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TAX 2 DIGESTS

Lorenzo v. Posadas

Thomas Hanley died in 1922 in Zamboanga leaving a will w/c


provided that:
o
Any money left be given to nephew Matthew
o
All real estate shall not be sold or disposed of 10 years
after his death. It shall be managed by the executors.
The proceeds shall be given to nephew Matthew in
Ireland to be used only for the education of Hanleys
brother's children and their descendants.
o
10 years after Thomas death, his property be given to
Matthew to be disposed of in the way he thinks most
advantageous

In 1924, the CFI appointed an administrator, Moore, eventually


replaced by Lorenzo (after Moore resigned).

CIR assessed the estate inheritance taxes from the time of


Thomas death including penalties for deliquency in payment
(P2k+).

CIR filed a motion before the CFI praying that the Lorenzo be
ordered to pay the said amount. The motion was granted. Lorenzo
paid under protest and asked for a refund. CIR refused to refund.

I: (a) When does the inheritance tax accrue and when must
it be satisfied? UPON DEATH

Lorenzo asserts that article 657 of the Civil Code (the rights to
the succession of a person are transmitted from the moment of his
death) operates only in so far as forced heirs are concerned.

HOWEVER, there is no distinction between different classes of


heirs. The Administrative Code imposes the tax upon the
transmission of property of a decedent, made effective by his
death. An excise or privilege tax imposed on the right to succeed
to, receive, or take property by or under a will or the intestacy law,
or deed, grant, or gift to become operative at or after death. The
property belongs to the heirs at the moment of the death of the
ancestor as completely as if the ancestor had executed and
delivered to them a deed for the same before his death.

Since Thomas Hanley died on May 27, 1922, the inheritance tax
accrued as of the date.

However, it does not follow that the obligation to pay the tax arose
as of the date. The time for the payment on inheritance tax is
fixed by the Revised Administrative Code w/c provides that the
payment must be made before entrance into possession of the
property of the fideicommissary or cestui que trust. Thus, the tax

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should have been paid before the delivery of the properties to


Moore as trustee in 1924.

(b) Should the inheritance tax be computed on the basis of


the value of the estate at the time of the testator's death,
or on its value ten years later? AT THE TIME OF DEATH
Plaintiff contends that the estate of Thomas Hanley could not legally pass
to Matthew until after the expiration of 10 years from the death of the
testator in 1922 and the inheritance tax should be based on the value of
the estate in 1932.
Upon the death of the decedent, succession takes place and the right of the
estate to tax vests instantly. The tax should be measured by the value of
the estate as it stood at the time of the decedent's death, regardless of any
subsequent contingency value of any subsequent increase or decrease in
value, or the postponement of the actual possession or enjoyment of the
estate by the beneficiary.
(c) In determining the net value of the estate subject to tax, is it
proper to deduct the compensation due to trustees? NO
A trustee, no doubt, is entitled to receive a fair compensation for his
services. However, it does not follow that the compensation due him may
lawfully be deducted in arriving at the net value of the estate subject to
tax. First, There is no statute requiring trustees' commissions to be
deducted in determining the net value of the estate subject to inheritance
tax. Second, though a testamentary trust has been created, the testator
intended that the duties of his executors and trustees should be separated.
(d) What law governs the case at bar? Should the provisions of Act
No. 3606 favorable to the tax-payer be given retroactive effect?
NO
The law at the time was section 1544 of the Revised Administrative Code,
as amended by Act No. 3031, which took effect on March 9, 1922.
Inheritance taxation is governed by the statute in force at the time of the
death of the decedent . A statute should be considered as prospective in
its operation, whether it enacts, amends, or repeals an inheritance tax,
unless the language of the statute clearly demands or expresses that it
shall have a retroactive effect.
CIR v Fisher

Walter G. Stevenson was born in the Philippines of British parents,


married in Manila to another British subject, Beatrice. He died in
1951 in California where he and his wife moved to.

In his will, he instituted Beatrice as his sole heiress to certain real


and personal properties, among which are 210,000 shares of
stocks in Mindanao Mother Lode Mines (Mines).

Ian Murray Statt (Statt), the appointed ancillary administrator of


his estate filed an estate and inheritance tax return. He made a

preliminary return to secure the waiver of the CIR on the


inheritance of the Mines shares of stock.
In 1952, Beatrice assigned all her rights and interests in the estate
to the spouses Fisher.
Statt filed an amended estate and inheritance tax return claiming
ADDITIOANL EXEMPTIONS, one of which is the estate and
inheritance tax on the Mines shares of stock pursuant to a
reciprocity proviso in the NIRC, hence, warranting a refund from
what he initially paid. The collector denied the claim. He then filed
in the CFI of Manila for the said amount.
CFI ruled that (a) the share of Beatrice should be deducted from
the net estate of Walter, (b) the intangible personal property
belonging to the estate of Walter is exempt from inheritance tax
pursuant to the reciprocity proviso in NIRC.
I: W/N the estate can avail itself of the reciprocity proviso in the
NIRC granting exemption from the payment of taxes for the Mines
shares of stock
R: No.
Reciprocity must be total. If any of the two states collects or
imposes or does not exempt any transfer, death, legacy or
succession tax of any character, the reciprocity does not work.
In the Philippines, upon the death of any citizen or resident, or
non-resident with properties, there are imposed upon his estate,
both an estate and an inheritance tax.
But, under the laws of California, only inheritance tax is
imposed. Also, although the Federal Internal Revenue Code
imposes an estate tax, it does not grant exemption on the basis of
reciprocity. Thus, a Filipino citizen shall always be at a
disadvantage. This is not what the legislators intended.
SPECIFICALLY:
Section122 of the NIRC provides that No tax shall be collected
under this Title in respect of intangible personal property
o
(a) if the decedent at the time of his death was a resident
of a foreign country which at the time of his death did not
impose a transfer of tax or death tax of any character in
respect of intangible personal property of citizens of the
Philippines not residing in that foreign country, or
o
(b) if the laws of the foreign country of which the
decedent was a resident at the time of his death allow a
similar exemption from transfer taxes or death taxes of
every character in respect of intangible personal property
owned by citizens of the Philippines not residing in that
foreign country."

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On the other hand, Section 13851 of the California


Inheritance Tax Law provides that intangible
personal property is exempt from tax if the decedent
at the time of his death was a resident of a territory
or another State of the United States or of a foreign
state or country which then imposed a legacy,
succession, or death tax in respect to intangible
personal property of its own residents, but either:.
(a) Did not impose a legacy, succession, or
death tax of any character in respect to
intangible personal property of residents of
this State, or
(b) Had in its laws a reciprocal provision under
which intangible personal property of a nonresident was exempt from legacy,
succession, or death taxes of every character
if the Territory or other State of the United
States or foreign state or country in which
the nonresident resided allowed a similar
exemption in respect to intangible personal
property of residents of the Territory or State
of the United States or foreign state or
country of residence of the decedent."

CIR v Campos Rueda

Maria Cerdeira was a Spanish national by


reason of her marriage to a Spanish national.

She resided in Tangier, Morocco until she


died. She left some intangible properties in the Philippines.

The Commissioner of Internal Revenue (CIR)


then held the administrator of her estate, Campos Rueda, to be liable
for deficiency estate and inheritance taxes after the transfer of Marias
intangible properties in the Philippines.

Campos Rueda countered this by saying


that Section 122 (now sec 104) of the NIRC provided for reciprocity
and that in the laws of Tangier, Morocco, "the transfers by reason of
death of movable properties, corporeal or incorporeal, including
furniture and personal effects as well as of securities, bonds,
shares, ..., were not subject, on that date and in said zone, to the
payment of any death tax, whatever might have been the nationality
of the deceased or his heirs and legatees."

Thus, Campos Rueda claimed an exemption


in the amount that the CIR was claiming as a deficiency.

The CIR on the other hand claimed that the


reciprocity clause could not apply since Tangier Morocco is not a
foreign country as required in sec 122.
I: W/N Tangier, Morocco is a Foreign
country within the meaning of section 122 (now sec 104) of the NIRC
R: YES, Tangier is a foreign country
The expression "foreign country", used in
the last proviso of Section 122 of the National Internal Revenue Code,
refers to a government of that foreign power which, although not an
international person in the sense of international law, does not impose
transfer or death taxes upon intangible personal properties.
It is, therefore, not necessary that Tangier
should have been recognized by our Government order to entitle the
petitioner to the exemption benefits of the proviso of Section 122 of
our Tax. Code.
Court also cited previous cases:
o
CIR v. De Lara: State of California was considered a
Foreign country within the meaning of sec 122.
o
Kiene v. CIR: Liechtenstein was considered a foreign
country within the meaning of sec 122.

In this case, it was stated that while US decisions held that


intangible personal property in the Philippines belonging to a nonresident foreigner, who died outside of this country is subject to
the estate tax, the congress, in including sec 122 in the NIRC
clearly provided for an exemption (reciprocity) and this
exemption must be honored.

Zapanta v Posadas

Father Braulio Pineda died without any


ascendants or descendants leaving a will in which he instituted his
sister Irene Pineda as his sole heiress.

During his lifetime Father Braulio donated


some of his property to the six plaintifffs, his relatives, severally, with
the condition that some of them would pay him a certain amount of
rice, and others of money every year, and with the express provision
that failure to fulfill this condition would revoke the donations ipso
facto.

The donations contained another clause that


they would take effect upon acceptance. They were accepted during
Father Braulio's lifetime by every one of the donees.

CIR then imposed upon the 6 plaintiffs


separate inheritance taxes on the property donated to them in
accordance with Section 1536 of the Administrative Code, as amended,

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which states that Every transmission by virtue of inheritance, devise,


bequest, gift mortis causa or advance in anticipation of inheritance,
devise, or bequest of real property located in the Philippine Islands and
real rights in such property
The 6 plaintiffs paid the inheritance tax
under protest and subsequently filed a separate civil action against the
CIR. The trial court in deciding these six cases, held that the donations
to the six plaintiffs made by the deceased Father Braulio Pineda are
donations inter vivos, and therefore, not subject to the inheritance tax,
and ordered the CIR to return to each of the plaintiffs the sums paid by
the latter.
I: W/n the donation made by Father Braulio
was in fact a donation mortis causa, and thus taxable.
R: NO, the donation was inter vivos. It was
thus not taxable.
Donations were inter vivos considering that
not only was it stated as such in the instruments in which they
appeared, but they were also made in the nature of a donation inter
vivos.
In donations mortis causa, it is the donors
death that determines the acquisition of, or the right to, the property,
and that it is revocable at the will of the donor.
In donations inter vivos, as in the present
case, the donees acquired the right to the property while the donor
was still alive, subject only to their acceptance and the condition that
they pay the donor rice and/or money. The nature of these donations is
not affected by the fact that they were subject to the condition of
payment since it was imposed as a resolutory condition, and in this
sense, it is necessarily implies that the right came into existence first,
otherwise there would be nothing to resolve upon the nonfulfillment of
the condition imposed.
If the donor's life is mentioned in connection
with this condition, it is only fix the donor's death as the end of the
term within which the condition must be fulfilled, and NOT because
such death of the donor is the cause which determines the birth of the
right to the donation. The property donated passed to the ownership of
the donees from the acceptance of the donations, and these could not
be revoked except upon the nonfulfillment of the condition imposed, or
for other causes prescribed by the law, but not by mere will of the
donor.
(However, considering that these donations
had onerous conditions, they are not donations to the full extent.
Rather, they are partly contractual and partly donations. They are
donations inter vivos only insofar as they exceed to the incumbrance
imposed.)

Neither can these donations be considered


as an advance on inheritance or legacy, since they were not heirs or
legatees of their predecessor in interest upon his death (Sec. 1540 of
the Administrative Code). Neither can it be said that they obtained this
inheritance or legacy by virtue of a document which does not contain
the requisites of a will (Sec. 618 of the Code of Civil Pocedure).
Besides, if the donations made by the plaintiffs are, as the appellants
contended, mortis causa, then they must be governed by the law on
testate succession (art. 620 of the Civil Code). In such a case, the
documents in which these donations appear, being instruments which
do not contain the requisites of a will, are not valid to transmit the
property to the donees (Sec. 618, Code of Civil Procedure.) Then the
defendants are not justified in collecting from the donees the
inheritance tax, on property which has not been legally transferred to
them, and in which they acquired no right.
Dissenting Opinion by Justice Street: Justice
Street strongly believed that the present case involved advances in
anticipation of inheritance considering that the donees were entitled
to receive an inheritance if no will had been made by the decedent. He
believed that what transpired in the present case is an attempt by the
donor to evade the payment of taxes by disposing of the bulk of his
property before his death.

Tuason v Posadas

In 1922, Esperanza Tuason Chuajap made a donation inter vivos of


certain property to Mariano Tuason.

In 1923, she made another donation inter vivos, this time to


Alfredo Tuason.

She died 3 years after leaving a will bequeathing P5,025 to


Mariano Tuason after the judicial administratix paid the prescribed
inheritance tax on these two bequests.

Consequently, Posadas collected the sums of P3, 809.76 and P6,


653.64 from both the petitioners as inheritance tax upon the gifts
inter vivos made to them against their opposition and protest.

They filed their protest and the judgment was that the defendant
must return the amount claimed by the plaintiff. Posadas appealed
and argued that the collection of these amounts as inheritance tax
is authorized by the law.

I: W/n Posadas was correct in collecting inheritance tax

R: YES.

Section 1536 of the Administrative Code provides that every


transmission by virtue of inheritance, devise, bequest, gift mortis
causa, or advance in anticipation of inheritance, devise, or
bequest shall be subject to tax.

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Section 1540 then provides that after deductions have been made,
there shall be added to the resulting amount the value of all gifts
or advances made by the predecessor to any of those who,
after his death, shall prove to be his heirs, devisees,
legatees, or donees mortis causa.
When the law say all gifts, it doubtless refers to gifts inter vivos,
and not mortis causa. Both the letter and the spirit of the law
leave no room for any other interpretation.
The language refers to donation that took effect before the donor's
death, and not to mortis causa donations, which can only be made
with the formalities of a will, and can only take effect after the
donor's death.
In this case, it appears that the Tuazons, after the death of
Espereanza, were found to be legatees under her will. Thus, the
donation inter vivos she had made to them in 1922 and 1923,
must be added to the net amount that is to be taxed.
If the donee inter vivos was found to be legatees, heirs,
devisees OR donees mortis causa of the decedent, then
they would have to pay the inheritance tax.
The reason for this is because the donation inter vivos is
deemed
to
be
a
transfer
in
anticipation
of
inheritance/death, meaning that it is a scheme to evade
payment of taxes.

Dizon v Posadas

Dizon was assessed to pay P2k+ as inheritance tax from the


properties he received from his father prior to his fathers death
through a deed of gift inter vivos.

Dizon alleged that the tax was illegally collected because he


received the property prior to the death of his father, through a
deed of gift inter vivos which was duly accepted and registered
before the death of his father making the property not an
inheritance.

He further states that he was not trying to evade the inheritance


tax that is imposed on heirs when his father donated all his
properties to him. Thus, no inheritance tax under Act No. 2601
(Chapter 40 of the Administrative Code), being the inheritance tax
statute, should be imposed upon the said properties.

The Court, however, ruled in favor of Posadas, hence, this appeal.

I:W/N the inheritance tax was correctly imposed upon the


properties transferred through donation inter vivos

R: YES.

Section 1540 of the Administrative Code states that after


deductions have been made, there shall be added to the resulting
amount the value of all gifts or advances made by the predecessor
to any of those who, after his death, shall prove to be his heirs,
devises, legatees, or donees mortis causa
In this case facts conveyance was made by the donor five days
before his death and accepted by the donee one day before the
donor's death. Obviously, this was fraudulently made for the
purpose of evading the inheritance tax.
As to Dizons contention that the he is not an heir because there is
no property to inherit anymore because he already received the
properties of the father through a donation inter vivos, SC said
that even if they dont know w/n the father left a will, Dizon should
NOT be deprived of his share of the inheritance because the Civil
Code confers upon him the status of a forced heir.
Thus, an advance made by the decedent to Dizon is subject to tax.
As to Dizons contention that Section 1540 is unconstitutional in
taxing gifts or donations because the act would then embrace two
subjects, the Court states that: When the law says all gifts, it
doubtless refers to gifts inter vivos, and not mortis causa. Both the
letter and the spirit of the law leave no room for any other
interpretation. Such, clearly, is the tenor of the language which
refers to donations that took effect before the donor's death, and
not to mortis causa donations, which can only be made with the
formalities of a will, and can only take effect after the donor's
death.
The law presumes that such gifts have been made in
ancitipation of inheritance in order to EVADE tax. Thus, to
prevent this, they are added to the resulting amount."

Vidal de Roces v Posadas

Esperanza Tuazon by public document donated parcels of land situated


in Manila to plaintiffs Vidal de Roces, etc. with their respective
husbands, accepted them in the same public documents, which were
duly recorded in the registry of deeds.

The plaintiffs took possession of the said lands, received the fruits and
obtained TCTs.

The donor then died w/o any forced heir and in her will, she
bequeathed to each of the donees the sum of P5,000.

After the estate had been distributed among the instituted legatees
and before delivery of their respective shares, the CIR ruled that the
donees should pay inheritance tax.

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They thus paid under protest, contending that Art 1540 of the Revised
Administrative Code (after deductions have been made, there shall be
added to the resulting amount the value of all gifts / advances made by
the predecessor to any of those who after his death prove to be heirs,
devisees, legatees or donees mortis causa) does NOT include
donations inter vivos. If it does, it is null and void as it violates
uniformity of taxation.
I: W/n donations inter vivos is included in Sec. 1540 of the
Administrative Code
R: No.
The gifts referred to in section 1540 of the Revised Administration Code
are, obviously, those donations inter vivos that take effect immediately
or during the lifetime of the donor but are made in consideration or in
contemplation of death.
Gifts inter vivos, the transmission of which is NOT MADE IN
CONTEMPLATION OF THE DONOR'S DEATH should not be understood as
included within the said legal provision for the reason that it would
amount to imposing a direct tax on property and not on the
transmission.
This act does not come within the scope of the provisions contained in
Article XI of Chapter 40 of the Administrative Code which deals
expressly with the tax on inheritances, legacies and other acquisitions
mortis causa.

CIR v CA and Pajonar

Pedro Pajonar, a member of the Philippine Scout during WWII was


a part of the infamous Death March by reason of which he suffered
shock and became insane.

His sister Josefina became the guardian over his person, while his
property was placed under the guardianship of the PNB by the RTC
of Dumaguete.

After his death, PNB filed an accounting of his property under


guardianship valued at 3M in Special Proceedings.

However, PNB did NOT file and estate tax return, instead it advised
his heirs to execute an extrajudicial settlement and to pay taxes
on the estate.

Pursuant to BIRs assessment, the estate of Pedro paid taxes in the


amount of 2k.

Josefina then filed a petition w/ RTC of Dumaguete for the issuance


in her favor of letters of administration of the estate of her brother.

RTC appointed Josefina as regular administratrix of Pedros estate.

The BIR then made a 2nd amendment for deficiency estate tax, w/c
Josefina paid under protest.

Without waiting for her protest to be resolved by the BIR, Josefina


then filed a petition for review w/ the CTA praying for the refund of
1.5M OR the alternative 840k as erroneously paid estate tax.
CTA ordered CIR to refund Josefina the amount of 252k,
representing erroneously paid estate tax. Among the deductions
from the gross estate allowed by CTA were the amounts of 60K
representing notarial fee for Extrajudicial Settlement plus
attys fees for guardianship proceedings.
I: W/N the notarial fee and attys fees paid for the EJ Settlement
may be allowed as deductions fro the gross estate of decedent in
order to arrive at the value of the net estate.
R: YES, they are allowed deductions.
ATTYs FEES:
Under American Jurisprudence, expenses incurred in the EJ
Settlement of the estate should be allowed as deduction from the
gross estate. There is not requirement of formal administration. It
is sufficient that the expense be a NECESSARY contribution toward
the settlement to the case.
Attys fees in order to be deductible from the gross estate must be
essential and related to the settlement of estate. In this case, the
attys fees paid for guardianship proceeding was necessary for the
distribution of the property of the late Pedro Pajonar to his rightful
heirs. Thus, it was deductible.
Necessary expenses of administration are such expenses as are
entailed for the preservation and productivity of the estate and for
its management for the purposes of liquidation, payment of debts
and distribution of the residue among the persons entitled.
NOTARIAL FEES:
Although tax code specifies judicial expenses of the testamentary
or intestate proceedings, there is no reason why expenses
incurred in the administration and settlement of an estate in EJ
proceedings should not be allowed. However, deduction is limited
to such administration expenses as are actually and necessarily
incurred in the collection of the assets of the estate, payment of
debts, and distribution of the remainder among those entitled
thereto. Such expenses may include executors or administrators
fees, attys fees, court fees and charges, appraisers fees, clerk
hire, costs of preserving and distributing the estate and storing or
maintaining it, brokerage fees or commissions for selling or
disposing of the estate.
It is clear that the EJ settlement was for the purpose of payment of
taxes and the distribution of the estate to the heirs. The execution
of EJ settlement necessitated the notarization of the same. Thus

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the 60k for notarial fee for the EJ Settlement should be allowed as
a deduction from the gross estate.
Judicial expenses are expenses for administration. Administration
expenses are deductible from the gross estate. Expenses must be
essential to the proper settlement of the estate.

