TAXATION

By
Prof. Abelardo T. Domondon
HOW TO USE THESE NOTES:
These Notes in the form of review questions and textual materials were
specially prepared by the author for the exclusive use of Bar Candidates who
attended his lectures in Taxation. They are to be used as supplements to his Bar
eviewer in Taxation! "ols! # and ##.
The purpose of these Notes is to test the candidate$s ability to answer
hypothetical questions as well as those based on selected cases decided by the
%upreme Court durin& the period '(()*+))).
#t is su&&ested that the reviewee should cover the su&&ested answers while
readin& the questions. This should force him to recall the applicable law and
,urisprudence. #f there is time! the answers should be written on a &rade school
noteboo- usin& the si&n pen to be used durin& the actual exams. .ach question
should be answered within a span of nine /(0 minutes only. Chec- your answers
referrin& to the %122.%T.D AN%3.%.
Do not 4.45#6. the su&&ested answers. They were purposely made to
be len&thy to serve as explanatory devices. This is so! because the reviewee does
not have time any more to refer bac- to the review materials. #f the candidate still
could not understand the concepts after readin& these notes! then refer to the
author$s Bar eviewer in Taxation! "ols! # and ##.
IMPORTANT: The questions as-ed in the Bar may not be worded in the same
manner as the questions shown in these notes! therefore the reviewee is warned
that it should be the concepts shown in the questions and su&&estions that he
should master and not the questions and answers per se. Be specially careful
where the Bar questions are variations of the questions included because the
answers may be different. #t is su&&ested that particular attention be &iven to
questions and areas which are mar-ed ***
WARNING:
These materials are copyri&hted and are only authori7ed for the use of bar
candidates who have attended the Tax eview lectures of Prof. Domondon and
others he has personally authori7ed. These include those who have attended the
lectures conducted by Primus 4ana&ement 1nlimited %ervices! #nc.! held at the
Asian %ocial #nstitute! #nc.! Lex Bar eviews and %eminars! #nc.! 1niversity of the
Philippines! 1niversity of %anto Tomas! Ateneo de 4anila 1niversity! %an
%ebastian Colle&e*ecolletos and 8ar .astern 1niversity. Students o ot!er
s"!ools #nd re$ie%ees o ot!er re$ie% "enters #re not #ut!ori&ed to use t!ese
notes.
GENERAL PRINCIPLES OF TAXATION
*** '( W!en m#y t!e )o%er to t#x in"lude t!e )o%er to destroy* W!en is
exer"ise o t!e )o%er to t#x not destru"ti$e o t#x)#yer+s )ro)erty*
%122.%T.D AN%3.9
The power to tax includes the power to destroy! where the tax is a valid tax. This
is so because a taxpayer could not see- the nullification of the valid tax solely upon the
premise that the tax will impoverish him.
The exercise of the power to tax is not destructive of taxpayer$s property where it
is an invalid tax! which violates the inherent or constitutional limitations. This is so
because there is a sympathetic court that shall come to the succor of the taxpayer and
declare such tax as invalid.
,( -is"uss t!e "on"e)t o inter)ret#tion o t#x l#%s #s dierenti#ted rom t!e
"on"e)t o inter)ret#tion o t#x exem)tion l#%s(
%122.%T.D AN%3.9 A tax cannot be imposed unless it is supported by the
clear and express lan&ua&e of a statute. /Davao 2ulf :umber Corporation v.
Commissioner of #nternal evenue! et al.! +(; %CA <=! >>0 #n short! in case of doubt!
tax laws must be construed strictly a&ainst the %tate and liberally in favor of the taxpayer.
This is because taxes! as burdens which must be endured by the taxpayer! should not be
presumed to &o beyond what the law expressly and clearly declares. /:incoln Philippine
:ife #nsurance Company! #nc.! etc.! v. Court of Appeals! et al.! +(; %CA (+! ((0
5n the other hand! when a tax is unquestionably imposed! a claim of exemption
form tax payments must be clearly shown and based on lan&ua&e in the law too plain to be
mista-en. /Davao 2ulf :umber Corporation! supra0
N5T.% AND C544.NT%9 The above concepts are also the holdin& in
/Commissioner of #nternal evenue v. Court of Appeals! et al.! 2.. No. ')<';?! prom.
8ebruary +;! '(((0 This is the C.N"5C5 case.
8urthermore! a reversal of a B# rulin& favorable to a taxpayer would not
necessarily create a perpetual exemption in his favor! for after all the &overnment is never
estopped from collectin& taxes because of mista-es or errors on the part of its a&ents.
/Ibid.0
*** .( W!#t do you underst#nd /y t!e in!erent #nd "onstitution#l limit#tions #s
/ein0 restri"ti$e o t!e ot!er%ise unlimited #nd )len#ry )o%er o t#x#tion*
%122.%T.D AN%3.9
The inherent and constitutional limitations to the power of taxation are safe&uards
which would prevent abuse in the exercise of this otherwise unlimited and plenary power.
*** 1( W!#t #re t!e in!erent limit#tions to t!e )o%er o t#x#tion*
%122.%T.D AN%3.9
a. P1B:#C P1P5%.. The tax revenues must be utili7ed for the benefit of the
community in &eneral. An alternative meanin& is that tax proceeds should be utili7ed only
to attain the ob,ectives of &overnment.
b. N5 #4P5P. D.:.2AT#5N 58 :.2#%:AT#". A1T@5#TA. The
power of taxation is exercised by the le&islature whose members are the mere dele&ates of
the people. This power could not therefore be dele&ated by the le&islature to other
departments of &overnment! li-e the executive.
c. T.#T5#A:#TA. The power to tax should be exercised only within the
territorial boundaries of the taxin& authority.
d. 25".N4.NT .B.4PT#5N %@51:D B. .C52N#6.D. This is so in
order to reduce the amount of money the &overnment is handlin&. There is verity in the
maxim! C8or the &overnment! exemption is the rule and taxation is the exception.D
+
e. C54#TA. espect should be accorded to other soverei&n nations. The power
of taxation is a hi&h prero&ative of soverei&nty. The properties of other soverei&n nations
within the territory of the taxin& authority should not be sub,ect to taxation as a measure
of respect to a co*equal.

*** 2( W!#t #re t!e "onstitution#l limit#tions on t!e )o%er o t#x#tion*
%122.%T.D AN%3.9
*** 2.N.A: 5 #ND#.CT C5N%T#T1T#5NA: :#4#TAT#5N%9
a. -ue )ro"ess "l#useE
b. E3u#l )rote"tion "l#useE
c. 4reedom o t!e )ressE
d. Reli0ious reedom5
e. Non6im)#irment "l#use5
f. L#%6m#7in0 )ro"ess9
'0 Bill should embrace only one sub,ect expressed in the title thereofE
+0 Three /;0 readin&s on three separate daysE
;0 Printed copies in final form distributed three /;0 days before passa&e.
&. Presidenti#l )o%er to 0r#nt re)rie$es! commutations and pardons and
remittal of fines and forfeiture after conviction by final ,ud&ment.
FFF %P.C#8#C 5 D#.CT C5N%T#T1T#5NA: :#4#TAT#5N%9
a. No im)risonment or non6)#yment o # )oll t#xE
b. T#x#tion s!#ll /e uniorm #nd e3uit#/leE
c. Con&ress shall evolve a )ro0ressi$e system o t#x#tionE
d. All #))ro)ri#tion8 re$enue or t#ri /ills s!#ll ori0in#te ex"lusi$ely in t!e
House o Re)resent#ti$es8 but the %enate may propose and concur with amendmentsE
e. The President s!#ll !#$e t!e )o%er to $eto #ny )#rti"ul#r item or items in
an appropriation! revenue! or tariff bill! but the veto shall not affect the item or items to
which he does not ob,ectE
f. -ele0#ted )o%er o t!e President to im)ose t#ri r#tes! import and export
quotas! tonna&e and wharfa&e dues9
'0 Dele&ation by Con&ress
+0 Throu&h a law
;0 %ub,ect to Con&ressional limits and restrictions
G0 3ithin the framewor- of national development pro&ram.
&. T#x exem)tion o "!#rit#/le institutions8 "!ur"!es8 )#rson#0es #nd
"on$ents #))urten#nt t!ereto8 mos3ues8 #nd #ll l#nds8 /uildin0s #nd im)ro$ements
o #ll 7inds #"tu#lly8 dire"tly #nd ex"lusi$ely used or reli0ious8 "!#rit#/le or
edu"#tion#l )ur)oses5
h. No tax exemption without the concurrence of ma,ority vote of all members of
Con&ressE
i. No use of public money or property for reli&ious purposes except if priest is
assi&ned to the armed forces! penal institutions! &overnment orphana&e or leprosariumE
,. 4oney collected on tax levied for a special purpose to be used only for such
purpose! balance if any! to &eneral fundsE
-. The %upreme CourtHs power to review ,ud&ments or orders of lower courts in
all cases involvin& the le&ality of any tax! impose! assessment or toll or the le&ality of any
penalty imposed in relation to the aboveE
l. Aut!ority o lo"#l 0o$ernment units to "re#te t!eir o%n sour"es o re$enue8
to le$y t#xes8 ees #nd ot!er "!#r0es su/9e"t to 0uidelines #nd limit#tions im)osed /y
:on0ress "onsistent %it! t!e /#si" )oli"y o lo"#l #utonomy5
m. Autom#ti" rele#se o lo"#l 0o$ernment;s 9ust s!#re in n#tion#l t#xes5
n. T#x exem)tion o #ll re$enues #nd #ssets o non6sto"78 non6)roit
edu"#tion#l institutions used #"tu#lly8 dire"tly #nd ex"lusi$ely or edu"#tion#l
)ur)osesE
o. T#x exem)tion o #ll re$enues #nd #ssets o )ro)riet#ry or "oo)er#ti$e
edu"#tion#l institutions su/9e"t to limit#tions )ro$ided /y l#% in"ludin0 restri"tions
on di$idends #nd )ro$isions or rein$estment o )roits5
;
p. T#x exem)tion o 0r#nts8 endo%ments8 don#tions or "ontri/utions used
#"tu#lly8 dire"tly #nd ex"lusi$ely or edu"#tion#l )ur)oses su/9e"t to "onditions
)res"ri/ed /y l#%(
<( Re)u/li" A"t No( =,,= "re#ted t!e Su/i" S)e"i#l E"onomi" >one ?SSE>@8
#nd )ro$ides t!#t t!e SSE> s!#ll /e m#n#0ed #s # se)#r#te "ustoms territory %it!
su"! in"enti$es #s t#x #nd duty6ree im)ort#tions o r#% m#teri#ls8 "#)it#l #nd
e3ui)ment( It urt!er )ro$ides t!#t Ano t#xes8 lo"#l #nd n#tion#l8 s!#ll /e im)osed
%it!in t!e SSE>B8 /ut in lieu t!ereo8 .C o t!e 0ross in"ome e#rned /y /usinesses
t!erein s!#ll /e remitted to t!e N#tion#l Go$ernment %it! 'C e#"! to t!e lo"#l
0o$ernment units #e"ted /y t!e de"l#r#tion o t!e &one in )ro)ortion to t!eir
)o)ul#tion #re# #nd ot!er #"tors( In #ddition8 # de$elo)ment und o 'C o t!e
0ross in"ome e#rned /y #ll /usinesses %it!in t!e SSE> s!#ll /e utili&ed or t!e
de$elo)ment o muni"i)#lities outside Olon0#)o :ity #nd t!e Muni"i)#lity o Su/i"
#nd ot!er muni"i)#lities "onti0uous to t!e /#se #re#s(
On Dune 'E8 'FF.8 President R#mos issued Exe"uti$e Order No( F= "l#riyin0
t!#t t#x #nd im)ort duty6ree im)ort#tions s!#ll #))ly only to r#% m#teri#ls8 "#)it#l
0oods #nd e3ui)ment /rou0!t in /y /usiness enter)rises in t!e SSE>( On Dune 'F8
'FF.8 President R#mos issued Exe"uti$e Order No8 F=6A s)e"iyin0 t!#t t!e se"ured
#re#s t!#t s!#ll /e "om)letely t#x #nd duty6ree in t!e SSE>4P> "onsists o t!e
A)resently en"ed6in ormer Su/i" N#$#l G#se(B
Exe"uti$e No( F=6A is "!#llen0ed or /ein0 $iol#ti$e o t!e e3u#l )rote"tion o
t!e l#% "l#use /e"#use o its /i#s in #$or o /i0 in$estors( Is t!ere merit in t!e
"!#llen0e * Ex)l#in /riely(
%122.%T.D AN%3.9 No. .qual protection of the law clause is sub,ect to
reasonable classification. #f the &roupin&s are characteri7ed by substantial distinctions
that ma-e real differences! one class may be treated and re&ulated differently from
another. The classification must also be &ermane to the purpose of the law and must apply
to all those belon&in& to the same class.
FFF Classification! to be valid! must /'0 rest on substantial distinctions! /+0 be &ermane
to the purpose of the law! /;0 not be limited to existin& conditions only! and /G0 apply
equally to all members of the same class.
#n issuin& ..5. No. (<*A delimitin& incentives within the confines of the former
%ubic military base! the President reasonably made a classification that is &ermane to the
purpose of epublic Act No. <++<( The purpose of epublic Act No. <++< is to
accelerate the conversion of military reservations into productive uses. #t was reasonable
for the President to have delimited the application of some incentives to the confines of
the former %ubic military base. The classification is therefore &ermane to the purposes of
the law.
There are substantial differences between bi& investors bein& enticed to the
Csecured areaD and the business operators outside that are in accord with the equal
protection clause that does not require territorial uniformity of laws. 5f course the
outsiders! possessin& the requisite investment capital can always avail of the same benefits
by channelin& their resources or business operations into the fenced*off free port 7one.
The classification set forth by ..5. No. (<*A does not merely apply to existin&
conditions. As laid down in .A. No. <++<! the ob,ective is to establish a Cself*sustainin&!
industrial! commercial! financial and investment centerD in the area. There will! therefore!
be a lon&*term difference between such investment center and the areas outside it.
The classification applies equally to al the resident individuals and businesses
within the Isecured area.D The residents! bein& in li-e circumstances o contributin&
directly to the achievement of the end purpose of the law! are not cate&ori7ed further.
#nstead! they are similarly treated! both in privile&es &ranted and obli&ations required.
/Tiu! et al.! v. Court of Appeals! et al.! 2.. No. '+<G')! January +)! '(((0
=( On Duly '8 'FF.8 or # mont! #ter t!e en#"tment #nd t%o d#ys /eore t!e
ee"ti$ity o Re)u/li" A"t No( =<218 t!e GIR issued RM: No( .=6F. %!i"!
"onsidered Ho)e Luxury8 Premium More #nd :!#m)ion "i0#rettes /ein0
G
m#nu#"tured /y 4ortune To/#""o "or)or#tion #s lo"#lly m#nu#"tured "i0#rettes
/e#rin0 # orei0n /r#nd su/9e"t to t!e !i0!er 22C ad valorem t#x on "i0#rettes(
T!e ollo%in0 d#y8 on Duly ,8 'FF.8 #t #/out 2:2E )(m(8 t!e GIR sent $i# #x #
"o)y o RM: No( .=6F. to 4ortune To/#""o /ut %#s #ddressed to no one in
)#rti"ul#r( On Duly '28 'FF. 4ortune To/#""o re"ei$ed8 /y ordin#ry m#il8 # "ertiied
xerox "o)y o RM: No( .=6F.(
4ortune To/#""o no% "l#ims t!#t its "onstitution#l ri0!t to due )ro"ess %#s
$iol#ted /e"#use t!ere %#s no !e#rin0 /eore GIR issued RM: No( .=6F.( -o your
#0ree * Ex)l#in(
%122.%T.D AN%3.9
Aes. There was a violation of 8ortune Tobacco$s ri&ht to due process.
B# issued 4C No. ;<*(; for the purpose of placin& @ope :uxury! Premium
4ore and Champion within the scope of the amendatory law and sub,ect them to the
increased tax rate.
#n so doin&! the B# did not simply interpret the law! it issued a le&islative rule
which is in the nature of subordinate le&islation! desi&ned to implement a primary
le&islation by providin& the details thereof. #n the same way that laws must have the
benefit of public hearin&! it is &enerally required that before a le&islative rule is adopted
there must be a hearin& and publication as required under the Administrative Code.
5n the other hand! if what is issued is merely an interpretative rule /which is not
the rule issued in this case0!no hearin& or publication is required since an interpretative
rule is desi&ned merely to provide &uidelines of the law which the administrative a&ency is
in char&e of enforcin&. /Commissioner of #nternal evenue v. Court of Appeals! et al.!
+=' %CA +;= 0

H( It is "ontended t!#t Ex)#nded I#lue6Added T#x is $iol#ti$e o t!e
"onstitution#l rule t!#t t#xes s!ould /e uniorm #nd e3uit#/le( It is li7e%ise
#d$#n"ed t!#t t!e EIAT is Ao))ressi$e8 dis"rimin#tory8 #nd un9ust(B Ho% %ere
t!ese o/9e"tions dis)osed o in t!e "#se o Tolentino $( Se"ret#ry o 4in#n"e #nd
"om)#nion "#ses8 ,1F S:RA <,H ?'FF2@ *
%122.%T.D AN%3.9
*** a. #t is inherent in the power to tax that the state be free to select the sub,ects of
taxation and it has been repeatedly held that inequalities which result from a sin&lin& out
of one particular class for taxation! or exemption infrin&e no constitutional limitation.
Thus! the ."AT on certain &oods and services only! but not on others! do not violate the
rule on uniformity and equitableness.
*** b. .quality and uniformity of taxation means that all taxable articles or -inds of
property of the same class be taxed at the same rate. The taxin& power has the authority
to ma-e reasonable and natural classifications for purposes of taxation. To satisfy the
requirement of uniformity and equitableness! it is enou&h that the statute or ordinance
applies equally to all persons! forms and or&ani7ations placed in a similar situation.
c. The ."AT is uniform because the tax is applied similarly on all &oods and
services sold to the public! which is not exempt! at the constant rate of )K or ')K.
d. The ."AT is equitable because it is imposed only on sale of &oods and services
by persons en&a&ed in business with an annual &ross sales as determined by the law.
%mall corner sari*sari stores are consequently exempt from its application.
:i-ewise exempt from the tax are sales of farm and marine products. Thus! the cost of
basic food and other necessities! spared as they are from ."AT! are expected to be
relatively lower and within the reach of the &eneral public.
F( On Au0ust 28 'FFH8 GIR #0ents #"tin0 u)on # re0ul#rly issued Mission
Order ex#mined t!e /oo7s o #""ount o $#rious 9e%elers en0#0ed in t!e
m#nu#"ture o 9e%elry #nd #llied undert#7in0s %ere ex#mined #nd in$esti0#ted or
ex"ise t#x )ur)oses( Amon0 t!ese irms %ere H#ns8 Mil#d#y8 Mer"elles8 et"(
Su/se3uently8 t!e 9e%elers #nd t!eir #sso"i#tion iled %it! t!e Re0ion#l Tri#l
:ourt # )etition or de"l#r#tory relie )r#yin0 t!#t "ert#in )ro$isions o t!e NIR:
im)osin0 ,EC ex"ise t#x on 9e%elry8 )e#rls #nd ot!er )re"ious stones8 #nd
)ro$isions o t!e T#ri #nd :ustoms :ode im)osin0 t!ree to ten )er"ent ?.C to
?
'EC@ t#ri #nd "ustoms duty on n#tur#l #nd "ultured )e#rls #nd )re"ious or semi6
)re"ious stones8 /e de"l#red un"onstitution#l #nd null #nd $oid(
T!e 9e%elers li7e%ise )resented #n ex!#usti$e study on t!e t#x r#tes on
9e%elry le$ied /y dierent Asi#n "ountries(
T!e tri#l "ourt de"l#red t!e 3uestioned )ro$isions #s ino)er#ti$e #nd %it!out
or"e #nd ee"t inso#r #s t!e 9e%elers #re "on"erned( T!e tri#l "ourt m#de t!e
o/ser$#tion t!#t indeed 0o$ernment t#x )oli"y tre#ts 9e%elry #s non6essenti#l items8
#nd t!ereore8 t#xed !e#$ily5 t!#t t!e )resent t#ri #nd t#x stru"ture in"re#se
m#nu#"turin0 "ost #nd renders t!e lo"#l 9e%elry m#nu#"turers un"om)etiti$e
#0#inst ot!er "ountries( W#s t!ere le0#l /#sis or t!e tri#l "ourt;s de"l#r#tion *
Ex)l#in(
%122.%T.D AN%3.9 No. There was no le&al basis for the followin& reasons9
a. The trial ,ud&e encroached upon matters properly fallin& within the province of
le&islative functions. #n ma-in& the aforesaid observations! the trial ,ud&e overloo-ed the
fact that such matters are not for him to decide. There are reasons why ,ewelry! a non*
essential item! is taxed as it is in this country and these reasons! deliberated upon by the
le&islature are beyond the reach of ,udicial questionin&.
b. The trial court is not the proper forum for the ventilation of the issues raised by
the ,ewelers. #t is the le&islature to which relief must be sou&ht! because with the
le&islature primarily lies the discretion to determine the nature /-ind0! ob,ect /purpose0!
extent /rate0! covera&e /sub,ects0 and situs /place0 of taxation. The ,udiciary cannot freely
delve into those matters which! by constitutional fiat! ri&htly rest on le&islative ,ud&ment.
c. The tax rates of other countries should not be used as a yardstic-! in
determinin& what may be the proper sub,ects of taxation in our own country. #t should be
pointed out that in imposin& the aforementioned taxes and duties! the %tate! actin& thou&h
the le&islative and executive branches! is exercisin& its soverei&n prero&ative. #t is
inherent in the power to tax that the %tate be free to select the sub,ects of taxation! and it
has been repeatedly held that! Linequalities which result from a sin&lin& out of one
particular class of taxation! or exemption! infrin&e no constitutional limitation.L
/Commissioner of #nternal evenue! et al.! v. %antos! et al.! +<< %CA ='<0
*** 'E( A ixed #nnu#l li"ense ee on t!ose en0#0ed in t!e /usiness o 0ener#l
enter)rise %#s #lso im)osed on t!e s#le o /i/les /y # reli0ious se"t( Is t!is $#lid *
%122.%T.D AN%3.9 No! because it violates the constitutionally &uaranteed
freedom of the press! and of reli&ion..
As a license fee is fixed in amount and unrelated to the receipts of the taxpayer!
such a license fee! when applied to a reli&ious sect is actually imposed as a condition for
the free exercise of reli&ion. A license fee Crestrains in advance those constitutional
liberties of press and reli&ion and inevitably tends to suppress their exercise.D
***''( T!e EIAT L#% im)oses # IAT re0istr#tion ee o P'8EEE(EE on non6IAT
enter)rises %!i"! in"ludes #mon0 ot!ers8 reli0ious se"ts %!i"! sells #nd distri/utes
reli0ious liter#ture( Is t!is $iol#ti$e o reli0ious reedom *
%122.%T.D AN%3.9 No. The P'!))).)) "AT re&istration fee! althou&h a
fixed amount is not imposed for the exercise of a privile&e but only for the purpose of
defrayin& part of the cost of re&istration.
The re&istration requirement is a central feature of the "AT system. #t is desi&ned
to provide a record of tax credits because any person who is sub,ect to the payment of the
"AT pays an input tax! even as he collects an output tax on sales made or services
rendered. The re&istration fee is thus more of an administrative fee! one not imposed on
the exercise of a privile&e! much less a constitutional ri&ht. /Tolentino v. %ecretary of
8inance! et al.! and companion cases! +;? %CA =;)0
*** ',( Airlines8 In"( %#s 0r#nted # le0isl#ti$e r#n"!ise to o)er#te s"!eduled
li0!t ser$i"es /et%een M#nil# #nd :e/u #nd $i"e6$ers#( It %#s su/9e"t to #
r#n"!ise t#x o ,C 3u#liied /y t!e Am#0i" %ords8B %!i"! As!#ll /e in lieu o #ll
t#xes(B Su/se3uently8 :on0ress en#"ted Re)u/li" A"t No( =='<8 t!e Ex)#nded
=
I#lue6Added T#x ?EIAT@ L#% %!i"! im)oses # 'EC IAT on #ll ser$i"es oered /y
Airlines8 In"(
Airlines8 In"( #ss#ils t!e $#lidity o R(A( No( =='< or /ein0 $iol#ti$e o t!e
non6im)#irment "l#use( It "ites :ommissioner o Intern#l Re$enue $( Lin0#yen
Gul Ele"tri" Po%er :o(8 In"(8 et #l(8 '<1 S:RA ,= ?'FHH@ %!ere it %#s !eld t!#t t!e
im)osition o # t#x on r#n"!ise !olders %it! t!e Am#0i" %ordsB is $iol#ti$e o t!e
non6im)#irment "l#use(
T!e Su)reme :ourt in t!e Lin0#yen Gul "#se !eld t!#t "!#rters or s)e"i#l
l#%s 0r#nted /y t!e le0isl#ture #re in t!e n#ture o )ri$#te "ontr#"ts( Rule on t!e
"ontention o Airlines8 In"(
%122.%T.D AN%3.9 The ."AT does not violate the non*impairment
clause. Tolentino v. %ecretary of 8inance and its companion cases! +;? %CA =;)! +G(
%CA.=+>! provides the reasons why there is no violation9
a. Article B##! %ec. '' of the Constitution provides that the &rant of a franchise
for the operation of a public utility is sub,ect to amendment. alteration or repeal by
Con&ress when the common &ood requiresE
b. Not only existin& laws but also the reservation of essential attributes of
soverei&nty is read into contracts as a postulate of the le&al orderE
c. Contracts must be understood as havin& been made in reference to the possible
exercise of the ri&htful authority of the &overnment and no obli&ation of contract can
extend to defeat that authorityE
d. A lawful tax on a new sub,ect! or an increased tax on an old one! does not
interfere with a contract or impairs its obli&ation! within the meanin& of the constitution.
.ven thou&h such taxation may affect particular contracts! as it may increase the debt of
one person and lessen the security of another! or may impose additional burdens upon one
class and release the burdens of another! still the tax must be paid unless prohibited by the
constitution! nor can it be said that it impairs the obli&ations of any existin& contract in its
true and le&al sense.

*** '.( Mer#l"o %#s 0r#nted # r#n"!ise to o)er#te #n ele"tri" li0!t #nd )o%er
ser$i"e in :#l#m/#8 L#0un# sometime in 'FH. under P(-( No( 22'( Under t!e
r#n"!ise Mer#l"o )#ys ,C r#n"!ise t#x on o its 0ross re"ei)ts #nd A#ny l#% to t!e
"ontr#ry not%it!st#ndin0 /e in lieu o #ll t#xes #nd #ssessments o %!#te$er n#ture
im)osed /y #ny n#tion#l or lo"#l #ut!ority or e#rnin0s8 re"ei)ts8 in"ome #nd
)ri$ile0e o 0ener#tion8 distri/ution #nd s#le o ele"tri" "urrent(B Pursu#nt to t!e
Lo"#l Go$ernment :ode8 t!e )ro$in"e o L#0un# en#"ted #n ordin#n"e im)osin0 #
r#n"!ise o 2EC o 'C o t!e 0ross #nnu#l re"ei)ts o /usiness en9oyin0 # r#n"!ise
re#li&ed durin0 t!e )re"edin0 "#lend#r ye#r %it!in t!e )ro$in"e in"ludin0 "ities
lo"#ted t!erein( Rule on t!e $#lidity o t!e t#x ordin#n"e(
%122.%T.D AN%3.9 The tax ordinance is valid. 1nder the now prevailin&
Constitution! where there is neither a &rant nor prohibition by statute! the tax power must
be deemed to exist althou&h Con&ress may provide statutory limitations and &uidelines.
The basic rationale for the current rule is to safe&uard the viability and self*sufficiency of
local &overnment units by directly &rantin& them &eneral and broad tax powers.
The :ocal 2overnment Code explicitly authori7es provinces and cities!
notwithstandin& Cany exemption &ranted by any law or other special lawD to impose a tax
on businesses en,oyin& a franchise. #ndicative of the le&islative intent to carry out the
constitutional mandate of vestin& broad tax powers to local &overnment units! the :ocal
2overnment Code has withdrawn tax exemptions or incentives theretofore en,oyed by
certain entities.
#n addition! the :ocal 2overnment Code contains a &eneral repealin& clause. The
phrase in Clieu of all taxesD has to &ive way to the peremptory lan&ua&e of the :ocal
2overnment Code which specifically provides for the withdrawal of all exemptions. The
Court has viewed its previous rulin&s as layin& stress on the le&islative intent of the
amendatory law whether the tax exemption privile&e is to be withdrawn or not rather than
on whether the law can or cannot withdraw the tax exemption! without violatin& the
constitution. /4anila .lectric Company v. Province of :a&una! et al.! 2.. No. ';';?(!
4ay ?! '(((0
<
The :ocal 2overnment Code provisions on withdrawal of tax exemptions
prescribes the &eneral rule! vi7. the tax exemptions or incentives &ranted to or presently
en,oyed by natural or ,uridical persons are withdrawn with the effectivity of the :ocal
2overnment Code except with respect to those expressly enumerated. /City 2overnment
of %an Pablo! :a&una! et al.! v. eyes! et al.! 2.. No. '+<<)>! 4arch +?! '(((0
N5T.% AND C544.NT%9 #t is possible that the Bar question mi&ht come from
one of the followin& areas9
*** Po%er o lo"#l 0o$ernments to t#x. :ocal &overnments do not have the inherent
power to tax except to the extent that such power mi&ht be dele&ated to them either by
the basic law or statute. Presently! under Article B of the '(>< Constitution a &eneral
dele&ation of that power has been &iven in favor of local &overnment units.
Nevertheless! the fundamental law did not intend the dele&ation to be absolute and
unconditional! the constitutional ob,ective obviously is to ensure that! while local
&overnment units are bein& stren&thened and made more autonomous! the le&islature must
still see to it that9
a. the taxpayer will not be over*burdened or saddled with multiple and
unreasonable impositionsE
b. each local &overnment unit will have its fair share of available resourcesE
c. the resources of the national &overnment will be unduly disturbedE and
d. local taxation will be fair! uniform and ,ust. /4anila .lectric Company v.
Province of :a&una! et al.! 2.. No. ';';?(! 4ay ?! '(((0
The 4anila .lectric Company case doctrine reversed the holdin& in City
2overnment of %an Pablo! :a&una! et al.! v. eyes! et al.! 2.. No. '+<<)>! 4arch +?!
'((( that municipal corporations are vested by the Constitution with the power to tax. #t
may be exercised by local le&islative bodies! no lon&er by virtue of a valid dele&ation as
before! but pursuant to direct authority conferred by the Constitution.
T!e non6im)#irment "l#use( Juestion#/le rulin0. The non*impairment clause
cannot be invo-ed by franchises! as franchises are always sub,ect to police power! as well
as the power to tax /M0! which li-e police power cannot be contracted away /M0. /City
2overnment of %an Pablo! :a&una! et al.! v. eyes! et al.! 2.. No. '+<<)>! 4arch +?!
'(((0 The author considers this rulin& to be questionable because the taxin& power is
inferior to the nonimpairment clause.
3hile the Court has! not too infrequently! referred to tax exemptions contained in
special franchises as bein& in the nature of contracts and a part of the inducement for
carryin& out the franchise! these exemptions! nevertheless far from bein& strictly
contractual in nature.
*** Constitutional tax exemptions! in the real sense of the term and where the non*
impairment clause of the Constitution can ri&htly be invo-ed! are those a&reed to by the
taxin& authority in contracts! such as those contained in &overnment bonds or debentures!
lawfully entered into by them under enablin& laws in which the &overnment! actin& in its
private capacity sheds its cloa- of authority and waives its &overnment immunity.
Truly! tax exemptions of this -ind may not be revo-ed without impairin& the
obli&ations of contracts. A franchise parta-es of the nature of a &rant which is not beyond
the purview of the non*impairment clause. #ndeed the '(>< Constitution li-e its
precursors the '(;? and the '(<; Constitutions is explicit that no franchise for the
operation of a public utility shall be &ranted except under the condition that such privile&e
shall be sub,ect to amendment! alteration or repeal by Con&ress as and when the common
&ood so requires. /4anila .lectric Company v. Province of :a&una! et al.! 2.. No.
';';?(! 4ay ?! '(((0
The reader should ta-e note of the conflictin& doctrines espoused by the 4anila
.lectric case and the City 2overnment of %an Pablo! :a&una case. #t may interest the
reader also to -now that the ponente in the 4anila .lectric case is Justice Jose "itu&!
while the ponente in the City 2overnment of %an Pablo! :a&una is Justice 4inerva
2on7a&a*eyes.
*** '1( W!#t is t!e "on"e)t o dou/le t#x#tion *
a. 4.AN#N2. #n its &eneric sense! this means taxin& the same sub,ect or ob,ect
twice durin& the same taxable period. #n its particular sense! it may mean direct duplicate
>
taxation! which is prohibited under the constitution because it violates the concept of
equal protection! uniformity and equitableness of taxation. #ndirect duplicate taxation is
not anathemi7ed by the above constitutional limitations.
b. .:.4.NT% 58 D#.CT D1P:#CAT. TABAT#5N9
'0 %ame
a0 %ub,ect or ob,ect is taxed twice
b0 Taxin& authority
c0 Taxin& purpose
d0 Taxin& period
+0 Taxin& all of the sub,ects or ob,ects for the first time without taxin& all
of them for the second time.
#f any of the elements are absent then there is indirect duplicate taxation
which is not prohibited by the constitution.
N5T.% AND C544.NT%9 There may be a problem on double taxation!
includin& compensation and set*off.
*** '2( -eine intern#tion#l 9uridi"#l dou/le t#x#tion(
%122.%T.D AN%3.9 The imposition of comparable taxes in two or more
states on the same taxpayer in respect of the same sub,ect matter and for identical
&rounds.
