Section 27(B). St. Luke’s fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely tax exempt from all its income. However, it remains a proprietary non-profit hospital under Section 27(B) of the NIRC as long as it does not distribute any of its profits to its members and such profits are reinvested pursuant to its corporate purposes. St. Luke’s, as a proprietary non-profit hospital, is entitled to the preferential tax rate of 10% on its net income from its for-profit activities. St. Luke’s is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC. However, St. Luke’s has good reasons to rely on the letter dated 6 June 1990 by the BIR, which opined that St. Luke’s is “a corporation for purely charitable and social welfare purposes” and thus exempt from income tax. In Michael J. Lhuillier, Inc. v. Commissioner of Internal Revenue, the Court said that “good faith and honest belief that one is not subject to tax on the basis of previous interpretation of government agencies tasked to implement the tax law, are sufficient justification to delete the imposition of surcharges and interest.” WHEREFORE, St. Luke’s Medical Center, Inc. is ORDERED TO PAY the deficiency income tax in 1998 based on the 10% preferential income tax rate under Section 27(8) of the National Internal Revenue Code. However, it is not liable for surcharges and interest on such deficiency income tax under Sections 248 and 249 of the National Internal Revenue Code. All other parts of the Decision and Resolution of the Court of Tax Appeals are AFFIRMED.

33. De La Salle University v. Commission on Internal Revenue CTA Case EB No. 671/ G.R. No. 198841, November 9, 2016

Facts: The BIR through a Formal Letter of Demand assessed DLSU the following deficiency taxes: (1) income tax on rental earnings from restaurants/canteens and bookstores operating within the campus; (2) value-added tax (VAT) on business income; and (3) documentary stamp tax (DST) on loans and lease contracts. The BIR demanded the payment of P17,303,001.12, inclusive of surcharge, interest and penalty for taxable years 2001, 2002 and 2003. The CTA Division, in view of the supplemental evidence submitted, reduced the amount of DLSU's tax deficiencies. Dissatisfied with the partial reduction of its tax liabilities, DLSU filed a separate petition for review with the CTA En Banc (CTA En Banc Case No. 671) on the ground that the CTA Division should still have cancelled the entire assessment because DLSU submitted evidence similar to those submitted by Ateneo De Manila University (Ateneo) in a separate case where the CT A cancelled Ateneo 's tax assessment, among others. Issue: Whether or not DLSU' s income and revenues proved to have been used actually, directly and exclusively for educational purposes are exempt from duties and taxes. Ruling: The revenues and assets of non-stock, non-profit educational institutions proved to have been used actually, directly, and exclusively for educational purposes are exempt from duties and taxes. Section 30 (H) of the Tax Code provides that a non-stock and nonprofit educational institution shall be exempt from Tax on Income. It further provides: Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of

23 | T a x a t i o n I | 2017 the disposition made of such income shall be subject to tax imposed under this Code. However, the 1997 Tax Code does not qualify the tax exemption constitutionally-granted to non-stock, non-profit educational institutions. The requisites for availing the tax exemption under Article XIV, Section 4 (3), namely: (1) the taxpayer falls under the classification non-stock, non-profit educational institution; and (2) the income it seeks to be exempted from taxation is used actually, directly and exclusively for educational purposes. The last paragraph of Section 30 of the Tax Code is without force and effect with respect to nonstock, non-profit educational institutions, provided, that the non-stock, non-profit educational institutions prove that its assets and revenues are used actually, directly and exclusively for educational purposes. The tax-exemption constitutionally-granted to non-stock, non-profit educational institutions, is not subject to limitations imposed by law.

property for educational purposes, it shall be exempted from RPT. The crucial point of inquiry then is on the use of the assets or on the use of the revenues. These are two things that must be viewed and treated separately. But so long as the assets or revenues are used actually, directly and exclusively for educational purposes, they are exempt from duties and taxes. Thus, we declare the last paragraph of Section 30 of the Tax Code without force and effect for being contrary to the Constitution insofar as it subjects to tax the income and revenues of non-stock, non-profit educational institutions used actually, directly and exclusively tor educational purpose. We make this declaration in the exercise of and consistent with our duty to uphold the primacy of the Constitution. For all these reasons, we hold that the income and revenues of DLSU proven to have been used actually, directly and exclusively for educational purposes are exempt from duties and taxes.

The tax exemption granted by the Constitution to non-stock, nonprofit educational institutions is conditioned only on the actual, direct and exclusive use of their assets, revenues and income for educational purposes.

34. Ateneo de Manila University v. Commission on Internal Revenue

Unlike Article VI, Section 28 (3) of the Constitution (pertaining to charitable institutions, churches, parsonages or convents, mosques, and non-profit cemeteries), which exempts from tax only the assets, i.e., "all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or educational purposes ... ," Article XIV, Section 4 (3) categorically states that "[a]ll revenues and assets ... used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties."

Facts: Respondent is a non-stock, non-profit educational institution duly organized and existing under and by virtue of the laws of the Republic of the Philippines with principal office located at Loyola Heights, Quezon City. On July 15, 2004, respondent received petitioner's FAN dated July 13, 2004 for alleged deficiency income tax for fiscal year ending March 31 , 2001 in the amount of P2,334,211 ,.22. On September 30, 2004, respondent received petitioner's FAN dated September 7, 2004 for alleged deficiency income tax and VAT for fiscal years ending March 31, 2002 and 2003 and for alleged deficiency VAT for fiscal year ending March 31, 2001 in the aggregate amount of P6,529 ,831.13. After trial, the Special First Division granted respondent's petition for review.

Thus, when a non-stock, non-profit educational institution proves that it uses its revenues actually, directly, and exclusively for educational purposes, it shall be exempted from income tax, VAT, and LBT. On the other hand, when it also shows that it uses its assets in the form of real

CTA Case Nos. 7246 & 7293, June 30, 2011

24 | T a x a t i o n I | 2017 Issue: Whether or not the honorable court erred in cancelling the assessment notices and in declaring respondent exempt from VAT on concession fees. Ruling: No. The Supreme Court gave only two requirements that the educational institution must prove, that: (I) it falls under the classification non-stock, non-profit educational institution, and (2) the income it seeks to be exempted from taxation is used actually, directly, and exclusively for educational purposes. As regards the first requisite, the parties already stipulated that petitioner is a non-stock, non-profit educational institution. Hence, no evidence is necessary to prove the same. As regards the second requisite, the income from cafeteria concession fees is commingled with the other funds that make up 'other educational income,' and such income is made available for school operations such as salaries, employee benefits, faculty development, supplies and expenses, new books, scholarships, research, new equipment, and major improvements. The Abra Valley College case is not applicable in the instant case as it involves property tax and the interpretation of Article VI, Section 22, paragraph 3 of the 1935 Philippine Constitution (now Article VI, Section 28, paragraph 3 of the 1987 Philippine Constitution). The present case involves income tax, the VAT and the construction of Article XIV, Section 4, paragraph 3 of the 1987 Constitution. Any doubt on whether a person, article or activity is taxable is generally resolved against taxation. It is basic that ' in case of doubt, such statutes are to be construed most strongly against the government and in favor of the subjects or citizens because burdens are not to be imposed or presumed to be imposed beyond what statutes expressly and clearly import.'

35. Angeles University Vs. City Of Angeles. Juliet G. Quinsaat G.R. No. 189999, June 27, 2012

Facts: Angeles University was converted into a non-stock, non-profit education foundation under the provisions of republic Act (R.A.) No. 6055. Petitioner filed with the Office of the City Building Official an application for a building permit for the construction of an 11-story building of the Angeles University Foundation Medical Center in its main campus the said office issue a Building permit fee and Locational Clearance Fee. Petitioner make a letter to respondent City Treasurer Juliet G. Quinssat and City Building Official Donato Z. Dizon alleging that it is exempt from payment of the building permit and locational clearance fee. Petitioner also reminded the respondent that they have previously issued building permit acknowledging such exemption from payment of building permit fees. The DOJ and trial court render decision in favor to petitioner for exempting in payment. But the CA reverse the decision of court in favor to respondent. Petitioner file a MR but it was denied by CA. Issue: WON the Angeles University is exempted in Building permit fee and Locational Clearance Fee. Ruling: No.Under R.A. No. 6055, petitioner was granted exemption only from income tax derived from its educational activities and real property used exclusively for educational purposes. Regardless of the repealing clause in the National Building Code, the CA held that petitioner is still not exempt because a building permit cannot be considered as the other “charges” mentioned in Sec. 8 of R.A. No. 6055 which refers to impositions in the nature of tax, import duties, assessments and other collections for revenue purposes, following the ejusdem generis rule. The CA further stated that petitioner has not shown that the fees collected were excessive and more than the cost of surveillance, inspection and regulation. And while petitioner may be exempt from

25 | T a x a t i o n I | 2017 the payment of real property tax, petitioner in this case merely alleged that “the subject property is to be used actually, directly and exclusively for educational purposes,” declaring merely that such premises is intended to house the sports and other facilities of the university but by reason of the occupancy of informal settlers on the area, it cannot yet utilize the same for its intended use. Thus, the CA concluded that petitioner is not entitled to the refund of building permit and related fees, as well as real property tax it paid under protest.R.A. No. 6055 granted tax exemptions to educational institutions like petitioner which converted to non-stock, non-profit educational foundations. Section 8 of said law provides: SECTION 8. The Foundation shall be exempt from the payment of all taxes, import duties, assessments, and other charges imposed by the Government on all income derived from or property, real or personal, used exclusively for the educational activities of the Foundation.(Emphasis supplied.) A “charge” is broadly defined as the “price of, or rate for, something,” while the word “fee” pertains to a “charge fixed by law for services of public officers or for use of a privilege under control of government.” As used in theLocal Government Code of 1991 (R.A. No. 7160), charges refers to pecuniary liability, as rents or fees against persons or property, while fee means a charge fixed by law or ordinance for the regulation or inspection of a business or activity.