Testate Estate of the late Felix de Guzman v de Guzman-Carillo

Felix Guzman died and was survived by eight children.

One of the properties he left was a residential house


located in the poblacion.

In conformity with his last will, that house and the lot on
which it stands were adjudicated to his eight children, each being
given a one-eighth proindiviso.

The administrator submitted four accounting reports for


the period from June 16, 1964 to September, 1967.

Three of the heirs Crispina de Guzmans-Carillo Honorata


de Guzman-Mendiola and Arsenio de Guzman interposed
objections to the administrator's disbursements in the total sum of
P13,610.48.

I: W/n expenses incurred by the administrator are


deductible

R: YES.

(Deductible) 1. Expenses for the renovation and


improvement of the family residence P10,399.59. These
expenses consisted of disbursements for the repair of the terrace
and interior of the family home, the renovation of the bathroom,
and the construction of a fence. The probate court allowed those
expenses because an administrator has the duty to "maintain in
tenantable repair the houses and other structures and fences
belonging to the estate, and deliver the same in such repair to the
heirs or devises" when directed to do so by the court (Sec. 2, Rule
84, Rules of Court).

(Non-deductible) 2. Expenses incurred by Librada


de Guzman as occupant of the family residence without
paying rent These were PERSONAL expenses of Librada de
Guzman, inuring to her benefit. Those expenses, not being
reasonable administration expenses incurred by the administrator,
should not be charged against the income of the estate. Librada
de Guzman, as an heir, is entitled to share in the net income of the
estate. She occupied the house without paying rent. She should
use her income for her living expenses while occupying the family
residence.

The STENOGRAPHIC NOTES, REPRESENTATION


EXPENSES and EXPENSES DURING THE CELEBRATION OF
THE 1ST DEATH ANNIVERSARY OF THE DECEASED should be
disallowed. They have no connection with the care,
management and settlement of the decedent's estate
(Nicolas vs. Nicolas 63 Phil 332).
The other expenses, namely, P19.30 for the
lawyer's subsistence and P144 as the cost of the gift to the
physician who attended to the testator during his last s are
allowable expenses.
(Deductible) 4. Irrigation fee was properly allowed as
a legitimate expense of administration.

Dizon in his capacity as Administrator of the deceased Fernandez v


CIR

Justice Arsenio Dizon and petitioner Atty. Dizon were appointed as


Special and Assistant Special Administrator, respectively, of the
Estate of Jose Fernandez.

Justice Dizon authorized Atty. Gonzales to sign and file the required
estate tax return.

Atty. Gonzales filed the estate tax return with the BIR Regional
Office of San Pablo City, showing a NIL estate tax liability (no tax
liability- in this case, because the deductions exceed the gross
estate).

Ten days after, the BIR Regional Director issued Certifications


stating that the taxes due on the transfer of real and personal
properties of Jose had been fully paid and said properties may be
transferred to his heirs.

Justice Dizon died thus the probate court appointed petitioner as


the administrator of the Estate.

Atty. Dizon requested the probate courts authority to sell several


properties of the Estate to pay its creditors. HOWEVER, BIR issued
a notice demanding the payment of P66k+ deficiency estate tax.

Atty. Gonzales moved for a reconsideration of the Assessment but


the CIR denied the request and reiterated the Estates liability. A
petition for Review was filed with the CTA.

I: W/n deficiency estate tax must be imposed against the Estate

R: No.

Claims existing at time of death should be allowed as deductions


to the gross estate.

Even in the United States, there is some dispute as to whether the


deductible amount for a claim against the estate is fixed as of the
decedent's death which is the general rule, or the same should be
adjusted to reflect post-death developments, such as where a

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settlement between the parties results in the reduction of the


amount actually paid. On one hand, the U.S. court ruled that the
appropriate deduction is the "value" that the claim had at the date
of the decedent's death.
On the other hand, the Internal Revenue Service (IRS) opines that
post-death settlement should be taken into consideration and the
claim should be allowed as a deduction only to the extent of the
amount actually paid.
SC agreed w/ date-of-death valuation rule.
First, there is no law, nor any legislative intent in our tax laws,
which disregards the date-of-death valuation principle and
particularly provides that post-death developments must be
considered in determining the net value of the estate . It
bears emphasis that tax burdens are not to be imposed, nor
presumed to be imposed, beyond what the statute expressly and
clearly imports, tax statutes being construed strictissimi juris
against the government. Any doubt on whether a person, article or
activity is taxable is generally resolved against taxation.
Second. Such construction finds relevance and consistency in our
Rules on Special Proceedings wherein the term "claims" required
to be presented against a decedent's estate is generally construed
to mean debts or demands of a pecuniary nature which could have
been enforced against the deceased in his lifetime, or liability
contracted by the deceased before his death. Therefore, the
claims existing at the time of death are significant to, and
should be made the basis of, the determination of allowable
deductions.

Gov of the Phils v Pamintuan

Florentino Pamintuan filed an income tax return for the year 1919
and paid an amount on the basis of said return.

When Florentino died in 1925, intestate proceedings were


instituted where the court appointed commissioners for the
appraisal of the value of the property left by Florentino.

The court then ordered the delivery to the heirs of their respective
shares of the inheritance after paying the corresponding
inheritance taxes which were duly paid.

During the pendency of the intestate proceedings, the


administrator Jose Ramirez filed income tax returns for the estate
of the deceased corresponding to the years 1925 and 1926. The
intestate proceedings were then closed in 1926.

In 1927, subsequent to the distribution of Florentinos estate, the


government discovered that Florentino had not paid P462
as additional income for 1919 on account of the sale of his

house, from which he realized an income of P11,000 which was


not included in his income tax return filed in 1919.
The government demanded payment of the income tax but the
heirs refused to pay. The lower court ruled that the government
was barred from collecting the income tax due to its failure to file
its claim with the committee on claims and appraisals.
I: W/n the gov can still collect the income tax despite its failure to
file its claim with the committee on claims and appraisals
R: Yes. A claim for taxes and assessments whether assessed
before or after the death of the decedent, are not required to be
presented to the committee.
Heirs are liable for the deficiency income taxes, in
proportion to their share in the inheritance.
The administration proceedings of the late Florentino having been
closed, and his estate distributed among his heirs, the heirs are
responsible for the payment of the income tax here in question.
The claims for income taxes need not be filed with the committee
on claims and appraisals appointed in the course of testate
proceedings and may be collected even after the distribution of
the decedents estate among his heirs, who shall be liable therefor
in proportion to their share in the inheritance.

CIR v Pineda

Atanasio Pineda died and was survived by his wife Felicisima (the
appointed administratrix) and 15 children.

Estate proceedings were instituted in the CFI of Manila. The estate


was divided among and awarded to the heirs and the proceedings
terminated on June 8, 1948.

After the estate proceedings, the BIR investigated the income tax
liability of the estate for the years 1945, 1946, 1947 and 1948 and
it found that the corresponding income tax returns were not filed.

The CIR found the estate liable for Deficiency Income Tax (DIT),
Additional residence tax for 1945 (ART 45), and Real Estate
dealer's tax for the 4th qtr of 1946 and the whole year of 1947
(REDT 46-47) .

Manuel, the eldest child, contested the assessment. Subsequently,


he appealed to the CTA alleging that he was appealing "only that
proportionate part or portion pertaining to him as one of the
heirs."

CTA held that Manuel was liable for payment corresponding to his
share of such taxes.

On the other hand, CIR insisted that Manuel should be liable for
the payment of ALL the taxes found by the Tax Court to be due

TAX 2 MONTERO | Y. Sanchez A2012

from the estate instead of only for the amount of taxes


corresponding to his share in the estate.
Manuel opposed the proposition on the ground that as an heir he
is liable for unpaid income tax due the estate only up to the extent
of and in proportion to any share he received, relying on
on Government of the Philippine Islands v. Pamintuan. 1
I: W/n Manuel can be required to pay the FULL amount of the tax
assessed by the BIR.
R: YES, he can be required to pay the full amount.
Pineda is liable for the assessment as (1) AN HEIR and as (2) A
HOLDER-TRANSFEREE
of
property
belonging
to
the
estate/taxpayer.
o
As an HEIR: As an heir he is individually answerable for
the part of the tax proportionate to the share he received
from the inheritance. His liability, however,
cannot exceed the amount of his share.
o
As a HOLDER OF PROPERTY belonging to the estate:
Pineda is liable for the tax up to the amount of the
property
in his possession. The reason is that
the Government has a lien on the P2,500.00 received
by him from the estate as his share in the inheritance, for
unpaid income taxes for which said estate is liable,
pursuant to the last paragraph
of Section 315 of the
Tax Code.2
Therefore, the Government has TWO WAYS of collecting the tax in
question:
o
One, by going after ALL the heirs and collecting from
each one of them the amount of the tax proportionate to
the inheritance received. This remedy was adopted
in Government of the Philippine Islands v. Pamintuan. In
said case, the Government filed an action against all
the heirs for the collection of the tax. This action rests
on the concept that hereditary property consists only of
that part which remains after the settlement of all lawful
claims against the estate, for the settlement of which the
entire estate is first liable. The reason for filing a suit

The SC held that "after the partition of an estate, heirs and distributees are liable individually for
the payment of all lawful outstanding claims against the estate in proportion to the amount or value
of the property they have respectively received from the estate."
2
If any person, corporation, partnership, joint-account (cuenta en participacion), association, or
insurance company liable to pay the income tax, neglects or refuses to pay the same after demand,
the amount shall be a lien in favor of the Government of the Philippines from the time when the
assessment was made by the Commissioner of Internal Revenue until paid with interest, penalties,
and costs that may accrue in addition thereto upon all property and rights to property belonging to
the taxpayer: . . .

is to achieve thereby two results: first, payment of


the tax; and second, adjustment of the shares of
each heir in the distributed estate as lessened by
the tax.
o
Another remedy is by subjecting said property of the
estate which is in the hands of an heir or
transferee to the payment of the tax due, the
estate. This second remedy is the very avenue the
Government took in this case to collect the tax.
The BIR should be given the necessary discretion to avail itself of
the most expeditious way to collect the tax as may be envisioned
in the 315, because taxes are the lifeblood of government and
their prompt and certain availability is an imperious need.
And as afore-stated in this case the suit seeks to achieve only one
objective: payment of the tax. The adjustment of the respective
shares due to the heirs from the inheritance, as lessened by the
tax, is left to await the suit for contribution by the heir from whom
the Government recovered said tax.

CIR v Gonzales

Matias Yusay died leaving his two children as his heirs, Jose & Lilia.

Jose was appointed administrator who filed with BIR an estate and
inheritance tax return declaring personal & real properties of their
father but the return did not mention any heir.

On January 25, 1955, BIR demanded payment of assessed estate


and inheritance taxes (approx P30k in total).

Jose requested for an extension of time within which to pay the


tax, which the CIR denied.

During the pendency of the said proceedings in Iloilo and after


reinvestigation, BIR reassessed the estate and inheritance tax
liability and issued a reassessment of taxes in a total of P69k.

Lilia disputed the legality of the 1958 assessment alleging that


the right to make the same has prescribed since more than 5
years had elapsed since the filing of estate and inheritance tax
return on May 11, 1949.

CTA ruled in favor of Lilia.

CIR appealed to the SC alleging that the right to assess the taxes
in question has not been lost by prescription since the return
which did not name the heirs cannot be considered true and
complete return to start the running of the period of limitations of
5 years under Sec 331 of Tax Code and pursuant to Sec 332 he has
10 years within which to make the assessment counted from the
discovery on September 24, 1953 of the identity of the heirs.

TAX 2 MONTERO | Y. Sanchez A2012

I: W/n the right of the CIR to assess the estate and inheritance
taxes in question has prescribed - NO
W/n the return filed by Jose sufficient to commence the running of
the prescriptive period to assess said taxes NO
R: When tax return is considered sufficient
A return need not be complete in all particulars. It is sufficient if it
complies substantially with law. There is substantial compliance

(1) when the return is made in good faith & is not false or
fraudulent;

(2) when it covers the entire period involved;

(3) when it contains information as to the various items of


income, deductions and credits with such definiteness as
to permit the computation and assessment of the tax.
In this case, the estate and inheritance tax filed by Jose was
substantially defective:

It was incomplete. It declared only 93 parcels of land


and leaving out 92 others. This was a huge
underdeclaration.

Moreover, the return mentioned no heir. Thus, no


inheritance tax could be assessed. As a matter of law, on
the basis of return, there would be no occasion for the
imposition of estate and inheritance taxes, When there is
no heir, the estate is escheated to the State. The state
does not tax itself.
The deficient return did not start the running of the period
of limitations BECAUSE the return was made on the wrong form.
The taxpayer failed to observe the law (Sec 332) w/c grants the
CIR 10 years (starting from date the fraud was discovered) within
which to bring action for tax collection, applies. He is obligated to
make a return or amend one already filed based on his own
knowledge & information obtained through testimony or
otherwise, & subsequently to assess taxes due.

On MR filed by Lilia: Lilia insists that since she administers only 1/3 of the
estate of her father, she should not be liable for the whole tax. And she
suggests that the intestate estate of Matias Yusay should be liable for the
said taxes, 1/3 to be paid by Lilia and 2/3 to be paid by Florencia (wife of
deceased Jose).
Ruling of the Court: Estate and inheritance taxes are satisfied from the
estate and are to be paid by the executor or administrator. Where there are
2 or more executors, all of them are severally liable for the payment of the
estate tax. The inheritance tax, although charged against the account of
each beneficiary, should be paid by the executor or administrator.

Failure to pay the estate and the inheritance taxes before distribution of
the estate would subject the executor or administrator to criminal liability.
It is immaterial that Lilia administers only 1/3 of the estate & will receive as
her share only said portion, for her right to the estate comes after taxes. As
an administratrix, she is liable for the entire estate tax. As an heir, she is
liable for the entire inheritance tax although her liability would not exceed
the amount of her share in the estate.

DONORS TAX
Tang Ho v. CIR

Li Seng Giap, his wife Tang Ho and their 13 children were


stockholders of two close family corporations.

BIR examiners made an examination of the books of the two


corporations and found that each of Li Seng Giaps children had a total
investment there of approximately P63k+ in shares issued to them by
their father (who was the manager and controlling stockholder of the
two corporations)

CIR regarded these transfers as undeclared gifts made in the


respective years, and assessed against Li Seng Giap and his children
donor's and donee's taxes due to delayed payment (P76k+).

They thus paid the sum of P53k+ representing the amount of the
basic taxes, and put up a surety bond to guarantee payment of the
balance demanded.

Sometime later, they requested the CIR for a revision of their tax
assessments, and submitted donor's and donee's gift tax returns
showing that the children received gifts inter vivos and proper nuptias.
o
each child received by way of gift inter vivos, every year
from 1939 to 1950 (except in 1947 and 1948) P4,000 in
cash;
o
each of the eight children who married during the period
aforesaid, were given an additional P20,000 as dowry or
gift propter nuptias;

TAX 2 MONTERO | Y. Sanchez A2012

unmarried children received roughly an equivalent


amount in 1949, also by way of gifts inter vivos, so that
the total donations made to each and every child, as of
1950, stood at P63,190.
They contended that since the cash donated came from the
conjugal funds, they are be considered as donations by BOTH
spouses, for which two separate TAX exemptions may be
claimed in each instance, one for each spouse.
I: W/n the donations made by Li Seng Giap to his children from the
conjugal property should be taxed against husband and wife
R: No. A donation of property belonging to the conjugal
partnership, made during its existence, by the husband alone in favor
of the common children, is taxable to him exclusively as sole donor.
To be a donation by both spouses, taxable to both, the wife must
expressly join the husband in making the gift. Her participation
cannot be implied.
THUS, in this case, ONLY ONE exemption or deduction can be
claimed for every such gift, and not two, as claimed by petitioners.
Speculation on the Tang Ho case: Why were they insisting that the
dowry was made in cash? Does the law say that for a dowry to be
considered as exemption, it has to be in cash? No. The reason why
they were insisting that it was made in cash and then this cash was
used to buy stock so that it can fall within the time period that the
dowry should be given before celebration or within 1 year thereafter.
o

Gibbs v. CIR

Allison and Esther Gibbs executed documents entitled Deed of


Sale and Declaration of Trust whereby they transferred 53, 000
Lepanto Consolidated Mines shares of stock to their 5 children, in
consideration of the sum of P26, 227.70 to be paid on or before
December 1950.

The instituted trustee was Allisons brother, Finley Gibb.

Spouses Gibb sent a letter to the CIR asking for a ruling on


whether or not gift taxes should be paid.

CIR initially assessed the spouses a donee gift tax of P75 on each
of the beneficiaries or a total of about P750. These assessments were
based upon the DIFFERENCE between said market value of the shares
of stock and the stipulated consideration for transfer thereof.

Subsequently, CIR revised the assessment by INCREASING them.

The spouses paid within the period fixed by law but SOUGHT a
refund.

Their demand was denied.

Trustee Finley Gibb appealed to the Secretary of Finance and


instituted a civil suit in the CFI for recovery of the amount.

TAX 2 MONTERO | Y. Sanchez A2012

Spouses Gibb again executed 10 additional and separate trusts


containing the same stipulations and conditions.
These additional deeds of trust impelled CIR to assess donor gift
taxes. CIR held that the gift taxes are available on the FULL MARKET
VALUE of all the shares of stock thus placed in trust instead of upon
the difference between said market value and the stipulated
considerations. CTA agreed.
I: W/n CTA was correct in ruling that the gift taxes on the transfer
of the shares of stock should be based on the full market value of
shares of stock (NOT diff between market value and stipulated
consideration)
R: YES, CTA was correct, tax should be based on full MV.
CTA was correct in finding that the agreements made by the
parties were mere devises to avoid and evade the payment of the
corresponding gift taxes:
o
If the trustors were earnestly concerned in providing
ample funds to assure the support, maintenance, care,
health, higher education and travel of their children and
the launching of their career after they had become of
age, the trustors would not have really meant to require
them to pay the consideration stipulated in the trust
agreements.
o
If the intent was really that the stipulated interest be
paid, the trustee could have authorized the trustors to
sell, mortgage, hypothecate or otherwise dispose of the
stocks to raise the necessary funds.
o
The compromise agreements were made with knowledge
of the fact that the CIR was already investigating whether
the stipulated consideration was real or fictitious.

There being no real consideration for the transfer, gift taxes should
be based on the full market value of the shares of stock at the
time of the respective transfer, and not merely on the difference
between the said market value and the consideration stipulated in
the trust agreements.

PIROVANO vs. CIR

Enrico Pirovano was the father Carla Pirovano.

De la Rama Steamship Co. insured the life of said Enrico Pirovano


(then its President and General Manager) with various Philippine and
American insurance companies for 1M, designating itself as the
beneficiary.

Enrico Pirovano died during the World War II.