Double taxation usually ta-es place when a person is a resident of a contractin&
state and derives income from or owns capital in! the other contractin& state and both
states impose tax on that income or capital. /Commissioner of #nternal evenue v. %.C.
Johnson and %on! #nc.! et al.! 2.. No. '+<')?! prom. June +?! '(((
*** '<( W!#t #re t!e met!ods or #$oid#n"e o dou/le t#x#tion * Ex)l#in e#"!
/riely /ut "om)re!ensi$ely(
%122.%T.D AN%3.9 The followin& are the methods of avoidin& double
taxation9
a. Tax treaties which exempts forei&n nationals from local taxation and local
nationals from forei&n taxation under the principle of reciprocity.
b. Tax credits where forei&n taxes are allowed as deductions from local taxes that
are due to be paid.
c. Allowin& forei&n taxes as a deduction from &ross income.
N5T.% AND C544.NT%9
a. Pur)ose o t#x tre#ties. To reconcile the national fiscal le&islations of the
contractin& parties in order to help the taxpayer avoid simultaneous taxation in two
different ,urisdictions. 4ore precisely! the tax conventions are drafted with a view towards
the elimination of international ,uridical double taxation.
b. R#tion#le or #$oidin0 dou/le t#x#tion. To encoura&e the free flow of
&oods and services and the movement of capital! technolo&y and persons between
countries! conditions deemed vital in creatin& robust and dynamic economies. 8orei&n
investments will only thrive in a fairly predictable and reasonable international investment
climate and the protection a&ainst double taxation is crucial in creatin& such a climate.
*** c. Met!ods resorted to /y # t#x tre#ty in order to elimin#te dou/le t#x#tion:
8irst 4ethod9 #t sets out the respective ri&hts to tax of the state of source or situs
and of the state of residence with re&ard to certain classes of income or capital. #n some
cases! an exclusive ri&ht to tax is conferred on one of the contractin& statesE however! for
other items of income or capital! both states are &iven the ri&ht to tax! althou&h the
amount of tax that may be imposed by the state of source is limited.
%econd 4ethod9 The state of source is &iven a full or limited ri&ht to tax to&ether
with the state of residence. #n this case! the treaties ma-e it incumbent upon the state of
residence to allow relief in order to avoid double taxation. Two methods of relief are
used9
'0 The exemption method N the income or capital which is taxable in the
state of source or situs is exempted in the state of residence! althou&h in some
instances it may be ta-en into account in determinin& the rate of tax applicable to
the taxpayer$s remainin& income or capital.
(
+0 The credit method N althou&h the income or capital which is taxed in
the state of source is still taxable in the state of residence! the tax paid in the
former is credited a&ainst the tax levied in the latter. /Commissioner of #nternal
evenue v. %.C. Johnson and %on! #nc.! et al.! 2.. No. '+<')?! prom. June +?!
'(((0
Difference between the exemption method and the credit method. The exemption
method focuses on income or capital itself while the credit method focuses upon the tax. .
/Commissioner of #nternal evenue v. %.C. Johnson and %on! #nc.! et al.! 2.. No.
'+<')?! prom. June +?! '(((0
*** '=( T!e RP6West Germ#ny T#x Tre#ty )ro$ides # 'EC t#x on roy#lties( /ut
ex)ressly #llo%s #0#inst Germ#n in"ome #nd "or)or#te t#x o ,EC o t!e 0ross
roy#lties )#id under t!e l#% o t!e P!ili))ines( On t!e ot!er !#nd t!e RP6US T#x
Tre#ty does not )ro$ide or # simil#r t#x "reditin0( T!us8 t!e t#x on roy#lties
e#rned /y U(S( irms in t!e P!ili))ines m#y eit!er /e o t!ree r#tes: ,2 )er"ent o
t!e 0ross #mount o t!e roy#lties5 '2 )er"ent %!en t!e roy#lties #re )#id /y #
"or)or#tion re0istered %it! t!e P!ili))ine Go#rd o In$estments #nd en0#0ed in
)reerred #re#s o #"ti$ities5 or t!e lo%est r#te o P!ili))ine t#x t!#t m#y /e
im)osed on roy#lties o t!e s#me 7ind )#id under simil#r "ir"umst#n"es to # resident
o # t!ird st#te(
M#y U(S( :or)or#tions "l#im entitlement to t!e Amost #$ored n#tionB t#x
r#te o 'EC on roy#lties #s )ro$ided in t!e RP6US T#x Tre#ty in rel#tion to t!e RP6
West Germ#ny T#x Tre#ty * Ex)l#in %it! re#sons(
%122.%T.D AN%3.9 No. The entitlement of the ')K rate by 1.%. firms
despite the absence of a matchin& credit /+)K for royalties0 would dero&ate from the
desi&n behind the most favored nation clause to &rant equality of international treatment
since the tax burden laid upon the income of the investor is not the same in the two
countries. The similarity in the circumstances of payment of taxes is a condition for the
en,oyment of the most favored nation treatment precisely to underscore the need for
equality of treatment. /Commissioner of #nternal evenue v. %.C. Johnson and %on! #nc.!
et al.! 2.. No. '+<')?! prom. June +?! '(((0
N5T.% AND C544.NT%9
a. Intention /e!ind #do)tion o )ro$ision on Arelie rom dou/le t#x#tion( B
The intention should be considered in the li&ht of the purpose behind the most favored
nation /48N0 clause which is to &rant to the contractin& party treatment not less favorable
than which has been or may be &ranted to the Cmost favoredD amon& other countries.
The 48N is intended to establish the principle of equality of international
treatment by providin& that the citi7ens or sub,ects of the contractin& nations may en,oy
privile&es accorded by either party to those of the most favored nation. The essence of
the principle is to allow the taxpayer in one state to avail of more liberal provisions
&ranted in another tax treaty to which the country of residence of such taxpayer is also a
party provided that the sub,ect matter of taxation is the same as that in the tax treaty under
which the taxpayer is liable. /Commissioner of #nternal evenue v. %.C. Johnson and %on!
#nc.! et al.! 2.. No. '+<')?! prom. June +?! '(((0
'H( T!e Ex)#nded I#lue6Added T#x L#% is #n indire"t t#x %!i"! m#y /e
"onsidered #s re0ressi$e in "!#r#"ter( It is # ixed t#x t!ereore t!e lo%er is t!e
in"ome t!e t#xes t!#t #re )#id #re )ro)ortion#tely !i0!er( Is t!is $iol#ti$e o t!e
"onstitution %!i"! m#nd#tes t!#t :on0ress s!#ll e$ol$e # )ro0ressi$e system o
t#x#tion * Ex)l#in(
%122.%T.D AN%3.9 There is no violation of the constitutional mandate
for the followin& reasons9
a. The mandate to Con&ress is not to prescribe but to evolve a pro&ressive system
of taxation. 5therwise! sales taxes which perhaps are the oldest form of indirect taxes!
would have been prohibited with the proclamation of the constitutional provision. %ales
taxes are also re&ressive.
')
b. The Constitution does not really prohibit the imposition of indirect taxes which!
li-e the "AT! are re&ressive. The constitutional provision means simply that indirect taxes
should be minimi7ed.
c. esort to indirect taxes should be minimi7ed but not avoided entirely because it
is difficult! if not impossible! to avoid imposin& such taxes accordin& to the taxpayer$s
ability to pay.
#n the case of "AT! the law minimi7es the re&ressive effects of this imposition by
providin& for 7ero ratin& of certain transactions while &rantin& exemptions to other
transactions. The transactions which are sub,ect to "AT are those which involve &oods
and services which are used or availed of mainly by hi&her income &roups. /Tolentino v.
%ecretary of 8inance and companion cases! +G( %CA =+>0
FFF'F( T!e :onstitution re3uires t!#t #ll re$enue /ills s!#ll ori0in#te ex"lusi$ely
rom t!e House o Re)resent#ti$es( W#s t!is $iol#ted %!en t!e EIAT /ill t!#t
ori0in#ted rom t!e House did not /e"ome t!e EIAT l#% * Ex)l#in(
a. The Constitution simply means that the initiative for filin& revenue! tariff or tax
bills must come from the @ouse of epresentatives on the theory that! elected as they are
from the districts! the 4embers of the @ouse can be expected to be more sensitive to the
local needs and problems.
b. #t is not the law * but the revenue bill * which is required by the Constitution to
Cori&inate exclusivelyD in the @ouse of epresentatives because a bill ori&inatin& in the
@ouse may under&o such extensive chan&es in the %enate that the result may be a
rewritin& of the whole! and a distinct bill may be produced.
c. To insist that a revenue statute * not only the bill which initiated the le&islative
process culminatin& in the enactment of the law * must substantially be the same as the
@ouse bill would be to deny the %enate$s power not only to Cconcur with amendmentsD
but also to Cpropose amendment.D #t would be to violate the coequality of le&islative
power of the two houses of Con&ress and in fact ma-e the @ouse superior to the %enate.
2iven the power of the %enate to propose amendments! it can propose its own
version even with respect to bills which are required by the Constitution to ori&inate in the
@ouse.
d. Nor does the Constitution prohibit the filin& in the %enate of a substitute bill in
anticipation of its receipt of the bill from the @ouse! so lon& as action by the %enate as a
body is withheld pendin& receipt of the @ouse bill. /Tolentino v. %ecretary of 8inance and
companion cases! +;? %CA =;)0

,E( A )etition or "ertior#ri #ndKor )ro!i/ition "!#llen0in0 t!e $#lidity o
Re)u/li" A"t No( H,1E8 #mendin0 "ert#in )ro$isions o t!e NIR: /y im)osin0 so6
"#lled Lsin t#xesL ?#"tu#lly s)e"ii" t#xes@ on t!e m#nu#"ture o /eer #nd
"i0#rettes(
Re)( Arroyo "!#r0es t!#t ?'@ in $iol#tion o Rule IIII8 Se"( .2 #nd Rule
MIII8 Se"( 'E. o t!e rules o t!e House o Re)resent#ti$es8 t!e :!#ir8 in su/mittin0
t!e "oneren"e "ommittee re)ort to t!e House8 did not "#ll or t!e yeas and nays, /ut
sim)ly #s7ed or its #))ro$#l /y motion in order to )re$ent Re)( Arroyo rom
3uestionin0 t!e )resen"e o # 3uorum5 ?,@ in $iol#tion o Rule MIM8 Se"( '',8 t!e
:!#ir deli/er#tely i0nored Re)( Arroyo;s 3uestion8 LW!#t is t!#t ((( Mr( S)e#7er *L
#nd did not re)e#l Re)( Al/#no;s motion to #))ro$e or r#tiy5 ?.@ in $iol#tion o
Rule MM8 Se"s( ','6',,8 Rule MMI8 Se"( ',.8 #nd Rule MIIII8 Se"( 'EF8 t!e :!#ir
sus)ended t!e session %it!out irst rulin0 on Re)( Arroyo;s 3uestion %!i"!8 it is
#lle0ed8 is # )oint o order or # )ri$ile0ed motion( It is #r0ued t!#t Re)( Arroyo;s
3uery s!ould !#$e /een resol$ed u)on t!e resum)tion o t!e session on No$em/er
,H8 'FF<8 /e"#use t!e )#rli#ment#ry situ#tion #t t!e time o t!e #d9ournment
rem#ined u)on t!e resum)tion o t!e session(
On t!e s#me d#y8 No$em/er ,'8 'FF<8 t!e /ill %#s si0ned /y t!e S)e#7er o
t!e House o Re)resent#ti$es #nd t!e President o t!e Sen#te #nd "ertiied /y t!e
res)e"ti$e se"ret#ries o /ot! Houses o :on0ress #s !#$in0 /een orm#lly )#ssed /y
t!e House o Re)resent#ti$es #nd !e Sen#te on No$em/er ,'8 'FF<( T!e enrolled
/ill %#s si0ned into l#% /y President R#mos on No$em/er ,,8 'FF<(
''
It is no% "!#r0ed t!#t t!e session %#s !#stily #d9ourned #t .:1E )(m( on
No$em/er ,'8 'FF< #nd t!e /ill "ertiied /y S)e#7er de Iene"i# to )re$ent Re)(
Arroyo rom orm#lly "!#llen0in0 t!e existen"e o # 3uorum #nd #s7in0 or #
re"onsider#tion( Rule on t!e "ontro$ersy(
%122.%T.D AN%3.9 There is no basis for the procedure bein& bruited as
havin& been violated.
1nder the enrolled bill doctrine! the si&nin& of the bill by the %pea-er and the
%enate President and the certification by the %ecretaries of both @ouses are conclusive of
its due enactment. /Arroyo! et al.! v. de "enecia! et al.! +<< %CA +=>0
,'( M#nil# Gol N :ountry :lu/8 In"( is # non6sto"7 "or)or#tion( It
m#int#ins # 0ol "ourse #nd o)er#tes # "lu/!ouse %it! # loun0e8 /#r #nd dinin0
room8 /ut t!ese #"ilities #re or t!e ex"lusi$e use o its mem/ers #nd #""om)#nied
0uests8 #nd it "!#r0es on "ost6)lus6ex)ense /#sis(
T!e "lu/ no% "l#ims t!#t Se"tion 1, insertin0 # ne% Se"tion 'F'6A in t!e
N#tion#l Intern#l Re$enue :ode %#s $etoed /y t!e President( On t!e ot!er !#nd8
t!e GIR m#int#ins t!#t Se"tion 1, %#s not entirely $etoed /ut merely t!e %ords
A!otels8 motels8 rest!ousesB on t!e 0round t!#t it mi0!t restr#in t!e de$elo)ment o
!otels %!i"! is essenti#l to t!e tourism industry(
Rule on t!e "onli"tin0 "ontentions(
%122.%T.D AN%3.9 The B# is correct. The inclusion of hotels! motels!
and resthouses are considered as Citems within the meanin& of no. /+0! %ec. +<! Art. "# of
the '(>< Constitution that! C the President shall have the power to veto any particular item
or items in an appropriation! revenue! or tariff bill! but the veto shall not affect the item or
items to which he does not ob,ect.D
#n the case of Commissioner of #nternal evenue v. Court of Tax Appeals and
4anila 2olf O Country Club! 2.. No. G<G+'! 4ay 'G! '(() it was held that Chotels!
motels and resthousesD are considered as items which the President has the power to veto.
An CitemD in a revenue bill does not refer to an entire section imposin& a particular
-ind of tax! but rather to the sub,ect of the tax and the tax rate. #n the portion of a
revenue bill which actually imposes a tax! a section identifies the tax and enumerates the
persons liable therefore with the correspondin& tax rate.
To construe the word CitemD as referrin& to the whole section would tie the
President$s hand in choosin& either to approve the whole section at the expense of also
approvin& a provision therein which he deems unacceptable or veto the entire section at
the expense of fore&oin& the collection of the -ind of tax alto&ether.
The evil which was sou&ht to be prevented in &ivin& the President the power to
disapprove items in a revenue bill would be perpetrated renderin& that power inutile.
/Commonwealth ex. rel. .l-in v. Barnett! '(( Pa. '='! ?? :A >>+ /'(';0
*** ,,( Mr( G#erl#n is t!e o%ner o # 28EEE s3( m( )#r"el o l#nd lo"#ted in t!e
"ity limits o S#n 4ern#ndo :ity( He le#sed t!e )ro)erty or P2E8EEE(EE # ye#r to #
reli0ious "on0re0#tion or # )eriod o iteen ?'2@ ye#rs ?'FFE6,EE2@( T!e reli0ious
"on0re0#tion /uilt on # '8EEE s3( m( )ortion # semin#ry #nd # "!#)el %!i"! it used
in "onne"tion %it! its reli0ious #"ti$ities( It "onstru"ted # ten ?'E@ story /uildin0 on
t!e rem#inin0 18EEE s3( m( %!i"! it rented out to $#rious "ommer"i#l
est#/lis!ments8 t!e )ro"eeds o %!i"! 0o to t!e su))ort o its $#rious semin#ries
lo"#ted t!rou0!out t!e P!ili))ines( T!ese semin#ries #re or0#ni&ed #s non6)roit
#nd non6sto"7 edu"#tion#l institutions(
Is Mr( G#erl#n exem)t rom t!e )#yment o re#l )ro)erty t#xes * W!#t
#/out t!e reli0ious "on0re0#tion * Ex)l#in( Is t!e reli0ious "on0re0#tion exem)t
rom t!e )#yment o in"ome t#xes on t!e rent#l re"ei)ts * Ex)l#in(
%122.%T.D AN%3.9
4r. 2aerlan is exempt from the payment of real property taxes on the '!))) sq. m.
portion of his ?!))) sq. m. lot! as well as on the remainin& G!))) sq.m. 5n the other hand
the reli&ious con&re&ation should pay real property taxes on the G!))) sq. m. parcel of
land and the ')*story buildin&.
'+
4r. 2aerlan is exempt from real property taxation! whether on the '!))) sq.m. or
on the G!))) sq. m. because the basis for taxation of real property is use and not
ownership. The reli&ious con&re&ation is exempt from real property taxes on the '!)))
sq. m. parcel of land as well as on the improvements the chapel and the seminary. This is
so be cause they are actually! directly and exclusively used for reli&ious purposes. The
treatment is different with re&ard to the G!))) sq. m. lot and its improvement the ') storey
buildin&. 3hile it is true that the proceeds are used for the support of its seminaries! this
is at the most indirect use! hence not sub,ect to the tax exemption.
The reli&ious con&re&ation is sub,ect to income taxation. /8or reasons! refer to
question no. +;! infra0 3hile it is true that all the seminaries are or&ani7ed as non*profit
non*stoc- educational institutions! it is not their incomes which is the sub,ect of the
problem but that of the reli&ious con&re&ation which is not a non*profit non*stoc-
educational institution.
*** ,.( OM:A %#s est#/lis!ed #s A# %el#re8 edu"#tion#l #nd "!#rit#/le non6
)roit "or)or#tionB e#rned #n in"ome o P<EE t!ous#nd rom le#sin0 out # )ortion
o its )remises to sm#ll s!o) o%ners8 li7e rest#ur#nts #n "#nteen o)er#tors8 #nd P11
t!ous#nd rom )#r7in0 ees "olle"ted rom non6mem/ers( It %#s su/9e"ted to #n
#ssessment or non6)#yment o in"ome t#xes on t!e ore0oin0 in"ome(
OM:A "l#ims t!#t it is t#x exem)t "l#imin0 or t!e re#son t!#t t!e le#sin0 to
sm#ll s!o) o%ners #nd t!e o)er#tion o t!e )#r7in0 lot #re re#son#/ly ne"ess#ry or
t!e #""om)lis!ment o its o/9e"ti$es( It )remises its "l#im on t!e )ro$isions o t!e
'FH= :onstitution( Is t!e in"ome deri$ed rom rent#ls o t!e re#l )ro)erty su/9e"t to
in"ome t#x * Re#son out your #ns%er(
%122.%T.D AN%3.9 Aes! the income is sub,ect to income tax. The N#C
reco&ni7es the exemption from tax of the incomes of civic lea&ues or or&ani7ations not
or&ani7ed for profit but operated exclusively for the promotion of social welfare! as well
as clubs or&ani7ed and operated exclusively for pleasure! recreation! and other non*
profitable purposes where no part of the net income inures to the benefit of any private
stoc-holder or member.
@owever! the tax exemption so reco&ni7ed does not flow to income of whatever
-ind and character of the fore&oin& or&ani7ations from any of their properties! real or
personal! or from any of their activities conducted for profit! re&ardless of the disposition
made of such income! which shall be sub,ect to income taxes.
8urthermore! the constitutional tax exemptions refer only to real property that are
actually! directly and exclusively used for reli&ious! charitable or educational purposes!
and that the only constitutionally reco&ni7ed exemption from taxation of revenues are
those earned by non*profit! non*stoc- educational institutions which are actually! directly
and exclusively used for educational purposes. A4CA is not an educational institution
embraced under this particular concept. /Commissioner of #nternal evenue v. Court of
Appeals! et al.! +(> %CA >;0
*** ,1( Ase#n Piddie S"!ool8 In"(8 is # non6)roit8 non6sto"7 edu"#tion#l
institution( It o%ns # one !e"t#re lot8 one6!#l o %!i"! is o""u)ied /y t!e s"!ool
"#m)us #nd t!e ot!er !#l is le#sed to A0ri64#rms8 In"(8 or use #s # lo%er 0#rden to
meet t!e ex)ort re3uirements o A0ri64#rms8 In"( T!e rent#ls "olle"ted rom A0ri6
4#rms #re used /y Ase#n to )#y or t!e s#l#ries o its s"!ool te#"!ers( Anti"i)#tin0
!i0!er ex)enditures or o)er#tin0 t!e s"!ool durin0 t!e s"!ool ye#r 'FF=6FH8 t!e
s"!ool in"re#sed its tuition ees #nd st#rted "olle"tin0 t!e in"re#sed ees #s e#rly #s
A)ril 'FF=( T!e #d$#n"ed "olle"tions %ere in t!e me#ntime de)osited in # lo"#l
/#n7 %!ere it e#rns interest( An intern#tion#l or0#ni&#tion don#ted USQ'E8EEE(EE
on t!e solit#ry "ondition t!#t it s!ould /e used to u)0r#de t!e s#l#ries o t!e s"!ool
#dministr#tors( T!e s"!ool #lso %#nts to im)ort some "om)uters or t!e use o its
students(
Oou #re no% "onsulted to ex)l#in t!e t#x im)li"#tions o t!e #/o$e #nd 0i$e
your #d$i"e( W!#t s!#ll you s#y *
%122.%T.D AN%3.9
';
a. The school is exempt from the payment of real property taxes on the one*half
portion of its one hectare lot which is bein& used as the school campus.
This is so because the same is actually! directly and exclusively used for educational
purposes.
A&ri*8arms is sub,ect to the payment of real property taxes on the remainin& one*
half that it leases from Asean for the reason that the said portion is used for commercial
purposes and not actually! directly and exclusively for educational purposes. Asean$s tax
exemption privile&e does not flow to A&ri*8arms because real property taxation is based
on use and not on ownership. 3hile it is true that the rental income is devoted to
educational purposes! it has no bearin& in the case as it is the land that should the actually!
directly and exclusively used for educational purposes.
b. The income derived from the tuition fees is exempt from the income taxes as
these are to be actually! directly and exclusively used for educational purposes bein&
devoted to meet the increased school operational expenditures.
c. The passive income in the form of interests on ban- deposits may be exempt
from income taxes and the withholdin& taxes of +)K if they are reflected on the school$s
annual information returns and duly audited financial statements! supported by a
certification from the depository ban- as to the amount of interest income earned from
passive investments not sub,ect to the +)K final withholdin& tax! a resolution of the
school$s Board of Trustees on the proposed pro,ects to be funded out of the money
deposited in the ban-! and a certification of actual utili7ation of said interest income for
actual! direct and exclusive use for educational purposes. /8inance Department 5rder No.
'G(*(?! issued November +G! '((? amendin& Department 5rder No. ';<*>< as amended
by Department 5rder No. (+*>>0.
d. 3hile it is true that the 1%P')!))).)) is to be utili7ed for administration
purposes! and under %ec. (G/A*;0 of the N#C! may be sub,ect to tax! it is to be noted
that epublic Act No. <<(> which amended B.P. Bl&. +;+ provides that! CTaxes shall not
be due on donations to educational institutions.D #t is to be noted that exemptions to
educational institutions are not sub,ect to the so*called strictissimi juris strict
interpretation a&ainst the taxpayer and liberally in favor of the &overnment.
e. The computers could be imported! exempt from the payment of customs duties
and value*added tax as there is showin& of their actual! direct and exclusive use for
educational purposes.
,2( W!y is it im)ort#nt to 7no% t!e distin"tions /et%een # t#x #nd # de/t(
W!#t #re t!e distin"tions /et%een # t#x #nd # de/t *
%122.%T.D AN%3.9 #t is important to -now the distinctions because non*
payment of a tax /except a poll tax0 could sub,ect a person to imprisonment while no
person could be imprisoned for non*payment of a debt. 8urthermore! a debt could be
compensated by another debt! but a debt or another tax could not be compensated for a
tax in accordance with the lifeblood doctrine.
*** Distinctions between a tax and a debt9
a. BA%#%. Tax is based on law 3@#:. debt is based on contract or ,ud&ment.
b. 8A#:1. T5 PAA. 8ailure to pay a tax /except a poll tax0 may result in
imprisonment 3@#:. there is no imprisonment for failure to pay a debt.
c. 45D. 58 PAA4.NT. Tax is &enerally payable in money 3@#:. debt may
be payable in money! property or services.
d. A%%#2NAB#:#TA. A tax is not assi&nable 3@#:. a debt is assi&nable.
e. #NT..%T. A tax does not draw interest unless delinquent 3@#:. a debt
draws interest if stipulated or delayed.
f. A1T@5#TA. Taxes are imposed by public authority 3@#:. debt can be
imposed by private individuals.
&. P.%C#PT#5N. Prescriptive periods for tax are determined under the N#C
3@#:. debt! under the Civil Code.
,<( Are t!ere distin"tions /et%een # t#x #nd # li"ense ee * W!y is it
im)ort#nt to 7no% t!e distin"tions *
'G
%122.%T.D AN%3.%9 The followin& are the distinctions between a tax and a
license fee9
a. P1P5%.9A tax is imposed for revenue purposes 3@#:. a license fee is
imposed for re&ulatory purposes.
b. BA%#%9 A tax is imposed under the power of taxation 3@#:. a license fee is
imposed under police power.
c. A451NT9 There is no limit as to the amount of a tax 3@#:. the amount of
license fee that could be collected is limited to the cost of the license and the expenses of
police surveillance and re&ulation.
d. T#4. 58 PAA4.NT9 Taxes are normally paid after the start of a business
3@#:. a license fee before the commencement of business.
e. .88.CT 58 N5N*PAA4.NT9 8ailure to pay a tax does not ma-e the
business ille&al 3@#:. failure to pay a license fee ma-es the business ille&al.
f. %1.ND.9 Taxes bein& the lifeblood of the state! cannot be surrendered
except for lawful consideration 3@#:. a license fee may be surrendered with or without
consideration.
#t is important to -now the distinctions because the limitations for one may not be
applied to the other except in the instance where re&ulatory taxes are imposed thus! the
power to tax is exercised co,ointly with the police power. 8urthermore! exemption from
taxes does not include exemption from the payment of license fees and vice*versa.
N5T.% AND C544.NT%9 ecall the distinctions between the power of
taxation and police power with respect to9 Purpose! amount! compensation! property
ta-en! what is done with the property ta-en! relation to the non*impairment clause.
THE COURT OF TAX APPEALS AND TAX REMEDIES
,=( W!#t is t!e :ourt o T#x A))e#ls * W!#t is t!e n#ture o t!e :ourt o
T#x A))e#ls * W!y %#s it "re#ted *
%122.%T.D AN%3.9
a. The Court of Tax Appeals is the special tax court created under epublic Act
No. ''+? composed of a Presidin& Jud&e and Two Associate Jud&es! appointed by the
President of the Philippines from nominees of the Judicial and Bar Council.
b. #t is not a mere administrative a&ency or tribunal but a re&ular court vested with
exclusive appellate ,urisdiction over cases arisin& under the National #nternal evenue
Code and the Tariff and Customs Code.
*** c. The Court of Tax Appeals was created9
'0 To prevent delay in the disposition of tax cases by the then Courts of
8irst #nstance /now TCs0! in view of the bac-lo& of civil! criminal! and cadast*
ral cases accumulatin& in the doc-ets of such courtsE and
+0 To have a body with special -nowled&e which ordinary Jud&es of the
then Courts of 8irst #nstance /now TCs0! are not li-ely to possess! thus pro*
vidin& for an adequate remedy for a speedy determination of tax cases.
*** ,H( W!#t is t!e 9urisdi"tion o t!e :ourt o T#x A))e#ls *
%122.%T.D AN%3.9
a. The Court of Tax Appeals has ,urisdiction over decisions of the Commissioner
of #nternal evenue over9
'0 Cases involvin&9
a0 Disputed assessmentsE
b0 efund of internal revenue taxes! fees or other char&esE
c0 Penalties imposed in relation thereto.
+0 5ther matters arisin& under9
a0 The National #nternal evenue Code! or
b0 5ther law or part of law administered by the Bureau of #nternal
evenue.
'?
The appeal to the Court of Tax Appeals must be filed within ;) days from receipt
of the Commissioner$s adverse decision. #f there is no decision! the appeal should be
dismissed for lac- of ,urisdiction.
b. The Court of Tax Appeals has ,urisdiction over decisions of the Commissioner
of Customs over9
'0 Cases involvin&9
a0 :iability for customs duties! fees or other money char&es!
b0 %ei7ures! detention or release of property affected!
c0 8ines! forfeitures and other penalties imposed in relation theretoE
+0 5ther matters arisin& under9
a0 the customs law! or
b0 5ther law or part of law administered by the Bureau of Customs
The appeal to the Court of Tax Appeals must be filed within ;) days from receipt
of the Commissioner$s adverse decision. #f there is no decision! the appeal should be
dismissed for lac- of ,urisdiction.
*** c. #nstances where the Court of Tax Appeals would have ,urisdiction even if there
is no decision yet of the Commissioner of #nternal evenue9
'0 3here the Commissioner has not acted on the disputed assessment after
a period of '>) days from submission of complete supportin& documents! the
taxpayer has a period of ;) days from the expiration of the '>) day period within
which to appeal to the Court of Tax Appeals. /last par.! %ec. ++> /e0! N#C of
'((<0
+0 3here the Commissioner has not acted on an application for refund or
credit and the two year period from the time of payment is about to expire! the
taxpayer has to file his appeal with the Court of Tax Appeals before the expiration
of two years from the time the tax was paid.
*** d. #nstances where the Court of Tax Appeals would have ,urisdiction even if there
is no decision of the Commissioner of Customs9
'0 Decisions of the %ecretary of Trade and #ndustry or the %ecretary of
A&riculture in anti*dumpin& and countervailin& duty cases are appealable to the
Court of Tax Appeals within thirty /;)0 days from receipt of such decisions.
+0 #n case of automatic review by the %ecretary of 8inance in sei7ure or
forfeiture cases where the value of the importation exceeds P? million or where the
decision of the Collector of Customs which fully or partially releases the shipment
sei7ed is affirmed by the Commissioner of Customs.
*** ,F( Only :ommissioner+s in#l de"ision denyin0 t!e dis)ute is su/9e"t o
#))e#l. 3ords to the effect that the matter would be referred to the Collection
.nforcement Division for the issuance of a warrant of levy and distraint is not a final
decision appealable to CTA /%olid Cement Corporation vs. Court of Tax Appeals! et al.!
CA*2 %P No. ;;?'=! 8ebruary +>! '((?0. E$en t!e #"tu#l issu#n"e o # %#rr#nt o
distr#int #nd le$y in "ert#in "#ses still "#nnot /e "onsidered # in#l de"ision on #
dis)uted #ssessment( ?:ommissioner o Intern#l Re$enue $( Union S!i))in0 :or)(8
'H2 S:RA 21=@
N5T.% AND C544.NT%9
*** a. A"ts o GIR :ommissioner "onsidered #s deni#l o )rotest %!i"! ser$e #s
/#sis or #))e#l to t!e :ourt o T#x A))e#ls:
'0 8ilin& by the B# of a civil suit for collection of the deficiency tax is
considered a denial of the request for reconsideration. /Commissioner of #nternal
evenue v. 1nion %hippin& Corporation! '>? %CA ?G<0
+0 An indication to the taxpayer by the Commissioner Cin clear and
unequivocal lan&ua&eD of his final denial not the issuance of the warrant of
distraint and levy. 3hat is the sub,ect of the appeal is the final decision not the
warrant of distraint. Commissioner of #nternal evenue v. 1nion %hippin&
Corporation! '>? %CA ?G<0
;0 A B# demand letter sent to the taxpayer after his protest of the
assessment notice is considered as the final decision of the Commissioner on the
protest. /%uri&ao .lectric Co.! #nc. v. Court of Tax Appeals! et al.! ?< %CA ?+;0
'=
G0 A letter of the B# Commissioner reiteratin& to a taxpayer his previous
demand to pay an assessment is considered a denial of the request for
reconsideration or protest and is appealable to the Court of Tax Appeals.
/Commissioner v. Ayala %ecurities Corporation! <) %CA +)G0
*** b. Re3uisites or $#lidity o t!e :ommissioner+s de"ision on t!e dis)ute( The
decision of the Commissioner or his duly authori7ed representative shall /a0 state the facts!
the applicable law! rules and re&ulations! or ,urisprudence on which such decision is based!
otherwise! the decision shall be void! in which case the same shall not be considered a
decision on the disputed assessmentE and /b0 that the same is his final decision. /%ec.
;.'.=! ev. e&s. '+*((0
*** .E( T!e GIR :ommissioner dis"o$ered t!#t # t#x)#yer 7ee)s no re"ords or
t!#t %!#te$er re"ords 7e)t #re in#de3u#te8 or t!#t t!ere is stron0 sus)i"ion t!#t t!e
t#x)#yer !#s re"ei$ed in"ome rom undis"losed sour"es8 or t!#t no return %#s iled
or t!e return iled %#s #lse #nd r#udulent( W!#t met!ods !#$e /een de$elo)ed /y
t!e GIR in order to determine t!e in"ome o t!e t#x)#yer %!i"! s!ould /e su/9e"t
to t#x * Ex)l#in e#"! met!od /riely /ut "om)re!ensi$ely(
%122.%T.D AN%3.9 The followin& are the &eneral methods developed by
the Bureau of #nternal evenue for reconstructin& a taxpayer$s income9
a. Percenta&e method. The computed amount of revenues based on the
percenta&e computation is compared to the amount of revenues reflected on the return.
The percenta&es used may be obtained from the taxpayer! industry publication! prior
year$s audit results! or third parties. The comparison will provide an indication on the
possibility of revenue bein& understated.
Amon& the si&nificant ratios and trends to be analy7ed are the percenta&e mar-*up!