36. CHEVRON vs. BCDA (G.R. No. 173863)

FACTS: On June 28, 2002, the Board of Directors of respondent Clark Development Corporation (CDC) issued and approved Policy Guidelines on the Movement of Petroleum Fuel to and from the Clark Special Economic Zone. In one of its provisions, it levied royalty fees to

suppliers delivering Coastal fuel from outside sources for Php0.50 per liter for those delivering fuel to CSEZ locators not sanctioned by CDC and Php1.00 per litter for those bringing-in petroleum fuel from outside sources. The policy guidelines were implemented effective July 27, 2002. The petitioner Chevron Philippines Inc (formerly Caltex Philippines Inc) who is a fuel supplier to Nanox Philippines, a locator inside the CSEZ, received a Statement of Account from CDC billing them to pay the royalty fees amounting to Php115,000 for its fuel sales from Coastal depot to Nanox Philippines from August 1 to September 21, 2002. Petitioner, contending that nothing in the law authorizes CDC to impose royalty fees based on a per unit measurement of any commodity sold within the special economic zone, protested against the CDC and Bases Conversion Development Authority (BCDA). They alleged that the royalty fees imposed had no reasonable relation to the probably expenses of regulation and that the imposition on a per unit measurement of fuel sales was for a revenue generating purpose, thus, akin to a “tax”. BCDA denied the protest. The Office of the President dismissed the appeal as well for lack of merit. Upon appeal, CA dismissed the case. CA held that in imposing the royalty fees, CDC was exercising its right to regulate the flow of fuel into CSEZ under the vested exclusive right to distribute fuel within CSEZ pursuant to its Joint Venture Agreement (JVA) with Subic Bay Metropolitan Authority (SBMA) and Coastal Subic Bay Terminal, Inc. (CSBTI) dated April 11, 1996. The appellate court also found that royalty fees were assessed on fuel delivered, not on the sale, by petitioner and that the basis of such imposition was petitioner’s delivery receipts to Nanox Philippines. The fact that revenue is incidentally also obtained does not make the imposition a tax as long as the primary purpose of such imposition is regulation. When elevated in SC, petitioner argued that: 1) CDC has no power to impose fees on sale of fuel inside CSEZ on the basis of income generating functions and its right to market and distribute goods inside the CSEZ as this would amount to tax which they have no power to impose, and that the imposed fee is not regulatory in nature but

26 | T a x a t i o n I | 2017 rather a revenue generating measure; 2) even if the fees are regulatory in nature, it is unreasonable and are grossly in excess of regulation costs. Respondents contended that the purpose of royalty fees is to regulate the flow of fuel to and from the CSEZ and revenue (if any) is just an incidental product. They viewed it as a valid exercise of police power since it is aimed at promoting the general welfare of public; that being the CSEZ administrator, they are responsible for the safe distribution of fuel products inside the CSEZ. ISSUE: Whether the act of CDC in imposing royalty fees can be considered as valid exercise of the police power. HELD: Yes. SC held that CDC was within the limits of the police power of the State when it imposed royalty fees. In distinguishing tax and regulation as a form of police power, the determining factor is the purpose of the implemented measure. If the purpose is primarily to raise revenue, then it will be deemed a tax even though the measure results in some form of regulation. On the other hand, if the purpose is primarily to regulate, then it is deemed a regulation and an exercise of the police power of the state, even though incidentally, revenue is generated. In this case, SC held that the subject royalty fee was imposed for regulatory purposes and not for generation of income or profits. The Policy Guidelines was issued to ensure the safety, security, and good condition of the petroleum fuel industry within the CSEZ. The questioned royalty fees form part of the regulatory framework to ensure “free flow or movement” of petroleum fuel to and from the CSEZ. The fact that respondents have the exclusive right to distribute and market petroleum products within CSEZ pursuant to its JVA with SBMA and CSBTI does not diminish the regulatory purpose of the royalty fee for fuel products supplied by petitioner to its client at the CSEZ. However, it was erroneous for petitioner to argue that such exclusive right of respondent CDC to market and distribute fuel inside CSEZ is the sole basis of the royalty fees imposed under the Policy Guidelines.

Being the administrator of CSEZ, the responsibility of ensuring the safe, efficient and orderly distribution of fuel products within the Zone falls on CDC. Addressing specific concerns demanded by the nature of goods or products involved is encompassed in the range of services which respondent CDC is expected to provide under Sec. 2 of E.O. No. 80, in pursuance of its general power of supervision and control over the movement of all supplies and equipment into the CSEZ. There can be no doubt that the oil industry is greatly imbued with public interest as it vitally affects the general welfare. Fuel is a highly combustible product which, if left unchecked, poses a serious threat to life and property. Also, the reasonable relation between the royalty fees imposed on a “per liter” basis and the regulation sought to be attained is that the higher the volume of fuel entering CSEZ, the greater the extent and frequency of supervision and inspection required to ensure safety, security, and order within the Zone. Respondents submit that the increased administrative costs were triggered by security risks that have recently emerged, such as terrorist strikes. The need for regulation is more evident in the light of 9/11 tragedy considering that what is being moved from one location to another are highly combustible fuel products that could cause loss of lives and damage to properties. As to the issue of reasonableness of the amount of the fees, SC held that no evidence was adduced by the petitioner to show that the fees imposed are unreasonable. Administrative issuances have the force and effect of law. They benefit from the same presumption of validity and constitutionality enjoyed by statutes. These two precepts place a heavy burden upon any party assailing governmental regulations. Petitioner’s plain allegations are simply not enough to overcome the presumption of validity and reasonableness of the subject imposition. WHEREFORE, the petition is DENIED for lack of merit and the Decision of the Court of Appeals dated November 30, 2005 in CA-G.R. SP No. 87117 is hereby AFFIRMED.

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37. TOLENTINO vs. THE SEC OF FINANCE (G.R. No. 115455)

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.

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.

ISSUES: Whether or not the law violates the provision of the constitution regarding the freedom of religion and its exercise thereof?

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.

Whether or not the law violates the provisions of the constitution regarding the Uniformity, Equitability and Progressivity of Taxation?

Claims of Progressivity, Denial of Due Process, Equal Protection, and Impairment of Contracts

RULING: 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."

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.

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

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

28 | T a x a t i o n I | 2017 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.

38. GARCIA V EXECUTIVE SECRETARY 211 SCRA 219

Facts: In November 1990, President Corazon Aquino issued Executive Order No. 438 which imposed, in addition to any other duties, taxes and charges imposed by law on all articles imported into the Philippines, an additional duty of 5% ad valorem tax. This additional duty was imposed across the board on all imported articles, including crude oil and other oil products imported into the Philippines. In 1991,

EO 443 increased the additional duty to 9%. In the same year, EO 475 was passed reinstating the previous 5% duty except that crude oil and other oil products continued to be taxed at 9%. Enrique Garcia, a representative from Bataan, avers that EO 475 and 478 are unconstitutional for they violate Section 24 of Article VI of the Constitution which provides: 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. He contends that since the Constitution vests the authority to enact revenue bills in Congress, the President may not assume such power by issuing Executive Orders Nos. 475 and 478 which are in the nature of revenue-generating measures. ISSUE: Whether or not EO 475 and 478 are constitutional. HELD: Under Section 24, Article VI of the Constitution, the enactment of appropriation, revenue and tariff bills, like all other bills is, of course, within the province of the Legislative rather than the Executive Department. It does not follow, however, that therefore Executive Orders Nos. 475 and 478, assuming they may be characterized as revenue measures, are prohibited to be exercised by the President, that they must be enacted instead by the Congress of the Philippines. Section 28(2) of Article VI of the Constitution provides as follows: (2) The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the Government. There is thus explicit constitutional permission to Congress to authorize the President “subject to such limitations and restrictions as [Congress] may impose” to fix “within specific limits” “tariff rates . . . and other duties or imposts . . . .” In this case, it is the Tariff and Customs Code which authorized the President ot issue the said EOs.

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39.OSMENA vs. ORBOS

exercised. In addition to the general policy of the law to protect the local consumer by stabilizing and subsidizing domestic pump rates, P.D. 1956 expressly authorizes the ERB to impose additional amounts to augment the resources of the Fund.