The BOD of De la Rama Steamship Co. adopted a resolution


granting the proceeds expected to be collected on Enricos life
insurance policies w/c was P400k for equal division among his 4 minor
children, to be convertible into 4k shares of stock (1k shares / child0.
The Company received the total sum of P643K as proceeds of the
said life insurance policies obtained from American insurers.
The BOD modified their resolution by renouncing all its rights title,
and interest to the said amount of P643k in favor of the minor children
of the deceased, subject to the express condition that said amount
should be retained by the Company in the nature of a loan to it,
drawing interest at the rate of 5% per annum, and payable to the
Pirovano children after the Company shall have first settled its bonded
indebtedness of 5M.
This resolution was allowed by the childrens guardian.
BOD again modified their resolution by providing that the
Company shall pay the proceeds of said life insurance policies to the
heirs after the Company shall have settled in full the balance of its
present remaining bonded indebtedness, but the annual interests
accruing on the principal shall be paid to the heirs of Pirovano
whenever the Company is in a position to meet said obligation.
The mother of the children ACCEPTED this resolution with a PUBLIC
DOCUMENT.
The SH of the Company ratified the resolutions with certain
clarifying modifications that the payment of the donation shall not
be effected until such time as the Company shall have first duly
liquidated its present bonded indebtedness (P3.2M) with the Natl Devt
Company and that any and all taxes, legal fees, and expenses in any
way connected with the above transaction shall be chargeable and
deducted from the proceeds of the life insurance policies.
HOWEVER, the majority stockholders of the Company voted to
revoke the donation.
As a consequence of this revocation and refusal of the Company to
pay the balance of the donation amounting to P564K despite demands,
the PIROVANOS brought an action for the recovery of said amount.
The RTC ordered that the donation was valid. Thus, the CIR
assessed the amount of P60K as donees' gift tax against each of the
heir, and a donor's gift tax in the total amount of P34K assessed
against De la Rama Steamship Co., which the latter paid.
The PIROVANOS contested CIRs assessment and imposition of the
donees' gift taxes and donor's gift tax and also made a claim for refund
of the donor's gift tax so collected.
I: W/n the PRIVANOS are obliged to pay donees' gift taxes as well
as the imposition of surcharge and interest on the amount of donees'
gift taxes

TAX 2 MONTERO | Y. Sanchez A2012

R: YES.
A donation made by the corporation to the heirs of a deceased
officer out of gratitude for the officer's past services is considered a
donation and is subject to donee's gift tax.
Art. 726 of the CivCode states that When a person gives to
another a thing ... on account of the latter's merits or of the services
rendered by him to the donor, provided they do not constitute a
demandable debt, ..., there is also a donation.
The fact that his services contributed in a large measure to
the success of the company did not give rise to a recoverable
debt, and the conveyances made by the company to his heirs
remain a gift or donation.
ALSO, the value of such services which do not constitute a
recoverable debt is NOT deductible from the donation.
The actual consideration for the cession of the policies was
the Company's gratitude to Pirovano. Gratitude has no economic
value and is not "consideration" in the sense that the word is used
under the Tax Code.
OTHERS:
Sec111 [where property is transferred for less than adequate
consideration, amt exceeding consideration deemed a gift] is NOT
applicable).
Whether remuneratory or simple, the conveyance remained a gift.
The definition of CONSIDERATION is anything that is bargained for
by the promisor and given by the promisee in exchange for the
promise
Pirovano's successful activities as officer of the De la Rama
Steamship Co. cannot be deemed such consideration for the gift to his
heirs, since the services were rendered long before the Company
ceded the value of the life policies to said heirs; cession and services
were not the result of one bargain or of a mutual exchange of
promises.
A subsequent promise to pay for past services is a nudum pactum
i.e., one that is unenforceable in view of the common law rule that
consideration must consist in a legal benefit to the promisee or some
legal detriment to the promisor.

SPS. Gestopa vs. CA ad Mercedes Danlag

Diego and Catalina Danlag were owners of 6 parcels of


unregistered lands.

They executed 3 deeds of donation mortis causa in favor of


Mercedes Danlag-Pilapil covering 4 parcels. All deeds contained the
reservation of rights of donors to amend / revoke the donation during

their lifetime AND to sell, mortgage / encumber the properties if


necessary.
Diego w/ the consent of Catalina then executed a deed of
donation inter vivos covering the aforementioned lots plus 2 other
parcels again in favor of respondent Mercedes.
This contained two conditions
o
(1) that Danlag spouses shall continue to enjoy the fruits
of land during their lifetime
o
(2) the donee cannot sell or dispose of the land during
the lifetime of the said spouses w/o their consent.
The Danlags sold parcels 3 and 4 to petitioners Gestopa and
executed a deed of revocation recovering 6 parcels of land subject to
deed of donation inter vivos.
Mecedes filed with RTC against the Gestopas and the Danlags for
quieting of title over the parcels of land.
She alleged that she was an illegitimate daughter of Diego Danlag
that she lived and rendered incalculable beneficial services to Diego
and his mother Maura, when she was still alive.
In recognition of her services, Diego executed Deed of Donation
conveying to her 6 parcels of land.
She accepted the donation in the same instrument, openly and
publicly exercised rights of ownership over the donated properties, and
caused the transfer of the tax declarations in her name.
Through the machination, intimidation and undue influence, Diego
persuaded the husband of Mercedes, Eulalio Pilapil to buy 2 of the 6
parcels covered by the deed of donation. The inter vivos donation was
coupled with conditions she complied with. She alleges she had not
been guilty of any act of ingratitude and that the revocation had no
legal basis.
Gestopas and Danlags opposed by saying that the deed of
donation was null and void because it was obtained by Mercedes
through machination and undue influence. Even assuming it was
validly executed, the intention was for the donation to take effect upon
death of donor. Further, the donation was void for it left the donor
Diego w/o any property at all.
I: W/n the donation was inter vivos or mortis causa inter vivos
W/n the revocation was valid NO, it was not.
R: The donation is INTER VIVOS. Revocation was not proper. (ruling
in favor of Mercedes)
Crucial in resolving whether the donation was inter vivos or mortis
causa is the determination of whether the donor intended to transfer
ownership over the properties upon the execution of the deed.
In ascertaining the intention of the donor, all the deeds provisions
must be read together:

TAX 2 MONTERO | Y. Sanchez A2012

IRST, the granting clause shows that Diego donated the


properties out of love and affection for Mercedes. This is a
mark of a donation inter vivos.
o
SECOND, the reservation of lifetime usufruct indicates
that the donor intended to transfer the naked ownership
of the properties. As correctly posed by the CA, what was
the need for such reservation if the donor and his spouse
remained the owners of the properties?
o
THIRD, the donor reserved sufficient properties for his
maintenance w/ his standing in society, indicating that
the donor intended to part w/ 6 parcels.
o
Lastly the donee accepted the donation.
Alejandro vs. Geraldez: An acceptance clause is a mark that the
donation is inter vivos. Acceptance is a requirement for donations
inter vivos.
Donations mortis causa, being in a form of a will, are not required
to be accepted by the donees during the donors lifetime.
THUS, the right to dispose the properties belonged to Mercedes.
Diegos right to give consent was merely intended to protect his
usufructuary interests.
The limitation on the right to sell during the donors lifetime
implied that ownership had passed to the donees and donation
was effective during the donors lifetime.
Circumstances show that the intention of the donor was to transfer
ownership to Mercedes. Prior to the donation inter vivos, the
Danlag spouses already executed 3 donations mortis causa.
The Danlag spouses were aware of the difference between the two
donations. If they did not intend to donate inter vivos, they would
not again donate the four lots already donated mortis causa.
Was the revocation valid? A valid donation, once accepted,
becomes irrevocable, EXCEPT on account of inofficiousness, failure
by donee to comply with charges imposed in donation, or
ingratitude.
The Danlag spouses did NOT invoke any of these. Finally, the
records do not show that the donor-spouses instituted any action
to revoke the donation in accordance w/ Art. 769. The revocation
has no legal effect.
o

ACCRA v. CIR

During the 1987 national elections, petitioners, who are partners


ACCRA law firm contributed about P882k+ each to the campaign
funds of Senator Angara, then running for the Senate.
BIR assessed each of the petitioners donors tax for their
contributions.

Petitioners questioned the assessment through a letter to the BIR.


They claimed that political or electoral contributions are NOT
considered gifts under the NIRC and that, therefore, they are not
liable for donors tax.
The claim for exemption was denied by the Commissioner.
I: W/n political contributions can be considered a donation and w/n
petitioners are liable for Donors tax
R: YES, political contributions ARE donations and petitioners ARE
liable for donors tax.
A donation has the following elements:
o
(a) the reduction of the patrimony of the donor;
o
(b) the increase in the patrimony of the donee;
and,
o
(c) the intent to do an act of liberality / animus
donandi
The present case falls squarely within the definition of a
donation.
Petitioners, each contributed to the campaign funds of Senator
Edgardo Angara, without any material consideration.
All three elements of a donation are present. The patrimony of the
four petitioners were reduced by P882k+, while Senator Edgardo
Angaras patrimony correspondingly increased.
There was intent to do an act of liberality / animus
donandi was present since each of the petitioners gave
their contributions without any consideration.
2) Petitioners attempt is strained. The fact that petitioners will
somehow in the future benefit from the election of the
candidate to whom they contribute, in no way amounts to
a valuable material consideration so as to remove political
contributions from the purview of a donation.
Senator Angara was under no obligation to benefit the petitioners.
The proper performance of his duties as a legislator is his
obligation as an elected public servant of the Filipino people and
not a consideration for the political contributions he received.
In fact, as a public servant, he may even be called to enact laws
that are contrary to the interests of his benefactors, for the benefit
of the greater good.
In fine, the purpose for which the sums of money were
given, which was to fund the campaign of Senator Angara
in his bid for a senatorial seat, cannot be considered as a
material consideration so as to negate a donation.
Finally, this Court takes note of the fact that subsequent to the
donations involved in this case, Congress approved Republic Act
No. 7166 on November 25, 1991, providing in Section 13 thereof

TAX 2 MONTERO | Y. Sanchez A2012

that political/electoral contributions, duly reported to the


Commission on Elections, are NOT subject to the payment of any
gift tax. This all the more shows that the political contributions
herein made are subject to the payment of gift taxes, since the
same were made PRIOR to the exempting legislation, and Republic
Act No. 7166 provides no retroactive effect on this point.

VAT
Commissioner of Internal Revenue v. Mirant Pagbilao Corporation
Mitsubishi MPC NPC

MPC, formerly Southern Energy Quezon, Inc., is a domestic firm


engaged in the generation of power which it sells to the National Power
Corporation (NPC).
For the construction of the electrical and mechanical equipment
portion of its Pagbilao, Quezon plant, MPC secured the services of
Mitsubishi Corporation (Mitsubishi) of Japan.
Under R.A. 6395, NPC is exempt from all taxes (which covers both
direct and indirect taxes).
In the light of the NPC's tax exempt status, MPC, on the belief that its
sale of power generation services to NPC is zero-rated for VAT
purposes, filed an Application for Effective Zero Rating.
CIR issued a ruling stating that the supply of electricity by MPC to the
NPC shall be subject to zero percent (0%) VAT.
Consistent with its belief to be zero-rated, MPC opted not to pay the
VAT component of the progress billings from Mitsubishi for the period
covering April 1993 to September 1996 - for the E & M Equipment
Erection Portion of MPC's contract with Mitsubishi.
This prompted Mitsubishi to advance the VAT component as this serves
as its output VAT which is essential for the determination of its VAT
payment.
MPC, while awaiting approval of its application, filed its quarterly VAT
return for the second quarter of 1998 where it reflected an input VAT of
P148M+, as supported by an OR.
MPC filed an administrative claim for refund of unutilized input VAT.
BIR failed to act on its claim for refund.
MPC went to the CTA via a petition for review to forestall the running of
the two-year prescriptive period.

TAX 2 MONTERO | Y. Sanchez A2012

BIR asserted that MPC's claim for refund CANNOT be granted since
MPC's sale of electricity to NPC is NOT zero-rated for its failure to
secure an approved application for zero-rating.
The CTA granted MPC's claim for input VAT refund or credit for PhP
10,766,939.48. The CA rendered its assailed decision modifying that of
the CTA decision by granting most of MPC's claims for tax refund or
credit for P146,760,509.48.
I: W/n MPC is entitled to the refund of its input VAT payments made
from 1993 to 1996
R: Yes, but only to the extent of P10M+, given that claim has
prescribed.
Prescription. MP's claim for refund / tax credit for the creditable input
VAT was filed beyond the period provided by law for such claim. Sec.
112(A) of the NIRC provides that any VAT-registered person, whose
sales are zero-rated may apply for the issuance of tax credit WITHIN 2
YEARS after the close of the taxable quarter when the sales were
made. MPC filed a refund in Dec 1999 when it should have filed in Sept
1998 (since the close of the quarter was Sept 1996).
Creditable input VAT is an indirect tax which can be shifted or
passed on to the buyer, transferee, or lessee of the goods, properties,
or services of the taxpayer.
The fact that the subsequent sale or transaction involves a wholly-tax
exempt client, resulting in a zero-rated or effectively zero-rated
transaction, does NOT, standing alone, deprive the taxpayer of its right
to a refund for any unutilized creditable input VAT, albeit the erroneous,
illegal, or wrongful payment angle does not enter the equation.
History of VAT. The law that originally imposed the VAT in the
country, as well as the subsequent amendments of that law, has been
drawn from the tax credit method (practiced in Europe).
If at the end of a taxable quarter the output taxes charged by a seller
are EQUAL to the input taxes passed on by the suppliers, no payment
is required. HOWEVER, when output taxes EXCEED input taxes, the
excess has to be paid. On the other hand, if the input taxes EXCEED
the output taxes, the excess shall be CARRIED OVER TO THE
succeeding quarter/s.
Should the input taxes result from zero-rated or effectively zero-rated
transactions or from the acquisition of capital goods, any EXCESS over
the output taxes shall be refunded to the taxpayer / credited against
other internal revenue taxes.
Zero-rated transactions generally refer to the export sale of goods
and supply of services. The tax rate is set at zero. When applied to the
tax base, such rate obviously results in no tax chargeable against the
purchaser. The seller of such transactions charges no output tax, but

can claim a refund of or a tax credit certificate for the VAT previously
charged by suppliers.
OTHERS:
BIR and other tax agencies have a duty to treat claims for refunds and
tax credits with proper attention and urgency. Had RDO No. 60 and,
later, the BIR proper acted, instead of sitting, on MPC's underlying
application for effective zero rating, the matter of addressing MPC's
right, or lack of it, to tax credit or refund could have plausibly been
addressed at their level and perchance freed the taxpayer and the
government from the rigors of a tedious litigation.
The official receipt proves payment by MPC of its creditable input VAT
relative to its purchases from Mitsubishi. BIR is precluded from
requiring additional evidence to prove that input tax had indeed paid
or, in fine, that the taxpayer is indeed entitled to a tax refund or credit
for input VAT, we agree with the CA's above disposition. As the Court
distinctly notes, the law considers a duly-executed VAT invoice or OR
referred to in the above provision as sufficient evidence to support a
claim for input tax credit.

CIR v. Phil Health Care Providers, Inc.

The Philippine Health Care Providers (PHCPI), a health care


organization for sick and disabled persons enrolled in a health care
plan, wrote BIR inquiring whether the services it provides are exempt
from the payment of the VAT.
BIR issued a ruling, confirmed by the BIR Regional Director, stating that
PHCPI was exempt from the VAT coverage.
BIR then sent PHCPI 2 notices for deficiency in its payment of the VAT
and documentary stamp taxes (DST) f P224M+ for taxable years 1996
and 1997.
PHCPI protested, but BIR did not take any action, so PHCPI filed with
the CTA a petition for review.
CTA ordered PHCPI to pay a reduced deficiency VAT and declared the
BIR ruling void, saying that PHCPI is a service contractor subject to
VAT since it does not actually render medical service but merely acts
as a conduit between the members and petitioner's accredited and
recognized hospitals and clinics.
However, after a careful review of the facts of the case, the CTA
resolved to grant petitioner's "Motion for Partial Reconsideration
relying on Sec.246 of the 1977 Tax code which provides that in the
absence of showing of bad faith, the retroactive revocation of the BIR
Ruling will be prejudicial to PHCPI. Accordingly, the VAT assessment
issued against PHCPI for the taxable years 1996 and 1997 was
WITHDRAWN and SET ASIDE.

TAX 2 MONTERO | Y. Sanchez A2012

I: 1. W/n PHCPI's services are subject to VAT


R: YES. HOWEVER, because of the VAT ruling exempting PHCPI from
VAT, it cannot be retroactively revoked and therefore, PHCPI is still
exempt.
1) Section 102 of the NIRC as amended provides that there shall be
levied a VAT equivalent to 12% of gross receipts derived from the sale
or exchange of services The phrase "sale or exchange of service"
means the performance of all kinds of services in the Philippines for
consideration.
Section 103 of the same Code specifies the exempt transactions from
the provision, which includes medical, dental, hospital and veterinary
services except those rendered by professionals.
It can be seen from PHCPIs letter to BIR that its services that it is not
actually rendering medical service but merely acting as a
conduit between the members and their accredited and
recognized hospitals and clinics.
Thus, it does NOT fall under VAT-exempt transactions.
2) Section 246 of the 1997 Tax Code, as amended, provides that
rulings, circulars, rules and regulations promulgated by the CIR have
no retroactive application if to apply them would prejudice the
taxpayer.
The exceptions to this rule are:
o
(1) where the taxpayer deliberately misstates or omits
material facts from his return or in any document
required of him by the BIR
o
(2) where the facts subsequently gathered by the BIR are
materially different from the facts on which the ruling is
based, or
o
(3) where the taxpayer acted in bad faith.
PHCPI did not fall under any of these exceptions.
PHCPI's failure to refer to itself as a health maintenance organization is
not an indication of bad faith or a deliberate attempt to make false
representations.
The term "health maintenance organization" was first recorded in the
Philippine statute books only upon the passage of "The National Health
Insurance Act of 1995" which defines a "health maintenance org" as
one of the classes of a "health care provider."
Thus, the VAT Ruling was issued in PHCPI's favor, and the term "health
maintenance organization" was yet unknown or had no significance for
taxation purposes. PHCPI therefore, believed in good faith that it was
VAT exempt for the taxable years 1996 and 1997 on the basis of the
VAT Ruling.
CIR is precluded from adopting a position contrary to one previously
taken where injustice would result to the taxpayer.

CIR v Acesite (Philippines) Hotel Corporation

Acesite is the owner and operator of the Holiday Inn Manila Pavilion
Hotel. It leases a portion of the hotels premises to the PAGCOR for
casino operations. It also caters food and beverages to PAGCORs
casino patrons through the hotels restaurant outlets.

From 1996 to 1997, Acesite incurred VAT amounting to P30M+ from its
rental income and sale of food and beverages to PAGCOR during said
period.

Acesite tried to shift the said taxes to PAGCOR by incorporating it in the


amount assessed to PAGCOR but the latter refused to pay the taxes on
account of its tax exempt status.

Thus, PAGCOR paid the amount due to Acesite minus the P30M+ VAT
while Acesite paid the VAT to the CIR.

However, Acesite belatedly arrived at the conclusion that its


transaction with PAGCOR was subject to zero rate as it was rendered to
a tax-exempt entity. In 1998, Acesite filed an administrative claim for
refund with the CIR but CIR failed to resolve the same, so the case was
elevated to the CTA.

I: W/n the 0% VAT rate (under then Sec 108 (B)(3) of the NIRC) applies
to Acesite

R: Yes.

PD 1869 w/c created PAGCOR granted it an exemption from paying


taxes.

A close scrutiny of the provisions of the said law gives PAGCOR a


blanket exemption to taxes with no distinction on whether the taxes
are direct or indirect.

The law even grants tax exempt status to persons dealing with
PAGCOR in casino operations. The unmistakable conclusion is that
PAGCOR is not liable for the P30M+ VAT and neither is Acesite as
Acesite is effectively subject to zero percent rate under the NIRC.

By extending the exemption to entities or individuals dealing with


PAGCOR, the legislature clearly granted exemption also from indirect
taxes. It must be noted that the indirect tax of VAT, as in the instant
case, can be shifted or passed to the buyer, transferee, or lessee of the
goods, properties, or services subject to VAT. Thus, by extending the
tax exemption to entities or individuals dealing with PAGCOR in casino
operations, it is exempting PAGCOR from being liable to indirect taxes.

The NIRC provides that transactions subject to 0% VAT include services


rendered to persons whose exemption under special laws or
international agreements subjects the supply of such services to 0%
rate.

OTHERS:

TAX 2 MONTERO | Y. Sanchez A2012

It is true that VAT can either be incorporated in the value of the goods,
properties, or services sold or leased, in which case it is computed as
1/11 of such value, or charged as an additional 10% to the value.
Verily, the seller or lessor has the option to follow either way in
charging its clients and customer.
In the instant case, Acesite followed the latter method, that is,
charging an additional 10% of the gross sales and rentals. Be that as it
may, the use of either method, and in particular, the first method, does
not denigrate the fact that PAGCOR is exempt from an indirect tax, like
VAT.

CIR v. BURMEISTER AND WAIN SCANDINAVIAN CONTRACTOR


MINDANAO, INC.

A foreign consortium composed of BWSC-Denmark, Mitsui


Engineering and Shipbuilding, Ltd., and Mitsui and Co., Ltd. entered
into a contract with NAPOCOR for the operation and maintenance of 2
power barges.

BWSC-Denmark, the coordination manager, established BWSCMindanao (domestic corp doing business in Davao) which
subcontracted the actual operation and maintenance of NAPOCORs
two power barges.

NAPOCOR paid capacity and energy fees to the Consortium in a


mixture of currencies (Mark, Yen, and Peso). The freely convertible nonPeso component is deposited directly to the Consortiums bank
accounts in Denmark and Japan, while the Peso-denominated
component is deposited in a separate and special designated bank
account in the Philippines.

On the other hand, the Consortium paid BWSC-Mindanao in foreign


currency inwardly remitted to the Philippines through the banking
system.