&ross profits ratio or &ross mar&in percenta&e! profit mar&in! total assets turnover! and
inventory turnover.
b. Net worth method. A method of reconstructin& income which is based on the
theory that if the taxpayer$s net worth has increased in a &iven year in an amount lar&er
than his reported income! he has understated his income for that year. The net worth on a
fixed startin& date is compared with the net worth on a fixed endin& date. Any increase in
net worth is presumed to be income not declared for tax purposes.
The difficulty of establishin& the openin& net worth of a tax payer has led to the
CCohan uleD which means the use estimates or approximations of the amount of cash and
other asserts where the taxpayer lac-s adequate records.
c. Ban- deposit method. The ban- records of the taxpayer are analy7ed and the
B# estimates income on the basis of the total ban- deposits after eliminatin& non*income
items. This method stands on the premise that deposits represent taxable income unless
otherwise explained as bein& non*taxable items. This method may be used only where the
B# has been le&ally allowed access to the taxpayer$s ban- records.
d. Cash expenditure method. This method assumes that the excess of a taxpayer$s
expenditures durin& the tax period over his reported income for that period is taxable to
the extent not disproved otherwise.
e. 1nit and value method. The determination or verification of &ross receipts may
be computed by applyin& price and profit fi&ures to the -nown ascertainable quality of
business of the taxpayer. 8or example! in order to determine the &ross receipts of a pi77a
parlor! multiply the pounds of flour used by the number of pi77as per pound which in turn
would then be multiplied by the avera&e price per pi77a.
f. Third party information or access to records method. The B# may require
third parties! public or private to supply information to the B#.
&. %urveillance and assessment method. /Chapter B###. #ndirect Approach to
#nvesti&ation! @andboo- on Audit Procedures and Techniques N "olume #! pp. =>*<G0
*** .'( T!e GIR dis"o$ered t!#t El$ie8 # /usiness%om#n8 did not ile !er in"ome
t#x returns or t!e t#x#/le ye#rs 'FFH #nd 'FFF( A )re6#ssessment noti"e or /#"7
t#xes %#s t!en issued in t!e #mount o P, million %!i"! ultim#tely m#tured into #n
#ssessment noti"e( T!e GIR #rri$ed #t t!e #ddition#l t#x due #ter usin0 t!e Anet
%ort!B met!od #nd #""ess to El$ie+s )ur"!#ses rom !er su))liers o r#% m#teri#ls(
'<
S!e no% dis)utes t!e #ssessment or l#"7 o le0#l /#sis /e"#use o t!e use o t!e Anet
%ort!B %!i"! is not #ut!ori&ed under t!e T#x :ode8 #nd or $iol#tion o !er
"onstitution#l ri0!ts %!en !er )ur"!#se re"ords %ere #""essed rom !er su))liers(
Rule on !er dis)ute(
%122.%T.D AN%3.9 .lvie$s contentions are bereft of merit. %ince .lvie did
not file her income tax returns! which reports are required by law as a basis for
assessment! then the B# Commissioner shall assess the tax on the best evidence available.
The B# Commissioner is authori7ed to secure records from public or private entities to
assist him in the assessment. 8urrthermore! the B# may use such method as in the
opinion of the Commissioner clearly reflects the income.
N5T.% AND C544.NT%9
a. 2eneral ule. CThe taxable income shall be computed upon the basis of the
taxpayer$s annual accountin& period /fiscal year or calendar year! as the case may be0 in
accordance with the method of accountin& re&ularly employed in -eepin& the boo-s of
such taxpayerE but if no such method of accountin& has been so employed! or if the
method employed does not clearly reflect the income! the computation shall be in
accordance with such method as in the opinion of the Commissioner clearly reflects the
income.D /%ec. G;! N#C of '((<0
b. 8ailure to %ubmit equired eturns! %tatements! eports or 5ther Documents.
C3hen a report required by law as a basis for the assessment of any national internal
revenue tax shall not be forthcomin& within the time fixed by laws or rules and re&ulations
or when there is reason to believe that any such report is false! incomplete or erroneous!
the Commissioner shall assess the proper tax on the best evidence obtainable.
#n case a person fails to file a required return or other document at the time
prescribed by law! or willfully or otherwise files a false or fraudulent return or other
document! the Commissioner shall ma-e or amend the return from his own -nowled&e and
from such information as he can obtain throu&h testimony or otherwise! which shall be
prima facie correct and sufficient for all le&al purposes.D Q%ec. = /B0! N#C of '((<R
*** c. Power of the Commissioner to 5btain #nformation. C#n ascertainin& the
correctness of any return! or in ma-in& a return when none has been made! or in
determinin& the liability of a person for any internal revenue tax! or in collectin& any such
liability! or in evaluatin& tax compliance! the Commissioner is authori7ed9 xxx
To obtain on a re&ular basis from any person other than the person whose internal
revenue tax laibility is sub,ect to audit or investi&ation! or from any office or officer of the
national and local &overnments! &overnment a&encies and instrumentalities includin& the
Ban&-o %entral n& Pilipinas and &overnment*owned or Ncontrolled corporations! any
information such as! but not limited to! costs and volume of production! receipts or sales
and &ross incomes of taxpayers! and the names ! addresses! and financial statements of
corporations! mutual fund companies! insurance companies! re&ional operatin&
headquarters or multinational companies! ,oint accounts! associations! ,oint ventures or
consortia and re&istered partnerships! and their membersE xxxD Q%ec. ? /B0! N#C of
'((<0
.,( W!#t is # )re6#ssessment noti"e #nd %!#t is its im)ort#n"e *
%122.%T.D AN%3.9 A pre*assessment notice is a a letter sent by the
Bureau of #nternal evenue to a taxpayer as-in& him to explain within a period of fifteen
/'?0 days from receipt why he should not be the sub,ect of an assessment notice.
As a &eneral rule! the B# could not issue an assessment notice without first
issuin& a pre*assessment notice because it is part of the due process ri&hts of a taxpayer to
be &iven notice in the form of a pre*assessment notice! and for him to explain why he
should be the sub,ect of an assessment notice.
*** N5T.% AND C544.NT%9 Inst#n"es %!ere # )re6#ssessment noti"e is not
re3uired /eore # noti"e o #ssessment is sent to t!e t#x)#yer:
a. 3hen the findin& for any deficiency tax is the result of mathematical error in the
computation of the tax as appearin& on the face of the returnE or
b. 3hen a discrepancy has been determined between the tax withheld and the
amount actually remitted by the withholdin& a&entE or
'>
c. 3hen a taxpayer opted to claim a refund or tax credit of excess creditable
withholdin& tax for a taxable period was determined to have carried over and
automatically applied the same amount claimed a&ainst the estimated tax liabilities for the
taxable quarter or quarters of the succeedin& table yearE or
d. 3hen the excess tax due on excisable articles has not been paidE or
e. 3hen an article locally purchased or imported by an exempt person! such as!
but not limited to vehicles! capital equipment! machineries and spare parts! has been sold!
trade or transferred to non*exempt persons. /%ec. ++>! N#C of '((<0
..( On t!e /#sis o # Letter o Aut!ority8 or t!e ex#min#tion o t!e /oo7s o
#""ounts #nd ot!er #""ountin0 re"ords o P#s"or Re#lty #nd -e$elo)ment
:or)or#tion ?PR-:@8 GIR ex#miners re"ommended t!e issu#n"e o #n #ssessment
noti"e in t!e #mounts o P= million #nd P . million or t!e ye#rs 'FH< #nd 'FH=
res)e"ti$ely(
On M#r"! '8 'FF28 t!e GIR iled # "rimin#l "om)l#int %it! t!e -e)#rtment
o Dusti"e #0#inst PR-:8 its President #nd Tre#surer #lle0in0 e$#sion o t#xes in t!e
tot#l #mount o P'E million( T!is %#s su))orted /y #n #id#$it6re)ort o t!e
ex#miners det#ilin0 t!e "om)ut#tion o t!e #lle0ed t#x e$#sion( PR-:8 its
President #nd Tre#surer iled #n Ur0ent Re3uest or
Re"onsider#tionKRein$esti0#tion dis)utin0 t!e t#x #ssessment #nd t#x li#/ility( On
M#r"! ,.8 'FF28 PR-: #nd its President #nd Tre#surer re"ei$ed # su/)oen# in
"onne"tion %it! t!e "rimin#l "om)l#int iled /y t!e GIR #0#inst t!em(
In # letter d#ted M#y '=8 'FF28 t!e :ommissioner denied t!e ur0ent re3uest
or re"onsider#tionKrein$esti0#tion iled /y PR-: #nd its oi"ers on t!e 0round t!#t
orm#l #ssessment !#s #s yet not /een issued /y t!e :ommissioner(
-o you #0ree %it! t!e de"ision o t!e :ommissioner * Ex)l#in /riely(
%122.%T.D AN%3.9 Aes! the affidavit*report of the examiners does not
constitute an assessment that may be the sub,ect of a motion for
reconsiderationSreinvesti&ation. The affidavit*report merely contained a computation of
the liabilities. #t did not state a demand or a period for payment. #t was not addressed to
the taxpayers but to the Department of Justice.
That the affidavit*report contained details of the tax liabilities does not ipso facto
ma-e the same an assessment. #ts purpose was merely to support the criminal complaint
for assessment. Clearly! it was not meant to be a notice of the tax due and a demand for
the payment thereof.
The fact that the complaint itself was specifically directed and sent to the
Department of Justice and not to the taxpayer shows that the intent of the B# was to file
a criminal complaint for tax evasion! not to issue an assessment. Althou&h the revenue
officers recommended the issuance of an assessment! the commissioner instead opted to
file a criminal complaint. 3hat was received by the taxpayer was notice of the filin& of
the criminal case not a notice that the B# had made an assessment. /Commissioner of
#nternal evenue v. Pascor ealty and Development Corporation! et al.! 2.. No.
'+>;'?! prom. June +(! '(((0
N5T.% AND C544.NT%9 The N#C defines the specific functions and effects
of an assessment. To consider the affidavit*report attached to the criminal complaint as a
proper assessment is to subvert the nature of an assessment and to set a bad precedent that
will pre,udice innocent taxpayers.
3hile an assessment informs the taxpayer that he or she has tax liabilities! not all
documents comin& from the B# containin& a computation of the tax liability can be
deemed assessments.
To start with! an assessment must be sent to and received by a taxpayer and must
demand the payment of the taxes therein within a specific period. Thus! the N#C
imposes a +?K penalty! in addition to the tax due! in case the taxpayer fails to pay the
deficiency tax within the time prescribed for its payment in the notice of assessment.
:i-ewise! an interest of +)K per annum! or such hi&her rate as may be prescribed by rules
and re&ulations! is to be collected from the date prescribed for its payment until full
payment.
'(
The issuance of an assessment is vital in determinin& the period of limitation
re&ardin& its proper issuance and the period within which to protest it. Necessarily! the
taxpayer must be certain that a specific document constitutes an assessment. 5therwise!
confusion would arise re&ardin& the period within which to ma-e an assessment or to
protest the sameE or whether interest and penalty may accrue thereon.
#t should also be stressed that the said document is a notice duly sent to the
taxpayer. #ndeed! an assessment is deemed made only when the B# releases! mails or
sends such notice to the taxpayer. Commissioner of #nternal evenue v. Pascor ealty and
Development Corporation! et al.! 2.. No. '+>;'?! prom. June +(! '(((0
Pascor has also defined assessment as layin& a tax.
N5T.% AND C544.NT%9 The word assessment when used in connection with
taxation! may have more than one meanin&. The ultimate purpose of an assessment to
such a connection is to ascertain the amount that each taxpayer is to pay. 4ore
commonly the word CassessmentD means the official valuation of a taxpayer$s property for
purpose of taxation. The above definition of assessment finds application under internal
revenue taxation! tariff and customs taxation as well as local &overnment taxation.
8or real property taxation! there may be a special meanin& to the burdens that are
imposed upon real properties that have been benefited by a public wor-s expenditure of a
local &overnment. #t is sometimes called a special assessment or a special levy.
T!e )res"ri)ti$e )eriods or m#7in0 #ssessments are three /;0 years from the
last day within which to file a return or when the return was actually filed and ten years
from discovery of the failure to file the tax return or discovery of falsity or fraud in the
return.
*** .1( W!#t is me#nt /y A9eo)#rdy #ssessmentB *
%122.%T.D AN%3.9 A delinquency tax assessment which was assessed
without the benefit of complete or partial audit by an authori7ed revenue officer! who has
reason to believe that the assessment and collection of a deficiency tax will be ,eopardi7ed
by delay because of the taxpayer$s failure to comply with the audit and investi&ation
requirements to present his boo-s of accounts andSor pertinent records! or to substantiate
all or any of the deductions! exemptions! or credits claimed in his return. Q%ec. ;.' /a0!
ev. e&s. No. =*+)))0
N5T.% AND C544.NT%9
a. Deo)#rdy #ssessment is an indication of the doubtful validity of the
assessment! hence it may be sub,ect to a compromise. Q%ec. ;.' /a0! ev. .&s. No. =*
+)))R
*** b. Re3uirements or $#lidity o orm#l letter o dem#nd #nd #ssessment
noti"e. The letter of demand callin& for payment of the taxpayer$s deficiency tax or taxes
shall state the facts! the law! rules and re&ulations! or ,urisprudence on which the
assessment is based! otherwise! the formal letter of demand and assessment notice shall be
void. /%ec. ;.'.G! ev. e&s. No. '+*((0
*** .2( AMB :or)or#tion iled its in"ome t#x returns in D#nu#ry8 'FF2 or its
in"ome or t!e ye#r 'FF1( In O"to/er8 'FF=8 M#r"!8 'FFH #nd M#y8 'FFH8 AMB
t!rou0! it+s #ut!ori&ed re)resent#ti$e si0ned t!ree ?.@ se)#r#te %#i$ers o t!e
ASt#tute o Limit#tions under t!e NIR:(B T!e %#i$ers %ere not si0ned /y t!e GIR
:ommissioner or !is #0ents(
In 'FFF8 t!e GIR issued letters o dem#nd8 #""om)#nied /y #ssessment
noti"es #s7in0 t!e "or)or#tion to )#y t!e dei"ien"y intern#l re$enue t#xes or its
in"ome or t!e ye#r 'FF1( AMB dis)uted t!e #ssessment #nd re3uested #
rein$esti0#tion( T!e GIR :ommissioner denied t!e )rotest( AMB #))e#led to t!e
:ourt o T#x A))e#ls8 on t!e 0round o )res"ri)tion( -e"ide(
%122.%T.D AN%3.9 The B#$s authority to assess already prescribed. The
three /;0 waivers did not suspend the runnin& of the prescriptive period.
The only a&reement that could suspend the runnin& of the prescriptive period for
the collection of the tax in question is a written a&reement between CBD corporation an the
B# entered into before the expiration of the three /;0 year prescriptive period. extendin&
the said period.
+)
%ince! what is required is the si&natures of both the Commissioner and the
taxpayer! a unilateral waiver on the part of the taxpayer does not suspend the prescriptive
period. /Commissioner of #nternal evenue v. Court of Appeals! et al.! 2.. No. ''?<'+!
8ebruary +?! '((( /Carnation case0
N5T.% AND C544.NT%9 Grounds or sus)endin0 st#tute o limit#tions or
)res"ri)ti$e )eriods or #ssessment8 /e0innin0 or distr#int or le$y or )ro"eedin0 in
"ourt(
The holdin& in Commissioner of #nternal evenue v. Court of Appeals! et al.! 2..
No. ''?<'+! 8ebruary +?! '((( /Carnation case0 that the waiver of the period for
assessment must be in writin& and have the written consent of the B# Commissioner is
still doctrinal because of the provisions of %ec. ++;! N#C of '((< which provides9
a. 3hen the Commissioner is prohibited from ma-in& the assessment! or
be&innin& distraint! or levy or proceedin& in court and for sixty /=)0 days thereafterE
b. 3hen the taxpayer requests for and is &ranted a reinvesti&ation by the
commissionerE
c. 3hen the commissioner could not be located in the address &iven by him in the
return filed upon which the tax is bein& assessed or collectedE
d. 3hen the warrant of distraint and levy is duly served upon the taxpayer! his
authori7ed representative! or a member of his household with sufficient discretion! and no
property could be locatedE and
e. 3hen the taxpayer is out of the Philippines.
:aw on prescription should be liberally construed in favor of the taxpayer( 8or the
purpose of safe&uardin& taxpayers from an unreasonable examination! investi&ation or
assessment! our tax law provides a statute of limitation on the collection of taxes.
Thus! the law on prescription! bein& a remedial measure! should be liberally
construed in order to afford such protection. As a corollary! the exceptions to the law
on prescription should perforce be strictly construed. /Commissioner of #nternal evenue
v. B.8. 2oodrich Phils.! #nc.! et al.! 2.. No. ')G'<'! 8ebruary +G! '(((0
Re3uirements or $#lidity o t#x)#yer+s )rotest. The taxpayer shall state the
facts! the applicable law! rules and re&ulations! or ,urisprudence on which his protest is
based! otherwise! his protest shall be considered void and without force and effect. #f
therer are several issues involved in the disputed assessment and the taxpayer fails to state
the facts! the applicable law! rules and re&ulations! or ,urisprudence in support of his
protest a&ainst some of the several issues on which the assessment is based! the same shall
be considered undisputed issue or issues! in which case! the taxpayer shall be required to
pay the correspondin& deficiency tax or taxes attributable thereto. /%ec. ;.'.?! ev. e&s.
'+*((0
.<( G(4( Goodri"! #$#ilin0 o t!e P#rity Amendment to t!e :onstitution
)ur"!#sed $#rious )#r"els o l#nd( W!en t!e P#rity Amendment ex)ired in 'F=18 it
sold t!e )#r"els or P2EE8EEE(EE )#y#/le in inst#llments #nd le#sed /#"7 t!e
)ro)erties or ,2 ye#rs( It iled its 'F=1 return re)ortin0 t!e s#le( A GIR #ssessment
on its in"ome or 'F=1 %#s )#id( In 'FHE it %#s #ssessed donor+s t#x /e"#use t!e
GIR "onsidered t!e "onsider#tion or t!e s#le insui"ient8 #nd t!e dieren"e
/et%een t!e #ir m#r7et $#lue #nd t!e #"tu#l )ur"!#se )ri"e8 # t#x#/le don#tion(
Su/se3uently8 on A)ril F8 'FH' t!e GIR in"re#sed t!e #ssessment(
W#s t!ere # A#lse #nd r#udulent returnB %it!in t!e "ontext o t!e T#x :ode
%!i"! %ould #llo% #ssessment /eyond t!e i$e ye#r Runder t!e )resent T#x :ode8
t!ree ?.@ ye#rs *
%122.%T.D AN%3.9 No! the fact that B.8. 2oodrich sold the property for a
price lower than its declared fair mar-et value did not constitute a Cfalse returnD which
contains wron& information due to mista-e! carelessness or i&norance. #t is possible that
real property may be sold for less than adequate consideration for a bona fide business
purpose! in such event! the sale remains an Carms len&thD transaction. #n the case at bar!
B.8. 2oodrich was tryin& to minimi7e its loss because of the expiration of the Parity
Amendment. Besides! the +? year lease was another consideration.
+'
B.8. 2oodrich declared the sale in its '(<G return submitted to the B# 3ithin
the prescriptive period! the B# could have made the assessment because the declared fair
mar-et value of said property was of public record.
That part of the sale transaction was actually a donation! did not erase the fact that
the income had already been reported( B.8. 2oodrich already reported its income by filin&
an income tax return. .ven thou&h a donor$s tax is different from capital &ains tax! a tax
on the &ain from the sale of the taxpayer$s property formin& part of capital assets! the tax
return filed by B.8. 2oodrich to report its income for the year '(<G was sufficient
compliance with the le&al requirement to file a return.
The B#$s oversi&ht on the issue of prescription cannot pre,udice the taxpayer.
.A%5N9 The prescriptive period was precisely intended to &ive the taxpayers peace of
mind. /Commissioner of #nternal evenue v. B.8. 2oodrich Phils.! #nc.! et al.! 2.. No.
')G'<'! 8ebruary +G! '(((0
.=. Assessment #nd reund "#ses "ould not /e "onsolid#ted. eason9
:ifeblood doctrine. #f there a pendin& assessment! refund should not be &ranted.
FFF.H( 1' non6lie insur#n"e "or)or#tions or0#ni&ed #nd existin0 under t!e l#%s
o t!e P!ili))ines or0#ni&ed # )ool o m#"!inery insurers or t!e )ur)ose o enterin0
into # Juot# S!#re Reinsur#n"e Tre#ty #nd # Sur)lus Reinsur#n"e Tre#ty %it! t!e
Mun"!ener Ru"7$ersi"!erun0s6Gessels"!#t ?Muni"! or /re$ity@8 # non6resident
orei0n insur#n"e "or)or#tion(
On A)ril '18 'F=< t!e )ool su/mitted # in#n"i#l st#tement #nd iled #n
AInorm#tion Return o Or0#ni&#tion Exem)t rom In"ome T#xB or t!e ye#r
endin0 'F=28 on t!e /#sis o %!i"! t!e )ool %#s #ssessed dei"ien"y "or)or#te
in"ome t#x o P'(H million #nd %it!!oldin0 t#x in t!e #mount o P'(= million #nd
PHF t!ous#nd #nd to t!e )ool on di$idends )#id to Muni"! #nd t!e )ool mem/ers
res)e"ti$ely(
T!e )ool r#ises t!e ollo%in0 issues %!y t!ey s!ould not /e su/9e"t to t!e
dei"ien"y t#xes:
'( T!ey !#$e not ormed #n unre0istered )#rtners!i) to /e tre#ted #s #
"or)or#tion or t#x )ur)oses5
,( T!ere %ould /e dou/le t#x#tion i t!ey %ould /e m#de to )#y t!e
dei"ien"y t#xes5 #nd
.( T!e ri0!t o t!e 0o$ernment to "olle"t !#s #lre#dy )res"ri/ed(
Rule on t!e issues r#ised dis"ussin0 e#"! one o t!em(
%122.%T.D AN%3.%9
'. They have formed an association which should be taxable li-e a corporation.
The Tax Code has included under the term CcorporationD partnerships! no matter how
created or or&ani7ed! ,oint*stoc- companies! ,oint accounts /cuentas en participacion0!
associations! or insurance companies. Q%ec. +G now %ec. +G /B0 of the N#C of '((<R.
#n .van&elista v. Collector! ')+ Phil. 'G)! the %upreme Court already held citin&
4ertens that the term partnership includes a syndicate! &roup! pool! ,oint venture or other
unincorporated or&ani7ation! throu&h or by means of which any business! financial
operation! or venture is carried on.
There is no question that the G' non*life corporations entered into a Pool
A&reement or an association that would handle all the insurance businesses covered under
their quota*share reinsurance treaty and surplus reinsurance treaty with 4unich. This
unmista-ably indicates a partnership or an association which is considered under the Tax
Code as a partnership or association treated li-e a corporation.
+. There is no double taxation which means taxin& the same property twice when
it should be taxed only once. The Pool is a taxable entity separate and distinct from the
individual corporate entities of the Pool.
;. The prescriptive period was not suspended because it may be suspended only
Cif the taxpayer informs the Commissioner of #nternal evenue of any chan&e in the
address.D The fact that the Pool$s information return filed in '(>) indicated therein its
Cpresent addressD is not sufficient compliance with the le&al requirement.
++
FFFN5T.% AND C544.NT%9 The Bar examination question may be with respect
to the income of an estate that has not been partitioned or to a case where there is co*
ownership.
:ert#in /usiness or0#ni&#tions do not #ll under t!e "#te0ory o
A"or)or#tionsB under t!e T#x :ode8 #nd t!ereore not su/9e"t to t#x #s
"or)or#tions. They include9
'. 2eneral professional partnershipsE
+. Joint venture or consortium formed for the purpose of underta-in&
construction pro,ects en&a&in& in petroleum! coal! &eothermal! and other ener&y
operations! pursuant to an operation or consortium a&reement under a service contract
with the 2overnment. Q'
st
sentence! %ec. ++ /B0! B#C of '((<R
.F( W!#t is # )#yment order *
%122.%T.D AN%3.9 A payment order contains the particular -ind of tax to
be paid and the correspondin& TNC is issued to a taxpayer to be presented by him to the
ban- when he pays his taxes. /.van&elista v. People of the Philippines! et al.! 2.. Nos.
')>';?*;=! prom. %eptember ;)! '(((0
*** 1E( A0ustin died in -e"em/er8 'FFF le#$in0 to !is t%o sons8 4ern#ndo #nd
Dose8 #n #)#rtment /uildin0( Ater t!e settlement o A0ustin+s est#te8 !is t%o sons
de"ided not to )#rtition t!e #)#rtment /uildin0 #nd 9ust di$ided t!e rent#ls #mon0
t!emsel$es or t!e ye#r ,EEE(
#( W#s # )#rtners!i) ormed %!i"! is su/9e"t to "or)or#te in"ome t#xes or
t!e ye#r ,EEE * Re#son out your #ns%er(
/( I8 inste#d o di$idin0 t!e rent#ls in ,EEE8 t!e /rot!ers in$ested t!e s#me
in t!e )ur"!#se o # !ouse to /e rented out( Ho% s!#ll t!e in"ome rom t!e rent#ls
o t!e !ouse /e tre#ted or t#x )ur)oses * Ex)l#in /riely( Would your #ns%er /e
dierent i t!e !ouse %#s not )ur"!#sed or t!e )ur)ose o rentin0 out t!e s#me /ut
%#s l#ter sold * Ex)l#in /riely(
%122.%T.D AN%3.%9
a. No. Co*heirs who own inherited properties which produce income should not
automatically be considered as partners of an unre&istered corporation sub,ect to income
tax for the followin& reasons9
'. the sharin& of &ross returns does not of itself establish a partnership!
whether or not the persons sharin& them have a ,oint or common ri&ht or interest
in any property from which the returns are derived. There must be an
unmista-able intention to form a partnership or ,oint venture. /5billos! Jr. v.
Commissioner of #nternal evenue! ';( %CA G;=0
+. There is no contribution or investment of additional capital to increase
or expand the inherited properties! merely continuin& the dedication of the
property to the use to which it had been put by their forebears. /Ibid.0
;. Persons who contribute property or funds to a common enterprise and
a&ree to share the &ross returns of that enterprise in proportion to their
contribution! but who severally retain the title to their respective contribution! are
not thereby rendered partners. They have no common stoc- capital! and no
community of interest as principal proprietors in the business itself from which the
proceeds were derived. /.lements of the :aw of Partnership by 8loyd . 4echem!
+
nd
.d.! %ec. >;! p. <G cited in Pascual v. Commissioner of #nternal evenue! '==
%CA ?=)0
G. #n order to constitute a partnership inter sese there must be9 /a0 an
intent to form the sameE /b0 &enerally participatin& in both profits and lossesE /c0
and such a community of interest! as far as third persons are concerned as enables
each party to ma-e a contract! mana&e the business! and dispose of the whole
property. /4unicipality Pavin& Co. v. @errin&! '?) 5. ')=<! ?) #ll. G<)! Ibid.0
?. The common ownership of property does not itself create a partnership
between the owners! thou&h they may use it for purpose of ma-in& &ains! and they
may! without becomin& partners! are amon& themselves as to the mana&ement and
+;
use of such property and the application of the proceeds therefrom.. /%purloc- v!.
3ilson! 'G+ %.3. ;=;! '=) No. App. 'G! Ibid.0
b. The income from the rental of the house shall be treated as the income of an
unre&istered partnership to be taxable as a corporation because of the clear intention of
the brothers to ,oin to&ether in a venture for ma-in& money out of rentals.
The answer would be different because there was no intention to enter into a profit
ma-in& venture. They merely formed a co*ownership. This is evident from the followin&
authorities9
3here the plaintiff! his brother and! and another a&reed to become owners of a
sin&le tract of realty holdin& as tenants in common! and to divide the profits of disposin&
of it! the brother and the other not bein& entitled to share in plaintiff$s commissions! no
partnership existed as between the three parties! whatever their relation may have been as
to third parties. /4a&ee v. 4a&ee! '+; N... =<;! +;; 4ass. ;G' cited in Pascual v.
Commissioner of #nternal evenue! '== %CA ?=)0
1'( Li/oro is # )r#"ti"in0 l#%yer %!o on '2 A)ril 'FF2 iled !is in"ome t#x
return or t!e ye#r 'FF1( U)on ex#min#tion8 t!e GIR ound !is return dei"ient o
P'18EEF(H1( On .E Se)tem/er #nd .E No$em/er 'FF28 Li/oro %#s notiied o !is t#x
dei"ien"y( He res)onded %it! # )rotest letter d#ted 'F -e"em/er 'FF2(
On '' M#y 'FF<8 t!e :ommissioner o Intern#l Re$enue denied Li/oro+s
)rotest or l#"7 o le0#l /#sis( He t!en se#son#/ly iled # )etition or re$ie% /eore
t!e :ourt o T#x A))e#ls( On ,F M#r"! 'FFH8 t!e :TA rendered # de"ision
dismissin0 t!e #))e#l %!i"! Li/oro re"ei$ed on ,F M#y 'FFH( T!us8 !e !#d until '.
Dune 'FFH to ile # )etition or re$ie% /eore t!e :ourt o A))e#ls(
On '' Dune 'FFH8 inste#d o ilin0 # )etition or re$ie% %it! t!e :ourt o
A))e#ls8 Li/oro iled # Noti"e o A))e#l %it! t!e :ourt o A))e#ls8 #nd on '. Dune
'FFH8 # motion or #n extension o t!irty ?.E@ d#ys to ile # )etition or re$ie% /eore
t!e :ourt o A))e#ls(
M#y t!e :ourt o A))e#ls 0r#nt Li/oro #n extension o time to ile t!e
)etition or re$ie%*
%122.%T.D AN%3.9 Aes. The prohibition a&ainst &rantin& an extension of
time applies only in a case where ordinary appeal is required to perfect an appeal and
nothin& more. @owever! it is different in a petition for review where the pleadin& is
required to be verified.
A petition for review! unli-e an ordinary appeal! requires careful preparation and
research in order to put up a persuasive and formidable position. #n other words! the
draftin& of a petition for review entails more time and effort than merely filin& a notice of
appeal. /:iboro v. Court of Appeals! et al.! 2.. No. ')'';+ and Commissioner of
#nternal evenue v. Court of Appeals! et al.! January +(! '((;0
N5T.% AND C544.NT%99 %ec. G! ule G; of the '((< ules of Civil
Procedure provides! CThe appeal shall be ta-en within fifteen /'?0 days from notice of
the ... ,ud&ment.... 1pon proper motion and the payment of the full amount of the doc-et
fee before the expiration of the re&lementary period! the Court of Appeals may &rant an
additional period of fifteen /'?0 days only within which to file the petition for review. No
further extension shall be &ranted except for the most compellin& reason and in no case to
exceed fifteen /'?0 days.D /paraphrasin& supplied0
*** 1,( Is t!ere # ne"essity or #n #dministr#ti$e determin#tion t!#t # t#x is due
/eore initi#tion o "rimin#l )rose"ution or t#x e$#sion *
%122.%T.D AN%3.9 No! because of the followin& reasons! which
distin&uishes a criminal char&e from an assessment9
a. Criminal char&e need only be supported by a prima facie showin& of failure to
file a required return 3@#:. the fact of failure to file a return need not be proven by an
assessment.
b. Before an assessment is issued! there is! by practice! a pre*assessment notice
sent to the taxpayer 3@#:. such is not so with a criminal char&e. The char&e is filed
directly with the Department of Justice.
+G
c. A criminal complaint is instituted not to demand payment! but to penali7e the
taxpayer for violation of the Tax Code 3@#:. the purpose of the issuance of an
assessment is to collect the tax. /Commissioner of #nternal evenue v. Pascor ealty and
Development Corporation! et al.! 2.. No. '+>;'?! June +(! '(((0
N5T.% AND C544.NT%9 8or G#r ex#min#tion )ur)oses ta-e note of the
distinction between the 8ortune Tobacco case /Commissioner of #nternal evenue v.
Court of Appeals! et al.! 2.. No. ''(;++! June G! '((=0 on one hand with the above
Pascor case and that of 1n&ab v. Cusi! (< %CA ><< /'(>)0! which allowed the tax
evasion case to proceed notwithstandin& no showin& of an administrative findin& that a tax
is due. #n 1n&ab! there was a prima facie attempt to evade taxes because of the
taxpayer$s failure to declare in his income tax return Chis income derived from banana
saplin&s!D 3@#:. in the 8ortune Tobacco case! the re&istered wholesale price of the
&oods! approved by the B# is presumed to be the actual wholesale price! therefore! not
fraudulent and unless and until the B# has made a final determination of what is supposed
to be the correct taxes! the taxpayer should not be placed in the crucible of criminal
prosecution
*** 1.( W!#t #re t!e t#x "#ses %!i"! m#y /e t!e su/9e"t o # "om)romise
settlement %it! t!e GIR *
%122.%T.D AN%3.9 The followin& may be the sub,ect matter of
compromise settlement9
a. Delinquent accountsE
b. Cases under administrative protest pendin& in the e&ional 5ffices! evenue
District 5ffices! :e&al %ervice! :ar&e Taxpayer %ervice /:T%0! .nforcement %ervice /.%0!