(GR No. 99886) " To avoid the taint of unlawful delegation of the power to tax, there must be a standard which implies that the legislature determines matter of principle and lays down fundamental policy." FACTS: Senator John Osmeña assails the constitutionality of paragraph 1c of PD 1956, as amended by EO 137, empowering the Energy Regulatory Board (ERB) to approve the increase of fuel prices or impose additional amounts on petroleum products which proceeds shall accrue to the Oil Price Stabilization Fund (OPSF) established for the reimbursement to ailing oil companies in the event of sudden price increases. The petitioner avers that the collection on oil products establishments is an undue and invalid delegation of legislative power to tax. Further, the petitioner points out that since a 'special fund' consists of monies collected through the taxing power of a State, such amounts belong to the State, although the use thereof is limited to the special purpose/objective for which it was created. It thus appears that the challenge posed by the petitioner is premised primarily on the view that the powers granted to the ERB under P.D. 1956, as amended, partake of the nature of the taxation power of the State. ISSUE: Is there an undue delegation of the legislative power of taxation? HELD: None. It seems clear that while the funds collected may be referred to as taxes, they are exacted in the exercise of the police power of the State. Moreover, that the OPSF as a special fund is plain from the special treatment given it by E.O. 137. It is segregated from the general fund; and while it is placed in what the law refers to as a "trust liability account," the fund nonetheless remains subject to the scrutiny and review of the COA. The Court is satisfied that these measures comply with the constitutional description of a "special fund." With regard to the alleged undue delegation of legislative power, the Court finds that the provision conferring the authority upon the ERB to impose additional amounts on petroleum products provides a sufficient standard by which the authority must be

40. REPUBLIC vs CTA (G.R. No. 62554-55) FACTS:"On 14 September 1971, respondent Commissioner assessed petitioner the amount of P1,060,615.06, plus 25% surcharge in the amount of P265,153.76, or a total of P1,325,768.82, as 1% monthly bank reserve deficiency tax for taxable year 1969. "In a letter dated 6 October 1971, petitioner requested reconsideration of the assessment which respondent Commissioner denied in a letter dated 26 February 1973. "On 5 April 1973, respondent Commissioner assessed petitioner the amount of P1,562,506.14, plus 25% surcharge in the amount of P390,626.53, or a total of P1,953,132.67, as 1% monthly bank reserve deficiency tax for taxable year 1970. "In a letter dated 16 May 1973, petitioner requested reconsideration of the assessment which respondent Commissioner denied in a letter dated 6 May 1974. "Petitioner contends that Section 249 of the Tax Code is no longer enforceable, because Section 126 of Act 1459, which was allegedly the basis for the imposition of the 1% reserve deficiency tax, was repealed by Section 90 of Republic Act 337, the General Banking Act, and by Sections 100 and 101 of Republic Act 265. "On 28 March 1973, petitioner filed a petition for review with the Tax Court, docketed as C.T.A. Case No. 2506, contesting the assessment for the taxable year 1969. On 3 July 1974, a similar petition, docketed as C.T.A. Case No. 2618, was filed contesting the assessment for the taxable year 1970. "The cases, involving similar issues, were consolidated. After hearing, the Tax Court rendered a decision dated 30 September 1982

TITLE VIII - MISCELLANEOUS TAXES

double taxation.[12] The payment of 1/10 of 1% for incurring reserve deficiencies (Section 106, Central Bank Act) is a penalty as the primary purpose involved is regulation,[13] while the payment of 1% for the same violation (Second Paragraph, Section 249, NIRC) is a tax for the generation of revenue which is the primary purpose in this instance.[14] Petitioner should not complain that it is being asked to pay twice for incurring reserve deficiencies. It can always avoid this predicament by not having reserve deficiencies. Petitioner's case is covered by two special laws -- one a banking law and the other, a tax law. These two laws should receive such construction as to make them harmonize with each other and with the other body of pre-existing laws.[15]

"Sec. 249. Tax on Banks. xxx xxx xxx.

Dura lex sed lex!

30 | T a x a t i o n I | 2017 dismissing the petitions for review and upholding the validity of the assessments. "Still not satisfied, petitioner filed this petition for review."[ ISSUE: Whether there shall be collected upon the amount of reserve deficiencies incurred by the bank. HELD:

"There shall be collected upon the amount of reserve deficiencies incurred by the bank, and for the period of their duration, as provided in section one hundred twenty six of Act numbered one thousand four hundred and fifty-nine, as amended by Act Numbered Three thousand six hundred and ten, one per centum per month. xxx xxx xxx. (As amended by Rep. Act No. 6110)"[10] Clearly, the law states a tax is to be collected. As the law stood during the years the petitioner was assessed for taxes on reserve deficiencies (1969 & 1970), petitioner had to pay twice -the first, a penalty, to the Central Bank by virtue of Section 106 for violation of Secs. 100 and 101, all of the Central Bank Act and the second, a tax to the Bureau of Internal Revenue for incurring a reserve deficiency. As correctly analyzed by the petitioner and public respondents, the new legislations on bank reserves merely provided the basis for computation of the reserve deficiency of petitioner bank. Petitioner submits that it was not the legislative intention that banks with reserve deficiencies would pay twice as the Tax Code (CA 466, as amended by P.D. 69) enacted on January 1, 1973 did not contain said questioned provision. While petitioner might have a point, the wisdom of this legislation is not the province of the Court.[11] It is clear from the statutes then in force that there was no double taxation involved -- one was a penalty and the other was a tax. At any rate, We have upheld the validity of

41. CIR vs Estate of Benigno Toda Jr. G.R. No. 147188. September 14, 2004 FACTS: On March 2, 1989: Cibeles Insurance Corp. (CIC) authorized Benigno P. Toda Jr., President and Owner of 99.991% of outstanding capital stock, to sell the Cibeles Building and 2 parcels of land which he sold to Rafael A. Altonaga on August 30, 1987 for P 100M who then sold it on the same day to Royal Match Inc. for P 200M. The CIC included gains from sale of real property of P 75,728.021 in its annual income tax return while Altonaga paid a 5% capital gains tax of P 10M. On July 12, 1990: Toda sold his shares to Le Hun T. Choa for P 12.5M evidenced by a deed of ale of shares of stock which provides that the buyer is free from all income tax liabilities for 1987, 1988 and 1989. Toda Jr. died 3 years later. On March 29, 1994: BIR sent an assessment notice and demand letter to CIC for deficiency of income tax of P 79,099, 999.22. On January 27, 1995, the BIR sent the same to the estate of Toda Jr. The Estate filed a protest which was dismissed fraudulent sale to evade the 35% corporate income tax for the additional gain of P 100M and that there is in fact only 1 sale. Since it is falsity or fraud, the prescription period is 10 years from the discovery of the falsity or fraud as prescribed under Sec. 223 (a) of the NIRC.

31 | T a x a t i o n I | 2017 The CTA ruled that there was no proof of the fraudulent transaction so the applicable period is 3 years after the last day prescribed by law for filing the return. The CA affirmed the decision of the CTA. CIR appealed.

subject the income to only 5% individual capital gains tax, and not the 35% corporate income tax. Generally, a sale of or exchange of assets will have an income tax incidence only when it is consummated but such tax incidence depends upon the substance of the transaction rather them mere formalities.

ISSUE: Whether or not there is falsity or fraud resulting to tax evasion rather than tax avoidance so that the period for assessment has not prescribed.

42. CIR V PASCOR REALTY & DEV’T CORP et. al.

HELD: YES. The falsity or fraud resulted to tax evasion. The estate shall be liable since the prescriptive period has NOT yet lapsed. Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation. Tax avoidance is the tax saving device within the means it is sanctioned by law. This method should be used by the taxpayer in good faith and at arm’s length. Tax evasion, on the other hand, is a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities. Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due (2) an accompanying state of mind which is described as being evil, in bad faith, willfull,or deliberate and not accidental; and (3) a course of action or failure of action which is unlawful. All are present in this case. The trial balance showed that RMI debited P 40M as "other-inv. Cibeles Building" that indicates RMI Paid CIC (NOT Altonaga). Fraud in its general sense, is deemed to comprise anything calculated to deceive, including all acts, omissions, and concealment involving a breach of legal or equitable duty, trust or confidence justly reposed, resulting in the damage to another, or by which an undue and unconscionable advantage is taken of another. Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid especially that the transfer from him to RMI would then

Facts: Pascor Realty and Development Corporation (PRDC) was found out to be liable for a total of P10.5 million tax deficiency for the years 1986 and 1987. In March 1995, the Commissioner of Internal Revenue (CIR) filed a criminal complaint against PRDC with the Department of Justice. Attached to the criminal complaint was a joint affidavit executed by the tax examiners.

GR No. 128315, June 29, 1999

PRDC then filed a protest with the Court of Tax Appeals (CTA). PRDC averred that the affidavit attached to the criminal complaint is tantamount to a formal assessment notice (FAN) hence can be subjected to protest; that there is a simultaneous assessment and filing of criminal case; that the same is contrary to due process because it is its theory that an assessment should come first before a criminal case of tax evasion should be filed. The CIR then filed a motion to dismiss on the ground that the CTA has no jurisdiction over the case because the CIR has not yet issued a FAN against PRDC; that the affidavit attached to the complaint is not a FAN; that since there is no FAN, there cannot be a valid subject of a protest. The CTA however denied the motion to dismiss. It ruled that the joint affidavit attached to the complaint submitted to the DOJ constitutes an assessment; that an assessment is defined as simply the statement of the details and the amount of tax due from a taxpayer; that therefore, the joint affidavit which contains a computation of the tax liability of PRDC is in effect an assessment which can be the subject of a protest. This ruling was affirmed by the Court of Appeals.