In order to ascertain the tax implications of the above transactions,


BWSC-Mindanao sought a ruling from the BIR, w/c responded with a
Ruling declaring that if BWSC-Min chose to register as a VAT person
and the consideration for its services is paid for in acceptable foreign
currency and accounted for in accordance with the rules and
regulations of the BSP, the aforesaid services shall be subject to VAT at
zero-rate.

BSWC-Mindanao chose to register as a VAT taxpayer.

In conformity with RR 5-96 allowing zero-rated VAT for services other


than processing, manufacturing and repacking of goods, it subjected
its sale of services to the Consortium to the 10% VAT and paid the
amount of P6M+ as its output tax liability for the year 1996.

It then filed a claim for the issuance of a tax credit certificate with the
BIR, believing that it erroneously paid the output VAT for 1996 due to
its availment of the Voluntary Assessment Program (VAP) of the BIR.

CTA ordered BIR to issue a tax credit certificate for the P6M+ in favor
of BSCW-Mindanao. This was affirmed by the CA.
I: W/n BWSC-Mindanao is entitled to the refund of P6,994,659.67 as
erroneously paid output VAT for the year 1996
R: Yes, they are entitled to refund. Their services ARE actually still
subject to 10% VAT BUT they are not liable for such given their reliance
on BIR Rulings.
An essential condition for qualification to zero-rating under Section
102(b)(2) of RR 5-96 is that services other than processing,
manufacturing, or repacking of goods must be performed for persons
doing business OUTSIDE the Philippines.
In this case, the payer-recipient of BWSC-Mindanaos services is the
Consortium which is a joint-venture doing business in the Philippines.
While the Consortiums principal members are non-resident foreign
corporations, the Consortium itself is doing business in the Philippines.
This is shown clearly in BIR Ruling No. 023-95 which states that the
contract between the Consortium and NAPOCOR is for a 15-year term.
Considering this length of time, the Consortiums operation and
maintenance of NAPOCORs power barges cannot be classified as a
single or isolated transaction.
The Consortium does not fall under Section 102(b)(2) which requires
that the recipient of the services must be a person doing business
outside the Philippines.
Therefore, BWSC-Mins services to the Consortium, not being supplied
to a person doing business outside the Philippines, cannot legally
qualify for 0% VAT.
The Court recognizes the rule that the VAT system generally follows the
"destination principle" (exports are zero-rated whereas imports are
taxed).
However, as the Court stated in American Express, there is an
exception to this rule, which is the 0% VAT on services enumerated in
Section 102 and performed in the Philippines. To be exempt from the
destination principle under Section 102(b)(1) and (2), the services
must be (a) performed in the Philippines; (b) for a person doing
business outside the Philippines; and (c) paid in acceptable foreign
currency accounted for in accordance with BSP rules.
In contrast, this case involves a recipient of services the Consortium
which is doing business in the Philippines.
Nevertheless, in seeking a refund of its excess output tax, respondent
relied on VAT Rulings insofar as they held that the services being
rendered by BWSCMI is subject to VAT at zero percent (0%). BWSCs
reliance on these BIR rulings binds BIR.
BIRs revocation CANNOT be given retroactive effect since it will
prejudice the taxpayer, w/c is prohibited by Sec 246 of the NIRC.

TAX 2 MONTERO | Y. Sanchez A2012

Changing respondents status will deprive respondent of a refund of a


substantial amount representing excess output tax.
CIR v. Magsaysay Lines

NDC decided to sell its National Marine Corporation (NMC) shares and 5
of its ships, w/c were offered for public bidding.

Among the stipulated terms and conditions for the public auction was
that the winning bidder was to pay "a VAT of 10% on the value of the
vessels.

Magsaysay Lines offered to buy the shares and the vessels for P168M.
The bid was made by Magsaysay Lines, purportedly for a new company
still to be formed composed of itself, Baliwag Navigation, Inc., and FIM
Limited of the Marden Group based in Hongkong (collectively, private
respondents)

The bid was approved by the Committee on Privatization, and a Notice


of Award was issued to Magsaysay Lines.

Private respondents through counsel then received a VAT Ruling from


the BIR, holding that the sale of the vessels was subject to the 10%
VAT. They filed a motion for reconsideration but their motion was
denied so they elevated the case to the CTA.

The NDC drew on the Letter of Credit to pay for the VAT, and the
amount of P15,120,000.00 in taxes was paid on 16 March 1989.

CTA ruled that the sale of a vessel was an "isolated transaction," not
done in the ordinary course of NDCs business, and was thus not
subject to VAT, which under Section 99 of the Tax Code, was applied
only to sales in the course of trade or business.

I: W/N the sale is subject to VAT

R: No, sale is NOT subject to VAT.

Any sale, barter or exchange of goods or services not in the course of


trade or business is not subject to VAT.

mperial v. CIR: The term "carrying on business" does not mean the
performance of a single disconnected act, but means conducting,
prosecuting and continuing business by performing progressively all
the acts normally incident thereof.

Thus, it connotes REGULARITY of activity.

In the instant case, the sale was an isolated transaction. The sale
which was involuntary and made pursuant to the declared policy of
Government for privatization could no longer be repeated or carried on
with regularity.

It should be emphasized that the normal VAT-registered activity of NDC


is leasing personal property.

This finding is confirmed by the Revised Charter of the NDC which


bears no indication that the NDC was created for the primary purpose
of selling real property.
Thus, the sale of the vessels was not in the ordinary course of trade or
business of NDC so it should not be subject to VAT.

CIR v. SEKISUI

SEKISUI JUSHI is a domestic corporation with principal office located in


the Special Export Processing Zone in Laguna.

It is principally engaged in the business of manufacturing, importing,


exporting, buying, selling wholesale such goods as strapping bands
and other packaging materials.

Having registered with the BIR as a VAT taxpayer, Sekisui filed its
quarterly returns with the BIR, in the amount of P4M paid by it in
connection with its domestic purchase of capital goods and services.

Said input taxes remained unutilized since Sekisui has not engaged in
any business activity or transaction for which it may be liable for
output tax and for which said input taxes may be credited.

Sekisui then filed with the One-Stop-Shop Inter-Agency Tax Credit and
Duty Drawback Center of the Department of Finance (CENTER-DOF)
two separate applications for tax credit/refund of VAT input taxes paid.

CIR denied this, but CTA ruled that Sekisui was entitled to refund.

I: W/n SEKISUI is entitled to the refund/tax credit certificate as alleged


unutilized input taxes paid on domestic purchase of capital goods and
services

R: Yes, it is entitled to refund

Business enterprises registered with the Philippine Export Zone


Authority (PEZA) may choose between two fiscal incentive schemes:
o
(1) to pay a 5% preferential tax rate on its gross income
and thus be exempt from all other taxes; or
o
(b) to enjoy an income tax holiday, in which case it is not
exempt from applicable national revenue taxes including
the value-added tax (VAT).

If the entity avails itself of the 5% preferential tax rate under the first
scheme, it is exempt from all taxes, including the VAT;

Under the second, it is exempt from income taxes for a number of


years, but not from other national internal revenue taxes like the VAT.

A perusal of the pleadings and supporting documents indicates that


Sekisui availed itself of the income tax holiday (second). By doing so, it
became subject to VAT. It correctly registered as a VAT taxpayer,
because its transactions were not VAT-exempt.

TAX 2 MONTERO | Y. Sanchez A2012

Notwithstanding the fact that its purchases should have been zerorated, Sekisui was able to prove that it had paid input taxes in the
amount of P4M, as substantially supported by invoices and ORs.
While an ecozone is within the Philippines, it is deemed a separate
customs territory. Sales by suppliers from outside the borders of the
ecozone to this separate customs territory are deemed as exports and
treated as export sales.
Since 100% of Sekisui's products are exported, all its transactions are
deemed export sales and are thus VAT zero-rated. Sekisui has no
output tax with which it could offset its paid input tax. Since the
subject input tax it paid for its domestic purchases of capital goods and
services remained unutilized, it can claim a refund for the input VAT
previously charged by its suppliers.

ABAKADA vs Ermita (Sept 1, 2005)

Several actions were filed by different petitioners assailing the validity


of R.A. No. 9337 (increasing VAT to 12%) for being unconstitutional, as
it violates Art 6, Section 28, w/c provides that The rule of taxation
shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation.

In particular, SHELL, etc. assailed Section 8, amending Section 110 (B)


of the NIRC, imposing a 70% limit on the amount of input tax to
be credited against the output tax , making it REGRESSIVE and
unconstitutional.
Specific provision: If at the end of any taxable quarter
the output tax exceeds the input tax, the excess shall be
paid by the VAT-registered person. If the input tax exceeds
the output tax, the excess shall be carried over to the
succeeding quarter or quarters: PROVIDED that the input
tax inclusive of input VAT carried over from the
previous quarter that may be credited in every
quarter shall not exceed 70% of the output VAT:
PROVIDED, HOWEVER, THAT any input tax attributable to
zero-rated sales by a VAT-registered person may at his
option be refunded or credited against other internal
revenue taxes. . .

I: W/n RA 9337 is unconstitutional for violating uniformity,


equitability and progressiveness of taxation No, it is VALID.

TAX IS UNIFORM.

Uniformity in taxation means that all taxable articles or kinds


of property of the same class shall be taxed at the same rate.

The rule of uniform taxation does not deprive Congress of the


power to classify subjects of taxation, and only demands
uniformity within the particular class.

In this case, the tax law is uniform because:

1) it provides a standard rate of 0% or 10% (or


12%) on all goods and services;
o
) it does not make any distinction as to the type
of industry or trade that will bear the 70%
limitation on the creditable input tax, 5-year
amortization of input tax paid on purchase of
capital goods or the 5% final withholding tax by
the government.
TAX IS EQUITABLE. (Taxes should equally burden all
individuals or entities in similar economic circumstances.)
The law is equipped with a threshold margin. The VAT rate of 0% or
10% (or 12%) does not apply to sales of goods or services with gross
annual sales or receipts not exceeding P1.5M.
Also, basic marine and agricultural food products in their original state
are still NOT subject to the tax, thus ensuring that prices at the
grassroots level will remain accessible.
Although the law outs a premium on businesses with low profit
margins, and unduly favors those with high profit margins, Congress
equalized the burden the law by likewise imposing a 3% percentage
tax on VAT-exempt persons under Section 109(v), i.e., transactions with
gross annual sales and/or receipts not exceeding P1.5 Million.
This acts as an equalizer because in effect, bigger businesses that
qualify for VAT coverage and VAT-exempt taxpayers stand on equalfooting.
Moreover, Congress provided under mitigating measures to ease, as
well as spread out, the burden of taxation, which would otherwise rest
largely on the consumers:
o
Excise taxes on petroleum products and natural gas were
reduced. Percentage tax on domestic carriers was removed.
Power producers are now exempt from paying franchise tax.
o
Income tax rates of corporations, in order to distribute the burden
of taxation, were increased
o
Domestic, foreign, and non-resident corporations are now subject
to a 35% income tax rate, from a previous 32%.
o
Intercorporate dividends of non-resident foreign corporations are
still subject to 15% final withholding tax but the tax credit allowed
on the corporations domicile was increased to 20%.
o
PAGCOR is not exempt from income taxes anymore.
o
Even the sale by an artist of his works or services performed for
the production of such works was not spared.
On the INPUT TAX LIMIT* (ITO ata yung impt)
Petitioner (Shell) assumes that the input tax exceeds 70% of the output
tax, and therefore, the input tax in excess of 70% remains uncredited.

TAX 2 MONTERO | Y. Sanchez A2012

However, to the extent that the input tax is less than 70% of the
output tax, then 100% of such input tax is still creditable.
More importantly, the excess input tax, if any, is retained in a
businesss books of accounts and remains creditable in the succeeding
quarter/s. This is explicitly allowed by Section 110(B), which provides
that if the input tax exceeds the output tax, the excess shall be
carried over to the succeeding quarter or quarters.
In addition, Section 112(B) allows a VAT-registered person to apply for
the issuance of a tax credit certificate or refund for any unused input
taxes, to the extent that such input taxes have not been applied
against the output taxes. Such unused input tax may be used in
payment of his other internal revenue taxes.
The non-application of the unutilized input tax in a given quarter is not
ad infinitum, as petitioners exaggeratedly contend.
On the other hand, it appears that petitioner Garcia failed to
comprehend the operation of the 70% limitation on the input tax.
According to petitioner, the limitation on the creditable input tax in
effect allows VAT-registered establishments to retain a portion of the
taxes they collect, which violates the principle that tax collection and
revenue should be for public purposes and expenditures.
As earlier stated, the input tax is the tax paid by a person,
passed on to him by the seller, when he buys goods. Output
tax meanwhile is the tax due to the person when he sells
goods. In computing the VAT payable, three possible scenarios may
arise:
o
If output tax = input tax = no payment
o
If output tax > input tax = person liable for excess, to be
paid to BIR
o
If input tax > output tax = excess shall be carried over to
the succeeding quarter or quarters.
o
IF input tax results from zero-rated or effectively zerorated transactions, any excess over the output taxes shall
be REFUNDED to the taxpayer / credited against other
internal revenue taxes, at the taxpayers option.
Section 8 of R.A. No. 9337 however, imposed a 70% limitation on the
input tax. Thus, a person can credit his input tax only up to the extent
of 70% of the output tax.
There is no retention of any tax collection because the taxpayer
has already previously paid the input tax to a seller, and the
seller will subsequently remit such input tax to the BIR. The
party directly liable for the payment of the tax is the seller. What only
needs to be done is for the person/taxpayer to apply or credit these
input taxes, as evidenced by receipts, against his output taxes.
TAX IS REGRESSIVE, BUT IT IS NOT INVALID.

Taxation is PROGRESSIVE when its rate goes up depending on the


resources of the person affected. The Constitution does not really
prohibit the imposition of indirect taxes, like the VAT. What it
simply provides is that Congress shall "evolve a progressive
system of taxation."

*NOTE the distinction made by the court:


VAT - A tax on spending or consumption. It is levied on the sale, barter,
exchange or lease of goods or properties and services. Being an indirect tax
on expenditure, the seller of goods or services may pass on the amount of
tax paid to the buyer, with the seller acting merely as a tax collector. The
burden of VAT is intended to fall on the immediate buyers and ultimately,
the end-consumers.

Direct tax is a tax for which a taxpayer is directly liable on the transaction
or business it engages in, without transferring the burden to someone else.
Examples are individual and corporate income taxes, transfer taxes, and
residence taxes.
ABAKADA v. Ermita (Oct 18, 2005)

This case is about the Resolution of the Motion for Reconsideration filed
by herein petitioners based on the decision rendered by the court on
Sept. 1, 2005, upholding the constitutionality of RA 9337 or the VAT
Reform Act.

Relevant issues are as follows:


1. MR of Escudero, et al.: W/N there was grave abuse of discretion
amounting to lack or excess of jurisdiction on the part of the
Bicameral Committee when the No Pass-On Provisions for the
sale of petroleum products and power generation services were
deleted.
2. MR of Bataan Governor Garcia, Jr.: W/N the VAT law is
unconstitutional for being arbitrary, oppressive and inequitable
because it burdens the consumers because of the price increase.
3. MR of Association of Pilipinas Shell Dealers: W/N the Court erred
in upholding the constitutionality of Section 110(A)(2) and
Section 110(B) of the NIRC as amended by the EVAT Law
imposing limitations on the amount of input VAT that may
be claimed as a credit against the output VAT; Section
114(C) of the NIRC as amended by the EVAT Law, requiring
the government or any of its instrumentalities to withhold
a 5% final withholding tax on their gross payments on
purchases of goods and services; for finding that the EVAT Law
is not arbitrary, oppressive and confiscatory as to amount a

TAX 2 MONTERO | Y. Sanchez A2012

deprivation of property without due process of law; that it did not


violate the equal protection clause.
R: MRs are DENIED. TRO is lifted.
Escudero, et al. argues that the bicameral committee should not have
touched on the No Pass-On Provisions since both the Senate and the
House of Representatives were in agreement that such provision
should be passed where no VAT Burden shall be passed to the endconsumer and instead will be shouldered by the sellers.
HOWEVER, the deletion of the No Pass-On Provision made
the present VAT law more in consonance with the very nature
of VAT which is a tax on spending or consumption, thus, the
burden thereof is ultimately borne by the end-consumer.
As to the contention that the right to credit input tax has already
evolved into a vested right, the Court finds that the right to credit
the same is a mere creation of law. Prior to the enactment of multistage sales taxation, the sales taxes paid at every level of distribution
are not recoverable from the taxes payable. With the advent of EO 273
imposing a 10% multi-stage tax on all sales, it was only then that the
crediting of the input tax paid on purchase or importation of goods and
services by VAT-registered persons against the output tax was
established. This continued with the Expanded VAT Law (R.A. No.
7716), and The Tax Reform Act of 1997 (R.A. No. 8424). The right to
credit input tax as against the output tax is clearly a privilege
created by law, a privilege that also the law can limit. It should
be stressed that a person has no vested right in statutory
privileges.
The impact of the 70% limitation on the creditable input tax will
ultimately depend on how one manages and operates its business.
Market forces, strategy and acumen will dictate their moves. With or
without these VAT provisions, an entrepreneur who does not have the
ken to adapt to economic variables will surely perish in the
competition. The arguments posed are within the realm of business,
and the solution lies also in business.

CIR v. Toshiba Information Equipment (Phils.), Inc.

Toshiba is a domestic corporation with the primary purpose of


engaging in the business of manufacturing and exporting of electrical
and mechanical machinery and goods relating to information
technology, computer hardware and software.

In 1995, Toshiba registered w/ Philippine Economic Zone Authority


(PEZA) as an Ecozone Export Enterprise. Toshiba also registered with
the BIR as a VAT taxpayer.

Toshiba filed its VAT returns for the year 1996 reporting its input VAT
and alleging that its input VAT was from its purchases of capital goods

and services which remained unutilized since it had not yet engaged in
any business activity for which it may be liable for output VAT.
Consequently, Toshiba filed with the One-Stop Shop Inter-Agency Tax
Credit and Duty Drawback center of the Department of Finance
applications for tax credit/refund of its unutilized input VAT.
Toshiba also filed a petition for review with the CTA to toll the running
of the two-year prescriptive period for judicially claiming a tax
credit/refund.
CTA ordered the CIR to refund or to issue a tax credit certificate to
Toshiba.
CIR opposed on the ground that since Toshiba is registered with PEZA
as an Ecozone Export Enterprise, its business is not subject to VAT
pursuant to Section 109 of the Tax Code. Since Toshibas business is
not subject to VAT, the capital goods and services it purchased are
considered not used in VAT taxable business and therefore, it is not
entitled to refund of input taxes on such capital goods.
I: W/n Toshiba is entitled to the tax credit/refund of its input VAT on its
purchases of capital goods and services
R: Yes, Toshiba is entitled to tax credit/refund of its input VAT on its
purchases of capital goods and services.
An Ecozone enterprise is a VAT-exempt entity. Sales of goods,
properties, and services by persons from the Customs Territory to
Ecozone enterprise shall be subject to VAT at zero percent (0%).
PEZA-registered enterprises, which would necessarily be located within
Ecozones, are VAT-exempt entities because of Section 8 of RA 7916
which establishes the fiction that Ecozones are foreign territory. The
national territory of the Philippines outside of the proclaimed borders of
the Ecozone are referred to as Customs Territory. The provision
provides that PEZA shall manage and operate the Ecozones as a
separate customs territory, thus creating the fiction that the Ecozone is
a foreign territory.
The Philippine VAT system adheres to the Cross Border Doctrine,
according to which, no VAT shall be imposed to form part of the cost of
goods destined for consumption outside of the territorial board of the
taxing authority.
Sales of goods, properties, and services by a VAT-registered supplier
from the Customs Territory to an Ecozone enterprise shall be treated as
export sales.
If such sales are made by a VAT-registered supplier, they shall be
subject to VAT at 0%. In zero-rated transactions, the VAT-registered
supplier shall not pass on any output VAT to the Ecozone enterprise,
and at the same time, shall be entitled to claim tax credit/refund of its
input VAT attributable to such sales.

TAX 2 MONTERO | Y. Sanchez A2012

Zero-rating of export sales primarily intends to benefit the export (i.e.,


the supplier from Customs territory), who is directly and legally liable
for VAT. Meanwhile, sales to an Ecozone enterprise made a by a nonVAT or unregistered supplier would only be exempt from VAT and the
supplier shall not be able to claim credit/refund of its input VAT.
Even conceding, however, that Toshiba as a PEZA-registered
enterprise, is a VAT-exempt entity that could not have engaged in a
VAT-taxable business, given the particular circumstances, Toshiba is
entitled to a credit/refund of its input vat.
The sales made to Toshiba, for which it is claiming a refund or credit of
its unutilized input vat, were made in 1996 under the old rule that the
tax-status of Ecozone enterprises would depend upon the tax
incentives it chooses to avail of, either the 5% preferential tax or the
income tax holiday under the Omnibus Investments Code where the
entity will only be exempt from income tax but not from VAT.
Since Toshiba chose to avail of the income tax holiday, it was therefore
subject to the 10% VAT. Therefore Toshibas transactions in 1996 being
subject to VAT, is entitled to a credit/refund of the unutilized input VAT
it incurred which it wasnt able to apply against its output taxes.