.xcise Taxpayer %ervice /.T%0 and Collection %ervice /C%0E
c. Civil tax cases bein& disputed before the courts! e.&. CTA! CA! %CE
d. Collection cases filed in courtsE and
e. Criminal violations! other than those already filed in court! or those involvin&
criminal tax fraud. /%ec. +! ev. e&s. No. =*+)))0
N5T.% AND C544.NT%9
a. T#x "#ses %!i"! "ould not /e t!e su/9e"t o "om)romise:
'0 3ithholdin& tax casesE
+0 Criminal tax fraud casesE
;0 Criminal violations already filed in courtE and
G0 Delinquent accounts with duly approved schedule of installment
payments. /%ec. +! ev. e&s. No. =*+)))0
FFF 11( On Dune '28 'FF<8 Mr( Gr#nt O( Ne#l8 )#id !is in"ome t#x or t!e ye#r
'FF2( On M#r"! '28 'FFH8 !e dis"o$ered t!#t t!e GIR ex"essi$ely "olle"ted rom !is
t!e #mount o P=28EEE(EE( T!us8 on t!e s#me d#y !e iled %it! t!e :ommissioner o
Intern#l Re$enue # %ritten "l#im or reund( On Au0ust '28 'FFH !e re"ei$ed t!e
:ommissioner+s letter denyin0 !is "l#im or reund( On Se)tem/er '8 'FFH8 or
%it!in t!irty ?.E@ d#ys rom re"ei)t o t!e letter8 !e iled # )etition or re$ie% %it!
t!e :ourt o A))e#ls or t!e reund o t!e P=28EEE(EE( In "onorm#n"e %it! t!e
m#teri#l d#t# rule8 !e #lle0ed t!#t Se"tion '' o Re)u/li" A"t No( '',28 )ro$ides
t!#t # t#x)#yer #d$ersely #e"ted /y # rulin0 or de"ision o t!e :ommissioner o
Intern#l Re$enue m#y #))e#l to t!e :ourt o T#x A))e#ls %it!in t!irty ?.E@ d#ys
rom re"ei)t o t!e #d$erse de"ision( -e"ide t!e "#se(
%122.%T.D AN%3.9 The petition should be dismissed for havin& been filed
out of time. %ec. ++(! N#C of '((< provides that court action for the recovery of
internal revenue tax should be filed within two /+0 years from the date such tax was paid.
The petition should have been filed no later than June '=! '((>. There was as yet
no decision of the Commissioner to be appealed but this contention is bereft of merit! as it
would leave the taxpayer at the mercy of the B# Commissioner without any positive and
expedient relief from the Court. #t is disheartenin& enou&h to a taxpayer to be -ept
waitin& for an indefinite period for the rulin&!. #t would ma-e matters more exasperatin&
for the taxpayer if the doors of ,ustice would be closed for such a relief until after the
Commissioner! would have! at his personal convenience! &iven his &o si&nal.
+?
/Commissioner of Customs! et al! v. Court of Tax Appeals! et al.! 2.. No. >+='>! prom.
4arch '=! '(>(! unrep.0
*** 12( P!ili))ine G#n7 o :ommuni"#tions iled its 3u#rterly in"ome t#x
returns or t!e irst #nd se"ond 3u#rters o 'FH28 re)ortin0 )roits #nd )#id t!e tot#l
in"ome t#x o P2 million( T!e t#xes due %ere settled /y #))lyin0 t!e G#n7+s t#x
"redit memos8 #nd #""ordin0ly8 t!e GIR issued t!e #))ro)ri#te T#x -e/it Memos(
Su/se3uently8 t!e G#n7 suered losses so t!#t %!en it iled its Annu#l
In"ome T#x Returns or t!e ye#r6ended -e"em/er .'8 'FH28 it de"l#red # net loss o
P,2 million8 t!ere/y s!o%in0 no t#x li#/ility( 4or t!e su""eedin0 ye#r8 endin0
-e"em/er .'8 'FH<8 it li7e%ise re)orted # net loss o P'1 million #nd t!us de"l#red
no in"ome t#x )#y#/le or t!e ye#r(
-urin0 'FH2 #nd 'FH<8 t!e G#n7 e#rned rent#l in"ome rom le#sed
)ro)erties rom %!ere t!e lessees %it!!eld #nd remitted to t!e GIR %it!!oldin0
"redit#/le t#xes o P,H, t!ous#nd or 'FH28 #nd P,.1 t!ous#nd or 'FH<(
On Au0ust =8 'FH=8 t!e G#n7 re3uested t!e :ommissioner o Intern#l
Re$enue8 #mon0 ot!ers or # t#x "redit o P2 million re)resentin0 t!e o$er)#yment
o t#xes in t!e irst #nd se"ond 3u#rters o 'FH2( T!ere#ter8 on Duly ,28 'FHH8 t!e
G#n7 iled # "l#im or reund o "redit#/le t#xes %it!!eld /y its lessees rom
)ro)erty rent#ls in 'FH2 #nd in 'FH<( Got! t!e re3uest #nd t!e "l#im %ere
se#son#/ly iled %it!in t!e ten ?'E@ ye#r )eriod or ilin0 "l#ims o ex"ess 3u#rterly
in"ome t#x )#yments #s )ro$ided or in RM: =6H2 issued /y t!e t!en A"t0( GIR
:ommissioner(
On No$em/er 'H8 'FHH t!e G#n7 instituted # Petition or Re$ie% /eore t!e
:ourt o T#x A))e#ls( Would t!e )etition )ros)er *
%122.%T.D AN%3.9 No. #t was filed out of time and since the taxpayer
decided to avail of the tax credit it could not anymore see- a refund.
The two /+0 year prescriptive period should be computed from the time of filin&
the Ad,ustment eturn and final payment of the tax for the year. /Philippine Ban- of
Communications v. Commissioner of #nternal evenue! et al.! 2.. No. ''+)+G! January
+>! '(((0
The claim for refund should be exercised within the time fixed by law. .A%5N9
The Bureau of #nternal evenue bein& an administrative body enforced to collect taxes! its
functions should not be unduly delayed or hampered by incidental matters. /Ibid.0
The issuance of 4C <*>? chan&in& the statutory prescriptive period of two /+0
years to ten /')0 years on claims of excess quarterly income tax payments did not merely
interpret the law! rather it le&islated &uidelines contrary to the statute passed by Con&ress.
evenue 4emorandum Circulars are considered administrative rulin&s /in the
sense of more specific and less &eneral interpretations of tax laws0 which are issued from
time to time by the Commissioner of #nternal evenue. #t is widely accepted that the
interpretation placed upon a statute by the executive officers! whose duty it is to enforce
it! is entitled to &reat respect by the courts. Nevertheless! such interpretation is not
conclusive and will be i&nored if ,udicially found to be erroneous. ules and re&ulations
issued by administrative officials to implement a law cannot &o beyond the terms and
provisions of the latter. 8urther! fundamental is the rule that the %tate cannot be put in
estoppel by the mista-es or errors of its officials or a&ents. /supra0
8inally! %ec. =( of the '(<< N#C /now %ec. <= of the '((< N#C0 provides that
any excess of the total quarterly payments over the actual income tax computed in the
ad,ustment or final corporate income tax return! shall either /a0 be refunded to the
corporation! or /b0 may be credited a&ainst the estimated quarterly income tax liabilities
for the quarters of the succeedin& taxable year. To ease the administration of tax
collection! these remedies are in the alternative and the choice of one precludes the other.
%ince the Ban- has chosen the tax credit approach it cannot anymore avail of the tax
refund.. /supra0
*** 1<( On Duly 'H8 'FH<8 t!e GIR issued to S#lud I( Hi&on # dei"ien"y in"ome
t#x #ssessment( Sin"e t!e #ssessment %#s not "ontested8 t!e GIR on D#nu#ry ',8
+=
'FHF8 ser$ed %#rr#nts o distr#int #nd le$y to "olle"t t!e t#x dei"ien"y( 4or
un7no%n re#sons8 t!e GIR did not )ro"eed to dis)ose o t!e #tt#"!ed )ro)erties(
On No$em/er .8 'FF,8 S#lud %rote t!e GIR re3uestin0 # re"onsider#tion o
!er t#x dei"ien"y #ssessment( T!e GIR8 in # letter d#ted Au0ust ''8 'FF18 denied(
On D#nu#ry '8 'FF=8 t!e GIR iled %it! t!e RT: # "#se to "olle"t t!e t#x dei"ien"y(
T!e "om)l#int %#s si0ned /y t!e :!ie o t!e Le0#l -i$ision o t!e Re0ion #nd
$eriied /y t!e Re0ion#l -ire"tor(
S#lud no% see7s t!e dismiss#l o t!e "#se on t!e ollo%in0 0rounds:
#( T!e "om)l#int %#s not iled u)on #ut!ority o t!e GIR :ommissioner #s
re3uired under Se"tion ,,E o t!e T#x :ode5
/( T!e #"tion !#s #lre#dy )res"ri/ed( Resol$e t!e issues r#ised(
%122.%T.D AN%3.%9
a. evenue Administrative 5rder No. ')*(? specifically authori7es the :iti&ation
and Prosecution %ection of the :e&al Division of the re&ional district offices to institute
the necessary civil and criminal actions for tax collection. As the complaint filed in this
case was si&ned by the B#$s Chief of :e&al Division for the re&ion and verified by the
e&ional Director! there was! therefore! compliance with the law. %ec. < of the present
Tax Code authori7es the B# Commissioner to dele&ate some of his powers.
b .%ec. ++> of the N#C of '((< mandates that a request for reconsideration must
be made within ;) days from the taxpayer$s receipt of the tax deficiency assessment!
otherwise the assessment becomes final! unappealable and! therefore demandable. The
notice was received by %alud on July '>! '(>= and she made her request for
reconsideration thereof only on November ;! '((+. .ven assumin& that she first learned
of the notice on the day the warrants were served on January '+! '(>(! her request for
reconsideration was still filed beyond the ;) day period. @ence! her request for
reconsideration did not suspend the runnin& of the prescriptive period. Althou&h the
Commissioner acted on %alud$s request! eventually denyin& it on Au&ust ''! '((G! this is
of no moment and does not detract from the fact that the assessment had lon& become
demandable. /epublic of the Philippines! etc. v. @i7on! 2.. No. ';)G! prom. December
';! '(((0
N5T.% AND C544.NT%9
a. Ee"t o ser$i"e o %#rr#nt o distr#int or le$y. The timely service of a
warrant of distraint or levy suspends the runnin& of the period to collect the tax deficiency
in the sense that the disposition of the attached properties mi&ht well ta-e time to
accomplish! extendin& even after the lapse of the statutory period for collections.
/Advertisin& Associates! #nc.! v. Court of Appeals! ';; %CA <=?E Palanca v.
Commissioner of #nternal evenue! ''G Phil. +);0. #n those cases! the B# did not file
any collection case but merely relied on the summary remedy of distraint and levy to
collect the tax deficiency.
Thus! the enforcement of tax collection throu&h summary proceedin&s may be
carried out beyond the statutory period. /epublic of the Philippines! etc. v. @i7on! 2..
No. ';)G! prom. December ';! '(((0 The statutory period for collection applies only
where a court suit is availed of for collection.
b. 4orm #nd Mode o Pro"eedin0 in A"tions Arisin0 under t!e T#x :ode.
CCivil and criminal actions and proceedin&s instituted in behalf of the 2overnment under
the authority of this Code or other law enforced by the Bureau of #nternal evenue shall
be brou&ht in the name of the 2overnment of the Philippines and shall be conducted by
le&al officers of the Bureau of #nternal evenue but no civil or criminal action for the
recovery of taxes or the enforcement of any fine! penalty or forfeiture under this Code
shall be filed in court without the approval of the Commissioner.L /%ec. ++)! N#C of
'((<0
*** 1=( Ater dissolution o P#r#mount on M#r"! .'8 'FH<8 GPI #"ted #s
li3uid#tor( On M#y .E8 'FH2 P#r#mount )#id P.EH8==F(EE in in"ome t#xes or t!e
'
st
3u#rter5 or t!e ,
nd
3u#rter8 it )#id P<,<8EEE(EE on Au0ust ,F8 'FH25 or t!e .
rd
3u#rter8 it )#id P,H18'<'(EE on No$em/er ,F8 'FH2(
+<
On A)ril ,8 'FH<8 P#r#mount iled its "or)or#te #nnu#l in"ome t#x return or
t!e "#lend#r ye#r endin0 -e"em/er .'8 'FH2( All in #ll8 P#r#mount )#id t!e tot#l
#mount o P'8,'H8F1E(EE t!ere/y s!o%in0 # reund#/le #mount o P<28,2F(EE(
On A)ril '18 'FHH8 GPI8 #s li3uid#tor o P#r#mount8 iled %it! t!e :ourt o
T#x A))e#ls # letter d#ted A)ril ',8 'FHH reiter#tin0 its "l#im or t!e reund o
P<28,2F(EE #s o$er)#id in"ome t#x or "#lend#r ye#r 'FH2( On A)ril '28 'FHH8 t!e
P#r#mount re)resent#ti$e8 iled %it! t!e :ourt o T#x A))e#ls # )etition to toll t!e
runnin0 o t!e )res"ri)ti$e )eriod or ilin0 # "l#im or reund o o$er)#id in"ome
t#xes(
T!e :ourt o T#x A))e#ls ruled t!#t t!e t%o6ye#r )res"ri)ti$e )eriod
"ommen"ed to run rom A)ril '28 'FH<8 t!e l#st d#y or ilin0 t!e "or)or#te in"ome
t#x return #nd 0r#nted t!e reund( W#s t!e 0r#nt o t!e reund )ro)er *
%122.%T.D AN%3.9 No. The two*year prescriptive period for actions for
refund of corporate income tax should be computed from the time of actual filin& of the
8inal Ad,ustment eturn or Annual #ncome Tax eturn. .A%5N9 At That point! it can
already be determined whether there has been an overpayment made by the taxpayer.
4oreover! payment is made at the time the return is filed.
%ince Paramount filed its corporate annual income tax return on April +! '(>=! it
had only two*years from date within which to file its written claim for refund. 3hen it
filed a written claim for refund on April 'G! '(>>! and a petition for refund only on April
'?! '(>>! both claim and action for refund were thus barred by prescription.
/Commissioner of #nternal evenue v. Court of Appeals! et al.! 2.. No. ''<+?G! January
+'! '(((0
N5T.% AND C544.NT%9 8or corporations! the two year prescriptive period
under %ec. +;) /now %ec. ++(! N#C of '((<0! for institutin& tax refund cases in court
commence to run only from the time the refund is ascertained! which can only be
determined after a final ad,ustment return is accomplished. Two years not ,urisdictional
and may be suspended. / Commissioner of #nternal evenue v. The Philippine :ife
#nsurance Co.!et al. 2.. No. ')?+)>! 4ay +(! '((? reiteratin& the T4B case0.
The two year period applies only to recovery of taxes or penalties N5T to tax
credits availment. Absent a specific provision in the Tax Code or special laws! the period
would be ') years. /Justice "itu&! concurrin& in the above case 0
A simultaneous filin& of the application with the B# for refundScredit and the
institution of the court suit with the CTA is allowed. No need to wait for a B# denial.
.A%5N%9
a. The positive requirement of %ection +;) N#C /now %ec. ++(! N#C of '((<0E
b. The doctrine that delay of the Commissioner in renderin& decision does not
extend the peremptory period fixed by the statuteE
c. The law fixed the same period two years for filin& a claim for refund with the
Commissioner under %ec. +)G! par. ;! N#C /now %ec. +)G QCR! N#C of '((<0! and for
filin& suit in court under %ec. +;)! N#C /now %ec. ++(! N#C of '((<0! unli-e in
protests of assessments under %ec. ++( /now %ec. ++>! N#C of '((<0! which fixed the
period /thirty days from receipt of decision0 for appealin& to the court! thus clearly
implyin& that the prior decision of the Commissioner is necessary to ta-e co&ni7ance of
the case. /Commissioner of #nternal evenue v. Ban- of Philippine #slands! etc. et al.! CA*
2.. %P No. ;G')+! %eptember (! '((GE 2ibbs v. Collector of #nternal evenue and Court
of Tax Appeals! ')< Phil! +;+E Johnston :umber Co. v. CTA! ')' Phil. '?'0
#f the protest is denied in whole or in part or n the instance where the
Commissioner of #nternal evenue does not act within one hundred ei&hty /'>)0 days
from submission of documents! the taxpayer adversely affected may appeal to the Court of
Tax Appeals within thirty /;)0 days from receipt of the said decision! or from the lapse of
the one hundred ei&hty /'>)0 days! otherwise the decision shall become final! executory
and demandable. /last par.! %ec. ++>! N#C of '((<0
1H( P!ili))ine Home Assur#n"e :or)or#tion )#id do"ument#ry st#m) t#xes
on "ert#in non6lie insur#n"e )oli"ies it issued( Ho%e$er8 t!e )remiums %ere not
)#id( T!e "om)#ny on /#sis t!e )ro$isions o Se"tion == o t!e Insur#n"e :ode to
t!e ee"t t!#t8 ANot%it!st#ndin0 #ny #0reement to t!e "ontr#ry8 no )oli"y or
+>
"ontr#"t o insur#n"e issued /y #n insur#n"e "om)#ny is $#lid #nd /indin0 unless
#nd until t!e )remium t!ereo !#s /een )#id xxx8B no% "l#ims or # reund o t!e
do"ument#ry st#m)s it )#id /e"#use t!e )oli"ies ne$er /e"#me ee"ti$e( S!ould t!e
reund /e 0r#nted * Altern#ti$ely8 "ould t!ere /e # reund o do"ument#ry st#m)
t#x )#yments *
%122.%T.D AN%3.9 No. Documentary stamp taxes are levied upon the
privile&e! opportunity! or facility to execute certain instruments irrespective of whether
the contracts are subsequently declared to be rescissible! void! voidable or unenforceable.
The documentary stamp taxes are imposed on the mere issuance of the policies even if
these policies subsequently are considered as not valid or bindin& under the law.
/Philippine @ome Assurance Corporation! et al.! v. Court of Appeals! et al.! 2.. No.
''(GG=! prom. January +'! '(((0
1F( S!ould interest /e )#id %!ere # t#x is reunded /y t!e Go$ernment to #
t#x)#yer *
%122.%T.D AN%3.9 The rule is that no interest on refund of tax can be
awarded unless authori7ed by law or the collection of the tax was attended by
arbitrariness. An action is not arbitrary when exercised honestly and upon due
consideration where there is room for two opinions! however much it may be believed that
an erroneous conclusion was reached. Arbitrariness presupposes inexcusable or obstinate
disre&ard of le&al provisions. /Philex 4inin& Corporation v. Commissioner of #nternal
evenue! et al.! 2.. No. '+);+G! prom. April +'! '(((0
2E( W!#t is t!e n#ture o # t#x #mnesty *
%122.%T.D AN%3.9 A tax amnesty is a &eneral pardon to taxpayers who
want to start a clean slate. #t also &ives the &overnment a chance to collect uncollected
tax from tax evaders without havin& to &o throu&h the tedious process of a tax case. To
avail of a tax amnesty &ranted by the &overnment! and to be immune from suit on its
delinquencies! the taxpayer must have voluntarily disclosed his previously untaxed income
and must have paid the correspondin& tax on such previously untaxed income.
A tax amnesty! much li-e a tax exemption! is never favored nor presumed in law
and if &ranted by statute! the terms of the amnesty li-e that of a tax exemption must be
construed strictly a&ainst the taxpayer and liberally in favor of the taxin& authority.
/Banas! Jr. v. Court of Appeals! et al.! 2.. No. ')+(=<! prom. 8ebruary ')! +)))0
NATIONAL INTERNAL REVENUE CODE
THE GUREAU O4 INTERNAL REIENUE
2'( An intern#l re$enue oi"er8 !#$in0 /een reli#/ly inormed /y #n
unim)e#"!#/le sour"e8 t!#t "i0#rs8 9e%elries8 li3uor #nd ot!er #rti"les su/9e"t to
ex"ise t#xes #re 7e)t in t!e !ouse o Mr( Tom#s8 entered s#id !ouse8 sei&ed t!e
#rti"les #nd #rrested Mr( Tom#s on t!e stren0t! o # %#rr#nt si0ned /y t!e
:ommissioner o Intern#l Re$enue(
#( Mr( Tom#s denoun"ed t!e se#r"!8 sei&ure #nd !is #rrest #s $iol#ti$e o t!e
"onstitution /e"#use it %#s ee"ted %it!out # se#r"! %#rr#nt #nd %#rr#nt o #rrest
issued /y t!e #))ro)ri#te "ourt( Under t!e "ir"umst#n"es8 is t!e #"tu#tion o t!e
intern#l re$enue oi"er s#n"tioned /y l#%* W!y*
/( Would your #ns%er /e t!e s#me i t!e se#r"!8 sei&ure #nd #rrest %#s
ee"ted /y "ustoms oi"ers /y $irtue o # %#rr#nt o sei&ure #nd detention si0ned
/y t!e "olle"tor o "ustoms* Ex)l#in(
%122.%T.D AN%3.9
a. Aes. Any internal revenue officer in the dischar&e of his official duties may
enter any house! buildin& or place where articles sub,ect to excise taxes are produced or
-ept! or are believed by him upon reasonable &rounds to be produced or -ept so far as
+(
may be necessary to examine! discover or sei7e the same. /'st par.! %ec. '<'! N#C of
'((<0
#nternal revenue officers shall have authority to ma-e arrests and sei7ures for
violation of any penal law or re&ulation administered by the Bureau of #nternal evenue.
Any person so arrested shall forthwith be brou&ht before a court! there to be dealt with
accordin& to law. /%ec. ';! N#C of '((<0
No search warrant or warrant of arrest is required under the doctrine of primary
,urisdiction which posits that in technical matters where the administrative bodies have
obtained expertise! the courts will defer. This is li-ewise premised on the lifeblood theory
which mandates the immediate collection of taxes to ensure the continued existence of the
%tate.
b. 4y answer would be different because customs authorities may search a
dwellin& place only upon a warrant issued by a Jud&e of the appropriate court upon sworn
application showin& probable cause and particularly describin& the place to be searched
and person or thin& to be sei7ed. /%ec. ++)>! ++)(! Tariff O Customs Code0. The
customs authorities could detain persons only if they are comin& to the Philippines from
forei&n countries /%ec. ++'+! #bid.0 not in the above entitled problem where they are
already in the Philippines.
2,( Ex)l#in t!e rule m#7in0 )o%er o GIR(
%122.%T.D AN%3.9
a. There are two -inds of rulin&s the B# may issue * interpretative rulin&s and
le&islative rulin&s.
#nterpretative rules are desi&ned to provide &uidelines to the law which the
administrative a&ency is in char&e of enforcin&. No notice! hearin& or publication is
required! as they are issued merely for the &uidance of administrative officers. #llustration9
evenue 4emorandum Circular No. G<*(' classifyin& copra as an a&ricultural non*food
item declarin& it exempt from "AT only if the sale is made by the primary producer.
/4isamis 5riental Association of Coco Traders! #nc. v. Department of 8inance %ecretary!
et al.! +;> %CA =; Q'((GR.
:e&islative rules are in the nature of subordinate le&islation! desi&ned to implement
a primary le&islation by providin& the details thereof. They are issued under the quasi*
le&islative authority of the B# Commissioner. There is a requirement for notice! hearin&
and publication. #llustration9 evenue 4emorandum Circular No. ;<*(; which placed
@ope :uxury! Premium 4ore and Champion ci&arettes within the scope of the
amendatory law .A. No. <=?G and sub,ected them to the increased tax rate requires
notice! hearin& and publication. /Commissioner of #nternal evenue v. Court of Appeals!
et al.! +=' %CA +;=0
N5T.% AND C544.NT%9
The rulin&s and circulars promul&ated by the Commissioner do not have
retroactive application if the revocation! modification! or reversal would be pre,udicial to
the taxpayers. /%ec. +G=! N#C of '((<E Commissioner of #nternal evenue v. Court of
Appeals! et al.! +=< %CA ??<0
.xceptions9 #nstances when revenue rulin&s and re&ulations have retroactive
effect even if pre,udicial to the taxpayer9
a. 3here the taxpayer deliberately misstates or omits material facts from his return
or in any document required of him by the B#E
b. 3here the facts subsequently &athered by the B# are materially different from
the facts on which the rulin& is based! or
c. 3here the taxpayer acted in bad faith. /%ec. +G=! N#C of '((<0
2.( In %!#t inst#n"es m#y t!e Gure#u o Intern#l Re$enue sus)end or
tem)or#rily "lose t!e /usiness est#/lis!ment o # t#x)#yer * Ho% lon0 does t!e
sus)ension l#st *
%122.%T.D AN%3.9 The Commissioner or his authori7ed representative is
empowered to suspend the business operations and temporarily close the business
establishment of any person for any of the followin& violationsD
a. #n case of a "AT*re&istered person9
;)
'0 8ailure to issue receipts or invoicesE
+0 8ailure to file a "AT return as required under the Tax CodeE
;0 1nderstatement of taxable sales or receipts by ;)K or more of his
correct taxable sales or receipts for the taxable quarter.
b. 8ailure to re&ister under the "AT provisions of the Tax Code. The temporary
closure of the establishment shall for the duration of not less than five /?0 days and shall be
lifted only upon compliance with whatever requirements prescribed by the Commissioner
in the closure order. /Atlas Consolidated 4inin& O Development Corporation v.
Commissioner of #nternal evenue! 2.. No. ';GG=<! prom. November '<! '(((0
*** 21( T!e :ommissioner o Intern#l Re$enue is #ut!ori&ed under t!e T#x :ode
to dele0#te t!e )o%ers $ested in !im under t!e )ertinent )ro$isions o t!e T#x :ode
to #ny su/ordin#te oi"i#l %it! t!e r#n7 e3ui$#lent to # di$ision "!ie or !i0!er(
W!#t #re t!e ex"e)tions to t!is rule on dele0#tion or #ltern#ti$ely s)e#7in08
%!#t #re t!e )o%ers o t!e :ommissioner t!#t !e "ould not dele0#te *
%122.%T.D AN%3.9 The followin& are some of the powers that he could
not dele&ate9
a. The power to recommend the rules and re&ulations by the %ecretary of 8inanceE
b. The power to issue rulin&s of first impression or to reverse! revo-e! or modify
any existin& rulin& of the BureauE
c. The power to compromise or abate! any tax deficiency! Provided! however! that
assessments issued by the e&ional 5ffices involvin& basic deficiency taxes of
P?))!))).)) or less! and minor criminal violations as may be determined by rules and
re&ulations to be promul&ated by the %ecretary of 8inance! upon the recommendation of
the Commissioner! discovered by re&ional and district officials! may be compromised by a
re&ional evaluation board which shall be composed of the e&ional Director as Chairman!
the Assistant e&ional Director! heads of the :e&al! Assessment and Collection Divisions
and the evenue District 5fficer havin& ,urisdiction over the taxpayer! as membersE and
d. The power to assi&n or reassi&n internal revenue officers to establishments
where articles sub,ect to excise tax are produced or -ept. /%ec. <! N#C of '((< cited in
epublic of the Philippines! etc. v. @i7on! 2.. No. ';)G;)! prom. December ';! '(((0
IN:OME TAMATION
*** 22( -eine in"ome in in"ome t#x l#%(
CAn amount of money comin& to a person within a specified time! whether as
payment for services! interest! or profit from investment.D #t means cash or its equivalent.
#t is &ain derived and severed from capital! from labor or from both combined. 8or
example! to tax a stoc- dividend would be to tax a capital increase rather than the income.
/Commissioner of #nternal evenue v. Court of Appeals! et al.! 2.. No. ')>?<=! January
+)! '(((0
N5T.% AND C544.NT%9 In"ome distin0uis!ed rom "#)it#l:
a. Capital is wealth or fund! 3@#:. income is profit or &ain from the flow of
wealth. /Commissioner of #nternal evenue v. Court of Appeals! et al.! 2.. No. ')>?<=!
January +)! '(((0
Capital is a fund of property existin& at an instant of time 3@#:. income is that
flow of services rendered by that capital by the payment of money from it or any other
benefit rendered by a fund of capital in relation to such fund throu&h a period of time.
b. Capital is wealth 3@#:. income is the service of wealthE and
c. Capital is the tree 3@#:. income is the fruit. /4adri&al v. afferty! ;> Phil.
G'G0
eali7ation is determinative of earnin& process resultin& to income. 3ithout
reali7ation! there is no income.
The determinin& factor for the imposition of income tax is whether any &ain or
profit was derived from the transaction. #n the metaphor of .isner v. 4acomber! +?+
1.%. G+=! income is not deemed Creali7edD until the fruit has fallen
*** 2<( W!#t #re t!e 0ener#l )rin"i)les o in"ome t#x#tion in t!e P!ili))ines *
;'
a. A citi7en of the Philippines residin& therein is taxable on all income derived
from sources within and without the Philippines.
b. A nonresident citi7en is taxable only on income derived from sources within the
Philippines.
c. An individual citi7en of the Philippines who is wor-in& and derivin& income
from abroad as an overseas contract wor-er is taxable only on income from sources within
the Philippines! Provided, That a seaman who is a citi7en of the Philippines and who
receives compensation for services rendered abroad as a member of the complement of a
vessel en&a&ed exclusively in international trade shall be treated as an overseas contact
wor-er.
d. An alien individual! whether a resident or not of the Philippines! is taxable only
on income derived from sources within the Philippines.
e. A domestic corporation is taxable on all income derived from sources within
and without the Philippines.
f. A forei&n corporation! whether en&a&ed or not in trade or business in the
Philippines! is taxable only on income derived from sources within the Philippines. /%ec.
+;! N#C of '((<0
2=( Are sto"7 di$idends su/9e"t to in"ome t#x#tion *
%122.%T.D AN%3.9 %toc- dividends are unreali7ed &ain and cannot be
sub,ect to income tax until the &ains have been reali7ed.
%toc- dividends represent capital and do not constitute income to its recipient.
The mere issuance thereof is not sub,ect to income tax as they are nothin& but an
Cenrichment throu&h increase in value of capital investment.D
As capital! stoc- dividends postpone the reali7ation of profits because the Cfund
represented by the new stoc- has been transferred from surplus to capital and no lon&er
available for actual distribution.D
Before reali7ation! stoc- dividends are nothin& but a representation of an interest
in the corporate properties. As capital! it is not yet sub,ect to income tax. /Commissioner
of #nternal evenue v. Court of Appeals! et al.! 2.. No. ')>?<=! January +)! '(((0
2H( W!#t is me#nt /y redem)tion o s!#res o sto"7 *
%122.%T.D AN%3.9 edemption is repurchase! a reacquisition of stoc- by a
corporation which issued the stoc- in exchan&e for property! whether or not the acquired
stoc- is cancelled! retired or held in treasury.
.ssentially! the corporation &ets bac- some of its stoc-! distributes cash or
property to the shareholder in payment for the stoc-! and continues in business as before.
The redemption of stoc- dividends previously issued is used as a veil for the constructive
distribution of cash dividends. /Commissioner of #nternal evenue v. Court of Appeals! et
al.! 2.. No. ')>?<=! January +)! '(((0
N5T.% AND C544.NT9 T#x#/ility o redem)tion /y issuin0 "or)or#tion
o s!#res o sto"7( #t is su&&ested that the Bar reviewee i&nores the concepts of taxability
of redemption of shares is stoc- by the issuin& corporation as discussed in Commissioner
of #nternal evenue v. Court of Appeals! et al.! 2.. No. ')>?<=! January +)! '((( /the
AN%C5 case0! where the present provisions of the Tax Code on transaction tax Q%ec.
'+< /A0! N#C of '((<R! and capital &ains tax find application. The only concepts that
should be retained is the definition of redemption! and the applicability of the AN%C5
case concept of redemption where the shares of stoc- that are redeemed are ordinary
assets. The tax treatment of redemption of shares of stoc-! under the present provisions of
the Tax Code shall be discussed below.
T#x tre#tment o redem)tion /y issuin0 "or)or#tion o s!#res o sto"7 under
t!e )resent )ro$isions o t!e T#x :ode8 not under t!e ormer )ro$isions o t!e T#x
:ode #s inter)reted in t!e ANS:OR "#se( The tax treatment would be dependent upon
the followin& factors9
a. The nature of the shares of stoc- bein& disposed of! whether the shares are
capital assets or ordinary assetsE
b. 3hether or not the shares of stoc- are listed and traded and listed in the stoc-
exchan&e.
;+
T#x#/ility o s#les8 /#rter or ex"!#n0e o s!#res o sto"7s:
a. %hares of stoc- are "#)it#l #ssets #nd not listed #nd tr#ded in t!e sto"7
ex"!#n0e( 3here the shares of stoc- are capital assets because the seller is not en&a&ed
in the business of buyin& and sellin& shares of stoc- /a dealer in securities0! and not listed
and traded in the stoc- exchan&e! the sale is sub,ect to a ?K tax on net capital &ain not
over P'))!))).)) while the net capital &ain over P'))!))).)) is sub,ect to a tax of ')K.
Note that the holdin& period is not applied. The capital &ains tax is an income tax because
the tax falls under title ## of the Tax Code! entitled! C#ncome TaxD
b. %hares of stoc- %!et!er "#)it#l or ordin#ry #ssets /ut #re listed #nd
tr#ded in the stoc- exchan&e are sub,ect to the transaction tax of T of 'K of the &ross
sellin& or transaction price. The holdin& period is not applied and the transaction tax is in
lieu of all income taxes that may be collected.
c. %hares of stoc- ordin#ry #ssets /ut not listed #nd tr#ded in t!e sto"7
ex"!#n0e( #f the shares of stoc- are ordinary assets because the seller is en&a&ed in the
business of buyin& and sellin& shares of stoc- /dealer in securities0! the transaction shall be
sub,ect to inclusion in the income tax return dependin& on certain circumstances. %ee
discussion on tax treatment of redemption of shares of soc- where the shares that are
redeemed are ordinary assets and not listed and traded in the stoc- exchan&e.
T#x tre#tment o redem)tion o s!#res o sto"7 %!ere t!e s!#res t!#t #re
redeemed #re ordin#ry #ssets #nd not listed #nd tr#ded in t!e sto"7 ex"!#n0e(
3hether the transaction is to be sub,ect to income taxation or not would be
dependent upon the nature and character of the shares of stoc- that are the sub,ect of
redemption.
#f the source is the ori&inal capital subscriptions upon the establishment of the
corporation or from initial capital investment in an existin& enterprise! the redemption to
the concurrent value of acquisition is not sub,ect to income taxation! as it is not income
but a mere return of capital.
5n the contrary! if the redeemed shares are from stoc- dividend declarations other
than as initial capital investment! the proceeds of the redemption is additional wealth! for it
is not merely a return of capital but a &ain therefrom.