32 | T a x a t i o n I | 2017 ISSUE: Whether or not the Court of Tax Appeal is correct. HELD: No. An assessment contains not only a computation of tax liabilities, but also a demand for payment within a prescribed period. It also signals the time when penalties and protests begin to accrue against the taxpayer. To enable the taxpayer to determine his remedies thereon, due process requires that it must be served on and received by the taxpayer. Accordingly, an affidavit, which was executed by revenue officers stating the tax liabilities of a taxpayer and attached to a criminal complaint for tax evasion, cannot be deemed an assessment that can be questioned before the CTA. Further, such affidavit was not issued to the taxpayer, it was submitted as an attachment to the DOJ. It must also be noted that not every document coming from the Bureau of Internal Revenue which provides a computation of the tax liability of a taxpayer can be considered as an assessment. An assessment is deemed made only when the CIR releases, mails or sends such notice to the taxpayer. Anent the issue of the filing of the criminal complaint, Section 222 of the National Internal Revenue Code specifically states that in cases where a false or fraudulent return is submitted or in cases of failure to file a return such as this case, proceedings in court may be commenced without an assessment. Furthermore, Section 205 of the NIRC clearly mandates that the civil and criminal aspects of the case may be pursued simultaneously.

43. CIR vs RAUL GONZALEZ G.R. No. 177279, October 13, 2010 FACTS: The BIR National Office conducted a fraud investigation for all internal revenue taxes to determine the tax liabilities of L. M. Camus Engineering Corporation (LMCEC) for the taxable years 1997, 1998 and 1999 due to the information provided by an “informer” that it had substantial underdeclared income for the said period.

LMCEC failed to comply with the subpoena duces tecum issued in connection with the tax fraud investigation, hence, a criminal complaint was instituted by the BIR for violation of Section 266 of the NIRC against LMCEC, Luis M. Camus and Lino D. Mendoza, the latter two were sued in their capacities as President and Comptroller, respectively. Camus and Mendoza assail the validity of the complaint and further aver that the company had already undergone a series of routine examinations for the years 1997, 1998 and 1999 for under the NIRC, only one examination of the books of accounts is allowed per taxable year. The Chief State Prosecutor, the Secretary of Justice and the Court of Appeals dismissed the complaint instituted by the BIR. Hence, this petition was filed before the Supreme Court. ISSUE: Whether LMCEC and its corporate officers may be prosecuted for violation of Sections 254 (Attempt to Evade or Defeat Tax) and 255 (Willful Failure to Supply Correct and Accurate Information and Pay Tax) of the Tax Code. RULING: The Supreme Court ruled in favor of the BIR. LMCEC cannot claim as excuse from the reopening of its books of accounts the previous investigations and examinations. Under Section 235 (a), an exception was provided in the rule on once a year audit examination in case of “fraud, irregularity or mistakes, as determined by the Commissioner”. The distinction between a Regular Audit Examination and Tax Fraud Audit Examination lies in the fact that the former is conducted by the district offices of the Bureau’s Regional Offices, the authority emanating from the Regional Director, while the latter is conducted by the TFD of the National Office only when instances of fraud had been determined by the BIR. In this case, the non-declaration by LMCEC for the taxable years 1997,

33 | T a x a t i o n I | 2017 1998 and 1999 of an amount exceeding 30% income declared in its return is considered a substantial underdeclaration of income, which constituted prima facie evidence of false or fraudulent return under Section 248(B) of the NIRC, as amended. Further, RR No. 2-99 was issued “providing for last priority in audit and investigation of tax returns” to accomplish the said objective “without, however, compromising the revenue collection that would have been generated from audit and enforcement activities.” The program “Economic Recovery Assistance Payment (ERAP) Program” granted immunity from audit and investigation of income tax, VAT and percentage tax returns for 1998. Since such immunity from audit and investigation does not preclude the collection of revenues generated from audit and enforcement activities, it follows that the BIR is likewise not barred from collecting any tax deficiency discovered as a result of tax fraud investigations. Additional note- re: Assessment; validity of assessment notice; lack of control number. The formality of a control number in the assessment notice is not a requirement for its validity; rather the contents thereof should inform the taxpayer of the declaration of deficiency tax against the taxpayer. Both the formal letter of demand and the notice of assessment shall be void if the former failed to state the fact, the law, rules and regulations or jurisprudence on which the assessment is based, which is a mandatory requirement under section 228 of the National Internal Revenue Code.

44. UNGAB vs. CUSI GR No. L-41919-24 May 30, 1980

"An assessment of a deficiency is not necessary to a criminal prosecution for wilful attempt to defeat and evade the income tax." FACTS: The BIR filed six criminal charges against Quirico Ungab, a banana saplings producer, for allegedly evading payment of taxes and other violations of the NIRC. Ungab, subsequently filed a motion to quash on the ground that (1) the information are null and void for want of authority on the part of the State Prosecutor to initiate and prosecute the said cases; and (2)that the trial court has no jurisdiction to take cognizance of the case in view of his pending protest against the assessment made by the BIR examiner. The trial court denied the motion prompting the petitioner to file a petition for certiorari and prohibition with preliminary injunction and restraining order to annul and set aside the information filed. ISSUE: Is the contention that the criminal prosecution is premature since the CIR has not yet resolved the protest against the tax assessment tenable? HELD: No. The contention is without merit. What is involved here is not the collection of taxes where the assessment of the Commissioner of Internal Revenue may be reviewed by the Court of Tax Appeals, but a criminal prosecution for violations of the National Internal Revenue Code which is within the cognizance of courts of first instance. While there can be no civil action to enforce collection before the assessment procedures provided in the Code have been followed, there is no requirement for the precise computation and assessment of the tax before there can be a criminal prosecution under the Code. An assessment of a deficiency is not necessary to a criminal prosecution for wilful attempt to defeat and evade the income tax. A crime is complete when the violator has knowingly and wilfully filed a fraudulent return with intent to evade and defeat the tax.

34 | T a x a t i o n I | 2017 The perpetration of the crime is grounded upon knowledge on the part of the taxpayer that he has made an inaccurate return, and the government's failure to discover the error and promptly to assess has no connections with the commission of the crime.

45. Yutivo Sons Hardware v. CTA FACTS: Yutivo Sons Hardware Co is a domestic corporation 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 until June of 1946 bought a number of cars and trucks from General Motors Overseas Corporation (GM), an American corporation licensed to do business in the PH. As an importer GM paid sales tax prescribed by 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 (SM) was organize to engage in the business of selling cars, trucks and spare parts. At the time of its incorporation 2,500 shares worth of Php 250,000 appear to have been subscribed by the sons of Yu Tiong Yee, one of Yutivo’s founders. After the incorporation of SM and until the withdrawal of GM for the PH in the middle of 1947, the cars and trucks purchased by Yutivo from GM were sold by Yutivo to SM, in turn, sold them to the public. When GM decided to withdraw from the PH, the US manufacturer of GM cars and trucks appointed Yutivo as importer and the latter continued its previous arrangement of selling exclusively to 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. On November 1950, after months of investigation, the collector of internal revenue made an assessment and demanded deficiency sales tax plus surcharges claiming that the taxable sales were the retail sales by SM to the oublic and not the sales at wholesale made by, Yutivo to the latter inasmuch as SM and Yutivo were one and the same corporation, the former being subsidiary of the latter. The CTA in its decision ordered Yutivo to pay the CIR the sales tax deficiency, plus 75% of surcharges. The CTA ruled that SM was organized for no other purpose than to defraud the government of its lawful revenues. ISSUE 1: Whether or not the CTA was justified in finding that SM was organized for no other purposed than to defraud the government of its lawful revenues? HELD 1: No, CTA’s ruling was not justified. RATIO: It is not disputed that until June 1946 it is GM as the importer of the cars and trucks, was the one solely liable for the sales taxes. The sales tax liability of Yutivo did not arise until July 1947 when it became the importer and simply continued its practice of selling to SM.

35 | T a x a t i o n I | 2017 The SC held that to prove the intention to minimize taxes and the use of such in the context of fraud, must be proved to exist by clear and convincing evidence amounting to more than mere preponderance, and cannot be justified by a mere speculation. This is because fraud is never lightly to be presumed. Fraud cannot be further proved because of the fact that the transactions between Yutivo and SM have always been open, embodied in private and public documents, constantly subject to inspection by the tax authorities. ISSUE 2: Whether or not CTA is justified in imposing 75% surcharge penalty to Yutivo? HELD 2: No. When GM as the importer and Yutivo, the wholesaler, of the cars and trucks, the sales tax was paid only once and on the original sales by the former and neither the latter nor SM paid taxes on their subsequent sales. Yutico might have, therefore, honestly believed that the payment by it, as importer, of the sales tax was enough as in the case of GM. Consequently, in filing its return on the basis of its sales to SM and not on those by the latter to the public, it cannot be said that Yutivo deliberately made a false return for the purpose of defrauding the government of its revenues which will justify the imposition of the surcharge penalty.