The transaction from a supplier in a customs territory to Toshiba,


being a PEZA-registered enterprise, was considered an effectively
VAT zero-rated transaction. However, the sales made by Toshiba to
a foreign country were considered export sales. Thus, they were
considered to be automatically VAT zero-rated transactions.
Given that in the case of Toshiba, Toshiba was Buyer 1 and not the
Seller, then it should not have claimed for an input tax credit since
theoretically, there was no input VAT on Toshibas part.
However, the Toshiba case happened prior to RMC 74-99 where
PEZA-registered enterprises availed of income tax holidays and so
Toshiba was subject to VAT. Thus, there was an assumption that
the seller passed on VAT to Toshiba and so, Toshiba should be
allowed to claim for an input tax credit.
As regards the fact that Toshiba was asking for an input tax credit
on capital goods, the ruling in that case is no longer applicable as
input tax credit for capital goods under RA 9337 are governed by
new rules.
In this case, the Court also made a pronouncement that a VATregistered supplier from the customs territory to an Ecozone
enterprise shall be treated as export sales, while sales to an
ECOZONE enterprise made by a NON-VAT or unregistered supplier
would only be exempt from VAT and the supplier shall not be able
to claim credit/refund for his input VAT.

CIR v Seagate

Seagate is a resident foreign corporation duly registered with the SEC


to do business in the Philippines, with principal office address at the
Special Economic Zone in Cebu.
It is also registered with the Philippine Export Zone Authority (PEZA) to
engage in the manufacture of recording components primarily used in
computers for export. Furthermore, it is a VAT-registered entity w/c filed
VAT returns for the period of April 1998 to 30 June 1999.
Subsequently, an administrative claim for refund of VAT input taxes
in the amount of P28,369,226.38 with supporting documents (inclusive
of the P12,267,981.04 VAT input taxes subject of this Petition for
Review), was filed.
CIR did not act upon this so Seagate elevated the case to CTA.
CTA granted the claim for refund but the CA modified it in the reduced
amount of P12M, w/c represented the unutilized but substantiated
input VAT paid on capital goods purchased for the period covering April
1, 1998 to June 30, 1999. This was because Seagate had availed itself
only of the fiscal incentives under EO 226 and NOT of those under both
PD 66 and Section 24 of RA 7916.
Respondent was, therefore, considered exempt only from the payment
of income tax when it opted for the income tax holiday in lieu of the
5% preferential tax on gross income earned. As a VAT-registered entity,
though, it was still subject to the payment of other national internal
revenue taxes, like the VAT.
I: W/n Seagate is entitled to the refund or issuance of Tax Credit
Certificate in the amount of P12,122,922.66 representing alleged
unutilized input VAT paid on capital goods purchased for the period
April 1, 1998 to June 30, 1999
R: YES, Seagate is entitled to refund.

THERE IS Preferential Tax Treatment Under the following


Special Laws:
o
PD 66- law creating PEZA
o
EO 226- Omnibus Investments Code" of 1987
o
RA 7227- Bases Conversion
and Development Act
of 1992
o
RA 7916- VAT Law
o
RA 7844- Export Development Act of 1994;
o
PD 1853- law requiring deposits of duties upon the
opening of letters of credit to cover imports
Seagate is one of the business entities registered in and operating from
the SEZ in Cebu. These entities are exempt from all internal revenue
taxes and the implementing rules relevant thereto, including the VAT.

TAX 2 MONTERO | Y. Sanchez A2012

Although export sales are not deemed exempt transactions, they are
nonetheless zero-rated, because the ecozone within which it is
registered is managed and operated by the PEZA as a separate
customs territory.
This means that in such zone is created the legal fiction of foreign
territory.
Under the cross-border principle of the VAT system being enforced
by the BIR, no VAT shall be imposed to form part of the cost of goods
destined for consumption outside of the territorial border of the taxing
authority. If exports of goods and services from the Philippines to a
foreign country are free of the VAT, then the same rule holds for such
exports from the national territory -- except specifically declared areas
-- to an ecozone.
THUS, sales made by a VAT-registered person in the customs territory
to a PEZA-registered entity are considered exports to a foreign
country
Conversely, sales by a PEZA-registered entity to a VAT-registered
person in the customs territory are deemed imports from a foreign
country.
An ecozone, even though a geographical territory of the Philippines, is
however regarded in law as foreign soil. This legal fiction is necessary
to give meaningful effect to the policies of the special law creating the
zone.
There is a difference between ZERO-RATED TRANSACTIONS and
EXEMPT / EFFECTIVE ZERO-RATED TRANSACTIONS
Zero-rated
It is automatic zero-rating.
Refers to the export sale of
goods and supply of services.

Exempt
It is effective zero rating.
Refers to the sale of goods or
supply of services to persons or
entities whose exemption under
special laws or Intl agreements
to which the Philippines is a
signatory effectively subjects
such transactions to a zero rate.

Intended to be enjoyed by the


seller who is directly and legally
liable for the VAT, making such
seller internationally competitive
by allowing the refund or credit of
input taxes that are attributable
to export sales.

Intended
to
benefit
the
purchaser who, not being
directly and legally liable for the
payment of the VAT, will
ultimately bear the burden of the
tax shifted by the suppliers.

There is total relief for the


purchaser from the burden of the
tax since he does not have input
VAT and in effect, because VAT is
at 0%, it does not have output
VAT.

There is partial relief because


the purchaser is not allowed any
tax refund of or credit for input
taxes paid.

Differentiate zero-rated from effectively zero-rated transactions


according to Seagate
Sir pointed out that: the difference between automatic zero-rated
transactions from effectively zero-rated transactions is that with automatic
zero-rated transactions, you only have to look at the Tax Code
provisions to know which transactions are automatic zero-rated.
However, with EXEMPTIONS / effective zero-rated transactions, you
have to look at other laws; thus, for effective zero-rated transactions,
there is a need to get a prior confirmation or prior approval from the BIR
that the transaction is effectively zero-rated.
NOTE however that Revenue Regulations of 4-2007 does not provide
anymore that there should be an approval before a transaction that is
effectively VAT zero-rated to become effectively VAT zero-rated, which
could be a legal basis why there is no need for prior confirmation. But Sir
does not agree since there is yet no amendment in the Tax Code.
Exempt Transaction
- involves goods or services which,
by their nature, are specifically
listed in and expressly exempted
from the VAT under the Tax Code,
without regard to the tax status of
the party (VAT-exempt or not) to the
transaction.
- such transaction is not subject to
the VAT, but the seller is not allowed
any tax refund of or credit for any
input taxes paid.

Exempt Party
- a person or entity granted VAT
exemption under the Tax Code, a
special law or an international
agreement to which the Philippines
is a signatory, and by virtue of
which its taxable transactions
become exempt from the VAT.
- Such party is also not subject to
the VAT, but may be allowed a tax
refund of or credit for input taxes
paid, depending on its registration
as a VAT or non-VAT taxpayer.
While the liability is imposed on one person, the burden may be passed on
to another. Therefore, if a special law merely exempts a party as a seller
from its direct liability for payment of the VAT, but does not relieve the
same party as a purchaser from its indirect burden of the VAT shifted to it
by its VAT-registered suppliers, the purchase transaction is not exempt.
Applying this principle to the case at bar, the purchase transactions entered
into by respondent are not VAT-exempt.

TAX 2 MONTERO | Y. Sanchez A2012

OTHERS:
Special laws may certainly exempt transactions from the VAT.
However, the Tax Code provides that those falling under PD 66 are not. The
purchase transactions it entered into are, therefore, not VAT-exempt. These
are subject to the VAT; respondent is required to register. Its sales
transactions, however, will either be zero-rated or taxed at the standard
rate of 10 percent, depending again on the application of the destination
principle (Under this principle, goods and services are taxed only in the
country where these are consumed. Thus, exports are zero-rated, but
imports are taxed).
When VAT Rate is at 0% or at 10%
0%- if Seagate enters into such sales transactions with a purchaser (usually
in a abroad) for use or consumption OUTSIDE the Philippines
10%- if Seagate entered into with a purchaser for use or consumption IN
the Philippines, UNLESS the purchaser is exempt from the indirect burden of
the VAT, in which case it shall also be zero-rated.
Since the purchases of respondent are not exempt from the VAT, the rate to
be applied is zero.
The Tax Exemptions are Broad and Express
Applying the special laws enumerated above, respondent as an
entity is exempt from internal revenue laws and regulations. This
exemption covers both direct and indirect taxes, stemming from the very
nature of the VAT as a tax on consumption, for which the direct liability is
imposed on one person but the indirect burden is passed on to another.
Respondent, as an exempt entity, can neither be directly charged for the
VAT on its sales nor indirectly made to bear, as added cost to such sales,
the equivalent VAT on its purchases. Ubi lex non distinguit, nec nos
distinguere debemus. Where the law does not distinguish, we ought not to
distinguish.
Tax Refund or Credit is in Order
Having determined that respondents purchase transactions are
subject to a zero VAT rate, the tax refund or credit is in order. As correctly
held by both the CA and the Tax Court, respondent had chosen the fiscal
incentives in EO 226 over those in RA 7916 and PD 66. It opted for the
income tax holiday regime instead of the 5 percent preferential tax regime.
Therefore, respondent can be considered exempt, not from the VAT, but
only from the payment of income tax for a certain number of years,
depending on its registration as a pioneer or a non-pioneer enterprise.

Summary
To summarize, special laws expressly grant preferential tax
treatment to business establishments registered and operating within an
ecozone, which by law is considered as a separate customs territory. As
such, respondent is exempt from all internal revenue taxes, including the
VAT, and regulations pertaining thereto. It has opted for the income tax
holiday regime, instead of the 5 percent preferential tax regime. As a
matter of law and procedure, its registration status entitling it to such tax
holiday can no longer be questioned. Its sales transactions intended for
export may not be exempt, but like its purchase transactions, they are zerorated. No prior application for the effective zero rating of its transactions is
necessary. Being VAT-registered and having satisfactorily complied with all
the requisites for claiming a tax refund of or credit for the input VAT paid on
capital goods purchased, respondent is entitled to such VAT refund or
credit.
American Express v. CIR
Petitioner Amex-Phil is a Philippine branch of American Express
International, Inc., a corporation duly organized under Delaware, US
laws. It is a servicing unit of American Express International, Inc. HK
branch, engaged primarily to facilitate the collection of Amex HK's
receivables from Amex cardholders residing or situated in the
Philippines, as well as the payment of Amex HK to American Express
accredited service establishments and merchants in the Philippines.
Amex-Phil made a request in writing to BIR for qualification as a zero
rated VAT enterprise.
BIR issued a VAT Ruling declaring that as a VAT registered entity whose
service is paid for in acceptable foreign currency which is remitted
inwardly to the Philippines and accounted for in accordance with the
rules and regulations of the Central Bank of the Philippines, Amex-Phils
service income is automatically zero rated effective January 1, 1988.
For this, there is no need to file an application for zero-rate.
For the taxable year 1998, petitioner allegedly generated and recorded
revenues in the total amount of P81k which were paid for in HK in
foreign currency inwardly remitted to the Philippines and accounted for
in accordance with the rules and regulations of the BSP.
Amex-Phil asserts that said revenues qualify as zero-rated pursuant Tax
Code as confirmed in the VAT Ruling. For the same period, Amex-Phil
allegedly paid input VAT amounting to P3.9M+ on its domestic
purchases of taxable goods/services. Petitioner nonetheless claims that
its output VAT liability for the period amounted only to P4k thereby
leaving an unutilized input VAT of P3M averred to be directly attributable
to its zero-rated sales.

TAX 2 MONTERO | Y. Sanchez A2012

Petitioner contends that the input VAT payments in 1998 were paid in
the course of its trade or business. Further, the unapplied input VAT
payments subject of this case had not been carried over to the
succeeding first quarter of 1999.
I: W/N Amex-Phil is entitled to a refund of P3,967,561.06 allegedly
representing unutilized input VAT payments on domestic purchases
of taxable goods/services which are directly attributable to zero-rated
sales for the period January 1 to December 31, 1998
R: YES. Petitioner's claim for refund is hereby PARTIALLY GRANTED.
Respondent CIR is ORDERED to REFUND to petitioner the sum of
P3,967,336.97 representing unutilized input VAT payments for the
period January 1 to December 31, 1998.
The onus (burden) of taxation under our VAT system is in the country
where the goods, property or services are destined and consumed.
This is the reason why under our VAT Law, goods, property or services
destined to be consumed in the Philippines are subject to the 10% VAT
whereas exports are zero-rated.
Amexs transactions were considered zero-rated because they were
services that were paid for in an acceptable foreign currency &
accounted for in accordance w/ the rules & regulations of the BSP since
its transactions were paid in HK foreign currency which was inwardly
remitted to the Philippines & accounted for in accordance w/ the rules of
BSP.
The governing law in the case at bar is Section 112(A)[then Section
106(a)] in relation to Section 108(B)(2) of the Tax Code. 3 In conformity
with this law, to be entitled to a refund or tax credit of input VAT
payments directly attributable to zero-rated or effectively zerorated sales, the following requisites must be complied with:
1) there must be zero-rated or effectively zero-rated sales;
2) that input taxes were incurred or paid;
3) that such input VAT payments are directly attributable to zero-rated
sales or effectively zero-rated sales;
4) that the input VAT payments were not applied against any output
VAT liability; and
5) that the claim for refund was filed within the two-year prescriptive
period.

SEC. 112. Refunds or Tax Credits of Input Tax.


(A) Zero rated or Effectively Zero-rated Sales. Any VAT registered person, whose sales are zerorated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when
the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input
tax due or paid attributable to such sales, except transitional input tax, to the extent that such input
tax has not been applied against output tax: Provided, however, That in the case of zero-rated sales
under Section 106(A)(2)(a)(1), (2) and (B) and Section 108(B)(1) and (2), the acceptable foreign
currency exchange proceeds thereof had been duly accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP).

PETITIONER in this case fulfilled all the requirements, except the 3rd (not
all of the input VAT payments were attributable to the zero-rated sales),
hence the partial grant.
1st requirement: Petitioner's sales of services qualify as zero-rated
sales. It is a VAT registered entity and its sales of services to AMEX HK
falls under Section 108(B)(2) of the Tax Code. Further, petitioner's
service fee earnings amounting to P81k were paid for in acceptable
foreign currency (US dollars) and accounted for in accordance with the
rules and regulations of the BSP as evidenced by the various telex
advices and demand deposit statementsand certification from BPI Forex
Corporation.
2ndrequisite: Petitioner submitted various suppliers' invoices and ORs
which are valid documents in accordance with Sections 113 and 237 of
the Tax Code. From said documents, petitioner established that it paid
an input VAT in the sum of P3,972,025.15 on its domestic purchases of
taxable goods/services for the year 1998.
3rd requisite: Not all of the substantiated input VAT payments of
P3,972,025.15 were directly attributable to petitioner's zero-rated sales.
For the year 1998, petitioner had taxable sales in the amount of
P46,881.80 with the corresponding output VAT of P4,688.18 Indubitably,
only the input VAT of P3,967,336.97, arrived at by deducting the output
VAT of P4,688.18 from the substantiated input VAT of P3,972,025.15,
can be directly attributed to petitioner's zero-rated sales for the subject
period.

4threquirement: Petitioner offered in evidence its quarterly VAT return


for the first quarter of 1999 to prove that the subject claim was not
applied or carried over to the said quarter.

Last requirement: Counting the two-year prescriptive period from the


date of filing of petitioner's 1998 first quarterly VAT returns on April 20,
1998, both the administrative (filed on April 18, 2000) and judicial (filed
on April 19, 2000) claims for refund were filed within the two-year
period as mandated by law.

CIR v. CA and Commonwealth Management and Services


Corporation

Commonwealth Management and Services Corporation (COMASERCO),


is a Phil corp w/c is an affiliate of PHILAMLIFE organized by the latter to
perform collection, consultative and other technical services, including
functioning as an internal auditor, of Philamlife and its other affiliates.
BIR issued an assessment to private respondent COMASERCO for

TAX 2 MONTERO | Y. Sanchez A2012

deficiency VAT amounting to P351k+ for taxable year 1988.


COMASERCO filed with the BIR, a letter-protest objecting to the latter's
finding of deficiency VAT, but the CIR sent a collection letter to
COMASERCO demanding payment of the deficiency VAT.
Thus COMASERCO file with the CTA a petition for review wherein they
averred that it was NOT engaged in the business of providing services
to Philamlife and its affiliates.
COMASERCO was established to ensure operational orderliness and
administrative efficiency of Philamlife and its affiliates, and NOT in the
sale of services. COMASERCO stressed that it was not profit-motivated,
thus not engaged in business. Thus, it is not liable to pay VAT.
I: W/n COMASERCO was engaged in the sale of services, and thus liable
to pay VAT thereon
R: YES, COMASERCO is liable to pay VAT (reversing CAs decision and
reinstating the decision of the Tax Appeal in favor of the Commissioner)
CIR avers that to "engage in business" and to "engage in the sale of
services" are two different things.
SC agreed w/ CIR in saying that the services rendered by COMASERCO
to Philamlife and its affiliates, for a fee or consideration, are subject to
VAT. VAT is a tax on the value added by the performance of the service.
It is immaterial whether profit is derived from rendering the service.
Sec 99 of the NIRC provides that any person who, in the course of trade
or business, sells, barters or exchanges goods, renders services, or
engages in similar transactions and any person who imports goods
shall be subject to the VAT imposed in Sections 100 to 102 of this
Code."
COMASERCO contends that the term "in the course of trade or
business" requires that the "business" is carried on with a view to profit
or livelihood. It avers that the activities of the entity must be profitoriented.
COMASERCO submits that it is not motivated by profit, as defined by its
primary purpose in the articles of incorporation, stating that it is
operating "only on reimbursement-of-cost basis, without any profit."
HOWEVER, the EVAT Law clarifies that even a non-stock, non-profit,
organization or government entity, is liable to pay VAT on the sale of
goods or services.
VAT is a tax on transactions, imposed at every stage of the distribution
process on the sale, barter, exchange of goods or property, and on the
performance of services, even in the absence of profit attributable
thereto. The term "in the course of trade or business" requires the
regular conduct or pursuit of a commercial or an economic activity,
regardless of whether or not the entity is profit-oriented.
The definition of the term "in the course of trade or business"
incorporated in the present law applies to all transactions even to

those made prior to its enactment. Executive Order No. 273 stated that
any person who, in the course of trade or business, sells, barters or
exchanges goods and services, was already liable to pay VAT. The
present law merely stresses that even a nonstock, nonprofit
organization or government entity is liable to pay VAT for the sale of
goods and services.
Section 108 of the NIRC defines the phrase "sale of services" as the
"performance of all kinds of services for others for a fee, remuneration
or consideration." It includes "the supply of technical advice,
assistance or services rendered in connection with technical
management or administration of any scientific, industrial or
commercial undertaking or project."
It is immaterial whether the primary purpose of a corporation indicates
that it receives payments for services rendered to its affiliates on a
reimbursement-on-cost basis only, without realizing profit, for purposes
of determining liability for VAT on services rendered. As long as the
entity provides service for a fee, remuneration or consideration, then
the service rendered is subject to VAT.

TAX 2 MONTERO | Y. Sanchez A2012

CIR v SM Primeholdings Inc.

SM Prime and First Asia are both engaged in the business of operating
cinema houses, among others.

BIR sent them both preliminary assessment notices for VAT deficiency
on cinema ticket sales.

Both protested, but BIR denied their protests, arguing that the list of
enumerated services under Sec. 108 of the NIRC is not
exhaustive because it covers all sales of services. Also, the
deficiency assessments were based on Revenue Memorandum Circular
No. 28-2001.

CTA ruled that the activity of showing cinematographic films was NOT
subject to VAT, and should instead be subject to an amusement tax.

CTA en banc affirmed this, saying that section 108 of the NIRC actually
sets forth an exhaustive enumeration of what services are intended to
be subject to VAT, w/c does NOT include the showing films and motion
pictures.

I: W/n the gross receipts derived from admission tickets by


cinema/theater operators or proprietors are subject to VAT

R: NO, it is not subject to VAT.

The enumeration of services subject to VAT under Sec. 108 of the NIRC
is not exhaustive. It is up to the court to determine if showing of films
and motion pictures fall under the phrase similar services of Sec. 108
by ascertaining the intent of the legislature.