The test for taxability therefor! as would ma-e the redemption Cessentially
equivalent to the distribution of a taxable dividend!D is whether the redemption resulted
into a flow of wealth. #f no wealth is reali7ed from the redemption! there may not be a
dividend equivalence treatment. /Commissioner of #nternal evenue v. Court of Appeals!
et al.! 2.. No. ')>?<=! January +)! '(((0
*** 2F( W!#t #re im)ro)erly #""umul#ted e#rnin0s *
%122.%T.D AN%3.9 These are the earnin&s or profits of a corporation
which are permitted to accumulate instead of bein& divided by a corporation to its
shareholders for the purpose of avoidin& the income tax with respect to its shareholders or
the shareholders of another corporation. #f the income were divided and distributed! they
would have been taxed as dividends.
N5T.% AND C544.NT%9
a. Im)ro)erly #""umul#ted e#rnin0s t#x( #n addition to other income taxes!
there is imposed for each taxable year on the improperly accumulated taxable income of
each corporation! an improperly accumulated earnin&s tax equal to ten percent of the
improperly accumulated taxable income. Q%ec. +( /A0! N#C of '((<R
b. :or)or#tions li#/le or t!e im)ro)erly #""umul#ted e#rnin0s t#x. .very
corporation formed or availed for the purpose of avoidin& income tax with respect to its
shareholders or the shareholders of another corporation! by permittin& earnin&s and profits
to accumulate instead of bein& divided or distributed. Q%ec. +( /B0 /'0! N#C of '((<R
*** c( :or)or#tions exem)t rom t!e im)ro)erly #""umul#ted e#rnin0s t#x:
'0 Publicly*held corporationsE
+0 Ban-s and other nonban- financial intermediariesE and
;0 #nsurance companies. Q%ec. +( /B0 /+0! N#C of '((<R
d. E$iden"e determin#ti$e o )ur)ose to #$oid t#x u)on s!#re!olders. The
fact that the earnin&s or profits of a corporation are permitted to accumulated beyond the
reasonable needs of the business shall be determinative of the purpose to avoid the tax
;;
upon its shareholders or members unless the corporation! by clear preponderance of
evidence! shall prove the contrary. Q%ec. +( /C0 /+0! N#C of '((<R
Re#son#/le needs o /usiness includes the reasonably anticipated needs of the
business. Q%ec. +( /.0! N#C of '((<R
#n order to determine whether profits are accumulated for the reasonable needs of
the business to avoid the surtax upon shareholders! it must be shown that the controllin&
intention of the taxpayer is manifested at the time of the accumulation! not intentions
declared subsequently! which are mere afterthou&hts. 8urthermore! the accumulated
profits must be used within a reasonable time after the close of the taxable year.
/Cyanamid Philippines! #nc. v. Court of Appeals! et al.! 2.. No. ')>)=<! prom. January
+)! +)))0
*** e. Tests to determine 9ustiied #""umul#tion not su/9e"t to t#x(
'0 Immedi#"y Test( Ceasonable needs of the businessD means the
immediate needs of the business! and it was &enerally held that if the corporation
did not prove an immediate need for the accumulation of the earnin&s and profits!
the accumulation was not for the reasonable needs of the business and the penalty
tax would apply. /Cyanamid Philippines! #nc. v. Court of Appeals! et al.! 2.. No.
')>)=<! prom. January +)! +))) citin& 4anila 3ine 4erchants! #nc. v.
Commissioner of #nternal evenue in turn citin& 4ertens0
+0 A, to 'B Rule( The ratio of current assets to current liabilities and the
adoption of the industry standard. The ratio of current assets to current liabilities
is used to determine the sufficiency of wor-in& capital. #deally! the wor-in&
capital should equal the current liabilities and there must be + units of current
assets for every unit of current liability! hence the so*called C+ to 'D ule. /Ibid.0
;0 AG#rd#!lB 4ormul#. Allows retention as wor-in& capital reserve!
sufficient amounts of liquid assets to carry the company throu&h one operatin&
cycle. The formula requires an examination of whether the taxpayer has sufficient
liquid assets to pay all its current liabilities and any extraordinary expenses
reasonably anticipated! plus enou&h to operate the business durin& one operatin&
cycle.
O)er#tin0 "y"le is the period of time it ta-es to convert cash into raw
materials! raw materials into inventory! and inventory into sales! includin& the time
it ta-es to collect payment for the sales. There are variations in the application of
the CBardahlD formula! such as avera&e operatin& cycle or pea- oiperatin& cycle.
#n times when there is no recurrence of a business cycle! the wor-in& capital needs
cannnot be predicted with accuracy.
Althou&h the CBardahlD formula is well*established and routinely applied by
the courts! it is not a precise rule. #t is used only for administrative convenience.
/Ibid.0
<E( W!#t is me#nt /y t!e #""ru#l met!od o #""ountin0 *
%122.%T.D AN%3.9 #ncome is reportable when all the events have occurred
that fix the taxpayer$s ri&ht to receive the income! and the amount can be determined with
reasonable accuracy. Thus it is the ri&ht to receive income! and not the actual receipt! that
determines when to include the amount in &ross income.
Consequently! the followin& are the requisites9
'0 That the ri&ht to receive the income must be valid! unconditional and
enforceable! i.e. not contin&ent upon future timeE
+0 The amount must be reasonably susceptible of accurate estimateE and
;0 There must be a reasonable expectation that the amount will be paid in due
course. /8ilipinas 8iber Corporation v. Court of Appeals! et al.! 2.. Nos. ''>G(> O
'+G;<<! prom. 5ctober '+! '(((0
N5T.% AND C544.NT%9
a. T!e t%o ?,@ )rin"i)#l #""ountin0 met!ods or re"o0nition o in"ome are the
'0 accrual methodE and the /+0 cash method.
1nder the "#s! met!od income is to be construed as income for tax purposes only
upon actual receipt of the cash payment. #t is also referred to as the Ccash receipts and
disbursements methodD because both the receipt and disbursements are considered. Thus!
;G
income is reco&ni7ed only upon actual receipt of the cash payment but no deductions are
allowed from the cash income unless actually disbursed throu&h an actual payment in cash.
.xample of the two methods. :eon the owner of a buildin& leased the same to
4i&uel.for P?)!))).)) monthly! payable every '
st
day of the month. #f :eon uses the
accrual method of income reco&nition! he would have an income of P?)!))).)) on the '
st
day of each month irrespective of whether he receives the rent from 4i&uel. 5n the other
hand! if :eon uses the cash method! he would have income only when he physically
receives the cash from 4i&uel.
b. Ot!er met!ods o #""ountin0:
'0 :om)letion o :ontr#"t /#sis. 1nder this method! &ross income is to
be reported in the taxable year in which the contract is fully completed and
accepted by the contractee if the taxpayer elected it as a consistent practice to treat
such income! provided that such method clearly reflects the net income. This
method is applicable to contractors in the construction of buildin&! installation of
equipment and other fixed assets! or other construction wor- coverin& a period in
excess of one year. This is not reco&ni7ed under the N#C of '((<.
+0 Per"ent#0e o "om)letion /#sis.
;0 Inst#llment /#sis which is a method considered when collections
extend over relatively lon& periods of time and there is a stron& possibility that full
collection will not be made. As customers ma-e installment payments! the seller
reco&ni7es the &ross profit on sale in proportion to the cash collected. /Chapter ##!
Accountin& 4ethods! @andboo- on Audit Procedures and Techniques N "olume
#! evision +)))! pp. ;*G0
<'( W!#t is # rin0e /eneits t#x *
%122.%T.D AN%3.9 A final withholdin& tax imposed on the &rossed*up
monetary value of frin&e benefits furnished! &ranted or paid by the employer to the
employee! except ran- and file employees. /'
st
par.! %ec. +.;; QAR! ev. e&s. No. ;*(>0
<,( W!#t #re "onsidered #s rin0e /eneits or )ur)oses o t#x#tion *
%122.%T.D AN%3.9 8or purposes of taxation! frin&e benefit means any
&ood! service! or other benefit furnished or &ranted in cash or in -ind by an employer to an
individual employee /except ran- and file employees0! such as but not limited to9
a. @ousin&E
b. .xpense accountE
c. "ehicle of any -indE
d. @ousehold personnel! such as maid! driver and othersE
e. #nterest on loan at less than mar-et rate to the extent of the difference between
the mar-et rate and actual rate &rantedE
f. 4embership fees! dues and other expenses borne by the employer for the
employee in social and athletic clubs or other similar or&ani7ationsE
&. .xpenses for forei&n travelE
h. @oliday and vacation expensesE
i. .ducational assistance to the employee or his dependentsE and
,. :ife or health insurance and other non*life insurance premiums or similar
amounts in excess of what the law allows. Q%ec. ;; /B0! N#C of '((<E '
st
par.! %ec. +.;;
/B0! ev. e&s. No. ;*(>R
*** <.( W!#t #re t!e 7inds o rin0e /eneits t!#t #re not su/9e"t to t!e rin0e
/eneits t#x *
%122.%T.D AN%3.9
a. 3hen the frin&e benefit is required by the nature of! or necessary to the trade!
business or profession of the employerE or
b. 3hen the frin&e benefit is for the convenience or advanta&e of the employer.
Q%ec. ;+/A0! N#C of '((<E '
st
par.! %ec. +.;; /A0! ev. e&s. No. ;*(>R
c. 8rin&e benefits which are authori7ed and exempted from income tax under the
Tax Code or under any special lawE
;?
d. Contributions of the employer for the benefit of the employee to retirement!
insurance and hospitali7ation benefit plansE
e. Benefits &iven to the ran- and file employees! whether &ranted under a
collective bar&ainin& a&reement or notE and
f. De minimis benefits as defined in the rules and re&ulations to be promul&ated by
the %ecretary of 8inance upon recommendation of the Commissioner of #nternal evenue.
Q'
st
par.! %ec. ;+ /C0! N#C of '((<E %ec. +.;; /C0! ev. e&s. No. ;*(>R
*** <1( W!#t #re de minimis /eneits *
%122.%T.D AN%3.9 8acilities and privile&es /such as entertainment!
medical services! or so*called Ccourtesy discountsD on purchases0! furnished or offered by
an employer to his employees. They are not considered as compensation sub,ect to
income tax and consequently to withholdin& tax! if such facilities are offered or furnished
by the employer merely as a means of promotin& the health! &oodwill! contentment! or
efficiency of his employees. Q%ec. +.<>!' /A0 /;0! ev. e&s. +*(> as amended by ev.
e&s. No. >*+)))R
*** <2( W!#t #re "onsidered #s de minimis /eneits not su/9e"t to %it!!oldin0
t#x on "om)ens#tion in"ome o /ot! m#n#0eri#l #nd r#n7 #nd ile em)loyees *
%122.%T.D AN%3.9 The followin& shall be considered as de minimis
benefits not sub,ect to withholdin& tax on compensation income of both mana&erial and
ran- and file employees9
a. 4oneti7ed unused vacation leave credits of employees not exceedin& ten /')0
days durin& the yearE
b. 4edical cash allowance to dependents of employees not exceedin& P<?).)) per
employee per semester or P'+? per monthE
c. ice subsidiy of P'!))).)) or one /'0 sac- of ?)*-&. rice per month amountin&
to not more than P'!))).))E
d. 1niforms and clothin& allowance not exceedin& P;!))).)) per annumE
e. Actual yearly medical benefits not exceedin& P')!))).)) per annumE
f. :aundry allowance not exceedin& P;)) per monthE
&. .mployees achievement awards! e.&. for len&th of service or safety
achievement! which must be in the form of a tan&ible persona property other than cash or
&ift certificate! with an annual monetary value not exceedin& P')!))).)) received by an
employee under an established written plan which does not discriminate in favor of hi&hly
paid employeesE
h. 2ifts &iven durin& Christmas and ma,or anniversary celebrations not exceedin&
P?!))) per employee per annumE
i. 8lowers! fruits! boo-s! or similar items &iven to employees under special
circumstances! e.&. on account of illness! marria&e! birth of a baby! etc.E and
,. Daily meal allowance for overtime wor- not exceedin& twenty five percent
/+?K0 of the basic minimum wa&e.
The amount of de minimis benefits conformin& to the ceilin& herein prescribed
shall not be considered in determinin& the P;)!))) ceilin& of Cother benefitsD provided
under %ection ;+ /B0/<0/e0 of the Code. @owever! if the employer pays more than the
ceilin& prescribed by these re&ulations! the excess shall be taxable to the employee
receivin& the benefits only if such excess is beyond the P;)!))).)) ceilin&! provided!
further! that any amount &iven by the employer as benefits to its employees! whether
classified as de minimis benefits or frin&e benefits! shall constitute as deductible expense
upon such employer. Q%ec. +.<>.' /A0 /;0! ev. e&s. +*(> as amended by ev. e&s.
No. >*+)))R
N5T.% AND C544.NT%9 The above provision of ev. e&s. No. >*+)))
li-ewise modified %ec. +.;; /C0! ev. e&s. No. ;*(>! which enumerates the de minimis
benefits exempt from frin&e benefits taxes.
*** <<( T!e ollo%in0 %ere t!e e$ents #nd tr#ns#"tions o Ros#lind#8 # resident
#lien8 in ,EEE:
;=
#( Re"ei$ed P=(E million #s "ommissions or /ein0 t!e #0ent o #"tor Mi7ey
#nd #"tress Me00y5
/( Re"ei$ed P,(E million #s /l#"7m#il money or not ex)osin0 t!e
indis"retions o mo$ie #"tress Alm#5
"( Sold !er residenti#l "ondominium #t Ay#l# A$enue or P.E million( S!e
/ou0!t t!e s#me in 'FF= or only P'E million5
d( M#de # A7illin0B #t t!e sto"7 m#r7et %!en s!e sold or P2(E million
Primus8 In"( s!#res %!i"! %ere not tr#ded in t!e sto"7 ex"!#n0e( S!e /ou0!t t!e
s!#res in 'FH2 or only P2EE8EEE(EE5
e( -urin0 !er /irt!d#y8 Mrs( W#ter Lily8 t!e #mous )rodu"er 0#$e !er #
ten "#r#t di#mond rin0 %ort! P=2E8EEE(EE5
( Re"ei$ed P.<E8EEE(EE #nnu#l s#l#ry #s P(R(O( o Re0#l Produ"tions5
0( A%#rded P'(2 million d#m#0es rom t!e li/el suit s!e iled #0#inst #"tress
N#t#li#5
!( W#s sent /y Re0#l Produ"tions to Holly%ood8 U(S(A( to o/ser$e mo$ie
m#7in0 #t $#rious studios( S!e tr#$eled #t Re0#l +s ex)ense t!rou0! 4irst :l#ss
Air#re8 #nd Re0#l s)ent USQ2EE(EE # d#y or !er !otel #nd #""ommod#tions %!i"!
%ere #ll reim/ursed to Ros#lind#5
i( Re"ei$ed P=2E8EEE(EE rom Re0#l Produ"tions #s se)#r#tion )#y %!en
s!e %#s termin#ted #s t!e result o !er in$ol$ement in # %ell )u/li"i&ed s"#nd#l5
9( U)on nomin#tion o !er riend8 Ros#lind# %#s #%#rded t!e /est P(R(O( o
t!e ye#r %it! t!e #""om)#nyin0 tro)!y %ort! P2E8EEE(EE #nd "#s! )ri"e o
P'EE8EEE( S!e %#s re3uired to deli$er #t le#st ', le"tures /eore P(R(O(s5
7( Won # /r#nd ne% Mer"edes Gen& :<EE> %ort! P<82EE8EEE(EE durin0 #
r#le "ondu"ted /y # %ell67no%n su)erm#r7et5
l( P,2E8EEE(EE )ro"eeds o # /oun"in0 "!e"7 s!e issued to !er riend Ms( :ris
Ty8 %!o instituted # "rimin#l "#se or $iol#tion o G(P( Gl0( ,,5 #nd
m( P2EE8EEE(EE %!i"! "onstituted t!e s#les )ro"eeds o t!e 9e%elry s!e stole
rom mo$ie )rodu"er8 Alin0 Pe)#(
'@ W!#t items #re to /e in"luded #s )#rt o Ros#lind#+;s "om)ens#tion
in"ome8 or in"ome rom sel6em)loyment* Ex)l#in(
,@ W!y %ere t!e items you ex"luded not in"ludi/le #s )#rt o Ros#lind#+s
"om)ens#tion in"ome or in"ome rom sel6em)loyment* Ex)l#in(
%122.%T.D AN%3.9
a. The followin& are the items to be included as part of osalinda$s compensation
income because they were derived from employer*employee relationship from e&al
Productions9
'.0 The P;=)!))).)) annual salary as P..5. of e&al Productions.
+.0 The cost of the 8irst Class Airfare Tic-et exceedin& the cost of a
business class tic-et for the travel to @ollywood in pursuit by osalinda of e&alHs trade
and business is includible as part of osalinda$s compensation income. /No. ;! ;.'!
evenue Audit 4emorandum No. '*><0.
;.0 The amount reimbursed to osalinda for meals and lod&in& durin& her
stay in the 1.%.A. exceedin& 1.%.P'?).)) per day or in the problem 1.%.P;?).)) per day
forms part of osalinda$s compensation income. /No. ;! ;.+! #bid.0
The followin& are the items to be included as part of osalinda$s income from self*
employment en&a&ed in the business of bein& an a&ent for actors and actresses9
'0 The P<.) million commissions for bein& the a&ent of actor 4i-ey and
actress 4e&&yE
+0 The P+.) million blac-mail money is considered as other income
comin& from sources other than those mentioned in %ec. ;/A0 of evenue e&ulation No.
+*(; as well as income from whatever source derived. /%ection ;+ QAR! N#C of '((<0
The same is true with the P+?)!))).)) proceeds of the bouncin& chec- and the
P?))!))).)) sales proceeds of the ,ewelry she stole. Thus! all incomes! ille&al or le&al! are
included. 8or Philippine tax purposes all income not expressly excluded or exempted from
the class of taxable income! irrespective of the voluntary or involuntary action of the
taxpayer in producin& the income are sub,ect to income taxation.
;<
N5T.% AND C544.NT%9 The rule is different in the 1nited %tates. #n
Commissioner of #nternal evenue v. 3ilcox! +>= 1.%. G'<! the 1.%. %upreme Court held
that a swindler! embe77ler! thief or robber has an unqualified duty and obli&ation to return
the money. to collect a tax would &ive the &overnment an un,ustified preference as to the
part of the money which ri&htfully belon&s to the victim.
#n 1.%. v. :o7ia! ')G! ')G 8. %upp. /D.C.J.D.N.A. '(?+0! it was held that the
money or other proceeds of the sale or other disposition of stolen property is sub,ect to
income tax because the felon has an obli&ation to return the property ta-en. The proceeds
were not the property ta-en. The proceeds may not even be the equivalent of the property
ta-en.
;0 P'.? million dama&es! because they are not compensation arisin& from
under %ec. ;+ /B0 QGR of the N#C of '((<. These are not dama&es which arose from
personal in,uries! hence sub,ect to income tax.
G0 The P?)!))).)) pri7e as Best P..5. 3hile it is true that osalinda
was selected without any action on her part to enter the contest or proceedin&! she is
required to deliver '? lectures! which is considered as substantial future services as a
condition to receivin& the pri7e. /%ec. ;+ QBR U<V /c0 UiiV of the N#C of '((<0
b. The followin& are the excluded items and reasons for their exclusion9
'0 P;) million proceeds from the sale of her residential condominium
because the same is sub,ect to final taxes in the form presumed capital &ains taxes from the
sale of real property under %ec. +G /D0 of the N#C of '((<0.
+0 The &ains from the sale of Primus shares because the &ains are sub,ect
to final taxes for the capital &ains from sales of stoc- not traded in the stoc- exchan&e
under %ec. +G /C0 of the N#C of '((<.
;0 The P<?)!))).)) diamond rin& because it is a &ift excluded from &ross
income /%ec. ;+ QBR U;V of the N#C of '((<0 #t is sub,ect to &ift taxes under %ec. (> of
the N#C of '((<. The &ivin& of the &ift was a pure act of liberality and not in
consideration of any service.
G0 P<?)!))).)) separation pay as osalinda$s services were terminated for
a cause beyond her control in accordance with %ec. ;+ /B0 Q=R UbV of the N#C of '((<!
hence excluded from &ross income.
?0 The P=!?))!))).)) value of the 4ercedes Ben7 she won because it is
sub,ect to a final tax of +)K on passive income under the provisions of %ec. +G /B0 Q'R of
the N#C of '((<.
<=( In 'FFH8 M#n0 Doe Li/y #ter t!irty ?.E@ ye#rs ex)erien"e #s # me"!#ni"
or Mer"edes Gen& de"ided to est#/lis! !is o%n #uto re)#ir s!o) %it! t%o o !is
ormer su)er$isors #s !is )#rtners( 4or t!e ye#r ,EEE8 t!e #uto re)#ir s!o) in"urred
t!e ollo%in0:
#( Ad$ertisin0 ex)enses5
/( -on#tions to t!e S#m#!#n0 Ri&#list#8 # non6)roit8 non6sto"7 reli0ious
"or)or#tion %!i"! $ener#tes #s its God8 t!e !ero Dose Ri&#l5
"( T#xes )#id on t!e im)ort#tion o #uto re)#ir e3ui)ment5
d( Losses %!en t!e #uto re)#ir s!o) %#s /urned5
e( Insur#n"e )remiums on t!e lie o M#n0 Doe Li/y )#y#/le to t!e
)#rtners!i)5
( S#l#ries o me"!#ni"s(
M#n0 Doe #nd !is )#rtners no% #s7s you !o% t!eir )#rtners!i) in"ome s!#ll
/e t#xed in t!e li0!t o t!e )ro$isions o t!e NIR: o 'FF=( W!#t #d$ise s!#ll you
0i$e*
%122.%T.D AN%3.9
4an& Joe and his partners shall be taxed li-e a corporation. As defined under
%ec. ++ /B0! of the N#C of '((<! a corporation includes partnerships no matter how
created or or&ani7ed! but does not include &eneral professional partnership. %ince what
was formed by 4an& Joe and his partners was a business partnership! they should be
considered as havin& formed a corporation for tax purposes.
;>
%ince the partnership was or&ani7ed and existin& under Philippine law! its taxable
income shall be sub,ect to the reduced rate of ;+K on taxable income effective January '!
+))). /%ec. +< QAR! N#C of '((<0 To arrive at its taxable income! the partnership is
allowed to use the allowed itemi7ed deduction under %ec. ;G also of the N#C of '((<.
All of the above expenses! except the insurance premium are all deductible.
The partnership shall not be sub,ect to the minimum corporate income tax on
domestic corporations! because it is only on its second taxable year immediately followin&
the commencement of its business operations. The minimum corporate income tax is
computed only be&innin& the fourth taxable year immediately followin& the year the
taxpayer corporation commenced business. /%ec. +< Q.R U'V! N#C of '((<0
%hould the partnership distribute its net income after tax to 4an& Joe and his
partnerships! their individual shares in the distribution shall be sub,ect to tax on dividends.
/%ec. +G QBR U+V! N#C of '((<0
<H( Ater ten ?'E@ ye#rs ex)erien"e %or7in0 #s t!e Gener#l M#n#0er o #
#stood "!#in8 Wendy de"ided to /e"ome sel em)loyed #nd o)ened #n e#tery %!i"!
s!e "#lled AM"Wendy+s Pi&&#(B S!e re0istered t!e e#tery #s # sin0le )ro)rietors!i)(
In ,EEE8 Wendy !#d t!e ollo%in0 in"ome items:
#( Gross re"ei)ts rom o)er#tion o AM"Wendy+s Pi&&#B #mountin0 to P2
million(
/( Pro"eeds rom t!e s#le o !er !ouse #nd lot #mountin0 to P. million %!i"!
s!e in$ested in AM"Wendy+s Pi&&#B(
"( :#s! )ri&e o P'28EEE %!i"! s!e %on in # sin0in0 "ontest(
d( :#s! di$idends o P.28EEE(EE %!i"! s!e re"ei$ed rom MERAL:O8 #
domesti" "or)or#tion(
e( Lie insur#n"e )ro"eeds %!i"! s!e re"ei$ed rom t!e de#t! o !er )et do0
#mountin0 to P'28EEE(EE(
( P,28EEE(EE "#s! )ri&e or /ein0 t!e Gest Pi&&# P#rlor in Metro M#nil#(
T!e #%#rd %#s m#de /y #n inde)endent /ody "om)rised o sele"ted )i&&# )#rlor
o)er#tors %!i"!8 %it!out t!e 7no%led0e o )i&&# )#rlor o)er#tors8 %ent #round
Metro M#nil# s#m)lin0 t!e ood8 r#tin0 t!e #"ilities #nd )ersonnel( T!ere %ere no
entries to t!e "ontest #s t!e %inners %ere "!osen /y t!e inde)endent /ody(
0( T%o round tri) ti"7ets or t!e U(S(A( $#lued #t U(S( Q.82EE(EE %it! U(S(
Q28EEE(EE )o"7et money %on rom t!e #nnu#l r#le o !er de)ository /#n7(
!( P128EEE(EE interest e#rned rom !er time de)osit %it! # lo"#l /#n7(
I( P1E8EEE(EE do%ry rom !er )ros)e"ti$e mot!er6in6l#%8 #n Ameri"#n
li$in0 in Ne% Oor78 U(S(A(8 #s Wendy %#s 0ettin0 m#rried in 'FFF(
9( P2E8EEE(EE net )roit rom t!e s#le o Primus :or)or#tion sto"7s %!i"!
%ere not tr#ded #t t!e P!il( Sto"7 Ex"!#n0e(
U)on t!e ot!er !#nd8 Wendy !#d t!e ollo%in0 dis/ursements:
#( P2E8EEE(EE le0#l ees or t!e or0#ni&#tion o AM"Wendy+s Pi&&#5B
/( P',E8EEE(EE or r#dio #nd TI time to #d$ertise AM"Wendy+s Pi&&#5B
"( P,28EEE(EE #s "ontri/ution to t!e 4irst L#dy+s A-o"tor or t!e PoorB
Pro0r#ms5
d( P.28EEE(EE %ort! o ood %!i"! Wendy )erson#lly distri/uted to #milies
dis)l#"ed /y l#!#r in P#m)#n0#8 # "#l#mity6stri"7en #re# de"l#red /y t!e President5
e( P'E8EEE(EE don#tion to !er #lm# m#ter8 t!e Uni$ersity o t!e P!ili))ines5
( P'2E8EEE(EE $#lue o s)oiled ood resultin0 rom # /ro%n6out5
0( P,28EEE(EE "ustoms duties #nd $#lue #dded t#xes on t!e im)ort#tion o
ood !e#ters5
!( P',8EEE(EE )#id to t!e inde)endent :PA %!o #udited M"Wendy+s Goo7s
o A""ounts5
I( P.28EEE(EE medi"#l ex)enses or one o !er %#iters %!o %#s in9ured in #
9o/ rel#ted #""ident5
9( PH28EEE(EE )#id #s interest to !er sister %!o lent !er P2EE8EEE(EE #s )#rt
o t!e initi#l "#)it#li&#tion or M"Wendy+s5
;(
7( P.28EEE(EE interest )#yments or t!e "#r Wendy /ou0!t on inst#llment
/#sis %!i"! "#r %#s /ou0!t rom # "#r "om)#ny /ut in#n"ed /y :ITOTRUST8 #
/#n7 #ut!ori&ed to o)er#te /y t!e G#n07o Sentr#l n0 Pili)in#s5 #nd
l( P'2E8EEE(EE %!i"! Wendy s)ent in o/ser$in0 trends in t!e #stood
/usiness in t!e United St#tes #nd Euro)e(
#( W!i"! o t!e #/o$e in"ome items s!ould /e re)orted /y Wendy on !er
,EEE In"ome T#x Return* Ex)l#in(
/( W!i"! o t!e #/o$e dis/ursements #re )ro)erly dedu"ti/le in "om)utin0
t!e t#x#/le in"ome o Wendy* Ex)l#in(
%122.%T.D AN%3.9
a. The followin& are the income items to be reported by 3endy in her +)))
income tax return9
'0 P? million &ross receipts from operation of 4c3endy$s Pi77a derived
as income from self*employment under sec. '/'+0 ev. e&s. No. +*(;.
+0 P'?!))).)) life insurance proceeds derived from the death of her do&.
The tax imposed on income from self*employment is imposed on income received from all
sources other than compensation income! certain passive incomes! capital &ains from the
sales of shares of stoc- and capital &ains from sales of real property /%ec. ;/A0 ev. e&s.
+*(;0 3hile the P'?!))).)) is sourced from life insurance proceeds! the same is not
excluded under %ec. ;+ /B0 Q'R of the N#C of '((< because the exclusion presupposes
life insurance proceeds from the death of a person and not of animals.
;0 P+?!))).)) cash pri7e as the Best Pi77a Parlor because this is a pri7e
was not &iven primarily in reco&nition reli&ious! charitable! scientific! educational! artistic!
literary or civic achievement but rather as part of business activity. #t does not matter that
4c3endy$s Pi77a was selected without any action on its part to enter the contest or
proceedin& and 4c3endy$s Pi77a is not required to render substantial future services as a
condition to receivin& the pri7e. /%ec. ;+ /B0 U<V /c0! N#C of '((<0
The followin& items are excluded from her income reportable in her income tax
returns9
'0 P; million proceeds from sale of house and lot as sub,ect to capital
&ains from sale of real property which is a final tax. /%ec. +G QDR! N#C of '((<0
+0 P;?!))).)) dividends from 4.A:C5! a domestic corporation is
sub,ect to a final tax on dividends under %ec. +G /B0 Q+R! N#C of '((<.
;0 P'?!))).)) won in a sin&in& contest as this is a pri7e exceedin&
P')!))).)) sub,ect to a final tax on passive income in accordance with %ec. +G /B0 Q'R!
N#C of '((<.
G0 "alue of the tic-ets and poc-et money won from the annual raffle of
3endy$s Ban- for the same reason as above.
?0 PG?!))).)) interest income for the same reason as above.
=0 Net profit from sale of Primus shares as these are sub,ect to final tax on
the sales of shares of stoc- not traded in the stoc- exchan&e under %ec. +G /C0 of the
N#C of '((<.
<0 PG)!))).)) dowry because it is a &ift. /%ec. ;+ QBR U;V! N#C of
'((<0
b. 5nly the P?)!))).)) donation to the 1niversity of the Philippines is allowed to
be deducted from 3endy$s income from self*employment to arrive at her taxable income.
This is so! because it is a donation to the &overnment under %ec. ;G /@0 Q+R UaV! N#C of
'((<.
The &overnment as used here refers to the 2overnment of the Philippines or any of
its a&encies or political subdivisions and includes amon& others state colle&es and
universities. The 1niversity of the Philippines is a state university /%ec. ;/b0/f0 ev. e&s.
No. +*(;0.
c. The P?)!))).)) le&al fees! the P'+)!))).)) advertisin& expenses for radio and
T" timeE the P'?)!))).)) value of the spoiled food! the P+?!))).)) taxes! the P'+!))).))
audit fee! the P;?!))).)) medical expenses and the P'?)!))).)) expenses to observe
G)
trends in the fastfood business are deductible as ordinary and necessary expenses incurred
in connection with 3endyHs trade and business.
The followin& are not deductible from her &ross income9
'. P+?!))).)) contribution to the CDoctor for the Poor Pro&ramD because it is a
contribution to a private or&ani7ation and not to the &overnment.
+. 3hile it is true that the P;?!))).)) worth of food was distributed to families in
a calamity stric-en area declared by the President! the same was not donated to the
&overnment or to a relief or&ani7ation duly accredited as such by the Department of
%ocial 3elfare and the Bureau of #nternal evenue.
;. The interest paid to her sister amountin& to P>?!))).)) because her sister is a
related party.
G. The P;?!))).)) interest payments to C#TAT1%T because there is no
showin& in the problem that it has been paid or incurred in connection with the conduct of
3endy$s business.
%ince she is a resident! 3endy could! instead of availin& of the itemi7ed
deductions! choose to avail of the optional standard deduction of ten percent /')K0 of
&ross income.
<F( W!#t is "onsidered #s "on"lusi$e )roo o serious /usiness losses *
%122.%T.D AN%3.9 8inancial statements audited by in dependent external
auditors constitute the normal method of proof of the profit and loss performance of a
company. A comparative statement of revenue and expenses for two years! by itself! is
not conclusive proof of serious business losses. /Bo&o*4edellin %u&arcane Planters
Association! #nc. v. N:C! et al.! +(= %CA ')>! '+'0
N5T.% AND C544.NT%9 The above definition was for a labor case. 8or tax
purposes! business losses have to be proven by more strin&ent rules than throu&h mere
audited financial statements. The author believes that! there must be proof to support
each transaction which contributed to a ma,or extent to the business losses.
=E( W!#t #re /#d de/ts *
%122.%T.D AN%3.9 Those debts resultin& from the worthlessness or
uncollectibility! in whole or in part! of amounts due the taxpayer by others! arisin& from
money lent or from uncollectible amounts of income from &oods sold or services rendered.