46. People of the Philippines v. Lucio Tan G.R. No. 144707, July 13, 2004

FACTS:On September 7, 1993, the Commissioner of Internal Revenue filed a Complaint with the Department of Justice (DOJ), charging Fortune Tobacco Corporation (hereafter Fortune), its corporate officers, nine (9) other corporations and their respective corporate officers, with

fraudulent tax evasion for supposed non-payment of the correct ad valorem, income and value-added taxes for the years 1990, 1991, & 1992. However, the preliminary investigations for the said complaints were enjoined. The said decision by the lower courts was affirmed by the Supreme Court in G.R. No. 119322 (CIR filed a Petition for Review) where it states the following: The trial court and the Court of Appeals maintained that at that stage of the preliminary investigation, where the complaint and the accompanying affidavits and supporting documents did not show any violation of the Tax Code providing penal sanctions, the prosecutors should have dismissed the complaint outright because of total lack of evidence, instead of requiring private respondents to submit their counter affidavits under Section 3(b) of Rule 112. We believe that the trial court in issuing its questioned orders, which are interlocutory in nature, committed no grave abuse of discretion amounting to lack of jurisdiction. In the said decision, the Supreme Court further resolved to (1) DIRECT the Secretary of Justice to designate as early as possible, a new panel of prosecutors to investigate the complaints against private respondents; (2) ORDER the new panel of prosecutors designated by the Secretary of Justice to grant private respondents motion for the submission by petitioner Commissioner of Internal Revenue to private respondents, thru their counsel of record, of the documents supporting the complaints, and to give private respondents reasonable time to examine the documents and to submit their counteraffidavits; and, (3) ORDER the preliminary investigation to proceed with all reasonable dispatch. Proceedings before the MTC: On December 1, 1998, Informations for nine (9) counts of tax evasion (Taxable Years 1990, 1991 and 1992) were filed by the New DOJ Panel with the Metropolitan Trial Court (MeTC), Marikina City, Branch 75, docketed as Criminal Cases Nos. 98-38181 to 98-38189 for violation of

36 | T a x a t i o n I | 2017 Section 127[b] (now Section 130[b]), Cases Nos. 98-38181 to 9838189 for violation of Section 127[b] (now Section 130[b]), in relation to Section 253 (now Section 254) and Section 252[b] (now Section 253[b]) and Section 255 (now Section 256), of the National Internal Revenue Code (NIRC), as amended. Respondents filed an Urgent Opposition to Issuance of Warrants of Arrest. Furthermore, a Manifestation and Motion was filed before the MeTC by the officers of the Litigation and Prosecution Division of the BIR, verified by then incumbent BIR Commissioner, praying for the withdrawal of the Informations. It states that the Bureau of Internal Revenue in fact conducted several hearings on the tax liability of the accused relative to the protest filed by Fortune Tobacco Corporation regarding its tax liabilities connected with the filing of the instant cases against Lucio C. Tan et al., and that thereafter the Bureau of Internal Revenue found no fraud committed by the Fortune Tobacco Corporation and, that, therefore, there is no legal justification to further pursue the three tax evasion cases against Lucio C. Tan, et al. Consequently, the complaints were dismissed. Proceedings before the RTC: The Petition for Certiorari was dismissed for being filed out of time. The Court finds that the petition was filed eleven (11) days late, in violation of Section 4, Rule 65 of the 1997 Rules of Criminal Procedure, as amended by the resolution of the Supreme Court En Banc dated July 21, 1998, Bar Matter No. 803. The Panel of Prosecutors of the Department of Justice (DOJ Panel) admittedly received a copy of the assailed Order dated March 22, 1999 on March 24, 1999 and filed a Motion for Reconsideration on April 7, 1999. Thus, a period of fourteen (14) days had elapsed. According to Section 4 of Rule 65, as amended, this period of fourteen (14) days should be deducted from the total period of sixty (60) days prescribed therein. Hence, the DOJ Panel had the remaining period of forty-six (46) days within which to file the petition for certiorari.

Proceedings before the CA: The Court of Appeals dismissed the petition for lack of merit. ISSUE: Whether or not the Metropolitan Trial Court (MeTC) erred in dismissing the criminal cases before it, on the basis of the Manifestation and Motion of the BIR to withdraw the said cases. RULING: Yes. Timelines Instead of filing an appeal, petitioner filed before RTC-Marikina a Petition for Certiorari, on July 14, 1999. Respondents argue that: (1) This was the wrong remedy; and (2) even assuming this was the correct mode, the 60-day period to file the petition had also already lapsed. This Court has allowed resort to the extraordinary remedy of certiorari although the remedy appeal was available. In Metropolitan Manila Development Authority v. JANCOM Environmental Corporation ,citing Ruiz, Jr. v. Court of Appeals, one of the exceptions is when public welfare and the advancement of public policy dictate; or when the broader interests of justice so require, or when the writs issued are null or when the questioned order amounts to an oppressive exercise of judicial authority. There can be no question as to the public interest involved in this case. For the case of the prosecution, if proved, would mean that a fraudulent scheme to evade taxes has been resorted to by respondents, and the amount involved, at the time of the investigation, is nearly P 20 billion pesos. The principle is well established that taxes are the lifeblood of government and every citizen is duty bound to pay taxes and to pay taxes in the right amount. Technicalities, therefore, will have to yield to the paramount interest of the nation to enforce its laws against tax evasion, especially where the amounts involved are huge. As aptly put by petitioner in its Consolidated Reply, procedural rules should not be applied with rigidity especially when to do so would result in manifest failure or miscarriage of justice.

37 | T a x a t i o n I | 2017 Furthermore, the petition for certiorari filed by the prosecution is not late. For the provision under which it can be considered late was subsequently amended and under the amended rules the petition is on time (the sixty (60) day period shall be counted from notice of the denial of said motion. (SC. A.M. 00-2-03)). Said amendment should be retroactively applied since it is a procedural rule and it is also remedial in character, i.e., it is intended precisely to correct the unjust effect of the amended rule. Grave abuse of discretion in the dismissal of the criminal case Jurisprudence mandates that the grant of a motion to dismiss must be based upon the judges own personal conviction that there was no case against the accused. The trial judge must himself be convinced that there was indeed no sufficient evidence against the accused, and this conclusion can be arrived at only after an assessment of the evidence in the possession of the prosecution. What was imperatively required was the trial judge's own assessment of such evidence, it not being sufficient for the valid and proper exercise of judicial discretion merely to accept the prosecution's word for its supposed insufficiency. In the present case, the record clearly shows that the MeTC failed to discharge its duty to judiciously and independently rule upon the motion to withdraw. In it's decision, the trial court stated: The Court agrees with the Bureau of Internal Revenue that in view of the aforecited Section of the Tax Reform Act of 1997, a substantive law, and the fact that it is evident that the Commissioner of Internal Revenue has not approved the filing of the instant cases, this Court, thus, has no other recourse but to obey the law and dismiss the cases at bar. A reading of the MeTC order thus shows that the same was basically anchored only on the Manifestation and Motion of the BIR, praying for the withdrawal of the complaints. For this reason, this Court is

constrained to annul and set aside the Orders of the MeTC.

47. CIR vs. Pineda

G.R. No. L-22734, September 15, 1967

FACTS: Anastasio died and was survived by his wife and 15 children, the eldest being Manuel. After estate proceedings were closed, the BIR investigated the tax liability of the estate and made an assessment. Manuel contested the amount to be paid, especially those that pertain to him as a heir. The CTA reversed the assessment of the Commissioner on the ground that his right to assess has already prescribed. This was appealed and the SC decided that the right to assess only prescribed with respect to the later years. ISSUE: Whether or not the Government can require Manuel Pineda to pay the full amount of the tax assessed. HELD: The Government can require Manuel B. Pineda to pay the full amount of the taxes assessed. Pineda is liable for the assessment as an heir and as a holdertransferee of property belonging to the estate/taxpayer. As an heir he is individually answerable for the part of the tax proportionate to the share he received from the inheritance. His liability, however, cannot exceed the amount of his share. As a holder of property belonging to the estate, Pineda is liable for he tax up to the amount of the property in his possession. The reason is that the Government has a lien on the P2,500.00 received by him from the estate as his share in the inheritance, for unpaid income taxes4a for which said estate is liable, pursuant to the last paragraph of Section 315 of the Tax Code, which we quote hereunder—If any person, corporation,

38 | T a x a t i o n I | 2017 partnership, joint-account (cuenta en participacion), association, or insurance company liable to pay the income tax, neglects or refuses to pay the same after demand, the amount shall be a lien in favor of the Government of the Philippines from the time when the assessment was made by the Commissioner of Internal Revenue until paid with interest, penalties, and costs that may accrue in addition thereto upon all property and rights to property belonging to the taxpayer. By virtue of such lien, the Government has the right to subject the property in Pineda's possession, i.e., the P2,500.00, to satisfy the income tax assessment in the sum of P760.28. After such payment, Pineda will have a right of contribution from his co-heirs, to achieve an adjustment of the proper share of each heir in the distributable estate. All told, the Government has two ways of collecting the tax in question. One, by going after all the heirs and collecting from each one of them the amount of the tax proportionate to the inheritance received. The reason for this method is to achieve thereby two results: first, payment of the tax; and second, adjustment of the shares of each heir in the distributed estate as lessened by the tax. Another remedy, pursuant to the lien created by Section 315 of the Tax Code upon all property and rights to property belonging to the taxpayer for unpaid income tax, is by subjecting said property of the estate which is in the hands of an heir or transferee to the payment of the tax due, the estate. This second remedy is the very avenue the Government took in this case to collect the tax. The Bureau of Internal Revenue should be given, in instances like the case at bar, the necessary discretion to avail itself of the most expeditious way to collect the tax as may be envisioned in the particular provision of the Tax Code above quoted, because taxes are the lifeblood of government and their prompt and certain availability is an imperious need.7 And as afore-stated in this case the suit seeks to achieve only one objective: payment of the tax. The adjustment of the respective shares due to the heirs from the

inheritance, as lessened by the tax, is left to await the suit for contribution by the heir from whom the Government recovered said tax.