Based on various amendments to the VAT coverage, none pertain to


cinema/theater operators or proprietors. In fact, the activity of showing
films and motion pictures has always been considered as a form of
entertainment subject to amusement tax.

At present, only lessors or distributors of cinematographic films


are subject to VAT, while persons subject to amusement tax are
exempt from the coverage of VAT.

It is therefore clear that the legislature never intended to subject this


kind of activity to VAT. To hold otherwise would impose an
unreasonable burden on cinema/theater houses operators or
proprietors, who would be paying an additional 10% VAT on top
of the 30% amusement tax imposed by Sec. 140 of the Local
Govt. Code, or a total of 40% tax.

Such imposition would result in injustice, as persons taxed under the


NIRC of 1997 would be in a better position than those taxed under the
LGC of 1991.

The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis
for the imposition of VAT on the gross receipts of cinema/theater

TAX 2 MONTERO | Y. Sanchez A2012

operators or proprietors derived from admission tickets. The removal


of the prohibition under the Local Tax Code did not grant nor restore to
the national government the power to impose amusement tax on
cinema/theater operators or proprietors.
Neither did it expand the coverage of VAT. Since the imposition of a
tax is a burden on the taxpayer, it cannot be presumed nor can it be
extended by implication. As it is, the power to impose amusement tax
on cinema/theater operators or proprietors remains with the local
government.
Considering that there is no provision of law imposing VAT on the gross
receipts of cinema/theater operators or proprietors derived from
admission tickets, RMC No. 28-2001 which imposes VAT on the gross
receipts from admission to cinema houses is therefore invalid.
The rule on tax exemptions should be construed strictly against the
taxpayer does not apply in this case. SM Primeholdings and First Asia
need not prove that they are exempted from the coverage of VAT. Such
rule presupposes that the taxpayer is clearly subject to the tax being
levied against him.
The reason is obvious: it is both illogical and impractical to determine
who are exempted without first determining who are covered by the
provision. Thus, unless a statute imposes a tax clearly, expressly and
unambiguously, what applies is the equally well-settled rule that the
imposition of a tax cannot be presumed. In fact, in case of doubt,
tax laws must be construed strictly against the government and in
favor of the taxpayer.

Tambunting Pawnshop Inc v CIR


CIR assessed Tambunting pawnshop for deficiency Value-Added Tax for
the taxable year 1999.
Tambunting was ordered by the BIR to pay P3M+ representing deficiency
VAT.
Tambunting alleged that it is NOT liable for tax because a pawnshop is
not enumerated as one of those engaged in "sale or exchange of
services" in Section 108 of the NIRC.
The nature of the business of pawnshops does not fall under "service" as
defined under the Legal Thesaurus of William C. Burton (accommodate,
administer to, advance, afford, aid, assist, attend, be of use, care for,
come to the aid of, commodere, comply, confer a benefit, contribute to,
cooperate, deservire, discharge one's duty, do a service, do one's
bidding, fill an office, forward, furnish aid, furnish assistance, give help,
lend, aid, minister to, promote, render help, servire, submit, succor,
supply aid, take care of, tend, wait on, work for)
I: W/n Pawnshops are subject to VAT pursuant to Section 108 (A) of NIRC.

Pawnshops are not under 108 of the NIRC but are specifically
classified as other Non-bank Financial Intermediaries by RA
9238.
Prior to the passage of the EVAT Law in 1994, pawnshops were treated as
lending investors subject to lending investor's tax.
Subsequently, pawnshops were then treated as VAT-able enterprises
under the general classification of "sale or exchange of services" under
Section 108 (A) of the Tax Code of 1997, as amended. Finally, R.A. No.
9238 [which was passed in 2004] classified pawnshops as Other
Non-bank Financial Intermediaries.
At the time of the disputed assessment, that is, for the year 2000,
pawnshops were not subject to 10% VAT under the general provision on
"sale or exchange of services" as defined under Section 108 (A) of the
Tax Code of 1997, which states: "'sale or exchange of services' means
the performance of all kinds of services in the Philippines for others for a
fee, remuneration or consideration . . . ."
Instead, due to the specific nature of its business, pawnshops were then
subject to 10% VAT under the category of non-bank financial
intermediaries.
The Court finds that pawnshops should have been treated as nonbank financial intermediaries from the very beginning, subject to
the appropriate taxes provided by law, thus
o
Under the NIRC of 1977, pawnshops should have been levied the
5% percentage tax on gross receipts imposed on bank and
non-bank financial intermediaries under (now) Section 121 of
the Tax Code of 1997
o
With the imposition of the VAT under the EVAT Law, pawnshops
should have been subjected to the 10% VAT imposed on banks
and non-bank financial intermediaries and financial institutions
under (now) Section 108 of the Tax Code of 1997
o
However, through the years, various laws effectively deferred
the levy, collection, and assessment of 10% VAT on services
rendered by banks, non-bank financial intermediaries, finance
companies, and other financial intermediaries not performing
quasi-banking functions from 1994 to December 31, 2002;
o
With no further deferments given by law, the levy, collection and
assessment of the 10% VAT on banks, non-bank financial
intermediaries, finance companies, and other financial
intermediaries not performing quasi-banking functions were
finally made effective beginning January 1, 2003;
o
2004: Finally, with the enactment of R.A. No. 9238 in 2004, the
services of banks, non-bank financial intermediaries, finance
companies, and other financial intermediaries not performing
quasi-banking functions were specifically exempted from VAT,
and the 0% to 5% percentage tax on gross receipts on other non-

TAX 2 MONTERO | Y. Sanchez A2012

bank financial intermediaries was reimposed under Section 122


of the Tax Code of 1997.
Coming now to the issue at hand - Since petitioner is a non-bank financial
intermediary:
o
For the tax years 1996-2002 it is actually subject to 10%
VAT.

HOWEVER, with the levy, assessment and collection of


VAT from non-bank financial intermediaries being
specifically deferred by law then petitioner is NOT
liable for VAT during these tax years.
o
Starting January 1, 2003 petitioner is LIABLE for 10% VAT
for said tax year with the full implementation of the VAT system
on non-bank financial intermediaries starting this date.
o
Beginning 2004 up to the present, by virtue of R.A. No.
9238, petitioner is NO longer liable for VAT but it is subject to
percentage tax on gross receipts from 0% to 5%, as the case may
be.
Fort Bonifacio Dev Corp v CIR

Bground: The first VAT law, EO 273 (OLD NIRC), accommodated


potential burdens for newly liable VAT-registered persons through
providing Transitional Input Tax Credit (TITC).

Then, RA 7716 took effect, which amended the OLD NIRC and
included sales of real property in the coverage of VAT.

RA 8424 (NIRC) was enacted and amended the Transitory


Provisions. It also included the concept of Presumptive Input Tax
Credit

Fort Bonifacio Development Corporation (FBDC) acquired from the


National Government a vast tract of land now known as Fort
Bonifacio Global City.

Because the law then was prior to RA 7716, no VAT was paid.

However, at the effectivity of RA 7716, FBDC became a VATRegistered person, liable for VAT and entitled for transactional
input tax credit.

FBDC executed 2 contracts to sell over lands in Global City in favor


of Metro Pacific Corporation.

It paid VAT but utilized its transitional input tax credit, which offset
each other.

Upon FBDC asking the BIR whether the offsetting was valid, BIR
recommended that their claim TITC was correct.

However, BIR subsequently issued an Assessment where it


disallowed the use of TITC on the basis of a Revenue Regulation
7-95 (limit use of 8% transitional input tax to book value of
improvements only). BIR now claims tax deficiency.

CTA ruled in favor of the CIR. CA affirmed the decision but


removed the penalties and surcharges. FBDC filed 2 petitions to
the SC, both claiming TITC. Both were consolidated in this
decision.
I: W/N Section 105 of the Old NIRC restricts the application by Real
Estate Dealers of the Transitional Input Tax only to improvements
on the real property belonging to their beginning inventory
R: No. The restriction is invalid. The FBDC is allowed to credit its
transitional input tax on the sale.
In the OLD NIRC, only goods where covered by the VAT. Real
properties were only included by an amendment of RA 7716.
But when it was amended, there was no differential treatment in
transitional input tax for goods or real properties. In addition, the
definition of Real Property is being primarily used for sale to
customers or held for lease in the ordinary course of business.
Thus, the real property is treated the same way as goods.
The issuance of RR 7-95 was erroneous. There is no logic to
limit the provision only to improvements. The very idea runs
counter to what the tax credit seeks to accomplish.
As GOODS in the business sense, refers to the product that the
VAT-registered person offers for sale the public, real estate dealers
treat real properties as their goods.
The purpose behind the transitional input tax credit is not confined
to the transition from sales to VAT. As proof, Congress has
reenacted the transitional input tax both in the OLD NIRC and the
NEW NIRC. The transitional aspect of the transitional input tax
pertains to the event that the taxpayer starts to become VATregistered. As being covered by the VAT does not merely take
place by operation of law, it requires the act of a person to be
covered by VAT.
For example, A person can be liable for VAT if he decides to
start a business. Thus, transitional tax input credit is
available, whether under the OLD NIRC or NEW NIRC, to a
newly-VAT registered person.
The transitional input tax is available, regardless whether
the purchase of the goods, materials and supplies in the
beginning inventory was subjected to VAT or not. To limit its
availability to goods subjected to VAT, would be absurd. Because
some goods acquired are not subject to VAT, but still liable for tax
like capital gains tax, donors tax and estate tax. It would render
the purpose of the law useless.
It is apparent that the transitional input tax credit
operates to benefit newly VAT-registered persons, whether

TAX 2 MONTERO | Y. Sanchez A2012

or not they previously paid taxes in the acquisition of their


beginning inventory of goods, materials and supplies.

During that period of transition from non-VAT to VAT status, the


transitional input tax credit serves to alleviate the impact of the
VAT on the taxpayer. At the very beginning, the VAT-registered
taxpayer is obliged to remit a significant portion of the income it
derived from its sales as output VAT. The transitional input tax
credit mitigates this initial diminution of the taxpayers income by
affording the opportunity to offset the losses incurred through the
remittance of the output VAT at a stage when the person is yet
unable to credit input VAT payments.

Although the CIR has the power to redefine the concept of goods,
it pertains to more technical matters. It cannot go as far as to
amend the provision, as it include goods and real property in the
course of business. Thus, in case of conflict between a statue and
an administrative order, the statue shall prevail
Justice Antonio Carpio dissent: The transitional input tax credit
applies only when taxes where paid on the properties in the beginning
inventory, but this would constitute a new requisite to the application
of transitional input tax credit and would require the taxpayer
additional proof of payment of taxes. He also argues that the word
presumptive assumes the payment of tax, thus requiring prior
payment of taxes. The law necessarily comes into existence only after
the introduction of VAT. However, presumptive input tax credit is
included in the OLD NIRC but was never integrated until the NEW NIRC
took effect, which is more than a decade. Thus, the old meaning is not
anymore attached to the word. Only those goods on which input VAT
was paid could form the basis of input tax credit. However, this brings
about the again absurd situation where goods not subject to VAT are
acquired but liable for other tax (estate / donor / capital gains).
As a last point, the prohibition of using value of real properties in the
beginning inventory in RR 7-95 has already been repealed by RR 6-97.

Fort Bonifacio Dev Corp v CIR (MR)

RA 7716 took effect on January 1, 1996. It amended Section 100 of


the Old NIRC by imposing for the first time VAT on sale of real
properties.

The provisions of Section 105 of the NIRC remain intact despite the
enactment of RA 7716. Section 105 however was amended with the
passage of the New NIRC

In the April 2, 2009 Decision sought to be reconsidered, the Court


struck down Section 4.105-1 of RR 7-95 for being in conflict with the
law. It held that the CIR had no power to limit the meaning and
coverage of the term "goods" in Section 105 of the Old NIRC to only

apply to IMPROVEMENTS on real property belonging to the beginning


inventory.

I: W/n RR 7-95 is valid, given that

1) Sec 100 of the Old NIRC as amended by RA7716, could not have
supplied the distinction between the treatment of real properties or
real estate dealers, and the treatment of transactions involving other
commercial goods, as said distinction is found in section 105 and,
subsequently, revenue regulations no. 7-95 which defines the input tax
creditable to a real estate dealer who becomes subject to vat for the
first time.

2) Section 4.105.1 and paragraph (a) (iii) of the transitory provisions of


revenue regulations no. 7-95 validly limits the 8% transitional input tax
to the improvements on real properties.

A law must not be read in truncated parts; its provisions must be read
in relation to the whole law.

The term "goods or properties" by the unambiguous terms of Section


100 includes "real properties held primarily for sale to costumers or
held for lease in the ordinary course of business."

Having been defined in Section 100 of the NIRC, the term "goods" as
used in Section 105 of the same code could not have a different
meaning.

Under Section 105, the beginning inventory of "goods" forms part of


the valuation of the transitional input tax credit.

Goods, as commonly understood in the business sense, refers to the


product which the VAT-registered person offers for sale to the public.
With respect to real estate dealers, it is the real properties themselves
which constitute their "goods." Such real properties are the operating
assets of the real estate dealer.

Section 4.105-1 of RR 7-95 restricted the definition of "goods", when it


stated that in the case of real estate dealers, the basis of the
presumptive input tax shall be the improvements, such as buildings,
roads, drainage systems, and other similar structures, constructed on
or after the effectivity of EO 273 (January 1, 1988). As mandated by
Article 7 of the Civil Code an administrative rule or regulation cannot
contravene the law on which it is based. RR 7-95 is inconsistent with
Section 105 insofar as the definition of the term "goods" is concerned.
This is a legislative act beyond the authority of the CIR and the
Secretary of Finance.

RR 7-95, insofar as it restricts the definition of "goods" as basis of


transitional input tax credit under Section 105 is a nullity.
CIR v PAL

From Jan to Dec 2001, PLDT collected from PAL the said 10%
Overseas Communication Tax4 on the amount paid by PAL for overseas
telephone calls it made through PLDT.
PAL filed w/ the BIR a claim for refund of the OCT it alleged to have
erroneously paid in 2001. This was based on its franchise, Sec 13 of PD
1590, w/c granted it:
o
1) the option to pay either the basic corporate income tax
on its annual net taxable income or the 2% percent
franchise tax on its gross revenues, whichever was lower;
and
o
2) the exemption from all other taxes, duties, royalties,
registration, license and other fees and charges imposed
by any municipal, city, provincial or national authority or
government agency, now or in the future, except only
real property tax.
Also invoking a BIR Ruling in 1994, PAL maintained that, other than
being liable for basic corporate income tax or the franchise tax,
whichever was lower, PAL was exempted from ALL OTHER TAXES,
including the OCT by virtue of the in lieu of all taxes clause in Section
13 of PD1590.
BIR failed to act on the request for refund of PAL, so PAL filed a
petition for review before the CTA.
CTA ordered BIR to refund PAL the 10% OCT erroneusly collected.
(However CTA held that out of the total amount of P127k respondent
sought to refund, only P126k was supported / documents)
I: W/n CTA was correct in holding that BIR should refund PAL for
10% OCT
R: Yes, CTA was correct.
The language used in Section 13 of PD 1590, granting PAL tax
exemption, is clearly all-inclusive.
The basic corporate income tax or franchise tax paid by
respondent shall be in lieu of all other taxes, duties, royalties,
registration, license, and other fees and charges of any kind, nature, or
description imposed, levied, established, assessed or collected by any
municipal, city, provincial, or national authority or government agency,
now or in the future x x x, except only real property tax.

OCT - imposed by Section 120 of the NIRC, w/c shall be collected upon every overseas dispatch or
message transmitted from the Phils by telephone or other communication equipment.

TAX 2 MONTERO | Y. Sanchez A2012

The discussion in the previous PAL case5 on gross income is


immaterial to the case at bar. OCT is not even an income tax. It is a
business tax, which the government imposes on the gross annual sales
of operators of communication equipment sending overseas
dispatches, messages or conversations from the Philippines.
According to Section 120 of the NIRC, the person paying for the
services rendered shall pay the OCT to the person rendering the
service (PLDT); the latter, in turn, shall remit the amount to the BIR.
If this Court deems that final tax on interest income which is also
an income tax, but distinct from basic corporate income tax is
included among all other taxes from which respondent is exempt,
then with all the more reason should the Court consider OCT, which is
altogether a different type of tax, as also covered by the said
exemption.
BIR also argues that PAL cannot avail itself of the benefit
of the in lieu of all other taxes proviso in PD1590 when it
made no actual payment of either the basic corporate income
tax or the franchise tax.
BIR made the same averment in the PAL case, which the Court
rejected.
It is clear that PD 1590 intended to give PAL the option to avail
itself of Subsection (a) or (b) as consideration for its franchise.
PAL has the option to choose the alternative that results in lower
taxes. It is NOT the fact of tax payment that exempts it, but the
EXERCISE of its option.
Under Subsection (a), the basis for the tax rate is PALs annual net
taxable income, which (as earlier discussed) is computed by
subtracting allowable deductions and exemptions from gross income.

BIR likewise opposed the claim for refund of PAL based on the argument that the latter was not
exempted from final withholding tax on interest income, because said tax should be deemed part of
the basic corporate income tax, which respondent had opted to pay. This Court was unconvinced by
BIRs argument, ratiocinating that basic corporate income tax, under Section 13(a) of Presidential
Decree No. 1590, relates to the general rate of 35% (reduced to 32% by the year 2000) imposed on
taxable income by Section 27(A) of the NIRC. Although the definition of gross income is broad
enough to include all passive incomes, the passive incomes already subjected to different rates of
final tax to be withheld at source shall no longer be included in the computation of gross income,
which shall be used in the determination of taxable income. The interest income of respondent is
already subject to final withholding tax of 20%, and no longer to the basic corporate income tax of
35%. Having established that final tax on interest income is not part of the basic corporate income
tax, then the former is considered as among all other taxes from which respondent is exempted
under Section 13 of Presidential Decree No. 1590.

By basing the tax rate on the annual net taxable income, PD 1590
necessarily recognized the situation in which taxable income may
result in a negative amount and thus translate into a zero tax liability.
The fallacy of the CIRs argument is evident from the fact that the
payment of a measly sum of one peso would suffice to exempt PAL
from other taxes, whereas a zero liability arising from its losses would
not. There is no substantial distinction between a zero tax and a onepeso tax liability.
Thus, by merely exercising its option to pay for basic corporate
income tax even if it had zero liability for the same due to its net loss
position in 2001 PAL was already exempted from all other taxes,
including the OCT.

FITNESS BY DESIGN v CIR


Facts: In 2004, CIR assessed Fitness by Design, Inc. (FDI) for deficiency
taxes (Income Tax, VAT, Documentary Stamp Tax) of P10M for 1995. FDI
protested on the ground that it was issued beyond the 3-year prescriptive
period under Section 203 of the NIRC. FDI also claimed that since it was
incorporated only in 1995, there was no basis to assume that it had already
earned income for that year.
CIR alleged that its right to assess had not prescribed. FDIs 1995 ITR filed
in 1996 was fraudulent for its deliberate failure to declare its true sales.
FDI declared that it was on its pre-operation stage and had not declared its
income. Investigation disclosed that it was operating/doing business and
had sales operations for 1995 of P7M which it failed to report in its 1995
ITR. Likewise, FDI failed to file a VAT Return. Hence, the corresponding
taxes may be assessed at any time within 10 years after the discovery of
such omission or fraud pursuant to Section 222(a) of the NIRC.
BIR filed a criminal complaint before the DOJ against the officers and
accountant of FDI for violation of the NIRC. During the preliminary hearing,
FDIs former bookkeeper attested that a former colleague, Leonardo Sablan,
illegally took custody of FDIs accounting records, invoices, and receipts and
turned them over to the BIR. CTA denied FDIs Motion for Issuance of
Subpoenas and disallowed the submission by FDI of written interrogatories
to Sablan since he was not a party to the case and that the testimony,
documents, and admissions sought were not relevant. FDIs MR was denied.
Hence, a petition for certiorari was filed against CTA.
Issue: W/N the BIR can obtain documents without the taxpayers consent. YES
Held: WHEREFORE, in light of the foregoing disquisition, the petition is
DISMISSED.