/%ec. +.a! ev. e&s. ?*((0
***='( P!ili))ine Reinin0 :om)#ny %#s #ssessed /y t!e Gure#u o Intern#l
Re$enue dei"ien"y t#xes /e"#use o dis#llo%#n"es o A/#d de/tsB ex)ense( W!#t
#re t!e re3uirements /eore A/#d de/tsB ex)ense #re #llo%ed to /e dedu"ti/le *
%122.%T.D AN%3.9
a. #n &eneral! the requisites for deductibility of bad debts are9
'0 There must be an existin& indebtedness due to the taxpayer which must
be valid and le&ally demandableE
+0 The same must be connected with the taxpayer$s trade! business or
practice of professionE
;0 The same must not be sustained in a transaction entered into between
related parties as enumerated under the Tax Code of '((<E
G0 The same must be actually char&ed off the boo-s of accounts of the
taxpayer as of the end of the taxable yearE and
?0 The same must be actually ascertained to be worthless and uncollectible
as of the end of the taxable year. /%ec. ;! ev. e&s. ?*((0
b. The followin& steps must be underta-en by the taxpayer to proved that it
exerted dili&ent efforts to collect the debts9
'0 %endin& of statements of accountsE
+0 %endin& of collection lettersE
;0 2ivin& the account to a lawyer for collectionE
G0 8ilin& a collection case in court. 3hile it is not required to file suit! a
taxpayer is at least expected by the law to produce reasonable proof that the debts
G'
are uncollectible althou&h dili&ent efforts were exerted to collect the same. /Phil.
efinin& Company! etc.! v. Court of Appeals! +?= %CA ==<0
N5T.% AND C544.NT%9 Rel#ted )#rties(
a. 4embers of the same family. The family of an individual shall include only his
brothers and sisters /whether by the whole or half*blood0! spouse! ancestors! and lineal
descendantsE
b. An individual and a corporation more than fifty percent /?)K0 in value of the
outstandin& stoc- of which is owned! directly or indirectly! by or for such individualE
c. Two corporations more than fifty percent /?)K0 in value of the outstandin&
stoc- of which is owned! directly or indirectly! by or for the same individualE
d. A &rantor and a fiduciary of any trustE or
e. The fiduciary of a trust and the fiduciary of another trust if the same person is a
&rantor with respect to each trustE or
f. A fiduciary of a trust and a beneficiary of such. Q%ec. ;= /B0! N#C of '((<R
=,( W!#t is me#nt /y t!e At#x /eneit ruleB * Illustr#te /y ex#m)le(
%122.%T.D AN%3.9 The recovery of bad debts previously allowed as
deduction in the precedin& year or years shall be included as part of the taxpayer$s &ross
income in the year of such recovery to the extent of the income tax benefit of said
deduction.
8or example9 #f in the year the taxpayer claimed deduction of bad debts written*
off! he reali7ed a reduction of the income tax due from him on account of the said
deduction! his subsequent recovery thereof from his debtor shall be treated as a receipt of
reali7ed taxable income. Conversely! if the said taxpayer did not benefit from the
deduction of the said bad debt written*off because it did not result to any reduction of his
income tax in the year of such deduction /i.e. where the result of his business operation
was a net loss even without deduction of the bad debts written*off0! then his subsequent
recovery thereof shall be treated as a mere recovery or a return of capital! hence! not
treated as receipt of reali7ed taxable income. /%ec. G! ev. e&s. ?*((0
=.( W!#t is me#nt /y de)re"i#tion( W!#t #re t!e dierent met!ods o
de)re"i#tion #llo%ed under t!e l#% *
%122.%T.D AN%3.9
a. Depreciation is the &radual diminution in the useful value of tan&ible property
resultin& from ordinary wear and tear and from normal obsolescence. The term is also
applied to amorti7ation of the value of intan&ible assets the use of which in the trade or
business is definitely limited in duration.
b. The methods of depreciation are the followin&9
'0 %trai&ht line methodE
+0 Declinin& balance methodE
;0 %um of years di&its methodE and
G0 Any other method prescribed by the %ecretary of 8inance upon the
recommendation of the Commissioner of #nternal evenue9
a0 Apportionment to units of productionE
b0 @ours of productive useE
c0 evaluation methodE and
d0 sin-in& fund method.
*** =1( W!#t #re ordin#ry #nd ne"ess#ry ex)enses or t#x )ur)oses( W!#t #re
t!e re3uirements /eore /usiness ex)enses m#y /e dedu"ted rom 0ross in"ome *
%122.%T.D AN%3.9
a. 5rdinary expenses are those which are common to incur in the trade or business
of the taxpayer 3@#:. capital expenditures are those incurred to improve assets and
benefits for more than one taxable year. 5rdinary expenses are usually incurred durin& a
taxable year and benefits such taxable year. Necessary expenses are those which are
appropriate or helpful to the business.
b. The followin& are the requisites for deductibility of business expenses9
'0 Compliance with the business test9
G+
a0 4ust be ordinary and necessaryE
b0 4ust be paid or incurred within the taxable yearE
c0 4ust be paid or incurred in carryin& on a trade or business.
d0 4ust not be bribes! -ic-bac-s or other ille&al expenditures
+0 Compliance with the substantiation test. Proof by evidence or records
the deductions allowed by law includin& compliance with the business test.
=2( In ,EEE8 M#r#8 In"(8 in"urred P.2E8EEE(EE in order to )romote t!e s#le o
its line o l#dies dresses %!i"! %ere s)e"i#lly desi0ned #nd t#r0etted t!e I#lentine+s
d#y m#r7et or t!#t ye#r( It li7e%ise in"urred P2EE8EEE(EE to )romote its im#0e in
t!e lo"#l m#r7et #nd #not!er P,2E8EEE(EE to )romote t!e s#le o its s!#res o sto"7
%!i"! it %#s oerin0 to t!e 0ener#l )u/li" or s#le(
It #s7s your #d$i"e on !o% to tre#t t!ese #d$ertisin0 ex)enses(
%122.%T.D AN%3. 9
a. #t should deduct the P;?)!))).)) from its +))) &ross income as ordinary and
necessary expenses because these are advertisin& expenses used to stimulate the current
sale of merchandise.
b. #t should not deduct the P?))!))).)) advertisin& expense from its +))) &ross
income as these are advertisin& expenses desi&ned to stimulate the future sale of
merchandise. These are expenditures in order to create or maintain some form of
&oodwill for 4ara! #nc.$s trade or business. These expenditures are to be spread over a
reasonable period of time because they are considered that a capital asset which has a
determinable life has been acquired. /2eneral 8oods QPhils.R! #nc. v. Commissioner of
#nternal evenue! CTA Case No. G;>=! prom. 8ebruary >! '((G0
c. #t should li-ewise spread the P+?)!))).)) over a reasonable period of time
because these are expenses incurred to create a favorable ima&e for the corporation to
&enerate sales of its shares of stoc-. These constitute capital investment because the
particular advertisin& expense was incurred in relation to the capital asset or equity of the
company. /Atlas Consolidated 4inin& and Development Corporation v. Commissioner of
#nternal evenue! ')+ %CA +G=0
** *=<( Mi7ey :or)or#tion issued )reerred s!#res %it! t!e ollo%in0 "ondition:
AT!e !olders o )reerred s!#res s!#ll /e entitled to #n #nnu#l =C interest8 #nd s!#ll
li7e%ise )#rti"i)#te in t!e 0ener#l distri/ution o di$idends to "ommon s!#res(B In
,EEE Mi7ey :or)or#tion )#id P1 million to its )reerred s!#re!olders re)resentin0
t!e =C interest( It see7s your #d$ise %!et!er it "ould dedu"t t!e s#id #mount rom
its 0ross in"ome( W!#t %ould your #d$i"e /e *
%122.%T.D AN%3.9 #t is not allowed to deduct said interests. Preferred
shares are considered capital re&ardless of the conditions under which such shares are
issued and dividends or CinterestsD paid thereon are not allowed as deductions from the
&ross income of corporations. /evenue 4emorandum Circular No. '<*<'0
*** ==( D#"78 12 ye#rs old %it! 'E ye#rs ser$i"e %it! !is em)loyer8 de"ided to
#$#il o t!e li/er#l e#rly $olunt#ry retirement )ro0r#m oered /y !is em)loyer( T!e
)ro0r#m %#s )#rt o t!e )roit im)ro$ement )ro0r#m o t!e "om)#ny( T!e
)ositions o t!ose %!o %ould #$#il o t!e )ro0r#m %ould not /e illed u) on"e t!ey
#re $#"#ted #s # result o t!e $olunt#ry e#rly retirement( Are #ny #mounts re"ei$ed
/y D#"7 #s # result o !is #$#ilment o su"! )ro0r#m t#x6ree * W!#t s!ould /e
done in order to !#$e !is retirement )#y /e exem)t rom t#x#tion * Ex)l#in /riely(
%122.%T.D AN%3.9 Any amount he shall receive shall be sub,ect to tax!
considerin& that he is below ?) years of a&e and that his retirement is voluntary in
character.
8or Jac- to avail of the tax exemption his employer should CfireD him. @ence! any
amount he would be receivin& would be as a consequence of his separation for a cause
beyond his control such as retrenchment. Q'
st
par.! %ec. +.<>.' /B0 U'V UbV! ev. e&s.
No. +*(>R
N5T.% AND C544.NT%9
*** a. :onditions or ex"ludin0 retirement /eneits rom 0ross in"ome:
G;
'0 etirement benefits received under epublic Act No. <=G' and those
received by officials and employees of private firms! whether individual or
corporate! in accordance with the employer$s reasonable private benefit plan
approved by the B#.
+0 etirin& official or employee
a0 #n the service of the same employer for at least ten /')0 yearsE
b0 Not less than fifty /?)0 years of a&e at time of retirementE
c0 Availed of the benefit of exclusion only once. Q%ec. ;+ /B0 U=V
UaV! N#C of '((<R. The retirin& official or employee should not have
previously availed of the privile&e under the retirement plan of the same or
another employer. Q'
st
par.! %ec. +.<> /B0 U'V! ev. e&s. No. +*(>R
*** b. Se)#r#tion ?retirement@ )#y ex"luded rom 0ross in"ome8 !en"e t#x6
exem)t.
'0 Any amount received by an official! employee or by his heirs!
+0 8rom the employer
;0 As a consequence of separation of such official or employee from the
service of the employer because of
a0 Death! sic-ness or other physical disabilityE or
b0 8or any cause beyond the control of said official or employee
Q%ec. ;+ /B0 U=V UbV! N#C of '((<R! such as retrenchment! redundancy
and cessation of business. Q'
st
par.! %ec. +.<> /B0! U'V UbV! ev. e&s. No.
+*(>R
=H8 W!#t #re t!e )ri&es t!#t #re ex"luded rom 0ross in"ome8 !en"e not
t#x#/le *
%122.%T.D AN%3.9
a. Pri7es and awards made primarily in reco&nition of reli&ious! charitable!
scientific! educational! artistic! literary! or civic achievement but only if
'0 The recipient was selected without any action on his part to enter the
contest or proceedin&E and
+0 The recipient is not required to render substantial future services as a
condition to receivin& the pri7e or award. Q%ec. ;+ /B0 U<V UcV! N#C of '((<R
b. All pri7es and awards
'0 2ranted to athletes
+0 #n local and international sports tournaments and competitions
;0 3hether held in the Philippines or abroad! and
G0 %anctioned by their national sports associations Q%ec. ;+/B0 U<V UdV!
N#C of '((<R! which per B# rulin& is accreditation with the Philippine 5lympic
Committee. Note that the exemption refers only to amateur sports. 8or
professional boxin&! a special law &rants the exemption not the N#C.
*** =F( AAB %#s seriously in9ured in # $e!i"ul#r #""ident( As # result o !is
in9uries8 !e %#s #/le to re"o$er P' million re)resentin0 une#rned in"ome8 #nd P2
million or mor#l #nd exem)l#ry d#m#0es( Are t!e #mounts su/9e"t to t#x *
%122.%T.D AN%3.9 No. .xcluded from &ross income! hence exempt from
income tax are amounts received as compensation for personal in,uries plus the amounts
of any dama&es received whether by suit or a&reement on account of such in,uries. Q%ec.
;+ UBV UGV! N#C of '((<E %ec. +.<> /B0 U(V! ev. e&s. No. +*(>R
N5T.% AND C544.NT%9 The above is the prevailin& view. The author
submits that the amount of P' million! bein& in the nature of replacement of income lost is
taxable. This is so! because exclusions are in the nature of tax exemptions! hence they
must be strictly construed a&ainst the taxpayer.
*** HE( In 'FH< Gell# )ur"!#sed # )#r"el8 o l#nd #d9oinin0 t!e :ity :#m)
L#0oon in G#0uio :ity or P,(2 million( S!e intended to /uild !er #mily !ome on
t!e s#id )#r"el o l#nd( Unortun#tely or !er8 t!e em/#n7ment %#s destroyed
durin0 t!e Duly <8 ,EE' l#s! loods "#usin0 erosion %!i"! led to # deterior#tion o
GG
t!e m#r7et $#lue to only P'(2 million( T!e :ity Assessor #ssessed t!e )ro)erty or
t#x )ur)oses #t P'(, million %!ile t!e GIR &on#l $#lu#tion is P'(1 million(
#( Su))osin0 t!#t on Au0ust .'8 ,EE'8 t!e o%ner o t!e #d9oinin0 )ro)erty
/uys t!e )ro)erty #t P'(. million8 %!#t %ould /e t!e t#x "onse3uen"es to Gell#
"onsiderin0 t!#t s!e suered # loss* Ex)l#in(
/( Would your #ns%er /e t!e s#me i t!e 0o$ernment ex)ro)ri#ted t!e
)ro)erty #t its )resent m#r7et $#lue o P'(2 million* W!y*
%122.%T.D AN%3.%9
a. The parcel of land is a capital asset of Bella. This is so because it is not her
stoc- in trade! or property includible as part of her inventory at the end of the taxable
year! or property primarily held by her for sale to customers in the ordinary course of
trade or business! or property used in trade or business sub,ect to depreciation! or real
property used by Bella in her trade or business. /%ec. ;; QAR U'V! N#C of '((<0
Consequently! irrespective of the holdin& period under the provisions of %ec. ;(
/B0 of the N#C of '((<! the capital &ains presumed to have been reali7ed from the sale
shall be taxed at the rate of =K based on the &ross sellin& price or the fair mar-et value at
the time of the sale whichever is hi&her. /%ec. +G QDR! N#C of '((<0 %ince the mar-et
value of P'.? million is hi&her than the &ross sellin& price of P'.; million! then the
presumed capital &ains tax of =K should be based on P'.? million not P'.; million.
The tax is denominated as a presumed capital &ains tax hence it is imposed even if
there was a loss.
b. No. The taxpayer! in this case Bella! has the option of reportin& her actual
&ains from the expropriation as part of her income sub,ect to the rates for compensation
income under %ec +'/a0 of the National #nternal evenue Code or to pay a =K presumed
capital &ains tax based on the fair mar-et value of P'.? million. /%ec. +G /D0 Q'R! N#C of
'((<0 %ince she suffered a loss and there is no &ain! she should choose the first optionE
she should not be sub,ected to any tax.
H'( In 'FF18 # domesti" "or)or#tion en0#0ed in t!e m#nu#"ture o semi6
"ondu"tor de$i"es /ou0!t # )#r"el o l#nd or P,(E million( On Au0ust ,=8 ,EE'8 it
sold t!e )#r"el o l#nd or P2(2 million( T!e #ir m#r7et $#lue #t t!e time %#s P2(=
million8 t!e #ssessed $#lue %#s P1(2 million #nd t!e GIR &on#l $#lu#tion %#s P2(<
million( T!e "or)or#tion re#li&ed # net )roit o P.(2 million on t!e tr#ns#"tion(
T!e l#nd %#s not )#rt o t!e "or)or#tion+s sto"7 in tr#de8 or )ro)erty
in"ludi/le #s )#rt o its in$entory #t t!e end o t!e t#x#/le ye#r8 or )ro)erty
)rim#rily !eld /y it or s#le to "ustomers in t!e ordin#ry "ourse o tr#de or /usiness
or )ro)erty used in tr#de or /usiness su/9e"t to de)re"i#tion8 or re#l )ro)erty used
/y t!e "or)or#tion in its tr#de or /usiness(
To %!#t t#x s!ould t!e "or)or#tion /e su/9e"t to #nd %!y*
%122.%T.D AN%3.9
A final tax of six percent /=K0 based on the &ross sellin& price or fair mar-et value
as determined by the Commissioner of #nternal evenue or as shown in the schedule of
values of the Provincial and City Assessors. /%ec. +< QDR U?V! N#C of '((< in relation
to %ec. = Q.R0
H,( -eine net loss "#rry6o$er #nd net o)er#tin0 loss "#rry6o$er( -istin0uis!
t!e t%o "on"e)ts #nd dis"uss t#x im)li"#tions o e#"!(
%122.%T.D AN%3.9
a. Net loss carry*over means the deduction from net capital &ains of a succeedin&
year the net capital loss suffered durin& the prior year. Net operatin& loss carry*over is the
deduction from &ross income for the next three /;0 consecutive taxable years followin& the
year of such loss! the excess of allowable deduction over the &ross income .
b. Distinctions between net loss carry*over and net operatin& loss carry*over.
%ource9 The source of net loss carry*over are capital losses only 3@#:. the source of
net operatin& loss carry*over are from the ordinary trade and business of the taxpayer.
3ho may en,oy the carry*over9 5nly taxpayers other than corporations may en,oy net loss
carry*over 3@#:. only corporations may en,oy the net operatin& loss carry*over.
G?
c. Any taxpayer! other than a corporation /individuals includin& trusts and estates0!
who sustains in any taxable year a net capital loss from capital transactions involvin&
capital assets /other than real property or shares of stoc- not listed or traded in the stoc-
exhan&e0! is allowed to treat durin& the succeedin& year such net capital loss as a loss
from the sale or exchan&e of a capital asset /other than real property or shares of stoc- not
listed and traded in the stoc- exchan&e0! held for more than twelve months. /%ec. ;( QDR!
N#C of '((<0
H.( In 'FF28 Ms( M# G#nd# /ou0!t # di#mond rin0 %ort! P=28EEE(EE or use
durin0 !er de/ut( On Se)tem/er 28 ,EE'8 !#$in0 no urt!er use or t!e rin08 s!e
de"ided to sell it to Mrs( M( Ay#m#n or P.2E8EEE(EE( Wit!out 0oin0 into
#rit!meti"#l "om)ut#tions8 !o% s!ould Ms( G#nd# /e t#xed on t!e s#le o !er rin0.
%122.%T.D AN%3.9
The rin& is 4s. 2anda$s capital asset because she is not in the business of buyin&
and sellin& ,ewelry. %he bou&ht the rin& for her personal use and not for trade or business.
Consequently! she should determine the net profit from the sales of the rin& and applyin&
the holdin& period should report fifty percent /?)K0 of such net profit in her income tax
return for '((( as part of ordinary income. The holdin& period should be applied because
she held the diamond rin&! her capital asset! for more than twelve /'+0 months.
*** H1( In 'FHE8 :!in# G#n7in0 :or)or#tion m#de # 2.C e3uity in$estment in
t!e 4irst :G: :#)it#l ?Asi#@ Ltd(8 # Hon07on0 su/sidi#ry en0#0ed in in#n"in0 #nd
in$estment %it! Ade)osit6t#7in0B un"tion( T!e in$estment #mounted to
P'<8,,=8H2'(HE8 "onsistin0 o 'E<8EEE s!#res %it! # )#r $#lue o P'EE )er s!#re(
Su/se3uently8 4irst :G: :#)it#l ?Asi#@8 Ltd(8 !#s /e"ome insol$ent( :!in#
G#n7in0 tre#ted t!e in$estment in its 'FH= In"ome T#x Return #s # /#d de/t or #s
#n ordin#ry loss dedu"ti/le rom its 0ross in"ome( T!e GIR dis#llo%ed t!e
dedu"tion /e"#use t!e in$estment s!ould not /e "l#ssiied #s A%ort!less(B Rule on
t!e dis#llo%#n"e(
%122.%T.D AN%3.9 B# was correct. The equity investment is capital in
character! the loss of which could be deductible only from capital &ains! and not from any
other income of the taxpayer.
8irst CBC Capital /Asia0! :td.! the investee corporation! is a subsisidary
corporation of China Ban-in& whose shares in said investee corporation are not intended
for purchase or sale but an investment. /China Ban-in& Corporation v. Court of Appeals!
et al.! 2.. No. '+?)>! prom. July '(! +)))0
N5T.% AND C544.NT%9
*** a. W!en se"urities /e"ome %ort!less8 t!e l#% deems t!e loss to /e # loss rom
t!e s#le or ex"!#n0e o "#)it#l #ssets. An equity investment is a capital! not ordinary!
asset of the investor! the sale or exchan&e of which results in either a capital &ain or a
capital loss. The &ain or the loss is ordinary when the property sold or exchan&ed is not a
capital asset.
The loss sustained by the holder of the securities! which are capital assets /to him0!
is to be treated as a capital loss as if incurred from a sale or exchan&e transaction. A
capital &ain or a capital loss normally requires the concurrence of two conditions for it to
result9
'0 There is a sale or exchan&eE and
+0 The thin& sold or exchan&ed is a capital asset.
3hen securities become worthless there is strictly no sale or exchan&e but
the law deems the loss anyway to be Ca loss from the sale or exchan&e of capital assets.D
/China Ban-in& Corporation v. Court of Appeals! et al.! 2.. No. '+?)>! prom. July '(!
+)))0
b. Se"urities8 deined or dedu"ti/ility o /#d de/ts( %hares of stoc- in a
corporation and ri&hts to subscribe for or to receive such shares. The term includes
bonds! debentures! notes or certificates! or other evidence of indebtedness! issued by any
corporation! includin& those issued by a &overnment or political subdivision thereof! with
interest coupons or in re&istered form. /%ec. +.b! ev. e&s. No. ?*((0
G=
*** c. T#x tre#tment o se"urities /e"omin0 %ort!less( #f securities! as defined
under %ec. + /b0 hereof! held as capital asset! are ascertained to be worthless and char&ed
off within the taxable year! the loss resultin& therefrom shall be considered as a loss from
the sale or exchan&e of capital asset made on the last day of such taxable year. The
taxpayer! however! has to prove throu&h clear and convincin& evidence that the securities
are in fact worthless.
This rule! however! is not true in the case of ban-s or trust companies incorporated
under the laws of the Philippines! a substantial part of whose business is the receipt of
deposits. /%ec. ?! ev. e&s. No. ?*((0
FFFH2( MO> :or)or#tion !#s #n #ut!ori&ed "#)it#l sto"7 o P2 million di$ided
into 2E8EEE s!#res %it! )#r $#lue o P'EE(EE )er s!#re( P, million o t!e #ut!ori&ed
"#)it#l sto"7 %ere su/s"ri/ed8 /y $#rious sto"7!olders in"ludin0 Mr( 4lores %!o
su/s"ri/ed or sto"7s %it! )#r $#lue o P'(2 million( To ully )#y or !is
su/s"ri)tion8 Mr( 4lores tr#nserred in ,EEE to MO> :or)or#tion # )#r"el o l#nd(
It %#s su/se3uently dis"o$ered /y t!e Gure#u o Intern#l Re$enue t!#t t!e )#r"el o
l#nd !#d # #ir m#r7et $#lue o only P' million(
#( Sin"e t!e $#lue o t!e )#r"el o l#nd %#s only P' million %!ile Mr( 4lores
re"ei$ed s!#res o sto"7 %ort! P'(2 million did Mr( 4lores e#rn in"ome #mountin0
to P2EE8EEE(EE %!i"! s!ould /e su/9e"t to in"ome t#x * On t!e ot!er !#nd8 s!ould
t!e "or)or#tion /e #llo%ed to dedu"t # loss #mountin0 to P2EE8EEE(EE *
/( W!#t %ould /e t!e t#x tre#tment8 i in ,EE'8 Mr( 4lores sold t!e s!#res o
sto"7 in MO> :or)or#tion %!i"! #re not listed or tr#ded in t!e sto"7 ex"!#n0e or
P'(, million *
"( Su))osin0 t!#t in ,EE' MO> :or)or#tion sold t!e )#r"el o l#nd or P'
million %!i"! is its &on#l $#lu#tion in ,EE'( MO> is not en0#0ed in t!e re#l est#te
/usiness( W!#t %ould /e t!e t#x tre#tment or su"! # s#le *
%122.%T.D AN%3.9
a. 4r. 8lores did not earn any income sub,ect to tax neither did BA6 incur a loss
which it could deduct from its +))) &ross income.
The transaction is -nown as a tax*free exchan&e solely in -ind! hence no &ain or
loss is reco&ni7ed. #t is an exchan&e solely in -ind because property /land0 was exchan&ed
for another property /shares of stoc-0. #t is a tax* free exchan&e because as a result of the
exchan&e! 4r. 8lores by himself was able to obtain control of the corporation.
b. #f in +))'! 4r. 8lores sold the shares of stoc- for P'.+ million! the basis for the
shares of stoc- would be the value of the parcel of land. #n this case! it would be
considered as if 4r. 8lores acquired the shares of stoc- for P' million the value of the
property he has exchan&ed for the shares of stoc-. %ince there is no showin& in the
problem that 4r. 8lores is en&a&ed in the business of buyin& and sellin& shares of stoc-!
then the net &ain should be computed! by deductin& the acquisition price /P' million0 from
the sellin& price /P'.+ million0. Thus! the net &ain is P+))!))).)). 5n the first
P'))!))).)) net &ain the tax should be ?K and on the amount exceedin& the first
P'))!))).)) net &ain then the tax should be ')K. #t is to be noted that the holdin& period
is not applied.
c. A corporation is now sub,ect to capital &ains taxes and all proceeds from sales
of real property owned by a corporation which are not used in trade or business is sub,ect
to the =K presumed capital &ains tax.
N5T.% AND C544.NT%9 emember that the first transaction is tax*free but
the second transaction is taxable. The problem that may be &iven may involve a mer&er or
consolidation in which case the above principles also find application. :i-ewise! if there
are more parties involved than 4r. 8lores! then 4r. 8lores to&ether with others not more
than four should obtain control of the corporation. #f the exchan&e is not solely in -ind
/for example! money plus property was exchan&ed or shares of stoc- or vice*versa0! then
there is no tax*free exchan&e because the &ain is taxed but the loss is not allowed to be
deductible.
H<( In t#x6ree ex"!#n0es solely in 7ind8 %!#t is me#nt /y /oot * W!#t
#/out /#sis *
G<
%122.%T.D AN%3.9
Boot is the property exchan&ed for stoc-s or securities. 8or example! 4r. :eon
exchan&es his parcel of land for shares of stoc- in 4ic-ey! #nc. The boot is the parcel of
land. Basis is the value assi&ned to the land or the shares of stoc-.
TRANS4ER TAMES
*** H=( -on :es#r Sori#no8 # S)#nis! n#tion#l8 died on Se)tem/er 28 ,EEE in !is
$ill# #t Lu"erne8 S%it&erl#nd( He exe"uted # %ill /eore !is de#t! le#$in0 #ll o !is
)ro)erties to !is 0irl riend M#ri"el Mont#no8 # 4ili)ino residin0 in Gru0e8 Gel0ium(
T!e 0irl riend de"ided to /rin0 t!e rem#ins o -on :es#r8 %!o %#s # resident o
t!e P!ili))ines rom 'F.2 u) to 'FF= to t!e P!ili))ines or /uri#l /e"#use t!#t %#s
!is %is! #s most o !is riends #re still li$in0 in t!e P!ili))ines( S!e s)ent #/out
P=2E8EEE(EE or uner#l ex)enses( On Se)tem/er '=8 ,EEE M#ri"el met you in
Hon07on0 #nd en0#0ed your ser$i"es in order to settle t!e est#te o -on :es#r in
#""ord#n"e %it! t!e %ill %!i"! %#s )ro)erly )ro/#ted in S%it&erl#nd( S!e )resents
to you #n in$entory o t!e )ro)erties let /y -on :es#r %it! t!eir "orres)ondin0
$#lues #s o Se)tem/er 28 ,EEE8 -on :es#r+s d#te o de#t!( T!e $ill# in S%it&erl#nd
USQ' million5 #n #)#rtment /uildin0 lo"#ted in Ne% Oor78 USQ2 million5 #
!#"iend# in -#$#o P,2 million /ut t!e )resent $#lu#tion is no% P1E million /e"#use
o ro#d "onstru"tions %!i"! en!#n"ed t!e $#lue o t!e )ro)erty5 USQ'2 million t!e
$#lue o lie insur#n"e )ro"eeds rom #n insur#n"e t#7en out /y -on :es#r on !is
o%n lie desi0n#tin0 !is est#te #s /enei"i#ry rom t!e :#nton S%iss Insur#n"e #t
:#nton8 S%it&erl#nd5 P,2 million )ro"eeds o lie insur#n"e t#7en /y -on :es#r on
!is o%n lie rom P!il#mlie Insur#n"e in t!e P!ili))ines )#y#/le to M#ri"el #s
irre$o"#/le /enei"i#ry5 outst#ndin0 /#n7 /#l#n"e %it! P!ili))ine G#n7 o
:ommer"e in t!e #mount o P2 million %it! N#nette #s !is #ndKor "o6de)ositor(
S!#res o sto"7 o # Hon07on0 "om)#ny /ut m#n#0ed rom t!e P!ili))ines #nd #
P'2 million #)#rtment lo"#ted in M#nil#8 P!ili))ines %!i"! !e don#ted to !is "lose
riend on A)ril ,28 'FHF su/9e"t to t!e "ondition t!#t t!e riend remits to -on
:ess#r #ll t!e rent#ls o t!e )ro)erty durin0 t!e lietime o -on :es#r(
#( W!#t s!ould /e re)orted #s )#rt o -on :es#r+s 0ross est#te #nd %!#t
dedu"tions #re #llo%#/le to determine !is net est#te* Ex)l#in(
/( Are t!e )ro"eeds o t!e P,2 million lie insur#n"e to /e "onsidered #s )#rt
o t!e 0ross est#te o -on :es#r or M#ri"el+s in"ome* W!y*
"( Su))osin0 M#ri"el %#nts to %it!dr#% t!e P2 million rom t!e /#n78 %!#t
#d$ise s!ould you 0i$e !er*
d( Is M#ri"el /ein0 t!e sole /enei"i#ry li#/le or t!e )#yment o t!e est#te
t#xes*
%122.%T.D AN%3.9
a. %ince Don Cesar was a Cnon*resident decedent who at the time of his death was
not a citi7en of the Philippines! only that part of the entire &ross estate which is situated in
the Philippines! shall be included in his taxable estate.D /%ec. >?! N#C of '((<0 The
problem is clear that Don Cesar resided in the Philippines only from '(;? to '((<.
%pecifically! the part of his &ross estate which are situated outside of the
Philippines and excluded from the taxable estate are the 1%P' million villa in %wit7erland!
the 1%P? million apartment buildin& in New Aor-! 1.%.A.! and the proceeds of the 1%P'?
million life insurance from the Canton %wiss #nsurance.
The followin& properties are part of his &ross estate because they are situated in
the Philippines. The P+? million Davao @acienda! the P? million ban- balance with the
Philippine Ban- of Commerce! the shares of stoc- in the @on&-on& corporation and the
P'? million apartment.
The shares of stoc- have acquired a business situs in the Philippines because the
forei&n corporation is mana&ed from the Philippines hence! includible as part of Don
Cesar$s$s &ross estate.
The P'? million apartment is part of the &ross estate because it was transferred in
contemplation of death. Don Cesar has retained for his life the en,oyment of the fruits of
the property. /%ec. >? /B0! N#C of '(<0
G>
b. The proceeds of the P+? million life insurance is neither part of the &ross estate
nor income to 4aricel. The proceeds are not part of the estate because the beneficiary is
not the estate of Don Cesar! his executor or administrator and the desi&nation of the
beneficiary is irrevocable. /%ec. >? /.0! N#C of '((<0 The P+? million is not also
income to 4aricel because life insurance proceeds paid to beneficiaries upon the death of
the insured are exclusions from &ross income. /%ec. ;+ QBR U'V! N#C of '((<0
c. # would advise 4aricel to first secure a certification from the Commissioner of
#nternal evenue that the appropriate estate taxes were already paid. #f the amount to be
withdrawn does not exceed P+)!))).))! she should secure an authori7ation from the
Commissioner even if said taxes have not yet been paid. /+nd par.! %ec. (<! N#C of
'((<0
d. #f 4aricel is at the same time the executor or administrator of the estate! then
she is primarily liable. #f she is not the executor or administrator! then bein& the
beneficiary! she is subsidiary liable to the said executor or administrator. /%ec. (' QCV!
N#C of '((<0
N5T.% AND C544.NT%9 The valuation to be used is the valuation at the time
of the decedent$s death N5T at the time of filin& return or payment of estate tax.
*** HH( T!e NIR: o 'FF= #llo%s #s # dedu"tion rom t!e 0ross est#te o # "iti&en
or resident o t!e P!ili))ines A9udi"i#l ex)enses o t!e test#ment#ry or intest#te
)ro"eedin0sB in order to #rri$e #t t!e net est#te su/9e"t to est#te t#xes( RSe"( H< ?A@
?/@S( Are not#ri#l ees )#id or t!e extr#9udi"i#l settlement o t!e est#te #s %ell #s
#ttorneys ees or t!e 0u#rdi#n dedu"ti/le rom t!e 0ross est#te #s A9udi"i#l
ex)ensesB * Ex)l#in /riely(
%122.%T.D AN%3.9 Aes. The notarial fee paid for the extra,udicial
settlement is clearly a deductible expense since such settlement effected a distribution of
the estate to his lawful heirs! %imilarly! the attorney$s fees for a &uardian of the property
durin& the decedent$s lifetime should also be considered as a deductible administration
expense. The &uardian &ives a detailed accountin& of decedent$s property and &ives
advice as to the proper settlement of the estate! acts which contributed towards the
collection of decedent$s assets and the subsequent settlement of the case. /Commissioner
of #nternal evenue v. Court of Appeals! et al.! 2.. No. '+;+)=! prom. 4arch ++! +)))0
N5T.% AND C544.NT%9 Judicial expenses are expenses of administration.
Administration expenses! as an allowable deduction from &ross estate of the decedent for
purposes of arrivin& at the value of the net estate! have been construed to include all
expenses Cessential to the collection of the assets! payment of debts or the distribution of
the property to the persons entitled to it.D #n other words! the expenses must be essential
to the proper settlement of the estate.