48. Commissioner of Internal Revenue vs. W.E. Lednicky and Maria Lednicky GR Nos. L-18262 and L-21434, July 31, 1964 FACTS: Spouses are both American citizens residing in the Philippines and have derived all their income from Philippine sources for taxable years in question. On March, 1957, filed their ITR for 1956, reporting gross income of P1,017,287.65 and a net income of P 733,809.44. On March 1959, file an amended claimed deduction of P 205,939.24 paid in 1956 to the United States government as federal income tax of 1956. ISSUE: Whether a citizen of the United States residing in the Philippines, who derives wholly from sources within the Philippines, may deduct his gross income from the income taxes he has paid to the United States government for the said taxable year? HELD: An alien resident who derives income wholly from sources within the Philippines may not deduct from gross income the income taxes he paid to his home country for the taxable year. The right to deduct foreign income taxes paid given only where alternative right to tax credit exists. Section 30 of the NIRC, Gross Income “Par. C (3): Credits against tax per taxes of foreign countries. If the taxpayer signifies in his return his desire to have the benefits of this paragraph, the tax imposed by this shall be credited with: Paragraph (B), Alien resident of the Philippines; and, Paragraph C (4), Limitation on credit.” An alien resident not entitled to tax credit for foreign income taxes paid when his income is derived wholly from sources within the Philippines. Double taxation becomes obnoxious only where the taxpayer is taxed

39 | T a x a t i o n I | 2017 twice for the benefit of the same governmental entity. In the present case, although the taxpayer would have to pay two taxes on the same income but the Philippine government only receives the proceeds of one tax, there is no obnoxious double taxation.

49. CIR vs. Isabela Cultural Corporation (ICC) G.R. No. 172231

FACTS: ICC, a domestic corporation, received from BIR two (2) notices for deficiency of (1) income tax amounting to P333, 196.86 and (2) expanded withholding tax amounting to P4, 897.79, both for 1986.Income tax deficiency arose from the BIR disallowance of ICC’s claimed expense deductions for professional and security services billed to and paid by ICC in 1986 and alleged understatement of ICC’s interest income on the 3 promissory notes due to Realty Investment, Inc. Expanded withholding tax (EWT)deficiency (with interest and surcharge) was allegedly due to failure of ICC to withhold 1% EWT on itsclaimed P244,890.00 deduction for security services.ICC sought reconsideration of the assessments on March 1990 but received final notice beforeseizure (demanding payment of amounts) on February 1995. Thus, brought to CTA which held that petitionis premature because final notice cannot be considered final decision appealable to tax court. CA reversedholding that demand letter of BIR amounts to final decision on the protested assessments and may be questioned before CTA. SC sustained CA and remanded case to CTA on July 2001.On 2003, CTA decided to cancel and set aside the assessment notices against ICC– claimed deductions were properly claimed in 1986 because it was only that year that the bills were sent to ICC. Hence, even if some of the services were rendered to ICC in 1984 or 1985, it could not declare the same because amounts cannot be determined at that time. The CTA also held that ICC did not understate its interest income on the subject promissory notes. It found that it was the BIR which made an

overstatement of said income when it compounded the interest income receivable by ICC from the promissory notes of Realty Investment, Inc., despite the absence of a stipulation in the contract providing for a compounded interest; nor of a circumstance, like delay in payment or breach of contract, that would justify the application of compounded interest. Petition for review was filed with the CA, which sustained CTA decision. Hence, the petition before the SC. ISSUE/S: (1)WON the expenses for professional and security services should be deducted from ICC’s gross income. (2)WON held that ICC did not understate its interest income from the promissory notes of Realty Investment, Inc. and that ICC withheld the required 1% withholding tax from the deductions for security services. HELD: The requisites for the deductibility of ordinary and necessary trade, business, or professional expenses, like expenses paid for legal and auditing services, are: (a) The expense must be ordinary and necessary; (b) It must have been paid or incurred during the taxable year ; (c) It must have been paid or incurred in carrying on the trade or business of the taxpayer; and (d) it must be supported by receipts, records or other pertinent papers. The requisite that it must have been paid or incurred during the taxable year is further qualified by Section 45 of the NIRC which states that: “[t]he deduction provided for in this Title shall be taken for the taxable year in which ‘paid or accrued’ or ‘paid or incurred’, dependent upon the method of accounting upon the basis of which the net income is computed x”.

40 | T a x a t i o n I | 2017 In the instant case, the accounting method used by ICC is the accrual method. Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of accounting, expenses not being claimed as deductions by a taxpayer in the current year when they are incurred cannot be claimed as deduction from income for the succeeding year. For a taxpayer using the accrual method, the determinative question is, when do the facts present themselves in such a manner that the taxpayer must recognize income or expense? The accrual of income and expense is permitted when the all-events test has been met. This test requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the reasonable accurate determination of such income or liability. The all-events test requires the right to income or liability be fixed, and the amount of such income or liability is determined with reasonable accuracy. However, the amount of liability does not have to be determined exactly; it must be determined with “reasonable accuracy.” Accordingly, the term “reasonable accuracy” implies something less than an exact or completely accurate amount. The propriety of an accrual must be judged by the facts that a taxpayer knew, or could reasonably be expected to have known, at the closing of its books for the taxable year. Accrual method of accounting presents largely a question of fact; such that the taxpayer bears the burden of proof of establishing the accrual of an item of income or deduction. Corollary, it is a governing principle in taxation that tax exemptions must be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority; and one who claims an exemption must be able to justify the same by the clearest grant of organic or statute law. In the instant case, the expenses for professional fees consist of expenses for legal and auditing services. The expenses for legal services pertain to the 1984 and 1985 legal and retainer fees of the law firm Benzoin Baraga Narcissi Caudal Person Alcona & Benson, and for reimbursement of the expenses of said firm in connection with ICC’s tax problems for the year 1984.

As testified by the Treasurer of ICC, the firm has been its counsel since the 1960’s. ICC can be expected to have reasonably known the retainer fees charged by the firm as well as the compensation for its legal services. As previously stated, the accrual method presents largely a question of fact and that the taxpayer bears the burden of establishing the accrual of an expense or income. However, ICC failed to discharge this burden. It simply relied on the defense of delayed billing by the firm and the company, which under the circumstances, is not sufficient to exempt it from being charged with knowledge of the reasonable amount of the expenses for legal and auditing services. As to the expenses for security services, the records show that these expenses were incurred Bick in 1986 and could therefore be properly claimed as deductions for the said year. Anent the purported understatement of interest income from the promissory notes of Realty Investment, Inc., we sustain the findings of the CTA and the Court of Appeals that no such understatement exists and that only simple interest computation and not a compounded one should have been applied byte BIR. Likewise, the findings of the CTA and the Court of Appeals that ICC truly withheld the required withholding tax from its claimed deductions for security services and remitted the same to the BIR is supported by payment order and confirmation receipts. Hence, the Assessment Notice for deficiency expanded withholding tax was properly cancelled and set aside. In sum, Assessment Notice for deficiency income tax should be cancelled and set aside but only insofar as the claimed deductions of ICC for security services. - said Assessment is valid as to the BIR’s disallowance of ICC’s expenses for professional services. The Court of Appeal’s cancellation of Assessment Notice in the amount of P4, 897.79 for deficiency expanded withholding tax, is sustained.