TAX 2 MONTERO | Y. Sanchez A2012

Rationale: FDI impugns the manner in which the documents in question


reached the BIR, Sablan having allegedly submitted them to the BIR
without FDIs consent. FDIs lack of consent does not, however, imply that
the BIR obtained them illegally or that the information received is false or
malicious. Nor does the lack of consent preclude the BIR from assessing
deficiency taxes on FDI based on the documents. Thus Section 5 of the
NIRC provides:
In ascertaining the correctness of any return, or in making a return
when none has been made, or in determining the liability of any
person for any internal revenue tax, or in collecting any such
liability, or in evaluating tax compliance, the Commissioner is
authorized:
(A) To examine any book, paper, record or other data which may
be relevant or material to such query;
(B) To obtain on a regular basis from any person other than the
person whose internal revenue tax liability is subject to audit or
investigationany information such as, but not limited to,
costs and volume of production, receipts or sales and gross
incomes of taxpayers, and the names, addresses, and financial
statements of corporations, mutual fund companies, insurance
companies, regional operating headquarters of multinational
companies, joint accounts, associations, joint ventures or
consortia and registered partnerships and their members;
(C) To summon the person liable for tax or required to file a return,
or any officer or employee of such person, or any person
having possession, custody, or care of the books of accounts
and other accounting records containing entries relating to the
business of the person liable for tax, or any other person, to
appear before the Commissioner or his duly authorized
representatives at a time and place specified in the summons
and to produce such books, papers, records, or other data, and
to give testimony;
(D) To take such testimony of the person concerned, under oath,
as may be relevant or material to such inquiry;
XXX
Thus, the law allows BIR to access all relevant or material records and data
in the person of the taxpayer, and the BIR can accept documents which
cannot be admitted in a judicial proceeding where the Rules of Court are
strictly observed. To require the consent of the taxpayer would defeat the
intent of the law to help the BIR assess and collect the correct amount of
taxes.

TAX 2 MONTERO | Y. Sanchez A2012

The issuance of subpoena duces tecum for the production of the documents
requested by the FDI which documents FDI claims to be crucial to its
defense is unnecessary in view of the CTA order for CIR to certify and
forward to it all the records of the case. If the order has not been complied
with, the CTA can enforce it by citing CIR for indirect contempt.

*Other issue pointed out by the Court: Sablan was not a party to the case
and the testimonies, documents, and admissions sought by FDI were not
relevant to the issue before the CTA. The only issues which surfaced during
the preliminary hearing before were whether CIRs issuance of assessment
against FDI had prescribed and whether FDIs tax return was fraudulent.
Besides, the subpoenas and answers to the written interrogatories would
violate RA 2338 as implemented by Finance Department Order 46-66.
Bonifacio Sy Po v CTA
Bonifacia is the widow of the late Mr. Po Bien Sing who died in 1980. In
taxable year 1964-1972, he was the sole proprietor of Silver Cup Wine
factory in Cebu. He was engaged in the business of manufacture and sale
of compound liquors, using alcohol and other ingredients as raw materials.
Silver Cup was alleged to have committed tax evasion amounting
to millions of pesos so Secretary of Finance ordered Finance-BIR-NBI Team
to conduct an investigation. A letter and a subpoena duces tecum were
issued against Silver Cup requesting production of books and accounting
documents. Po Bien Sing, however, did not comply with this. This prompted
the team to enter the factory bodega. They seized different brands of
alcohol products, a total of 1,555 cases. On basis of the teams
investigation, CIR assessed Po Bien Sing deficiency income tax amounting
to P12.7M.
Fact obtained from the decision: The former employees of the
factory testified on the fraudulent practices of Po Bien Sing. The factory
personnel manager testified that false entries were entered in the official
register book. The assistant factory superintendent also testified that when
the storekeeper is not around, illegal operations happen. Untaxed alcohol is
brought from Cebu Alcohol plant into the compound of Silver Cup. When the
storekeeper returns, he sees nothing because the untaxed alcohol is
brought directly to a secret tunnel within the bodega itself.
Bonifacia protested the deficiency assessments. A reinvestigation
was done but yielded the same results in view of the taxpayers insistent
failure to present the books of accounts. Warrants of distraint and levy were
issued by CIR but Bonifacia deemed it only as a denial of her protest.
Issue:

Whether or not the assessments have valid and legal bases? Yes.

Held:
(Hence, CTA and CIR have not committed errors, CTA decision is affirmed.)

Ratio:
1.

2.

3.

Best Evidence Obtainable is applicable in this case. Settled is


the rule that factual findings of CTA are binding upon SC and can
be disturbed on appeal only if such finding is not supported by
substantial evidence. The NIRC also gives the CIR the power to
assess the proper tax based on best evidence obtainable when (1)
a person fails to file a required return or other documents at the
proper time or (2) he files a false or fraudulent return. Rule on
Best Evidence Obtainable applies when tax report required by
law for assessment is not available or when tax report is
incomplete or fraudulent.
The tax figures arrived at by CIR is not arbitrary. On the
basis of the quantity of wines seized during the raid and sworn
statements of former employees, it was ascertained that Silver
Cup utilized and consumed in the manufacture of compounded
liquors and other products 20k drums of alcohol as raw materials
81,288,787 proof liters of alcohol. Also, surcharges for failure to
submit returns or for rendering false returns and Interest on
deficiency were also imposed.
Burden of proof is on tax payer. It is incumbent upon the tax
payer appealing to the tax court to prove what is the correct and
just liability through a full disclosure of all pertinent data in his
possession. This is the only way he could prove that the tax
assessment is wrong. Also, the fraudulent acts detailed in the
decision had not been satisfactorily rebutted by petitioner. This,
Bonifacia must counteract through substantial evidence.

CIR v Benipayo
(see block digests for the rest)

COLLECTION OF CASES WHERE THE ASSESSMENT IS FINAL AND


UNAPPEALABLE
Dayrit v Cruz

TAX 2 MONTERO | Y. Sanchez A2012

The Teodoros (petitioners) were legitimate children and heirs of the


deceased spouses Marta and Toribio Teodoro who died intestate.
The heirs separately filed estate and inheritance tax returns for the
estates of the spouses with the BIR.
The BIR then issued deficiency estate and inheritance tax assessments
for both estates. (roughly P1M each)
The heirs asked for reconsideration as the assessment was allegedly
contrary to law and not supported by sufficient evidence.
In 1974, the Commissioner filed a motion for allowance of claim
against the estates, and for an order of payment of taxes
before the TC, praying that petitioner be ordered to pay the BIR the
sum of P6M+ plus surcharges and interest.
TC ruled in favor of the Commissioner and directed payment of estate
and inheritance taxes.
Petitioners now contend that the TC acted w/ GAD in directing the order
of payment, given due to the pendency of their motion for
reconsideration of the deficiency assessments issued by the
Commissioner, and that the tax assessments were not yet final and
executory.
They contended that the absence of a decision on the disputed
assessments was a bar against collection of taxes. They also insist that
their act of filing an estate and inheritance tax return of a previously
untaxed wealth of the estates entitles said estates to tax amnesty
under P.D. No. 23, as amended by P.D. 67.
I: W/n the assessment is final, executory, and demandable.
R: Yes
In petitioners MR of the assessments, they requested the
commissioner for a period of 30 days from October 7, 1972 within
which to submit a position paper that would embody their grounds for
reconsideration.
However, no position paper was ever filed. Such failure to file a
position paper may be construed as abandonment of their request for
reconsideration.
It took the Commissioner a period of more than 1 yr and 5 months,
from October 7, 1972 to March 14, 1974, before finally instituting the
action for collection.
Under the circumstances of the case, the act of the Commissioner in
filing an action for allowance of the claim for estate and inheritance
taxes, may be considered as an outright denial of petitioners' request
for reconsideration.
From the date of receipt of the copy of the Commissioner's letter for
collection of estate and inheritance taxes against the estates of the
late Teodoro spouses, petitioners must contest or dispute the same
and, upon a denial thereof, the petitioners have a period of 30 days

within which to appeal the case to the CTA, which they failed to avail of
.

Tax assessment made by tax examiners are presumed correct and


made in good faith. A taxpayer has to prove otherwise.

Failure of the taxpayers to appeal to the Court of Tax Appeals in due


time made the assessments final, executory and demandable.

OTHERS:

PD 23, as amended by PD 67 is not applicable to the situation


of petitioners. A reading of PD 23 reveals that in order to avail of tax
amnesty, it is required, among others, that there should be a voluntary
disclosure of a previously untaxed income. In this case, the petitioners
were already issued an assessment by the CIR. In addition thereto,
said income must have been earned or realized prior to 1972 and the
tax return must be filed on or before March 31, 1973. Considering that
P.D. No. 23 was issued on October 16, 1972, the court rules that the
said decree embraces only those income declared in pursuance
thereof within the taxable year 1972. The time frame cannot be
stretched to include declarations made prior to the issuance of the said
decree or those made outside of the time frame as envisioned in the
said decree. Thus, the estates of the Teodoro spouses which have been
declared separately sometime in the 1960's are clearly outside the
coverage of the tax amnesty provision.
Marcos II v CA

Following the death of former President Marcos in 1989, a Special Tax


Audit Team was created to conduct investigations and examination of
tax liabilities of the late president, his family, associates and cronies.

The investigation disclosed that the Marcoses failed to file a:


o
(1) written notice of death of the decedent
o
(2) estate tax return and 2 income tax returns for the
years 1982 to 1986, all in violation of the Tax Code.

Criminal Charges were filed against Mrs. Marcos for violation of Secs.
82, 83 and 84, NIRC.

The CIR thereby caused the preparation of estate tax return for the
estate of the late president, the income returns of the Marcos spouses
for 1985 and 1986, and the income tax returns of petitioner Marcos II
for 1982 to 1985.

BIR issued deficiency estate tax assessment and the corresponding


deficiency income tax assessments. Copies of said assessments were
served personally and constructively upon Mrs. Marcos at her last
known address through her caretaker. Likewise, copies of the
deficiency assessments against Marcos II were personally and
constructively served at his last known address. Formal assessment
notices were served upon Mrs. Marcos c/o petitioner at his office in the
House of Representatives, as well as a notice to taxpayer to attend a
conference furnished through her counsel.

TAX 2 MONTERO | Y. Sanchez A2012

The deficiency tax assessments were NOT administratively protested


by the Marcoses w/in 30 days from service thereof.
Subsequently, the Commissioner issued a total of 30 notices to levy on
real property against certain parcels of land and other real property
owned by the Marcoses. Copies of the aforesaid notices were served
upon the Marcoses and their counsel of record.
Notices of sale at public auction were duly posted at the Tacloban City
Hall and the public auction for the sale of 11 parcels of land took place
thereafter. There being no bidder, the lots were declared forfeited in
favor of the Government.
Petitioner filed a petition to annul the notices of levy and enjoin BIR
from proceeding w/ the auction.
I: W/n the proper assessment and collection was made by BIR
R: Yes, BIRs actions were proper.
The enforcement and collection of estate tax is executive in character
and the task is specifically ascribed to the BIR.
The approval of the court, sitting in probate, or as a settlement tribunal
over the deceased is NOT a mandatory requirement in the collection of
estate taxes. It cannot, therefore, be argued that the Tax Bureau erred
in the proceeding w/ the levying and sale of the properties allegedly
owned by the late President on the ground that it was required to seek
first the probate courts sanction.
There is nothing in the Tax Code and in the pertinent remedial laws
that implies the necessity of the probate or estate settlement courts
approval of the States claim for estate taxes, before the same can be
enforced and collected.
On the contrary, under Sec. 87 (now, Sec. 94 of NIRC), it is the
probate court w/c is PROHIBITED from authorizing the delivery
of any of the distributive share to interested parties UNLESS
there is a certification by the CIR that estate taxes have been
paid. If there is any issue as to the validity of the BIRs decision to
assess the estate taxes, this should have been pursued through the
proper administrative and judicial processes provided under Sec. 229
(now, Sec. 228 of NIRC)
Apart from failing to file the required estate tax return w/in the
time required for filing the same, petitioner and other Marcos
heirs never questioned the assessments served upon them,
allowing the same to lapse into finality, and prompting the BIR
to collect said taxes by levying upon the properties left by the
late Pres. Marcos
The Notices of Levy upon real property were issued w/in the
prescriptive period and in accordance w/ Sec. 223 (now, Sec. 222 of
NIRC) of the Tax Code. The deficiency tax assessment, having become
final, executory and demandable, the same can now be collected
through the summary remedy of distraint and levy.

Regarding the services of notices of assessments, the Court found that


there was sufficient constructive and/or personal service thereof. The
subject tax assessments having become final, executory and
enforceable, the same can no longer be contested by means of
disguised protest.

Mambulao Lumber v RP

Agent Nestor Banzuela of the BIR examined the books of petitioner


Mambulao Lumber.

In his report, he stated that in January 1949, petitioner was assessed


by the Bureau of Forestry (BOF) for forest charges but hasnt paid such.

On August 1958, CIR sent a letter to Mambulao informing them of the


unpaid forest charges and demanding that such be settled within 10
days from receipt of the letter.

Mambulao requested for a reinvestigation and was given 20 days


(1959 letter) to submit results of verification of payments. It was
warned that non-compliance would be deemed abandonment of the
request for re-investigation.

Mambulao failed to comply with the demand.

On August 1961, CIR filed a collection in the CFI of Manila. CFI


adjudged Mambulao liable for the unpaid forest charges. CA affirmed.

Mambulao assails decision of the CA, contending that the period to file
a collection suit has already lapsed thus CIR is barred by prescription. It
contends that period should be reckoned from the January 1949 when
it was assessed by the BOF.

I: W/n action has prescribed

R: No. Action to file collection case has NOT PRESCRIBED.

NIRC Sec 332 provides that tax may be collected by distraint / levy OR
by a proceeding in court ONLY if begun (1) within 5 years after the
assessment of the tax, or (2) prior to the expiration of any
period for collection agreed upon in writing by the CIR and
taxpayer BEFORE expiration of such 5-year period.

THUS, 5-year period should be computed from the August 1958 letter
of the BIR.

Forest charges are internal revenue taxes and the sole power and duty
to collect the same is lodged with the BIR and not w/ the Bureau of
Forestry.

The computation and/or assessment of forest charges made by the


Bureau of Forestry may or may NOT be adopted by the CIR and such
computation made by the Bureau of Forestry is NOT appealable to the
Court of CTA.

Therefore, for the purpose of computing the 5-year period within which
to file a complaint for collection, the demand or even the assessment
made by the Bureau of Forestry is immaterial.

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The BIR Letter in August 1958 and case filed in August 1961 was well
within the 5-year period to institute case.
Also, given that Mambulao did NOT appeal assessment to the
CTA within 30 days from receipt of the letter (1959 as
prescribed by RA 1125), the assessment became final and
executory.
In a suit for collection of internal revenue taxes, where the assessment
has already become final and executory, the action to collect is akin to
an action to enforce a judgment.
No inquiry can be made therein as to the merits of the original case or
the justness of the judgment relied upon. Petitioner is thus already
precluded from raising the defense of prescription.
Where the taxpayer did not contest the deficiency income tax
assessed against him, the same became final and properly
collectible by means of an ordinary court action.
The taxpayer cannot dispute an assessment which is being enforced by
judicial action, He should have disputed it before it was brought to
court.

RP v Lim Tian Teng Sons & Co, Inc.

Lim Tian Teng Sons & Co., Inc., a domestic corporation with principal
office in Cebu City, engaged in 1951 and 1952, among others, in the
exportation of copra.

Lim Tian then filed its income tax return for 1952 based on accrued
income and expenses. Its return showed a loss of P56,109.98.

CIR assessed Lim Tian of deficiency income tax and 50% surcharge
thereon amounting to P5,037.00 and demanded payment thereof not
later than February 15, 1957.

Lim Tian requested reinvestigation of its income tax liability.

CIR did NOT reply but instead referred the case to the SolGen for
collection by judicial action.

SolGen demanded from Lim Tian payment w/in 5 days, stating that
otherwise judicial action would be instituted without further notice.

Lim Tian thus wrote CIR and SolGen, reiterating its request for
reinvestigation. It requested that it be allowed to present its
explanation together w/ supporting papers relative to its income tax
liability.

Deputy Collector of CIR informed the taxpayer that its request for
reinvestigation would be granted provided it executed within 10 days a
WAIVER of the statute of limitations as required in General Circular V258 dated August 20, 1957. The Deputy Collector extended the period
within which to execute and file with him the waiver of the statute of
limitations to December 31, 1957, but advised that if no waiver is

forthcoming on or before said date, judicial action for collection would


be instituted without further notice.
HOWEVER, Lim Tian failed to file a waiver.
CIR thus instituted 8 months after an action in the CFI of Cebu for the
collection of deficiency income tax.
CFI declared the CIR's assessment as valid, final and executory,
condemning Lim Tian to pay CIR w/ interest at 1% monthly until fully
paid.
I/R: W/n lower court has jurisdiction to entertain the case given
that CIR has NOT yet issued its final decision on request for
reinvestigation- Yes.
Nowhere in the Tax Code is the CIR required to rule first on a taxpayer's
request for reinvestigation before he can go to court for the purpose of
collecting the tax assessed. On the contrary, Section 305 of the same
Code withholds from all courts, except the CTA under Section 11 of
Republic Act 1125, the authority to restrain the collection of any
national internal-revenue tax, fee or charge, thereby indicating the
legislative policy to allow the CIR much latitude in the speedy and
prompt collection of taxes. The reason is obvious. It is upon taxation
that the government chiefly relies to obtain the means the carry on its
operations,
Section 11 of Republic Act 1125 states in part: No appeal taken to
the Court of Tax Appeals from the decision of the Collector of Internal
Revenue ... shall suspend the payment, levy, distraint, and/or sale of
any property of the taxpayer for the satisfaction of his tax liability as
provided by existing law EXCEPT if it may jeopardize interest of the gov
and/or taxpayer.
2) W/n court erred in considering as final and executory the
assessment contained in the letter of the CIR dated January 16,
1957. No, court was correct in considering assessment final and
executory.
In this case, Lim Tian received said assessment on January 30, 1957
and on the following day requested reinvestigation of its tax liability.
The CIR however did NOT reply to the request for reinvestigation.
Instead, he referred the case to the Solicitor General for collection of
the tax. The lower court interpreted this action of the Collector of
Internal Revenue as a denial of defendant's request for reinvestigation.
Instead of appealing to the Tax Court, however, Lim Tian reiterated its
request for reinvestigation.
Even if we do not count the period from October 8, 1957 (the date
when taxpayer received notice of the denial of its request for
reinvestigation) to December 31, 1957 (the deadline for the
submission of the written waiver of the statute of limitations) in
reckoning the 30-day period within which the taxpayer may appeal to

TAX 2 MONTERO | Y. Sanchez A2012

the CTA, said period had long lapsed when the CIR filed the complaint
in this case on September 2, 1958.
Taxpayers failure to appeal to the CTA in due time made the
assessment in question final, executory and demandable.
And when the action was instituted on September 2, 1958 to enforce
the deficiency assessment in question, it was already barred from
disputing the correctness of the assessment or invoking any defense
that would reopen the question of his tax liability on merits. Otherwise,
the period of 30 days for appeal to the Court of Tax Appeals would
make little sense.
OTHERS: Indications that taxpayer's income tax is fraudulent: Firstly,
taxpayer's beginning inventory for 1952 did not state the truth in
considering the copra outturn as copra on hand, for on December 31,
1951 such copra was not any more in taxpayer's bodega. It was in
transit to a foreign port. And the taxpayer no longer owned the copra.
As a matter of fact, it already received payment for the same.
Secondly, by observing regularly its own system of accounting,
taxpayer had no choice but to account the copra outturn as accrued
income. This it did not do. For such deviation, we see no other purpose
than to lessen, if not obliterate as in fact it did, its income tax liability
per its return. The lower court therefore did not err in imposing the
50% surcharge.

Basa v Republic

In a demand letter dated August 31, 1967, the CIR assessed against
Augusto Basa deficiency income taxes for 1957-1960 totaling P16k.

The deficiencies were based on taxpayers failure to report in full his


capital gains on sales of land. This omission or underdeclaration of
income justified the imposition of 50% surcharge. Taxpayer did not
contest the assessment in Tax Court.

The Commissioners letter decision on the case was dated December 6,


1974.

ON the assumption that the assessment has become final and


incontestable, the Commissioner on Sept. 3, 1975 sued the taxpayer in
CFI Manila for collection of said amount.

TC affirmed the assessment and ordered Basa to pay P16k. plus 5%


surcharge and 1% monthly interest from Aug. 31 1967-Aug. 31, 1970.

Instead of appealing to SC directly under RA 5440, in relation to Rules


41 and 45 of the Rules of Court, since no factual issues are involved,
Basa tried to appeal to CA. He did not perfect his appeal within the
reglementary period.

TC dismissed it. Basa filed a special civil action of certiorari assailing


trial courts decision.

I: W/n the decision CFI Manila (not the Tax Court) in an income tax case
is reviewable by Appellate Court or by SC.

R: No. The TC within its jurisdiction in rendering its decision and


dismissing Basas appeal.

If Basa wanted to contest the assessments, he should have appealed


to the Tax Court. Not having done so, he could not contest the same in
the CFI.

The issue of prescription raised by him is baseless. The assessments


were predicated on the fact that his income tax returns, if not
fraudulent, were false because he underdeclared his income.