Not deductible are expenditures incurred for the individual benefit of the heirs!
devisees or le&atees. Thus! in :oren7o v. Posadas! the Court construed the phrase
C,udicial expenses of the testamentary or intestate proceedin&sD as not includin& the
compensation paid to a trustee of the decedent$s estate when it appeared that such trustee
was appointed for the purpose of mana&in& the decedent$s real property for the benefit of
the testamentary heir. #n another case! the Court disallowed the premiums paid on the
bond filed by the administrator as an expense of administration since the &ivin& of a bond
is in the nature of a qualification for the office! and not necessary in the settlement of the
estate. Neither may attorney$s fees incident to liti&ation incurred by the heirs in assertin&
their respective ri&hts be claimed as a deduction from the &ross estate. /Commissioner of
#nternal evenue v. Court of Appeals! et al.! 2.. No. '+;+)=! prom. 4arch ++! +)))0
HF( In 'FFF Atty( :!#ri T( A/le m#de t!e ollo%in0 don#tions:
#( P ,2E8EEE(EE #lumni #sso"i#tion o !er #lm# m#ter8 t!e Uni$ersity
o t!e P!ili))ines5
/( P.2E8EEE(EE to Jue&on :ity Hi0! S"!ool8 # )u/li" s"!ool lo"#ted
in P#munin08 Jue&on :ity5
"( P2EE8EEE(EE #s )ri&e to M( Al#7#s8 # 4ili)ino #t!lete %!o 0#rnered
t!e 0old med#l in #n intern#tion#l %ei0!t litin0 "ontest !eld in Mos"o%
G(
%!i"! "ontest %#s s#n"tioned /y t!e P!ili))ine Wei0!tlitin0 Asso"i#tion8
t!e n#tion#l %ei0!tlitin0 #sso"i#tion5
d( P2E8EEE(EE to # riend s!e !#s not seen or # lon0 time5
e( On -e"em/er .'8 'FFH s!e don#ted one6!#l o !er )#r"el o l#nd
%ort! P,(2 million to !er son8 #nd on D#nu#ry ,8 'FFF8 s!e don#ted t!e re6
m#inin0 one6!#l o t!e s#me )#r"el o l#nd to t!e s#me son5 #nd
( P=2E8EEE(EE to t!e Holy Order o 4ri#rs8 # reli0ious "on0re0#tion
to /e used or t!e "onstru"tion o # "!ur"!(
Atty( :!#ri T( A/le deri$es !er in"ome solely rom t!e )r#"ti"e o !er
)roession( #@ S!ould s!e /e su/9e"t to donor+s t#xes on t!e #/o$e don#tions * /@ Is
s!e entitled to #ny exem)tions * "@ S!ould t!e don#tion m#de to !er son /e tre#ted
#s # sin0le don#tion /e"#use only t%o d#ys se)#r#te t!e don#tions * d@ S!ould s!e
/e #llo%ed to dedu"t t!e don#tions rom !er in"ome deri$ed rom t!e exer"ise o !er
)roession *
%122.%T.D AN%3.9
a. Atty. Able is sub,ect to the payment of donor$s taxes on the followin&
donations9 '0 P+?)!))).)) donation to the alumni association of the 1niversity of the
Philippines because the alumni association is not a schoolE +0 The P?)!))).)) donation
to a friend /not related to Atty. Able by consan&uinity within the fourth de&ree0 which is
considered as a donation to a stran&er hence sub,ect to a donor$s tax of thirty percent
/;)K0 of the net &iftE and ;0 the donation to her son.
b. %he is entitled to an exemption on the first P'))!))).)) of the '((( net
donations. 8urthermore! the followin& donations are exempt from donor$s taxes9 '0
P+?)!))).)) donation to Wue7on City @i&h %chool as the same is considered as a
donation to the &overnmentE +0 the donation to 4.A. :a-as under the provisions of
epublic Act No. <?G(! as it is clear that the conditions in the said law are metE and ;0 the
donation to the reli&ious con&re&ation because it is evident that the whole amount is not
to be used for administration purposes.
c. The donation to the son should be treated as separate donations because
donor$s taxes are computed on the basis of net &ifts made durin& a calendar year.
d. The donation to 4.A. :a-as is allowed as a deduction because it is a pri7e to
an athlete in an international sports tournament held abroad and sanctioned by the national
sports association. /%ec. '! .A. No. <?G(0 Also allowed as a deduction is the donation
to Wue7on City @i&h %chool.
FE( On Se)tem/er ,F8 'FHF8 ormer President M#r"os died in H#%#ii8 U(S(A(
A s)e"i#l #udit te#m "re#ted to "ondu"t in$esti0#tions #nd ex#min#tions o t!e t#x
li#/ility o t!e l#te )resident dis"losed t!#t t!e M#r"oses #iled to ile # %ritten
noti"e o de#t! o t!e de"edent #nd #n est#te t#x return in $iol#tion o t!e NIR:(
T!e :ommissioner o Intern#l Re$enue t!ere/y "#used t!e )re)#r#tion #nd
ilin0 o t!e Est#te T#x Return or t!e est#te o t!e l#te )resident( On Duly ,<8 'FF'8
t!e GIR issued # dei"ien"y t#x #ssessment #0#inst t!e est#te %!i"! %ere ser$ed
"onstru"ti$ely u)on Ms( Imeld# M#r"os ?t!rou0! !er "#ret#7er Mr( M#rtine&@ #t
!er l#st 7no%n #ddress #t No( ,E1 Orte0# St(8 S#n Du#n8 M (M(
T!e dei"ien"y t#x #ssessment %#s not )rotested #dministr#ti$ely /y Mrs(
M#r"os #nd t!e ot!er !eirs o t!e l#te )resident( On 4e/ru#ry ,,8 'FF.8 t!e GIR
:ommissioner issued t%enty6t%o noti"es o le$y on re#l )ro)erty #0#inst "ert#in
)#r"els o l#nd o%ned /y t!e M#r"oses 6 to s#tisy t!e #lle0ed est#te t#x8 #mon0
ot!ers(
Ot!er noti"es o le$y %ere m#de until t!e )ro)erties %ere sold #t )u/li"
#u"tion8 %it! t!e lots /ein0 oreited in #$or o t!e 0o$ernment or l#"7 o /idders(
T!e $#lidity o t!e GIR;s #"tions is no% r#ised(
%122.%T.D AN%3.9 The approval of the court sittin& in probate! or as a
settlement tribunal over the estate of the deceased is not a mandatory requirement for the
collection of the estate. The probate court is determinin& issues which are not a&ainst the
property of the decedent! or a claim a&ainst the estate as such! but is a&ainst the interest or
property ri&ht which the heir! le&atee! devisee! etc. has in the property formerly held by
the decedent.
?)
The notices of levy were re&ularly issued within the prescriptive period.
The tax assessment havin& become final! executory and enforceable! the same can
no lon&er be contested by means of a dis&uised protest. /4arcos! ## v. Court of Appeals!
et al.! +<; %CA G<0
F'( Mr( 4il I( Pino8 # :#n#di#n "iti&en #nd # resident o Ont#rio8 :#n#d#8
sends # 0it o USQ,E8EEE(EE to !is uture d#u0!ter6in6l#% %!o is to /e m#rried to
!is only son in t!e P!ili))ines( T!e m#rri#0e #"tu#lly too7 )l#"e on t!e d#te t!e 0it
%#s re"ei$ed(
#( Is t!e don#tion /y Mr( Pino su/9e"t to t#x * Ex)l#in( Would your #ns%er
/e t!e s#me i Mr( Pino is # 4ili)ino "iti&en /ut is # non6resident *
/( W!#t is t!e t#x "onse3uen"e8 i #ny8 to t!e Mr( Pino+s d#u0!ter6in6l#% *
%122.%T.D AN%3.9
a. Aes! because a non*resident alien is exempt only from the payment of donor$s
taxes if his &ifts are made to or for the use of the National 2overnment or any entity
created by any of its a&encies which is not conducted for profit! or to any political
subdivision of the said 2overnment.
@e is sub,ect to tax because the &ift was not made in favor of an educational
andSor charitable! reli&ious! cultural or social welfare corporation! institution! foundation!
trust or philanthropic or&ani7ation or research institution or corporation which does not
use more than ;)K of the donation for administration purposes.
#f 4r. Pino was a non*resident 8ilipino my answer would still be the same.
b. None. the amount should not be considered as part of her income as the same
is one of the exclusions! Neither is there any donor$s tax due from her because the tax is
to be paid by the donor and not the recipient.

RETURNS
F,( W!#t is t!e )ro/#ti$e $#lue o in"ome t#x returns #s e$iden"e *
%122.%T.D AN%3.9 #ncome tax returns bein& public documents! until
controverted by competent evidence! are competent evidence! are prima facie correct
with respect to the entries therein. /opali Tradin& v. N:C! et al.! +(= %CA ;)(! ;'<0
N5T.% AND C544.NT%9 3hile the above cited case is a labor case! the
author su&&ests that the same could find application in taxation as well.
F.( Gill #nd Hill#ry #re m#rried to e#"! ot!er( Gill is em)loyed #s #
0o$ernment em)loyee deri$in0 #nnu#l 0ross "om)ens#tion in"ome #mountin0 to
P',E8EEE(EE %!ile Hill#ry deri$es in"ome rom sellin0 /#/y dresses( Her mont!ly
in"ome lu"tu#tes8 /ut or t!e ye#r ,EEE8 s!e 0rossed P2EE8EEE(EE( T!e "ou)le !#$e
no "!ildren( Are t!ey #llo%ed to ile se)#r#te in"ome t#x returns * W!y *
%122.%T.D AN%3.9 No. As a &eneral rule! they are not allowed to file
separate returns as only married individuals who are both earnin& purely compensation
income are allowed to file separate income tax returns.
%ection ?' /D0 of the N#C of '((< provides that! C4arried individuals! whether
citi7ens! resident or non*resident aliens! who do not derive income purely from
compensation shall file a return for the taxable year to include the income of both spouses!
but where it is impracticable for the spouses to file one return! each spouse may file a
separate return of income but the returns so filed shall be consolidated by the Bureau for
purposes of verificationD There is no showin& in the problem that it is impracticable for
Bill and @illary to file one return! hence they should file a sin&le return.
*** F1( W!o #re t!e indi$idu#ls re3uired to ile #n in"ome t#x return *
%122.%T.D AN%3.9
a. .very 8ilipino citi7en residin& in the PhilippinesE
b. .very 8ilipino citi7en residin& outside the Philippines on his income from
sources within the PhilippinesE
?'
c. .very alien residin& in the Philippines on income derived from sources within
the PhilippinesE and
d. .very nonresident alien en&a&ed in trade or business or in the exercise of
profession in the Philippines. /%ec. ?' QAR U'V! N#C of '((<0
***F2( W!o #re t!e indi$idu#ls %!o #re not required to ile #n in"ome t#x return M
%122.%T.D AN%3.9
a. An individual whose &ross income does not exceed his total personal and
additional exemptions for dependents! Provided, That a citi7en of the Philippines and any
alien individual en&a&ed in business or practice of profession within the Philippines shall
file an income tax return re&ardless of the amount of &ross incomeE
b. An individual with respect to pure compensation income for services in
whatever form paid! includin&! but not limited to fees! salaries! wa&es! commissions! and
similar items! derived from sources within the Philippines! the income tax on which has
been correctly withheld! Provided, That an individual derivin& compensation concurrently
from two or more employers at any time durin& the taxable year shall file an income tax
return9 Provided, further, That an individual whose pure compensation income derived
from sources within the Philippines exceeds %ixty thousand pesos /P=)!))).))0! shall also
file an income tax returnE
c. An individual whose sole income has been sub,ect to final withholdin& taxE
d. An individual who is exempt from income tax pursuant to the provisions of the
N#C of '((<! and other laws! &eneral or special. /%ec. ?' QAR U+V! N#C of '((<0
N5T.% AND C544.NT%9 An individual who is not required to file an income
tax return may nevertheless be required to file an information return. /%ec. ?' QAR U;V!
N#C of '((<0
F<( A4B :or)or#tion /rou0!t to "ourt t!e issue o %!et!er it s!ould /e m#de
li#/le or t!e )#yment o t!e %it!!oldin0 t#x #t sour"e sin"e it is merely #n #0ent
#nd not t!e t#x )#yer( Rule on t!e issue %it! re#sons(
%122.%T.D AN%3.9 C8D Corporation as the withholdin& a&ent is explicitly
made personally liable under the Tax Code for the payment of the tax required to be
withheld.
eason9 The law sets no condition for the personal liability of the withholdin&
a&ent to attach. This is in order to compel the withholdin& a&ent to withhold the tax
under any and all circumstances. #n effect! the responsibility for the collection of the tax as
well as the payment thereof is concentrated upon the person over whom the 2overnment
has ,urisdiction.
Thus! the withholdin& a&ent is the constituted a&ent both of the &overnment and
the taxpayer. 3ith respect to the collection andSor withholdin& of the tax! he is the
2overnment$s a&ent. #n re&ard to the filin& of the necessary income tax return and the
payment to the 2overnment! he is the a&ent of the taxpayer. The withholdin& a&ent!
therefore! is no ordinary &overnment a&ent especially because under the Tax Code he is
personally liable for the tax he is duty bound to withholdE whereas! the Commissioner of
#nternal evenue and his deputies are not made liable under the law. /8ilipinas %ynthetic
8iber Corporation v. Court of Appeals! et al.! 2.. Nos. ''>G(> O '+G;<<! prom.
5ctober '+! '(((0
N5T.% AND C544.NT%9 Do not confuse the above holdin& with question no.
(<! infra. The issue in this question is the liability of the withholdin& a&ent for the unpaid
taxes 3@#:. under question no. (< the issue is whether a withholdin& a&ent is within
le&al contemplation a taxpayer who could avail of the tax amnesty.
The two /+0 types of withholdin& at source are the '0 final withholdin& taxE and +0
creditable withholdin& tax.
1nder the in#l %it!!oldin0 t#x system the amount of income tax withheld by the
withholdin& a&ent is constituted as a full and final payment of the income due from the
payee on the said income. Q'
st
sentence! '
st
par.! %ec. +.?< /A0! ev. e&s. No. +*(>R
The liability for payment of the tax rests primarily on the payor or the withholdin&
a&ent.. Thus! in case of his failure to withhold the tax or in case of under withholdin&! the
?+
deficiency tax shall be collected from the payor withholdin& a&ent. The payee is not
required to file an income tax return for the particular income.
.xample9 4ara won P+))!))).)) from the Pera or Bayon& contest. #t should be
the sponsor*payor who is required to deduct the appropriate withholdin& tax from the
P+))!))).)) pri7e before it is &iven to 4ara. 4ara! the payee is not required to file an
income tax return for the P+))!))).)). 8ailure to withhold sub,ects the sponsor*payee to
the tax.
1nder the "redit#/le %it!!oldin0 t#x system! taxes withheld on certain income
payments are intended to equal or at least approximate he tax due from the payee on the
said income. The income recipient is still required to file an income tax return andSor pay
the difference between the tax withheld and the tax due on the income. Q'
st
and +
nd
sentences! %ec. +?</B0! ev. e&s. No. +*(>R
The two -inds of creditable withholdin& taxes are '0 taxes withheld on income
payments covered by the expanded withholdin& taxE and +0 taxes withheld on
compensation income.
Exem)tions rom t!e re3uirement o %it!!oldin0 or when no withholdin& taxes
required9 Payments to the followin&9
'. National 2overnment and its instrumentalities includin& provincial! city! or
municipal &overnmentsE
+. Persons en,oyin& exemption from payment of income taxes pursuant to the
provisions of any law! &eneral or special! such as but not limited to the followin&9
a. %ales of real property by a corporation which is re&istered with and
certified by the @:1B or @1DCC as en&a&ed in sociali7ed housin& pro,ect
where the sellin& price of the house and lot or only the lot does not exceed
P'>)!))).)) in 4etro 4anila and other hi&hly urbani7ed areas and P'?)!))).))
in other areas or such ad,usted amount of sellin& price for sociali7ed housin& as
may later be determined and adopted by the @:1BE
b. Corporations re&istered with the Board of #nvestments and en,oyin&
exemptions from income under the 5mnibus #nvestment Code of '((<E
c. Corporations exempt from income tax under %ec. ;)! of the Tax Code!
li-e the %%%! 2%#%! the PC%5! etc. @owever! income payments arisin& from any
activity which is conducted for profit or income derived from real or personal
property shall be sub,ect to a withholdin& tax. /%ec. ?<.?! ev. e&s. No. +*(>0
F=( Andres Sori#no8 # U(S( "iti&en #nd resident8 ormed AA( Sori#no O :i#8B
%!i"! %#s su/se3uently ren#med ANS:OR( He o%ned ori0in#lly issued "ommon
s!#res %!i"! su/se3uently e#rned sto"7 di$idends( W!en !e died8 )#rt o t!e s!#res
)#ssed on to !is %ido% #nd #not!er )#rt to !is est#te( Sto"7 di$idends %ere #0#in
de"l#red( Su/se3uently8 ANS:OR re"l#ssiied its existin0 "ommon s!#res into
"ommon #nd )reerred s!#res( T!e %ido% #nd t!e est#te ex"!#n0ed t!eir "ommon
sto"7!oldin0s or )reerred s!#res8 %it! t!e est#te ret#inin0 some "ommon s!#res(
ANS:OR t!en redeemed t!e "ommon s!#res /elon0in0 to t!e est#te #ter
%!i"! t!e GIR #ssessed ANS:OR or dei"ien"y %it!!oldin0 t#x6#t sour"e on t!e
tr#ns#"tions o ex"!#n0e #nd redem)tion o sto"7s(
M#y ANS:OR8 #s t!e %it!!oldin0 #0ent #$#il o t!e /enei"ent )ro$isions o
P(-( No( <=8 %!i"! "ondones8 At!e "olle"tion o #ll intern#l re$enue t#xes in"ludin0
t!e in"rements o )en#lties on #""ount o non6)#yment #s %ell #s #ll "i$il8 "rimin#l
or #dministr#ti$e li#/ilities #risin0 rom or in"ident toB ?$olunt#ry@ dis"losures
under t!e NIR: o )re$iously unt#xed in"ome #ndKor %e#lt! Are#li&ed !ere or
#/ro#d /y #ny t#x)#yer8 n#tur#l or 9uridi"#l(B *
%122.%T.D AN%3.9 No. #n the operation of the withholdin& tax system! the
withholdin& a&ent is the payor! a separate entity actin& no more than an a&ent of the
&overnment for the collection of the tax in order to ensure its payments. The payor of the
tax is the taxpayer! he is the person sub,ect to tax imposed by lawE and the payee is the
taxin& authority.
#n other words! the withholdin& a&ent is merely a tax collector! not a taxpayer.
1nder the withholdin& system! however! the a&ent*payor becomes a payee by
fiction of law. @is /a&ent0 liability is direct and independent from the taxpayer! because
?;
the income tax is still imposed on and due from the latter. The a&ent is not liable for the
tax as no wealth flowed into him! he earned no income. The Tax Code only ma-es the
a&ent personally liable for the tax arisin& from the breach of its le&al duty to withhold as
distin&uished from its duty to pay tax since! the &overnment cause of action a&ainst the
withholdin& a&ent is not for the collection of income tax! but for the enforcement of the
withholdin& provisions of the Tax Code! compliance with which is imposed on the
withholdin& a&ent and not upon the taxpayer.
A withholdin& a&ent! not bein& a taxpayer is not covered by the protective
embrace of a tax amnesty because the provisions of the implementin& rules of P.D. No.
;<) which expanded amnesty on previously untaxed income is explicit in excludin& tax
liabilities on withholdin& tax at source. /Commissioner of #nternal evenue v. Court of
Appeals! et al.! 2.. No. ')>?<=! January +)! '(((0
N5T.% AND C544.NT%9
The above Commissioner of #nternal evenue v. Court of Appeals! et al.!
/AN%C50! case may have an impact on the doctrine enunciated in Commissioner of
#nternal evenue v. Procter O 2amble Philippine 4anufacturin& Corporation! +)G %CA
;<<! ;>;*;>=.
Procter O 2amble held that a taxpayer is defined under the N#C as Cany person
sub,ect to tax.D %ince! the withholdin& a&ent who is Crequired to deduct and withhold any
taxD is made Cpersonally liable for such tax!D sub,ect to and liable for deficiency
assessments! surchar&es and penalties should the amount of the tax be finally determined
to be less than that required to he withheld by law! then he is a taxpayer. @e has sufficient
le&al interest to brin& a suit for refund of taxes he believes were ille&ally collected from
him. /citin& Philippine 2uaranty Company! #nc. v. Commissioner of #nternal evenue! '?
%CA '0
The reader should ta-e note that! in case of doubt! tax amnesties are to be strictly
construed a&ainst the &overnment. Tax statutes bein& burdens are not to be presumed
beyond what the tax amnesty expressly and clearly declares. /epublic v. #ntermediate
Appellate Court! '(= %CA ;;?0
To summari7e! if the issue is application for refund! the withholdin& a&ent is a
taxpayer /Procter O 2amble0! but for tax amnesty purposes! he is not. /Anscor0
TARIFF AND CUSTOMS CODE
FH( W!en does im)ort#tion /e0in #nd %!en does it end *
%122.%T.D AN%3.9 #mportation be&ins when the conveyin& vessel or
aircraft enters the ,urisdiction of the Philippines with intention to unlade therein.
#mportation is deemed terminated upon payment of the duties! taxes and other
char&es due upon the a&encies! or secured to be paid! at the port of entry and the le&al
permit for withdrawal shall have been &ranted.
#n case the articles are free of duties! taxes and other char&es! until they have
le&ally left the ,urisdiction of the customs. /%ec. '+)+! TCCP0
FF( W!#t is me#nt /y t!e lexi/le t#ri "l#use *
%122.%T.D AN%3.9 This is a provision in the Tariff and Customs Code!
which implements the constitutionally dele&ated power of the President of the Philippines!
in the interest of national economy! &eneral welfare andSor national security upon
recommendation of the N.DA to increase! reduce or remove existin& protective rates of
import duty! P5"#D.D T@AT! the increase should not be hi&her than '))K ad
valoremE to establish import quota or to ban imports of any commodity! to impose
additional duty on all imports not exceedin& ')K ad valorem.
*** 'EE( T!e T#ri #nd :ustoms :ode )ro$ides or t!e im)osition o s)e"i#l
"ustoms duties( W!#t #re t!ese duties #nd %!#t is t!eir n#ture #nd )ur)ose *
%122.%T.D AN%3.9 %pecial customs duties are additional import duties
imposed on specific -inds of imported articles under certain conditions.
The special customs duties are the anti*dumpin& duty! the countervailin& duty! the
discriminatory duty and the mar-in& duty.
?G
The special customs duties are imposed for the protection of consumers and
manufacturers! as well as Philippine products.
*** 'E'( Ex)l#in /riely %!#t is me#nt /y #nti6dum)in0 duty #nd %!en is it
im)osed *
%122.%T.D AN%3.%9 A special duty imposed on the importation of a
product! commodity or article of commerce into the Philippines at less than its normal
value when destined for domestic consumption in the export country! which is the
difference between the export price and the normal value of such product! commodity or
article. /%ec. ;)' /s0 /'0! TCC! as amended by .A. No. ><?+! CAnti*Dumpin& Act of
'(((.D0
The anti*dumpin& duty is imposed where the importation of the product!
commodity or article of commerce described above is causin& or is threatenin& to cause
material in,ury to a domestic industry! or materially retards the establishment of a domestic
industry producin& the li-e product. /%ec. ;)' /a0! TCC! Ibid.D0
N5T.% AND C544.NT%9
The definition under the .A. No. ><?+! the CAnti*Dumpin& Act of '(((!D is
substantially the definition provided for under .A. No. <>G;! the CAnti*Dumpin& Act of
'((G.D
'E,( Ex)l#in t!e me#nin0 o norm#l $#lue or )ur)oses o im)osin0 t!e #nti6
dum)in0 duty(
%122.%T.D AN%3.9 #t is the comparable price at the date of sale of li-e
product! commodity! or article in the ordinary course of trade when destined for
consumption in the country of export. /%ec. ;)' /s0 /; 0! TCC! as amended by .A. No.
><?+! CAnti*Dumpin& Act of '(((.D0
'E.( W!#t is me#nt /y dum)ed im)ortK)rodu"t *
%122.%T.D AN%3.9 Any product! commodity or article of commerce
introduced into the Philippines at an export price less than its normal value in the ordinary
course of trade! for the li-e product! commodity or article destined for consumption in the
exportin& country! which is causin& or is threatenin& to cause material in,ury to a domestic
industry! or materially retardin& the establishment of a domestic industry producin& the
li-e product. /%ec. ;)' /s0 /?0! TCC! as amended by .A. No. ><?+! CAnti*Dumpin& Act
of '(((.D0
*** 'E1( W!o im)oses t!e #nti6dum)in0 duty(
%122.%T.D AN%3.9 The %ecretary of Trade and #ndustry in the case of
non*a&ricultural product! commodity! or article or the %ecretary of A&riculture! in the case
of a&ricultural product! commodity or article! after formal investi&ation and affirmative
findin& of the Tariff Commission.
.ven when all the requirements for the imposition have been fulfilled! the decision
on whether or not to impose a definitive anti*dumpin& duty remains the prero&ative of the
Tariff Commission. /%ec. ;)' /a0! TCC! as amended by .A. No. ><?+! CAnti*Dumpin&
Act of '(((.D0
N5T.% AND C544.NT%9 .A. No. ><?+! CAnti*Dumpin& Act of '(((D
abolished the %pecial Committee on Anti*Dumpin& created under .A. No. <>G;! the
CAnti*Dumpin& Act of '((GD.
:riteri# used /y t!e T#ri :ommission %!et!er or not to im)ose t!e #nti6
dum)in0 duty( #t may consider amon& others! the effect of imposin& an anti*dumpin&
duty on the welfare of the consumers andSor the &eneral public! and other related local
industries. /%ec. ;)' /a0! TCC! as amended by .A. No. ><?+! CAnti*Dumpin& Act of
'(((.D0
*** 'E2( W!#t is t!e #mount o #nti6dum)in0 duty t!#t m#y /e im)osed *
%122.%T.D AN%3.9 The difference between the export price and the
normal value of such product! commodity or article. /%ec. ;)' /s0 /'0! TCC! as amended
by .A. No. ><?+! CAnti*Dumpin& Act of '(((.D0
??
The anti*dumpin& duty shall be equal to the mar&in of dumpin& on such product!
commodity or article thereafter imported to the Philippines under similar circumstances! in
addition to ordinary duties! taxes and char&es imposed by law on the imported product!
commodity or article!
*** 'E<( W!#t #re "ounter$#ilin0 duties *
%122.%T.D AN%3.9 Additional customs duties imposed on any product!
commodity or article of commerce which is &ranted directly or indirectly by the
&overnment in the country of ori&in or exportation! any -ind or form of specific subsidy
upon the production! manufacture or exportation of such product commodity or article!
and the importation of such subsidi7ed product! commodity! or article has caused or
threatens to cause material in,ury to a domestic industry or has materially retarded the
&rowth or prevents the establishment of a domestic industry. /%ec. ;)+! TCCP as
amended by %ection '! .A. No. ><?'0
*** 'E=( W!#t #re m#r7in0 duties *
%122.%T.D AN%3.9 Additional customs duties imposed on forei&n articles
/or its containers if the article itself cannot be mar-ed0! not mar-ed in any official lan&ua&e
in the Philippines! in a conspicuous place as le&ibly! indelibly and permanently in such
manner as to indicate to an ultimate purchaser in the Philippines the name of the country
of ori&in.
*** 'EH( W!#t is # dis"rimin#tory duty *
%122.%T.D AN%3.9 New and additional customs duty imposed upon
articles wholly or in part the &rowth or product of! or imported in a vessel! of any forei&n
country which imposes! directly or indirectly! upon the disposition or transportation in
transit throu&h or reexportation from such country of any article wholly or in part the
&rowth or product of the Philippines! any unreasonable char&e! exaction! re&ulation or
limitation which is not equally enforced upon li-e articles of every forei&n country! or
discriminates a&ainst the commerce of the Philippines! directly or indirectly! by law or
administrative re&ulation or practice! by or in respect to any customs! tonna&e! or port
duty! fee! char&e! exaction! classification! re&ulation! condition! restriction or prohibition!
in such manner as to place the commerce of the Philippines at a disadvanta&e compared
with the commerce of any forei&n country.
'EF( W!#t is t!e do"trine o )rim#ry 9urisdi"tion *
%122.%T.D AN%3.9 The Bureau of Customs has exclusive administrative
,urisdiction to conduct searches! sei7ures and forfeitures of contraband without
interference from the courts. #t could conduct searches and sei7ures without need of a
,udicial warrant except if the search is to be conducted in a dwellin& place.
***''E( T!e :olle"tor o :ustoms issued # W#rr#nt o Sei&ure #nd -etention o
,28EEE /#0# o ri"e8 /e#rin0 t!e n#me o ASNOWMAN8 Milled in P#l#%#nB s!i))ed
on /o#rd t!e MKI AAl/ertoB %!i"! %#s t!en do"7ed #t Pier < #t :e/u :ity( T!e
%#rr#nt %#s issued on t!e /#sis o # re)ort t!#t t!e ri"e !#d /een ille0#lly im)orted
#s it %#s l#nded in P#l#%#n /y # orei0n $essel #nd t!en )l#"ed in s#"7s m#r7ed
ASNOWMAN8 Milled in P#l#%#n(B It %#s t!en s!i))ed to :e/u :ity on /o#rd t!e
MKI AAl/erto(B 4oreiture )ro"eedin0s %ere t!en st#rted in t!e :e/u :ity "ustoms
oi"e(
T!e "onsi0nee t!en iled # "i$il suit or in9un"tion /eore t!e :e/u :ity RT:8
%!i"! issued t!e in9un"tion /e"#use t!ere %#s #lle0ed l#"7 o )ro/#/le "#use or
"ustoms to ee"t t!e sei&ure( W#s t!e issu#n"e o t!e in9un"tion )ro)er *
%122.%T.D AN%3.9 No. There is no question that TC$s are devoid of
any competence to pass upon the validity or re&ularity of sei7ure and forfeiture
proceedin&s conducted by the Bureau of Customs and to en,oin or otherwise interfere
with these proceedin&s. The Collector of Customs sittin& in sei7ure and forfeiture
proceedin&s has exclusive ,urisdiction to hear and determine all questions touchin& on the
sei7ure and forfeiture of dutiable &oods. TCs are precluded from assumin& co&ni7ance
?=
over such matters even throu&h petitions of certiorari! prohibition or mandamus. /The
Bureau of Customs! et al.! v. 5&ario! et al.! 2.. No. ';>)>'! prom. 4arch +)! +)))0
N5T.% AND C544.NT%9
a. T!e T#ri #nd :ustoms :ode #nd t!e A"t :re#tin0 t!e :ourt o T#x
A))e#ls s)e"iy t!e )ro)er or# #nd )ro"edure for the ventilation of ant le&al
ob,ections or issues raised concernin& sei7ure and forfeiture proceedin&s. Thus! actions of
the Collector of Customs are appealable to the Commissioner of Customs! whose
decision! in turn! is sub,ect to the exclusive appellate ,urisdiction of the Court of Tax
Appeals and from there to the Court if Appeals.
The rule that TCs have no review powers over such proceedin&s is anchored
upon the policy of placin& no unnecessary hindrance on the &overnment$s drive! not only
to prevent smu&&lin& and other frauds upon Customs! but more importantly! to render
effective and efficient the collection of import and export duties due the %tate! which
enables the &overnment to carry out the functions it has been instituted to perform.
b. T!e "ustoms #ut!orities do not !#$e to )ro$e to t!e s#tis#"tion o t!e
"ourt t!#t t!e #rti"les on /o#rd # $essel %ere im)orted rom #/ro#d or #re intended
to /e s!i))ed #/ro#d /eore t!ey m#y exer"ise t!e )o%er to ee"t "ustoms se#r"!es8
sei&ures8 or #rrests )ro$ided /y l#% #nd "ontinue %it! t!e #dministr#ti$e !e#rin0s(
/The Bureau of Customs! et al.! v. 5&ario! et al.! 2.. No. ';>)>'! prom. 4arch +)!
+)))0
'''( A"tin0 on inorm#tion t!#t # s!i)ment rom Hon07on0 on /o#rd t!e
SKS S# -r#0on $iol#ted t!e T#ri #nd :ustoms :ode8 #s #mended8 #0ents o t!e
EIIG sei&ed t!e s!i)ment( It %#s ound t!#t t!e 1E t( $#n %#s m#de to #))e#r #s #
"onsolid#tion s!i)ment "onsistin0 o ,., )#"7#0es %it! Tr#nslin7 Int+l( 4rei0!t
4or%#rded #s s!i))er #nd Tr#ns0lo/e Int+l( In"(8 #s "onsi0nee5 t!#t t!ere %ere
ei0!t ?H@ s!i))ers #nd ei0!t ?H@ "onsi0nees de"l#red #s "o6lo#ders #nd "o6o%ners o
t!e "ontents o t!e $#n8 %!en in trut! t!e entire s!i)ment /elon0s only to one
entity5 t!#t t!e items #s de"l#red ?$#rious industri#l items@ %ere ound in t!e $#n8
inste#d it %#s ound to /e ully stued %it! textile )ie"e 0oods(
As # result o t!e #/o$e8 t!e #))ro)ri#te %#rr#nt o sei&ure %#s issued #nd
t!e 0oods oreited in #$or o t!e 0o$ernment(
T!e "onsi0nee iled # )etition or redem)tion o t!e s!i)ment #nd t!e
!e#rin0 oi"er re"ommended t!e rele#se o t!e s!i)ment u)on t!e )#yment o its
domesti" $#lue #s At!e s!i)ment "onsists o 0oods %!i"! #re in le0#l "ontem)l#tion
not )ro!i/ited8 nor t!e rele#se t!ereo to t!e "l#im#nt "ontr#ry to l#%(B
T!e :ommissioner o :ustoms denied t!e oer o redem)tion on t!e 0rounds
?'@ t!#t t!e s!i)ment %#s m#de to #))e#r #n inno"uous "onsolid#tion s!i)ment
destined or s!i)ment outside o t!e :O6:4S in order to "on"e#l t!e textile #/ri"s5
?,@ t!e ei0!t "o6lo#dersK"onsi0nes o t!e s!i)ment #re #ll i"titious5 #nd ?.@ :MO
H=6F, )ro$ides or # deni#l o #n oer o redem)tion %!en t!e sei&ed s!i)ment is
"onsi0ned to # i"titious )erson(
Would you #llo% t!e redem)tion * W!y *
%122.%T.D AN%3.9 Aes. There is absent the followin& circumstances
hence! it would be proper to allow the redemption of forfeited property upon payment of
its computed domestic mar-et value. /Trans&lobe #nternational! #nc. v. Court of Appeals!
et al.! 2.. No. '+==;G! January +?! '(((0
a. There is fraudE
b. The importation is absolutely prohibited! or
c. The release of the property would be contrary to law. /Ibid.0
4isdeclarations in manifest and rider cannot be ascribed to a consi&nee since it
was not the one that prepared them. As said in 8arolan! if at all! the wron&ful ma-in& or
falsity of the documents can only be attributed to the forei&n suppliers or shippers. ./Ibid.0
N5T.% AND C544.NT%9 8raud as defined in %ec. '! par. '.a.! C45*><*(+
must be actual! not constructive.