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50. Fernandez vs. CIR 29 SCRA 553 FACTS: • Four cases involve two decisions of the Court of Tax Appeal s determining the taxpayer ' s income tax liability for the years 1950 to 1954 and for the year 1957. Both the taxpayer and the Commissioner of Internal Revenue, as petitioner and respondent in the cases a quo respectively, appealed from the Tax Court's decisions, insofar as their respective contentions on particular tax items were therein resolved against them. Since the issues raised are inter related, the Court resolves the four appeals in this joint decision. • The taxpayer, Fernandez Herman’s, Inc., is a domestic corporation organized for the principal purpose of engaging in business as an “investment company” us the main office at Manila. Upon verification of the taxpayer's income tax returns for the period in quest ion, the Commissioner of Internal Revenue assessed against the taxpayer the sums of P13, 414.00, P119, 613.00, P11,698.00, P6,887.00 and P14,451.00 as alleged deficiency income taxes for the year’s 1950, 1951, 1952, 1953 and 1954, respectively. Said assessments were the result of alleged discrepancies found upon the examination and verification of the taxpayer's income tax returns for the said years, summarized by the Tax Court in its decision of June 10, 1963 in CTA Case No. 787, as follows: ISSUE: The correctness of the Tax Court's rulings with respect to the disputed items of disallowances enumerated in the Tax Court's summary reproduced HELD: That the circumstances are such that the method does not reflect the taxpayer’s income with reasonable accuracy and certainty and proper and just additions of personal expenses and other nondeductible expenditures were made and correct , fair and equitable credit

adjustments were given by way of eliminating non-taxable items. Proper adjustments to conform to the income tax laws. Proper adjustments for non-deductible items must be made. The following non-deductibles , as the case may be, must be added to the increase of decrease in the net worth: 1. Personal living or family expenses 2. Premiums paid on any life insurance policy 3. Losses from sales or exchanges of property between members of the family 4. Income taxes paid 5. Other non-deductible taxes 6. Election expenses and other expense against public policy 7. Non-deductible contributions 8. Gifts to others 9. Estate inheritance and gift taxes 10. Net Capital Loss On the other hand, non- taxable items should be deducted therefrom. These items are necessary adjustments to avoid the inclusion of what otherwise are non-taxable receipts. They are: 1. inheritance gifts and bequests received 2. non- taxable gains 3. compensation for injuries or sickness 4. proceeds of life insurance policies 5. sweepstakes 6. winnings 7. interest on government securities and increase in net worth are not taxable if they are shown not to be the result of unreported income but to be the result of the correction of errors in the taxpayer’s entries in the books relating to indebtedness

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51. Limpan Investment vs. CIR 17 S 703 FACTS: • BIR assessed deficiency taxes on Limpan Corp, a company that leases real property, for under-declaring its rental income for years 1956-57 by around P20K and P81K respectively. • Petitioner appeals on the ground that portions of these underdeclared rents are yet to be collected by the previous owners and turned over or received by the corporation. • Petitioner cited that some rents were deposited with the court, such that the corporation does not have actual nor constructive control over them. • The sole witness for the petitioner, Solis (Corporate SecretaryTreasurer) admitted to some undeclared rents in 1956 and1957, and that some balances were not collected by the corporation in 1956 because the lessees refused to recognize and pay rent to the new owners and that the corp’s president Isabelo Lim collected some rent and reported it in his personal income statement, but did not turn over the rent to the corporation. • He also cites lack of actual or constructive control over rents deposited with the court. ISSUE: Whether or not the BIR was correct in assessing deficiency taxes against Limpan Corp. for undeclared rental income HELD: Yes. Petitioner admitted that it indeed had undeclared income (although only a part and not the full amount assessed by BIR). Thus, it has become incumbent upon them to prove their excuses by clear and convincing evidence, which it has failed to do. When is there constructive receipt of

rent? With regard to 1957 rents deposited with the court, and withdrawn only in 1958, the court viewed the corporation as having constructively received said rents. The non-collection was the petitioner’s fault since it refused to refused to accept the rent, and not due to nonpayment of lessees. Hence, although the corporation did not actually receive the rent, it is deemed to have constructively received them.

53. MIAA vs. CA GR No. 155650, July, 20, 2006 FACTS: The Manila International Airport Authority (MIAA) operates the Ninoy Aquino International Airport (NAIA) Complex in Paranaque City under Executive Order No. 903 (MIAA Charter). as amended. As such operator, it administers the land, improvements and equipment Within the NAIA Complex. In March 1997, the Office of the Government Corporate Counsel (OGCC) Issued Opinion No. 061 to the effect that the Local Government Code of 1991 (LGC) withdrew the exemption from real estate tax granted to MIAA under Section 21 of Its Charter. Thus, MIAA paid some of the real estate tax already due. In June 2001, it received Final Notices of Real Estate Tax Delinquency from the City of Paranaque for the taxable years 1992 to 2001. The City Treasurer subsequently issued notices of levy and warrants of levy on the airport lands and buildings. At the instance of MIAA, the OGCC issued Opinion No. 147 clarifying Opinion No. 061, pointing out that Sec. 206 of the LGC requires persons exempt from real estate tax to show proof of exemption. According to the OGCC, Sec. 21 of the MIAA Charter is the proof that MIAA is exempt from real estate tax, MIAA, thus, filed a petition with the Court of Appeals seeking to restrain the City of Paranaque from imposing real

43 | T a x a t i o n I | 2017 estate tax on, levying against, and auctioning for public sale the airport lands and buildings. But this was dismissed for having been film out of time. Hence, MIAA filed this petition for review, pointing out that it is exempt from real estate tax under Sec. 21 of its charter and Sec. 234 of the LGC. It invokes the principle that the government cannot tax itself as a justification for exemption, since the airport lands and buildings, being devoted to public use and public service, are owned by the Republic of the Philippines. On the other hand, the City of Paranaque invokes Sec. 193 of the LGC, which expressly withdrew the tax exemption privileges of government owned and controlled corporations (GOCC) upon the effectivity of the LGC. It asserts that an international airport is not among the exceptions mentioned in the sad law. Meanwhile, the City of Paranaque posted and published notices announcing the public auction sale of the airport lands and buildings in the afternoon before the scheduled public auction, MIAA applied with the Court for the issuance of a TRO to restrain the auction sale The Court Issued a TRO on the day of the auction sale, however, the same was received only by the City of Paranaque three hours after the sale. ISSUE: Whether or not the airport lands and buildings of MIAA are exempt from real estate tax? HELD: The airport lands and buildings of MIAA are exempt from real estate tax imposed by local governments. Sec. 243(a) of the LGC exempts from real estate tax any real property owned by the Republic of the Philippines. This exemption should be read In relation with Sec. 133(0) of the LGC, which provides that the exercise of the taxing powers of local governments shall not extend to the levy of taxes, fees or charges of any kind on the National Government, Its agencies and instrumentalities.

These provisions recognize the basic principle that local governments cannot tax the national government, which historically merely delegated to local governments the power to tax. The rule is that a tax is never presumed and there must be clear language in the law imposing the tax. This rule applies with greater force when local governments seek to tax national government instrumentalities. Moreover, a tax exemption is construed liberally in favor of national government instrumentalities. MIAA is not a GOCC, but an instrumentality of the government The Republic remains the beneficial owner of the properties. MIAA itself is owned solely by the Republic. At any time, the Pre5ident can transfer back to the Republic title to the airport lands and buildings without the Republic paying MIAA any consideration. As long as the airport lands and buildings are reserved for public use, their ownership remains With the State. Unless the President issues a proclamation withdrawing these properties from public use, they remain properties of public dominion. As such, they are inalienable, hence, they are not subject to levy on execution or foreclosure sale, and they are exempt from real estate tax. However, portions of the airport lands and buildings that MIAA leases to private entities are not exempt from real estate tax. In such a case, MIAA has granted the beneficial use of such portions for a consideration to a taxable person.

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54. CIR vs. DE LA SALLE GR No196596, November 09, 2016 G.R. No. 198841/ CTA Case No. 671 Before the Court are consolidated petitions for review on certiorari: 1. G.R. No. 196596 see digest 32 2. G.R. No. 198841 filed by De La Salle University, Inc. (DLSU) to assail the June 8, 2011 decision and October 4, 2011 resolution in CTA En Banc Case No. 671; and 3. G.R. No. 198941 FACTS: CTA En Banc Case No. 671 The CTA En Banc partially granted DLSU's petition for review and further reduced its tax liabilities to P2,554,825.47 inclusive of surcharge. The issue of the LOA's validity was raised during trial. Citing jurisprudence, the CTA En Banc held that a LOA should cover only one taxable period and that the practice of issuing a LOA covering audit of unverified prior years is prohibited. The prohibition is consistent with Revenue Memorandum Order (RMO) No. 43-90, which provides that if the audit includes more than one taxable period, the other periods or years shall be specifically indicated in the LOA. In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified Prior Years. Hence, the assessments for deficiency income tax, VAT and DST for taxable years 2001 and 2002 are void, but the assessment for taxable year 2003 is valid. DLSU argues as that: RMO No. 43-90 prohibits the practice of issuing a LOA with any indication of unverified prior years. A LOA issued contrary to RMO No. 43-90 is void, thus, an assessment issued based on such defective LOA must also be void. DLSU points out that the LOA issued to it covered the Fiscal Year Ending

2003 and Unverified Prior Years. On the basis of this defective LOA, the Commissioner assessed DLSU for deficiency income tax, VAT and DST for taxable years 2001, 2002 and 2003. DLSU objects to the CTA En Banc's conclusion that the LOA is valid for taxable year 2003. Issue: Whether the entire assessment should be voided because of the defective LOA Ruling The LOA issued to DLSU is not entirely void. The assessment for taxable year 2003 is valid. Ratio A LOA is the authority given to the appropriate revenue officer to examine the books of account and other accounting records of the taxpayer in order to determine the taxpayer's correct internal revenue liabilities and for the purpose of collecting the correct amount of tax, in accordance with Section 5 of the Tax Code, which gives the CIR the power to obtain information, to summon/examine, and take testimony of persons. The LOA commences the audit process and informs the taxpayer that it is under audit for possible deficiency tax assessment. Given the purposes of a LOA, is there basis to completely nullify the LOA issued to DLSU, and consequently, disregard the BIR and the CTA's findings of tax deficiency for taxable year 2003? No. The relevant provision is Section C of RMO No. 43-90, the pertinent portion of which reads: A Letter of Authority [LOA] should cover a taxable period not exceeding one taxable year. The practice of issuing [LOAs] covering audit of unverified prior years is hereby prohibited. If the audit of a taxpayer shall include more than one taxable period, the other periods or years shall be specifically indicated in the [LOA]. What this provision clearly prohibits is the practice of issuing LOAs covering audit of unverified prior years. RMO 43-90 does not say that a LOA which contains unverified prior years is void. It merely prescribes that if the audit includes more than one taxable period, the other periods or years must be specified, the BIR must specify each taxable year or taxable period on separate LOAs.