%ec. '.a.! C45*><*(+ is of the same tenor as %ec. +?;)! pars.! /f0 and /m0!
subpars. ;! G and ?! which deals with falsities committed by the owner! importer! exporter
or consi&nee or importationSexportation throu&h any other practice or device.
?<
#n A7nar v. Court of Tax Appeals! ?> %CA ?'(! reiterated in 8arolan! Jr. v.
Court of Tax appeals! et al.! +'< %CA +(>! the %upreme court clarified that the fraud
contemplated by law must be actual and not constructive. #t must be intentional!
consistin& of deception! willfully and deliberately done or resorted to in order to induce
another to &ive up some ri&ht.
*** 8orfeiture proceedin&s are in the nature of proceedin&s in rem.
8orfeiture of sei7ed &oods in the Bureau of Customs is a proceedin& a&ainst the
&oods and not a&ainst the owner.
#t is in the nature of a proceedin& in rem! i.e. directed a&ainst the res or imported
&oods and entails a determination of the le&ality of their importation. #n this proceedin&! it
is in le&al contemplation the property itself which commits the violation and is treated as
the offender! without reference whatsoever to the character or conduct of the owner.
The issue is limited to whether the imported &oods should be forfeited and
disposed of in accordance with law for violation of the Tariff and Customs Code. .
/Trans&lobe #nternational! #nc. v. Court of Appeals! et al.! 2.. No. '+==;G! January +?!
'(((0
The one*year prescriptive period for forfeiture proceedin&s applies only in the
absence of fraud. /Commissioner of Customs v. Clurt of Tax Appeals! et al.! 2.. No.
';+(+(! prom. 4arch +<! +)))0
'',( On A)ril 'E8 'FF=8 t!e :olle"tor o :ustoms "ondu"ted # )u/li" #u"tion
s#le o Lot No( '2 "onsistin0 o $#rious m#r/le )ro"essin0 m#"!ine #nd 0rindin0
m#"!ine %!i"! in"luded # S)e"i#l :ir"ul#r S#% #nd # -i#mond S#%in0 M#"!ine(
T!e #%#rd %#s m#de to En0r( 4r#n7lin Poli"#r)io8 t!e !i0!est /idder( Ater En0r(
Poli"#r)io si0ned t!e G#te P#ss e$iden"in0 %it!dr#%#l o Lot No( '2 rom "ustoms
"ustody8 !e ound t!#t t!e t%o s#%s %ere missin0 #nd u)on !is in$esti0#tion ound
t!#t t!e items %ere inst#lled in t!e "om)ound o :#rr#r# M#r/le P!ili))ines8 In"(
:onse3uently8 or #lle0ed $iol#tions o Se"tion ,2.< ?non6)#yment o duties
#nd t#xes@ #nd Se"tion ,2.E ReS ?ille0#l remo$#l o #rti"les rom %#re!ouse@ o t!e
T#ri #nd :ustoms :ode ?T::@ t!e s#%s %ere sei&ed /y #ut!ority o # W#rr#nt o
Sei&ure #nd -etention d#ted M#y ,F8 'FF'8 rom t!e "om)ound o :#rr#r# M#r/le(
:#rr#r# M#r/le #iled to )resent e$iden"e o )#yment o duties #nd t#xes
#nd its deense is #n #lle0ed lo"#l s#le e$iden"ed /y not#ri&ed -eeds o S#le( In t!e
me#ntime8 En0r( Poli"#r)io inter$ened #nd "l#imed o%ners!i) o t!e s#%s( :#rr#r#
M#r/le t!en oered to settle t!e "#se in #""ord#n"e %it! t!e )ro$isions o t!e T::(
Ho%e$er8 t!e oer %#s reused /y t!e Gure#u o :ustoms8 %!i"! t!en de"l#red t!e
#rti"les oreited in #$or o t!e Go$ernment( Resol$e t!e ollo%in0 issues
ex)l#inin0 /riely t!e re#sons or your #ns%er:
#( Is it $#lid to oreit #n #rti"le ound in t!e )ossession o # t!ird )#rty #ter
t!e s#le #t )u/li" #u"tion *
/( H#s t!e im)ort#tion /een termin#ted *
"( W!o !#s t!e ri0!t to ret#in )ossession o$er t!e t%o ?,@ s#%s *
%122.%T.D AN%3.%9
a. Aes! because there is showin& that the imported saws were acquired by Carrara
4arble while they were in customs custody without showin& that the correct duties and
taxes were paid thereon.
The TCC sub,ects to forefeiture any article which is removed contrary to law from
any public or private warehouse under customs supervision! or released irre&ularly from
customs custody. Before forfeiture proceedin&s are instituted! the law requires the
presence of probable cause. 5nce established the burden of proof is shifted to the
claimant. Customs officers with proper authori7ation from the Commissioner in writin&!
may demand evidence of payment of duties and taxes on forei&n articles openly offered for
sale or -ept in stora&eE and if no such evidence can be produced! such articles may be
sei7ed and sub,ected to forfeiture proceedin&E provided however! that durin& such
proceedin&s the person or entity from whom such articles were sei7ed shall be &iven an
opportunity to prove or show the source of such articles and the payment of duties and
taxes thereon. 1nder the circumstances! it is clear that before the delivery of the items to
.n&r. Policarpio! the Bureau of Customs had custody of said saws. #t was only when the
?>
whole was handed over to .n&r. Policarpio that it was discovered that the two saws were
missin&.
#n this case the forfeiture ta-es effect immediately upon the commission of the
offense. The forfeiture of the sub,ect machineries! retroacted to the date they were
ille&ally withdrawn from customs custody. The &overnment$s ri&ht to recover the
machineries proceeds from its ri&ht as lawful owner and possessor thereof upon
abandonment by the importer. %uch ri&ht may be asserted no matter in whose hands the
property may have come! and the condemnation when obtained avoids all intermediate
alienations.
The forfeiture of the saws rests on a different statutory basis from Policarpio$s
ri&ht to receive the property as the winnin& bidder in the auction sale. #t was based upon
the &overnment$s ri&ht to recover property ille&ally withdrawn from its custody.
b. #mportation was already terminated after .n&r. Policarpio has si&ned the 2ate
Pass evidencin& withdrawal of :ot '? from customs custody.
#mportation is deemed terminated upon payment of duties! taxes and other char&es
due or secured to be paid upon the articles at a port of entry! and upon the &rant of a le&al
permit for withdrawalE or in case said articles are free of duties! taxes and other char&es!
until they have le&ally left the ,urisdiction of the customs. The forfeiture of the sub,ect
saws however! is not dependent on whether or not the importation was terminatedE rather
it is premised on the ille&al withdrawal of &oods from customs custody.
Thus! re&ardless of the termination of importation! customs authorities may validly
sei7e &oods which! for all intents and purposes! still belon& to the &overnment.
c. Compromise could not be allowed anymore since the sub,ect machineries had
already been awarded to Policarpio! bein& the hi&hest bidder in the public auction. The
&overnment has the ri&htful possession of the saws but it should turnover the same to
Policarpio. /Carrara 4arble Philippines! #nc.! v. Commissioner of Customs! 2.. No.
'+(=>)! prom. %eptember '! '(((0
N5T.% AND C544.NT%9 Administrative and ,udicial procedures relative to
customs searches! sei7ures and forfeitures9
a. -etermin#tion o )ro/#/le "#use #nd issu#n"e o %#rr#nt. The Collector of
Customs upon probable cause that the articles are imported or exported! or are attempted
to be imported or exported! in violation of the tariff and customs laws shall issue a warrant
of sei7ure. /%ec. =! Title ###! CA5 No. (*(;0
#f the search and sei7ure is to be conducted in a dwellin& place! then a search
warrant should be issued by the re&ular courts not the Bureau of Customs.
There may be instances where no warrants issued by the Bureau of Customs or the
re&ular courts is required! as in search and sei7ures of motor vehicles and vessels.
b. A"tu#l sei&ure o t!e #rti"les . 4aster this procedure.
Re3uirements or rele#se under /ond o sei&ed #rti"les 9 This is a probable area
so master.
Settlement o sei&ure "#se /y )#yment o ine or redem)tion o oreited
)ro)erty(
This is another probable area.
LOCAL TAXATION
*** ''.( W!#t #re t!e und#ment#l )rin"i)les o lo"#l t#x#tion *
%122.%T.D AN%3.9 The fundamental principles of local taxation are9
a. UniormityE
b. Taxes! fees! char&es and other impositions shall be e3uit#/le and based on
ability to pay! for )u/li" )ur)oses! not un9ust8 excessive! oppressive or confiscatory! not
"ontr#ry to law! public policy! national economic policy or in restraint of tradeE
c. The levy and collection shall not be let to any private personE
d. Inures solely to the local &overnment unit levyin& the taxE
e. The )ro0ressi$ity principle must be observed.
*** ''1( On Dune ,<8 'FF,8 t!e Sangguniang Panlalawigan o Gul#"#n )#ssed
Pro$in"i#l Ordin#n"e No( .8 to t#7e ee"t on Duly '8 'FF,8 %!i"! le$ies # t#x o 'EC
?(
o t!e #ir m#r7et $#lue in t!e lo"#lity )er "u/i" meter o ordin#ry stones8 0r#$el8
s#nd8 e#rt! #nd ot!er 3u#rry resour"es extr#"ted rom #re#s o )u/li" l#nd %it!in
its territori#l 9urisdi"tion(
It no% "olle"ts t!e s#id t#x u)on 3u#rry resour"es extr#"ted rom )ri$#te
l#nds /y Re)u/li" :ement( It "l#ims #ut!ority to do so under t!e )ro$isions o t!e
Lo"#l Go$ernment :ode #s %ell #s under t!e Re0#li#n t!eory o St#te o%ners!i)
o$er #ll n#tur#l resour"es( Is t!e "olle"tion "orre"t *
%122.%T.D AN%3.9 No! because the authority under the :ocal
2overnment Code to collect taxes on quarry resources applies only to those extracted
from public lands. /%ec. ';G in relation to %ec. ';>! :ocal 2overnment Code0
8urthermore! the :ocal 2overnment Code prohibits local &overnment units from
collectin& excise taxes on articles enumerated under the N#C! and taxes! fees or char&es
on petroleum products. /%ec. ';; QhR! :ocal 2overnment Code in relation to the Tax
Code0 The tax imposed is an excise tax upon the performance! carryin& on! or the
exercise of an activity. 3hile the Tax Code levies a tax on all quarry resources! re&ardless
of ori&in! whether extracted from public or private lands! the :ocal 2overnment Code
authori7es the local &overnment unit to impose such taxes on those ta-en from public
lands. Thus! those extracted from private lands are taxable under the N#C and not by
local &overnment units.
The e&alian doctrine may not be applied because taxes! bein& burdens! are not to
be presumed beyond what the applicable statute expressly and clearly declares! tax statutes
bein& construed stricitssimi juris a&ainst the &overnment. /The Province of Bulacan! et
al.! v. The Court of Appeals! etc.! et al.! +(( %CA GG+0
*** ''2( P!ili))ine G#s7et/#ll Asso"i#tion "ontested t!e dei"ien"y #musement
t#x #ssessed #0#inst it /y t!e GIR or "ondu"tin0 t!e )roession#l /#s7et/#ll 0#mes
#nd or t!e "ession o #d$ertisin0 #nd stre#mer s)#"es to Iint#0e Enter)rises8 In"(
#@ S!ould t!e #musement t#xes /e )#id to t!e lo"#l 0o$ernment inste#d o
t!e GIR *
/@ Is t!e "ession o #d$ertisin0 #nd stre#mer s)#"es to Iint#0e Enter)rises8
In"( su/9e"t to t!e )#yment o #musement t#xes *
%122.%T.D AN%3.9
a. No. Professional bas-etball &ames should pay the amusement taxes collected
by the B# and not the amusement taxes collected by the local &overnments. The
amusement tax which provinces and cities are allowed to collect under %ec. 'G) of the
:ocal 2overnment Code! refers to Can amusement tax to be collected from proprietors!
lessees! or operators of theaters! cinemas! concert halls! circuses! boxin& stadia! and other
places of amusement.D The authority to tax professional bas-etball &ames is not included
therein because it is a national tax provided for under %ec. '+? of the '((< Tax Code
which provides that! CThere shall be collected from the proprietor! lessee or operator of
coc-pits! cabarets! ni&ht or day clubs! boxin& exhibitions! professional bas-etball &ames!
Jai*Alai and racetrac-s! a tax equivalent to9 xxxx /d0 8ifteen percent /'?K0 in the case of
professional bas-etball &ames envisioned in Presidential Decree No. (<'9 Provided,
however, That the tax herein shall be in lieu of all other percenta&e taxes of whatever
nature and descriptionE xxxD
b0 Aes. The second to the last para&raph of %ec. '+? of the '((< Tax Code
provides that! the term C&ross receipts embraces all the receipts of the proprietor! lessee or
operator of the amusement place.. This term is broad enou&h to embrace the cession of
advertisin& and streamer spaces as the same embraces all the receipts of the proprietor!
lessee or operator of the amusement place. #t is thus! a national tax not a local tax.
The reco&nition by the B# of such income from cession as a local tax is of no
moment because the 2overnment is never estopped by the mista-e or error on the part of
its a&ents! specially on the matter of taxes. /Philippine Bas-etball Association v. Court of
Appeals! et al.! 2.. No. ''('++! prom. Au&ust >! +)))0
''<( T!e :ity Tre#surer dis"o$ered t!#t t!e Pne"!ts #iled to )#y t!eir re#l
)ro)erty t#xes on t!eir )ro)erty "onsistin0 o # )#r"el o l#nd %it! #n #re# o H8'E,
s3(m( T!e )ro)erty %#s su/se3uently sold #t )u/li" #u"tion or t!e t#x delin3uen"y(
=)
Ho%e$er8 t!e Pne"!ts did not re"ei$e #ny noti"e o t!eir t#x delin3uen"y #nd t!#t
t!e R0ister o -eeds did not order t!em to surrender t!eir o%ner+s du)li"#te or
#nnot#tion o t!e t#x lien )rior to t!e s#le( Neit!er did t!ey !#$e noti"e o t!e
#u"tion s#le nor %#s t!e "ertii"#te o s#le #nnot#ted on t!eir title nor %it! t!e title
in t!e )ossession o t!e Re0ister o -eeds(
Is t!e t#x s#le $#lid * Re#son out your #ns%er(
%122.%T.D AN%3.9 No. #t has been ruled that the notice and publication!
as well as the le&al requirements for a tax delinquency sale! are mandatory! and the failure
to comply therewith can invalidate the sale. The prescribed notices must be sent to
comply with the requirements of due process. /De Xnecht! et al!. v. Court of AppealsE De
Xnecht! et al.! v. @onorable %ayo! +() %CA ++;!+;=0
The reason behind the notice requirement is that tax sales are administrative
proceedin&s which are in personam in nature. /Pu7on v. Abbellera! '=( %CA <>(! <(?E
De Asis v. #.A. C.! '=( %CA ;'G0
N5T.% AND C544.NT%9 All of the above cases were decided interpretin& the
provisions of C.A. No. G<)! the old Assessment :aw! and P.D. No. G=G! the eal
Property Tax Code! both of which required personal notice to the taxpayer in addition to
the requisite advertisement.
The provisions of %ec. +=) of the :ocal 2overnment Code on CAdvertisement and
%aleD does not require personal notice to the delinquent taxpayer.
#n view of the above! the author believes that personal notice of the auction sale is
not required anymore under the provisions of the :ocal 2overnment Code of '(( which
repealed C.A. No. G<) and P.D. No. G=G0
REAL PROPERTO TAMATION
FFF''=( W!#t #re t!e und#ment#l )rin"i)les o re#l )ro)erty t#x#tion *
a. Appraisal at current and fair mar-et valueE
b. Classification for assessment on the basis of actual useE
c. Assessment on the basis of uniform classificationE
d. Appraisal! assessment! levy and collection shall not be let to a private personE
e. Appraisal and assessment shall be equitable.
''H( -etermin#tion o $#rious items:
a. The reasonable mar-et value is determined by the assessor in the form of a
schedule of fair mar-et values. The schedule is then enacted by the local san&&unian.
b. The assessment level is fixed by ordinances of the appropriate san&&unian.
c. The tax rate is also fixed by ordinances of the appropriate san&&unian.
''F( Pro)erty exem)t rom t!e )#yment o re#l )ro)erty t#x:
a. eal property owned by the epublic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been &ranted to a taxable person
for a consideration or otherwiseE
b. Charitable institutions! churches! parsona&es or convents appurtenant thereto!
mosques! non*profit or reli&ious cemeteries! and all lands! buildin&s and improvements
actually! directly and exclusively used for reli&ious! charitable and educational purposesE
c. 4achineries and equipment! actually! directly and exclusively used by local
water districtsE and &overnment owned and controlled corporations en&a&ed in the supply
and distribution of water and &eneration and transmission of electric powerE
d. eal property owned by duly re&istered cooperativesE
e. 4achinery and equipment used for pollution control and environmental
protection.
',E( The protest contemplated under %ection +?+ of .A. No. <'=) is needed
where there is a question of reasonableness of the amount assessed! not where the
question raised is on the very authority and power of the assessor to impose the
assessment and of the treasurer to collect the tax. /Ty v. Trampe! +?) %CA ?))0
='
','( On A)ril .8 'FH=8 R#ul )ur"!#sed rom Estrell# t%o lots8 /ot! lo"#ted in
:e/u :ity( Lot no( ' "ont#ined #n #re# o 1F s3(m( %!ile lot no( , "ont#ined #n
#re# o 1H s3(m( more or less( Got! lots !#d im)ro$ements8 %!i"! %ere des"ri/ed #s
L# residenti#l !ouse o stron0 m#teri#ls "onstru"ted on t!e lots #/o$e6mentioned(L
R#ul de"l#red t!e re#l )ro)erty "onstru"ted on t!e s#id lots or )ur)oses o
t#x #ssessment #s # residenti#l !ouse o stron0 m#teri#ls %it! # loor #re# o <E s3(m(
Ee"ti$e 'FH=8 t!e de"l#red )ro)erty %#s #ssessed /y t!e :ity Assessor under T#x
-e"l#r#tion ' #t # m#r7et $#lue o P<E8EEE(EE #nd #n #ssessed $#lue o P.<8FEE(EE(
-urin0 # t#x6m#))in0 o)er#tion "ondu"ted in 4e/ru#ry 'FF<8 t!e :ity
Assessor dis"o$ered t!#t t!e re#l )ro)erty de"l#red #nd #ssessed under T#x
-e"l#r#tion No( ' %#s #"tu#lly # residenti#l /uildin0 "onsistin0 o our ?1@ storeys
%it! # it! storey used #s # roo de"7( T!e /uildin0 !#s # tot#l loor #re# o 2EE(,E
s3( m( T!e #re# or e#"! loor %#s 'EE(E1 s3u#re meters(
As # result o t!e indin0s8 t!e :ity Assessor issued T#x -e"l#r#tion No( ,
ee"ti$e in t!e ye#r 'FF<8 "#n"elin0 t!e )re$ious T#x -e"l#r#tion #nd #ssessin0 t!e
/uildin0 t!erein #t # net m#r7et $#lue o P1FF8H<E(EE #nd #n #ssessed $#lue o
P.=18FEE(EE( T!e 'FH=6'FF' S"!edule o M#r7et I#lue %#s #))lied in t!e
#ssessment(
R#ul )rotested t!e ne% #ssessment or /ein0 Lex"essi$e #nd un"ons"ion#/le8L
"ontendin0 t!#t it %#s in"re#sed /y more t!#n '8EEEC #s "om)#red to its )re$ious
m#r7et o P<E8EEE(EE or #ssessed $#lue o P.<8FEE(EE under T#x -e"l#r#tion No( E,6
,E121 #nd Lt!#t !e /ou0!t t!e /uildin0 in"ludin0 t!e lots or only P'EE8EEE(EE on
A)ril .8 'FH=8 %!i"! #mount s!ould /e t!e m#r7et $#lue o t!e /uildin0 or )ur)oses
o determinin0 its #ssessed $#lue(L He 3uestioned t!e ne% #ssessment /eore t!e
Lo"#l Go#rd o Assessment A))e#ls o :e/u :ity8 %!i"! dismissed !is #))e#l on
D#nu#ry ''8 'FF=( R#ul ele$#ted !is "#se to t!e :entr#l Go#rd o Assessment
A))e#ls(
On Se)tem/er '=8 'FFH8 t!e :GAA rendered # de"ision orderin0 t!e :e/u
:ity Assessor to issue # ne% T#x -e"l#r#tion in t!e #mount o P,H'82HH(EE( R#ul
t!en iled # motion or t!e re"onsider#tion o t!e :GAA;s de"ision( R#ul #nd t!e
:ity Assessor 9ointly #0reed t!#t t!e re$ised $#lu#tion o t!e )ro)erty is P=H8..E(EE
#s #ssessed $#lue8 "l#ssiyin0 t!e )ro)erty #t P'8''E )er s3( m(8 t!e /uildin0 !#$in0
/een "om)leted #nd o""u)ied in 'F2= or orty6t%o ?1,@ ye#rs #0o(
T!e :GAA t!en ruled t!#t or )ur)oses o determinin0 t!e /#"7 t#xes due on
t!e ex"ess #re# o su/9e"t /uildin0 rom 'FHH to 'FF<8 t!e :e/u :ity Assessor s!ould
issue in #""ord#n"e %it! Se"( ,,, o t!e Lo"#l Go$ernment :ode:
#( T#x -e"l#r#tion ee"ti$e 'FHH to Dune .E8 'FF<8 /#sed on t!e minimum
r#te )er s3( m( or t!e ty)e o /uildin0 in #""ord#n"e %it! t!e 'FH26'FH< S"!edule o
I#lues5
/( T#x -e"l#r#tion to su)ersede T#x -e"l#r#tion No( ' to /e ee"ti$e rom
Duly '8 'FF1 to t!e ye#r 'FF28 /#sed on t!e minimum r#te )er s3( m( or t!e ty)e o
/uildin08 in #""ord#n"e %it! t!e 'FHH6'FF' S"!edule o I#lues5 #nd
"( T#x -e"l#r#tion to su)ersede T#x -e"l#r#tion No( , to t#7e ee"t in 'FF<8
/#sed on t!e re$ised $#lu#tion o t!e )ro)erty #s #0reed u)on /y t!e )#rties(
R#ul dis#0rees %it! t!e #/o$e indin0s8 /#sed on t!e ollo%in0:
#@ T!e :GAA erred in resol$in0 t!e issue o /#"7 t#xes rom 'FHH to 'FF28
des)ite t!e #"t t!#t su"! issue %#s not r#ised in t!e #))e#l to it8 under its )retext
t!#t it is #))lyin0 Se"( ,,, o t!e Lo"#l Go$ernment :ode(
/@ T!e :GAA erred in not stri"tly #))lyin0 )#r( ?l@8 Se"( 'FF o t!e Lo"#l
Go$ernment :ode8 deinin0 L4#ir M#r7et I#lueL #s /#sis or "om)utin0 t!e
L#ssessed $#lue(L
"@ T!e :GAA;s rulin0 is dis"rimin#tory8 un9ust8 "onis"#tory #nd
un"onstitution#l(
To %!#t "ourt s!ould R#ul ele$#te t!e #d$erse de"ision o t!e :GAA *
Would !is #))e#l )ros)er *
%122.%T.D AN%3.9
=+
aul should appeal the decision of the CBAA to the Court of Appeals! under ule
G; of the '((< ules of Civil Procedure! by filin& a petition for review within a period of
fifteen /'?0 days from receipt of the adverse CBAA decision.
aulHs appeal would not prosper for the followin& reasons9
a. The facts of the case do not show that aul has paid under protest the tax
assessed a&ainst his property. This is a mandatory requirement under %ec. +?+ of the
:ocal 2overnment Code. This is so! because the issue is reasonableness of the amount
assessed and not on the very authority and power of the assessor to impose the assessment
and of the treasurer to collect the tax. /Ty v. Trampe! +?) %CA ?))0
b. Appellate courts as well as appellate administrative a&encies! have inherent
authority to review unassi&ned errors /'0 which are closely related to an error properly
raised! or /+0 upon which the determination of the error properly assi&ned is dependent!
or /;0 where the court or administrative a&ency finds that consideration of them is
necessary in arrivin& at a ,ust decision of the case. There was no error! because aul
himself is assailin& the sub,ect assessment as Lexcessive and unconscionable.L Thus!
CBAA was duty*bound to review the factual antecedents of the case and to apply hereon
the pertinent provisions of law. #n the process! CBAA has to apply %ec. +++ of the :ocal
2overnment Code which authori7es the collection of bac- taxes.
c. The excess areas resultin& from the revision must be understood as never
havin& been declared before. This is evident from the provisions of %ec. +++ of the :ocal
2overnment Code which reads9
L%ec. +++. Assessment of Property Subject to Back a!es. "eal property declared
for the first time shall be assessed for taxes for the period durin& which it would have been
liable but in no case for more than ten /')0 years prior to the date of initial assessment9
Provided, however, That such taxes shall be computed on the basis of the applicable
schedule of values in force durin& the correspondin& period.L
#t is neither ,ust that a landowner should be permitted by an involuntary mista-e or
throu&h other causes! not to say bad faith! to state an area far less than that actually
contained in his land and pay a tax to the %tate a tax far below that which he should really
pay.
d. aulHs contention on the use of mar-et value for the computation of the
assessed value is erroneous. Par. /l0 %ec. '(( of the :ocal 2overnment Code merely
defines L8air 4ar-et "alue.L #t does not in any way direct that the L8air 4ar-et "alueL
should be used as a basis for purposes of real property taxation. 5n the other hand! par.
/a0! %ec. '(> of the same Code provides unequivocally that! Leal property shall be
appraised at its current and fair mar-et value.L The current value of li-e properties and
their actual or potential uses! amon& others! are also considered.
1nscrupulous sellers of real estate often understate the sellin& price in the deed of
sale to minimi7e their tax liability. 4oreover! the value of real property does not remain
sta&nant! it is unrealistic to expect that the current mar-et value of a property is the same
as its cost of acquisition ten years a&o. #n this li&ht! a &eneral revision of real property
assessment is required by law within two /+0 years after the effectivity of the :ocal
2overnment Code and every three /;0 years thereafter. /%ec. +'(! :ocal 2overnment
Code0
e. 3hen bac- taxes were imposed on aulHs property! there was no violation of the
rule that laws shall have only prospective applicability. The provisions of %ec. +? of P.D.
No. G=G! The eal Property Tax Code /now %ec. +++ of the :ocal 2overnment Code0 is
not penal in character! hence it may not be considered as an e! post facto law. /%esbreno
v. Central Board of Assessment Appeals! et al.! 2.. No. ')=?>>! 4arch +G! '((<0
',,( W!#t #re t!e #dministr#ti$e remedies t!#t #re )ro$ided or under t!e
)ro$isions o R(A( No( ='<E8 t!e Lo"#l Go$ernment :ode8 /eore resort to "ourts is
m#de rel#ti$e to re#l )ro)erty t#xes *
%122.%T.D AN%3.9 A taxpayer may question the constitutionality or
le&ality of a tax ordinance on appeal within thirty /;)0 days from effectivity thereof! to the
%ecretary of Justice. The taxpayer after findin& that his assessment is un,ust! confiscatory!
or excessive! must brin& the case before the %ecretary of Justice for questions of le&ality
or constitutionality of a city ordinance.
=;
An owner of real property who is not satisfied with the assessment of his property
may! within sixty /=)0 days from notice of assessment! appeal to the :ocal Board of
Assessment Appeals.
%hould the taxpayer question the excessiveness of the amount of tax! he must first
pay the amount due. Then! he must request the annotation of the phrase Cpaid under
protestD and accordin&ly appeal to the :ocal Board of Assessment Appeals by filin& a
petition under oath to&ether with copies of the tax declarations and affidavits or
documents to support his appeal. /:ope7 v. City of 4anila! et al.! 2.. No. '+<';(!
8ebruary '(! '(((0
N5T.% AND C544.NT%9
emedies of real property owner who questions validity of tax ordinance9
%ecretary of Justice can ta-e co&ni7ance of a case involvin& the constitutionality or
le&ality of tax ordinances where there are factual issues involved. /8i&uerres v. Court of
Appeals! et al.! 2.. No. ''('<+! 4arch +?! '(((0
Juestions on $#lidity or le0#lity o # t#x ordin#n"e. Taxpayer files appeal to
the %ecretary of Justice! within ;) days from effectivity thereof. #n case the %ecretary
decides the appeal! a period also of ;) days is allowed for an a&&rieved party to &o to
court. But if the %ecretary does not act thereon! after the lapse of =) days! a party could
already see- relief in court.
These three separate periods are clearly &iven for compliance as a prerequisite
before see-in& redress in a competent court. %uch statutory periods are set to prevent
delays as well as enhance he orderly and speedy dischar&e of ,udicial functions. 8or this
reason the courts construe these provisions of statutes as mandatory. /eyes! et al.! v.
Court of Appeals! et al.! 2.. No. ''>+;;! prom. December ')! '(((0
Public hearin&s are mandatory prior to approval of tax ordinance! but this still
requires the taxpayer to adduce evidence to show that no public hearin&s ever too- place.
/Ibid.0
',.( W!#t #re t!e ste)s to /e ollo%ed or t!e m#nd#tory "ondu"t o Gener#l
Re$ision o Re#l Pro)erty Assessments *
a. Preparation of %chedule of 8air 4ar-et "aluesE
b . .nactment of 5rdinancesE
'0 levyin& an annual Cad valoremD tax on real property and an
additional tax accruin& to the %pecial .ducation 8undE
+0 8ixin& the assessment levels to be applied to the mar-et values of real
propertiesE
;0 Providin& the necessary appropriations to defray expenses incident to
&eneral revision of real property assessments!E and
G0 Adoptin& the %chedule of 8air 4ar-et "alues prepared by the
assessors. /:ope7 v. City of 4anila! et al.! 2.. No. '+<';(! 8ebruary '(! '(((0
N5T.% AND C544.NT%9
Public hearin&s are required to be conducted prior to the enactment of an
ordinance imposin& real property taxes. /8i&uerres v. Court of Appeals! et al.! 2.. No.
''('<+! 4arch +?! '(((0
',1( W!#t #re t!e ste)s to /e ollo%ed in t!e )re)#r#tion o #ir m#r7et
$#lues *
a. The city or municipal assessor shall prepare a schedule of fair mar-et values for
the different classes of real property situated in their respective :ocal 2overnment 1nits
for the enactment of an ordinance by the san##unian concernedE and
b. The schedule of fair mar-et values shall be published in a newspaper of &eneral
circulation in the province! city or municipality concerned or the postin& in the provincial
capitol or other places as required by law. /:ope7 v. City of 4anila! et al.! 2.. No.
'+<';(! 8ebruary '(! '(((0
N5T.% AND C544.NT%9 Proposed fair mar-et values of real property in a
local &overnment unit as well as the ordinance containin& the schedule must be published
in full for three /;0 consecutive days in a newspaper of local circulation! where available!
within ten /')0 days of its approval! and posted in at lease two /+0 prominent places in the
=G
provincial capitol! city! municipal or baran&ay hall for a minimum of three /;0 consecutive
wee-s. /8i&uerres v. Court of Appeals! et al!. 2.. No. ''('<+! 4arch +?! '(((0
',2( W!#t is t!e )ro"edure to /e ollo%ed in "om)utin0 re#l )ro)erty t#xes *
%122.%T.D AN%3.9
a. Ascertain the assessment level of the propertyE
b. 4ultiply the mar-et value by the applicable assessment level of the propertyE
and
c. 8ind the tax rate which corresponds to the class /use0 of the property and
multiply the assessed value by the applicable tax rate. 8or easy reference! the computation
of real property tax is cited below9
4ar-et value P x x x
4ultiplied by Assessment :evel / x K0
Assessed value P x x x
4ultiplied by ate of Tax / x K0
eal Property Tax P x x x /:ope7 v. City of 4anila! et
al.! 2.. No. '+<';(! prom. 8ebruary '(! '(((0
N5T.% AND C544.NT%9 #t is farfetched that the above question would be
&iven. #t was included only for illustrative purposes. @owever the followin& concept
relative to the determination of real property taxes in order to ease the predicament of the
low and middle*income &roups of taxpayers! may be as-ed9
3ith the introduction of assessment levels! tax rates could be maintained! althou&h
tax payments can be made either hi&her or lower dependin& on their percenta&e
/assessment level0 applied to the fair mar-et value of property to derive its assessed value
which is sub,ect to tax. 4oreover! classes and values of real properties can be &iven
proper consideration! li-e assi&nin& lower assessment levels to residential properties and
hi&her levels to properties used in business. /:ope7 v. City of 4anila! et al.! 2.. No.
'+<';(! prom. 8ebruary '(! '(((0
GOO- LU:P AN- PRAOERS 4OR OOUR PASSING THE GAR(
=?