45 | T a x a t i o n I | 2017 In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified Prior Years. The LOA does not strictly comply with RMO 43-90 because it includes unverified prior years. This does not mean, however, that the entire LOA is void.

55. CIR vs. ST. LUKES GR No195909, September 26, 2012

Note: This case illustrates the position in the Philippines that income from commercial (for-profit) activity (in this case, paying patients) is taxable, but the organization remains tax-exempt on income from its actual charitable activities. The only question is whether an activity is for profit (commercial) or not. FACTS: St Luke’s Medical Center Inc. (St Luke’s) is a nonprofit hospital in Manila. On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St Luke’s deficiency taxes amounting to ₱76,063,116.06 for 1998, comprising deficiency income tax, value-added tax, withholding tax on compensation and expanded withholding tax. The BIR reduced the amount to ₱63,935,351.57 during trial in the First Division of the Court of Tax Appeals (CTA). This was a review on certiorari under Rule 45 of the Rules of Court of the Decision of 19 November 2010 of the CTA and its Resolution of 1 March 2011 in CTA Case No. 6746. The Supreme Court resolved this case on a pure question of law, which involved the interpretation of sub-section 27(B) and its interaction with subsections 30(E) and (G) of the National Internal Revenue Code of the

Philippines (NIRC), on the income tax treatment of proprietary nonprofit hospitals. The BIR had argued before the CTA that section 27(B) of the NIRC, which imposes a 10%preferential tax rate on the income of proprietary nonprofit hospitals, should be applicable to St. Luke’s. According to the BIR, section 27(B), introduced in 1997, ‘is a new provisionintended to amend the exemption on non-profit hospitals that were previously categorized asnon-stock, non-profit corporations under Section 26 of the 1997 Tax Code...’. It is a specificprovision which prevails over the general exemption on income tax granted under subsections30(E) and (G) for non-stock, non-profit charitable institutions and civic organisationspromoting social welfare. The BIR contended that St Luke’s was not really operating forcharitable purposes, but was for profit, on the basis that only 13% of its revenues came from its charitable purposes. St Luke’s took the position that the BIR should not consider its total revenues, because itsfree services to patients amounted to ₱218,187,498 or 65.20% of its 1998 operating income(i.e. total revenues less operating expenses) of ₱334,642,615. St Luke’s also claimed thatits income did not inure to the benefit of any individual, and that its making a profit did not affect its status as exempt from taxation under sub-sections 30(E) and (G) of the NIRC. The CTA had held that section 27(B) did not apply to St Luke’s. It was exempt from taxation on income derived from all services to patients, whether paying or non-paying. ISSSUE: whether section 27(B) did or did not apply. (If it did, then St Luke’s would have to pay the 10%reduced tax rate on the income of proprietary nonprofit hospitals.) HELD: Section 27(B) of the NIRC does not remove the income tax exemption of proprietary non-profit hospitals under Section 30(E) and (G). Section 27(B) on one hand, and Se on the other hand, can be construed together without the removal of such tax exemption. The

46 | T a x a t i o n I | 2017 effect of the introduction of Section 27(B) is to subject the taxable income of two specific institutions, namely, proprietary non-profit educational institutions and proprietary non-profit hospitals, among the institutions covered by Section 30, to the 10% preferential rate under Section 27(B) instead of the ordinary 30% corporate rate under the last paragraph of Section 30 in relation to Section 27(A)(1). Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary non-profit educational institutions and (2) proprietary non-profit hospitals. The only qualifications for hospitals are that they must be proprietary and non-profit. ‘Proprietary’ means private... ‘Non-profit’ means no net income or asset accrues to or benefits any member or specific person, with all the net income or asset devoted to the institution’s purposes and all its activities conducted not for profit. ‘Non-profit’ does not necessarily mean ‘charitable’.’ The Court said that charitable institutions were not automatically granted tax exemptions. Tax exemptions are given by the Congress under specific laws (except for exemption from real property taxation which was given by the Constitution of the Philippines). Section 30(E) of the NIRC defines a charitable institution as: (1) a non-stock corporation or association; (2) organised exclusively for charitable purposes; (3) operated exclusively for charitable purposes; and (4) with no part of its net income or assets belonging to or inuring to the benefit of any member, organiser, officer or any specific person. There was no doubt that St Luke’s was organised as a non-stock, non-profit charitableinstitution. However, this did not automatically exempt it from paying taxes. The last paragraph of section 30 of the NIRC stated that: ction 30(E) and (G)

Notwithstanding the provisions in the preceding paragraphs, the income of whateverkind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code. Therefore, the Court said that ‘if a tax exempt charitable institution conducts “any” activity forprofit, such activity is not tax exempt even if its not-for profit activities remain tax exempt’. The Court added that: The Court cannot expand the meaning of the words ‘operated exclusively’ withoutviolating the NIRC. Services to paying patients are activities conducted forprofit. They cannot be considered any other way. There is a ‘purpose to makeprofit over and above the cost’ of services. The ₱1.73 billion total revenues frompaying patients is not even incidental to St. Luke’s charity expenditure of ₱218,187,498 for non-paying patients. The Court therefore held that St Luke’s was not operated exclusively for charitable or socialwelfare purposes. It received income from paying patients. This income was subject to 10% taxation under section 27(B) of the NIRC. As the Court held: St. Luke’s fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely tax exempt from all its income. However, it remains a proprietary nonprofithospital under Section 27(B) of the NIRC as long as it does not distribute any of its profits to its members and such profits are reinvested pursuant to its corporate purposes. St. Luke’s, as a proprietary non-profit hospital, is entitled to the preferential tax rate of 10% on its net income from its for-profit activities. Thus, St Luke’s was liable for tax at the rate of 10% in the 1998 year under section 27(B) of the NIRC. It was held not liable for surcharges or interest on the amount of tax owing.

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56. DIAZ vs. SEC. OF FINANCE GR No. 193007, June, 19, 2011

FACTS: Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition for declaratory relief assailing the validity of the impending imposition of value added tax (VAT) by the Bureau of Internal Revenue (BIR) on the collections of tollway operators. Court treated the case as one of prohibition. Petitioners hold the view that Congress did not, when it enacted the NIRC, intend to include toll fees within the meaning of "sale of services" that are subject to VAT; that a toll fee is a "user's tax," not a sale of services; that to impose VAT on toll fees would amount to a tax on public service: and that, since VAT was never factored into the formula for computing toll fees its imposition would violate the nonimpairment clause of the constitution. The government avers that the NRC imposes VAT on all kinds of services of franchise grantees, including tollway operations; that the Court should seek the meaning and intent of the law from the words used in the statute; and that the imposition of VAT on tollway operations has been the subject as early as 2003 of several BIR rulings and circulars. The government also argues that petitioners have no right to invoke the non-impairment of contracts clause since they clearly have no personal interest in existing toll operating agreements (TOAs) between the government and toll way operators. At any rate, the nonimpairment clause cannot limit the State's sovereign taxing power which is generally read into contracts. ISSUE: May toll fees collected by tollway operators be subjected to

VAT (Are tollway operations a franchise and/or a service that is subject to VAT)? HELD: When a tollway operator takes a toll fee from a motorist, the fee is in effect for the latter's use of the tollway facilities over which the operator enjoys private proprietary rights that its contract and the law recognize. In this sense, the tollway operator is no different from the service providers under Section 108 who allow others to use their properties or facilities for a fee. Tollway operators are franchise grantees and they do not belong to exceptions that Section 119 spares from the payment of VAT. The word "franchise" broadly covers government grants of a special right to do an act or series of acts of public concern. Tollway operators are, owing to the nature and object of their business, "franchise grantees." The construction, operation, and maintenance of toll facilities on public improvements are activities of public consequence that necessarily require a special grant of authority from the state. A tax is imposed under the taxing power of the government principally for the purpose of raising revenues to fund public expenditures. Toll fees, on the other hand, are collected by private tollway operators as reimbursement for the costs and expenses incurred in the construction, maintenance and operation of the tollways, as well as to assure them a reasonable margin of income. Although toll fees are charged for the use of public facilities, therefore, they are not government exactions that can be properly treated as a tax. Taxes may be imposed only by the government under its sovereign authority, toll fees may be demanded by either the government or private individuals or entities, as an attribute of ownership.