In such a case, the deficiency assessments may be made within 10


years after the discovery of the falsity or omission. The court action
should be instituted within 5 years after the assessment but this
period is suspended during the time that the Commission is prohibited
from instituting a court action.

SGs memorandum: Basas request for reinvestigation tolled the


prescriptive period of 5 years within which the court action may be
brought (CIR vs. Capitol Subdivision). Moreover, the issue of
prescription should have been raised in the tax court.
Yabes v Flojo

Doroteo Yabes, was for sometime an exclusive dealer of products of the


International Harvester Macleod, Inc., received on May 1, 1962, a
letter from the CIR dated March 27, 1962, demanding payment of
P15k+ as commercial broker's fixed and percentage taxes plus
surcharges and the sum of P2,530 as compromise penalty alledgely
due from Yabes for the years 1956-1960.

On May 11, 1962, Yabes, through his counsel, filed with the CIR a letter
protesting the assessment of the said taxes and penalties on the
ground that his agreements w/ International Harvester were of
purchase and sale, and NOT of agency, hence he claimed he was not
able to pay such kind of taxes.

Yabes requested for reinvestigation and review of the case by the


appellate division of the BIR and that appeal be held in abeyance
pending resolution of a similar case (Constantino).

CIR DENIED the request for reinvestigation for failure to submit


evidence to offset findings of the Office. CIR however said that the
administrative appeal will be held in abeyance pending the
resolution of the issues in the Constantino case.

Yabes then filed a tax waiver on October 20, 1962, extending the
period of prescription to December 31, 1967.

Yabes died and no estate proceedings were instituted for the


settlement of his estate.

After Yabes' death, SC rendered a ruling in the Constantino case in


favor of the CIR.

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After 5 yrs, the heirs of the Yabes received a letter from CIR requesting
that they "waive anew the Statute of Limitations" and further
confirming the previous understanding that the final resolution of the
protest of the deceased Doroteo Yabes was "being held in abeyance
until the Supreme Court renders its decision on a similar case involving
the same factual and legal issues brought to it on appeal" (referring to
the Constantino "test" case).
Yabes filed a revised waiver further extending the period of prescription
to December 31 1970.
After, no word was received by Yabes heirs during the interim of more
than 3 yrs, but on January 20, 1971, they received the summons and a
copy of the complaint filed by the Commissioner in the CFI seeking to
collect taxes.
I: W/N CFI can lawfully acquire jurisdiction over a contested
assessment made by the CIR against Yabes w/c has not yet become
final, executory and incontestable, and which assessment is being
contested in the CTA and still pending consideration
R: No, CFI had no jurisdiction and should have dismissed the case.
Decision is NOT yet final, executory and incontestable.
CIR contends that Yabes received the Commissioner's letter dated
August 3, 1962, denying the latter's protest against the said
assessment on September 18, 1962 and FAILED to appeal therefrom
within the 30-day period contemplated under Section 11, of Republic
Act 1125.
HOWEVER, the period for appeal to this Court should NOT be counted
from September 18, 1962. In a letter of July 27, 1967, CIR informed
Yabes that a resolution of their protest was being held in abeyance
until the Supreme Court renders a decision on a similar case "involving
the same factual and legal issues".
As a matter of fact, in an earlier letter dated September 26, 1962, CIR
also informed Yabes' counsel that "administrative appeal for and in
behalf of their clients will be held in abeyance pending resolution of the
issues on a similar case which was appealed by you to the Court of Tax
Appeals".
It is thus clear in these letters that CIR reconsidered the finality of his
decision of August 3, 1962, assuming arguendo that the letter had a
tenor of finality.
The records show that a warrant of distraint and levy was issued on
October 2, 1970. Had this been served on Doroteo Yabes, it would have
been equivalent to a final decision. There is, however, nothing to
show that it was ever served on Yabes. Neither is there
anything in the record to show that a formal decision of denial
was made after CIR's letter of July 27, 1967.

Under the circumstances of this case, what may be considered as final


decision or assessment of the Commissioner is the filing of the
complaint for collection in the respondent Court of First Instance of
Cagayan, the summons of which was served on petitioners on January
20, 1971. THUS, the appeal with the CTA was filed on time (w/in the 30
day prescriptive period).
CFI only acquired jurisdiction after assessment by CIR becomes final
and executory.

CRIMINAL ACTION
Republic v Patanao

Patanao was engaged in the production and sale of logs and


lumber.

TAX 2 MONTERO | Y. Sanchez A2012

He was assessed deficiency income tax and additional residence


taxes from 1951 to 1955.
In 1958, the Deputy CIR sent a letter of demand w/ enclosed
income tax assessment.
Patanao refused, failed and neglected to pay the said taxes.
In 1962, a complaint for collection was filed.
Patanao filed a MTD alleging:
o
Res judicata, since Patanao was acquitted in criminal
cases, w/c were prosecutions for failure to file ITR for nonpayment of taxes
o
Prescription
RTC held that the action for collection was barred by prior
judgment, since the accused was acquitted in the criminal case.
I: W/n the acquittal in the criminal cases involving the failure to file
return and pay tax bars the institution of the civil case for collection.
R: NO, acquittal in the criminal case is not a bar to the institution
of the civil case.
Under the Penal Code the civil liability is incurred by reason of the
offender's criminal act. The criminal liability gives birth to the civil
obligation such that generally, if one is not criminally liable under the
Penal Code, he cannot become civilly liable thereunder.
The situation under the income tax law is the exact opposite.
Civil liability to pay taxes arises from the fact, for instance, that
one has engaged himself in business, and NOT because of any criminal
act committed by him.
The criminal liability arises upon failure of the debtor to satisfy his
civil obligation.
The incongruity of the factual premises and foundation principles
of the two cases is one of the reasons for NOT imposing civil indemnity
on the criminal infractor of the income tax law.
Also, while section 73 NIRC has provided the imposition of the
penalty of imprisonment or fine, or both, for refusal or neglect to pay
income tax or to make a return thereof, it failed to provide the
collection of said tax in criminal proceedings.
The only civil remedies provided, for the collection of income tax,
are distraint or judicial action, which remedies are generally exclusive
in the absence of a contrary intent from the legislator.
Considering that the Government cannot seek satisfaction of the
taxpayer's civil liability in a criminal proceeding under the tax law or,
otherwise stated, since the said civil liability is NOT deemed included in
the criminal action, acquittal of the taxpayer in the criminal proceeding
does NOT necessarily entail exoneration from his liability to pay the
taxes.

The acquittal in the said criminal cases cannot operate to


discharge defendant from the duty of paying the taxes which the law
requires to be paid, since that duty is imposed by statute prior to and
independently of any attempts by the taxpayer to evade payment.
Said obligation is not a consequence of the felonious acts charged
in the criminal proceeding, nor is it a mere civil liability arising from
crime that could be wiped out by the judicial declaration of nonexistence of the criminal acts charged.

Ungab v Cusi

In July, 1974, BIR examined the income tax returns filed by Ungab,
for the calendar year ending December 31, 1973. BIR discovered
that Ungab failed to report his income derived from sales of
banana saplings.

BIR District Revenue Officer sent a "Notice of Taxpayer" to Ungab


informing him that there is due from him the amount of P104k,
representing income, business tax and forest charges for the year
1973 and inviting him to an informal conference where he may
present his objections.

Ungab wrote the BIR District Revenue Officer protesting the


assessment, claiming that he was only a dealer/ agent on
commission basis in the banana sapling business and that his
income, as reported in his income tax returns for the said year,
was accurately stated.

BIR Examiner, however, was fully convinced that Ungab had filed a
fraudulent income tax return so that he submitted a "Fraud
Referral Report," to the Tax Fraud Unit of the BIR.

After examining the records of the case, the Special Investigation


Division of the BIR found sufficient proof that Ungab is guilty of tax
evasion for the taxable year 1973 and recommended his
prosecution. CIR approved the prosecution.

Thereafter, the State Prosecutor conducted a preliminary


investigation of the case, and finding probable cause, filed 6
informations against the petitioner with CFI:
o
1) filing a fraudulent income tax return
o
2) engaging in business as producer of saplings w/o first
paying the annual fixed/privilege tax
o
3) failure to render a true and complete return on the
gross quarterly sales, receipts and earnings in his
business as producer of banana saplings and to pay the
percentage tax due thereon,

Ungab filed a motion to quash the informations alleging that the


trial court has no jurisdiction to take cognizance of the cases in

TAX 2 MONTERO | Y. Sanchez A2012

view of his pending protest against the assessment made by the


BIR Examiner.
TC denied the motion.
Ungab now claims that the filing of the informations was
precipitate and premature since the CIR has not yet resolved his
protests against the assessment of the Revenue District Officer;
and that he was denied recourse to the Court of Tax Appeals.
I: W/n an assessment of the deficiency tax due is necessary before
the taxpayer can be prosecuted criminally for the charges
R: NO, an assessment of a deficiency is NOT necessary to a
criminal prosecution for willful attempt to defeat and evade the
income tax.
What is involved here is not the collection of taxes where the
assessment of the CIR may be reviewed by the CTA, but a
criminal prosecution for violations of the NIRC which is
within the cognizance of CFI.
While there can be no civil action to enforce collection before the
assessment procedures provided in the Code have been followed,
there is no requirement for the precise computation and
assessment of the tax before there can be a criminal prosecution
under the Code.
The crime is complete when the violator has, as in this case,
knowingly and willfully filed fraudulent returns with intent to evade
and defeat a part or all of the tax. The perpetration of the crime is
grounded upon knowledge on the part of the taxpayer that he has
made an inaccurate return, and the government's failure to
discover the error and promptly to assess has no connections with
the commission of the crime.
THUS, an assessment of a deficiency is NOT necessary to a
criminal prosecution for willful attempt to defeat and evade the
income tax.
A petition for reconsideration of an assessment may affect the
suspension of the prescriptive period for the collection of taxes,
but NOT the prescriptive period of a criminal action for violation of
law.
Obviously, the protest of the Ungab against the assessment of the
District Revenue Officer cannot stop his prosecution for violation of
the NIRC.

CIR v PASCOR Realty and Dev Corp

BIR Commissioner Jose Ong authorized Revenue Officers Que,


Estorco and Savillano to examine the books of accounts and other

accounting records of Pascor Realty, w/c resulted to the


recommendation of an issuance of assessments.
In 1995, CIR filed a complaint against the president and treasurer
of Pascor alleging evasion of taxes before the DOJ.
Pascor filed an Urgent Request for Reconsideration/Reinvestigation
disputing the said tax assessment. PRDC then received a
subpoena from the DOJ with regard to the complaint on March 23,
1995.
CIR denied the MR of the said assessment.
Pascor elevated the denial to CTA on petition for review.
CIR filed a motion to dismiss on the ground that CTA had no
jurisdiction over the subject matter since there was no formal
assessment issued against PRDC.
CTA denied the motion to dismiss and ordered the CIR to file an
answer within 30 days from receipt of the notice but the CIR did
not comply, nor did they file an MR.
Instead, CIR filed a petition in the CA alleging that the CTA acted
with GADALEJ.
CIR argues that the criminal action is not yet an assessment,
based on Sec 205 and 223 of the NIRC w/c provides that remedies
for the collection of tax may either be civil or criminal and that in
case of failure to file a return, a tax may be assessed OR a
proceeding in court may be begun without an assessment.
Pascor argues that the joint-affidavit filed by the CIR for criminal
action already constitutes an assessment. It argues that an
assessment is NOT an action or proceeding for the collection of
taxes but a mere notice of and demand for payment of taxes due.
I: 1) W/N the criminal complaint for tax evasion can be construed
as an assessment NO
2) W/n assessment is necessary before criminal charges for tax
evasion may be instituted. - NO
R:
1) The criminal complaint for tax evasion is NOT an
assessment. An assessment is a notice to the taxpayer
containing the amount of taxes due and a demand to pay such
taxes within a specific period.
It is deemed made only when the CIR releases the mail and sends
such notice to the petitioner.
The joint-affidavit for the criminal action CANNOT be considered an
assessment since:
o
It contained NO DEMAND for payment
o
There was NO specified period of payment
o
It is addressed to the Secretary of Justice and NOT the
taxpayer (Pascor)

TAX 2 MONTERO | Y. Sanchez A2012

Its purpose is merely to support / substantiate the


criminal complaint and NOT notify the payer of the tax
due
Since there was NO assessment issued yet, no reconsideration /
reinvestigation may be asked from the CIR.
2) Sec222 of the NIRC provides that when a false/fraudulent return
is filed, an action in court may be commenced WITHOUT an
assessment.
Sec 205 further provides that civil and criminal actions may be
pursued simultaneously by the CIR.
THUS, CIR is given discretion to either issue an assessment OR file
a criminal complaint or do both.
A criminal charge may be supported by only prima facie showing
of failure to file return. This fact NEED NOT be proven by an
assessment.
The issuance of an assessment is DIFFERENT from the filing of a
complaint.
Before an assessment is issued, there is, by practice, a preassessment notice sent to the taxpayer, who is given a chance to
submit position papers and documents to prove that the
assessment is unwarranted. If the commissioner is unsatisfied, an
assessment signed by him or her is then sent to the taxpayer
informing the latter specifically and clearly that an assessment has
been made against him or her.
In contrast, the criminal charge need not go through all these. The
criminal charge is filed directly with the DOJ. Thereafter, the
taxpayer is notified that a criminal case had been filed against
him, not that the commissioner has issued an assessment. It must
be stressed that a criminal complaint is instituted not to demand
payment, but to penalize the taxpayer for violation of the Tax
Code.
o

Adamson v CA

Lucas Adamson as President of Adamson Management Corporation


(AMC) sold common shares of stock to APAC Holding Limited (APAC)
and paid the capital gains tax for the transaction.

Subsequently, AMC sold to APAC Philippines, Inc. common shares


of stock and paid the capital gains tax therefor.

CIR Vinzons-Chato issued a Notice of Taxpayer to AMC,


Adamson, Therese Adamson (AMC treasurer), and Sara de Los Reyes
(AMC secretary), informing them of deficiencies on their payment of
capital gains tax and VAT.

CIR filed w/ the DOJ an Affidavit of Complaint against AMC and


Adamson et al. for violation of the NIRC.

After preliminary investigation, the state prosecutor found


probable cause.
AMC and Adamson et al. then filed a letter request for reinvestigation with the Commissioner.
Before the CIR could act on their letter-request, AMC, and
Adamson et al. filed a petition for review with the CTA, assailing the
CIRs finding of tax evasion against them.
CIR moved to dismiss the petition, on the ground that it was
premature, as she had not yet issued a formal assessment of the tax
liability of Adamson et al.
In 1994, Adamson, et al. were charged in a criminal case before
the RTC Makati. TC ruled that it did NOT have jurisdiction over the
criminal case because the complaints for tax evasion filed by the
Commissioner should be regarded as a decision of the Commissioner
regarding the tax liabilities of Adamson et al. thus appealable to the
CTA. It further held that the said cases cannot proceed independently
of the assessment case pending before the CTA, which has jurisdiction
to determine the civil and criminal tax liability of Adamson et al.
CTA denied the motion to dismiss filed by the Commissioner and
considered the criminal complaint filed by the Commissioner with the
DOJ as an implied formal assessment, and the filing of the criminal
informations with the RTC as a denial of Adamson et al.s protest
regarding the tax deficiency.
CIR filed a petition for review with the CA assailing the trial courts
dismissal of the criminal cases. The CA reversed the trial courts
decision and reinstated the criminal complaints. The CA ruled that in a
criminal prosecution for tax evasion, assessment of tax deficiency is
not required because the offense of tax evasion is complete or
consummated when the offender has knowingly and willfully filed a
fraudulent return with intent to evade the tax.
I/ R:
1) W/n CIRs recommendation letter to DOJ can be
considered as a formal assessment of Adamson et al.s tax
liability
No, the letter is NOT an assessment.
An assessment is a written notice and demand made by the BIR on
the taxpayer for the settlement of a due tax liability that is there
definitely set and fixed. It is a written communication containing a
computation by a revenue officer of the tax liability of a taxpayer and
giving him an opportunity to contest or disprove the BIR examiners
findings is not an assessment since it is yet indefinite.
In this case, the recommendation letter is NOT an assessment. It
served merely as the prima facie basis for filing criminal informations
that the taxpayers had violated the Tax Code.

TAX 2 MONTERO | Y. Sanchez A2012

2) W/n the criminal complaints against Adamson et al. by


the DOJ are premature for lack of a formal assessment
No. When fraudulent tax returns are involved, a proceeding in
court after the collection of such tax may be begun without
assessment.
Here, Adamson et al. had already filed the capital gains tax return
and the VAT returns, and paid the taxes they have declared due
therefrom. Upon investigation of the examiners of the BIR, there was a
preliminary finding of gross discrepancy in the computation of the
capital gains taxes, and that VAT had not been paid.
The gross disparity in the taxes due and the amounts actually
declared by Adamson, AMC, etc. constitutes badges of fraud.
3) W/n the CTA has jurisdiction to take cognizance of both
the civil and criminal aspects of the tax liability of Adamson et
al.
No. CTA can only entertain an appeal from a final decision or
assessment of the Commissioner, or in cases where the Commissioner
has not acted within the period prescribed by the NIRC. In the cases at
bar, the Commissioner has not issued an assessment of the tax liability
of private respondents.

PRESCRIPTION OF GOVS RIGHT TO ASSESS AND COLLECT


CIR v Goodrich Phils

Goodrich Phils., Inc. is an American-owned and controlled


corporation engaged in the manufacturing of tires and rubber products.

Pursuant to a Central Bank requirement, BF Goodrich developed a


rubber plantation. It purchased from the Phil gov certain parcels of land
in Basilan (as allowed by the Public Land Act and Parity Amendment to
the 1935 Constitution).

HOWEVER, upon the expiration of the Parity Amendment more


than a decade later, the ownership rights of Americans over public
agricultural lands, including the right to dispose or sell their real estate,
would be lost.

THUS, BF Goodrich sold its Basilan Landholdings to Siltown Realty.

Siltown then leased the parcels of land to BF Goodrich for 25


years.
BIR then assessed BF Goodrich for deficiency income tax, which
the latter paid.
Later on, BIR assessed BF Goodrich for deficiency donors tax, in
relation to the previously mentioned sale of its Basilan landholdings to
Siltown.
BIR claimed that the consideration for the sale was insufficient, so
it considered the difference between the fair market value and the
actual purchase price as a taxable donation.
Goodrich contested this assessment.
Instead, it received another assessment w/c increased the amount
demanded for the alleged deficiency donors tax, surcharge, interest
and compromise penalty.
Goodrich appealed the correctness and the legality of these last
two assessments to the CTA, questioning the legality of the
assessments.
I:
1) W/n the CIRs right to assess deficiency donors tax had
prescribed
YES, CIRs right to assess the deficiency had already prescribed.
Sec 331 of the NIR provides that (except as provided in the
succeeding section) internal-revenue taxes shall be assessed within
five years after the return was filed, and no proceeding in court
without assessment for the collection of such taxes shall be begun
after expiration of such perioda return filed before the last day
prescribed by law for the filing thereof shall be considered as filed on
such last day: Provided, That this limitation shall not apply to cases
already investigated prior to the approval of this Code.
Involved in this petition is the income of the petitioner for the year
1974, the returns for w/c were reqd to be filed on or before
April 15, 1975.
The returns for the year 1974 were duly filed and paid on June 21,
1974, and acknowledged by a Letter of Confirmation.
Thus, the subsequent assessment of Oct 10, 1980 modified, by
that of March 16, 1981, was made BEYOND THE PERIOD expressly set
by Art 331.
The law on prescription, being a remedial measure, should be
liberally construed in order to afford such protection. As a corollary, the
exceptions to the law on prescription should be strictly construed.
However, the CIR contended that there is Falsity in the return,
thus, the ordinary period of limitation upon assessment and collection
does not apply.

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Section 15 of the NIRC, provides that when there is reason to


believe that any such report is false, incomplete, or erroneous, the CIR
shall assess the proper tax on the best evidence obtainable. Clearly,
Section 15 does not provide an exception to the statute of limitations
on the issuance of an assessment, by allowing the initial assessment to
be made on the basis of the best evidence available.
2) W/n there was a false return, w/c extends the prescriptive
period
NO, there was no false return.
Section 332 of the NIRC, enumerates the exceptions to the period
of prescription, one of w/c includes the case of a false or fraudulent
return with intent to evade a tax or of a failure to file a return. In this
case, collection of tax may be begun w/o assessment anytime w/in 10
yrs from discovery of fraud.
CIR insists that Goodrich committed falsity when it sold the
property for a price less than the FMV. HOWEVER, this fact alone did
not constitute a false return.
A false return contains wrong information due to mistake,
carelessness or ignorance. It is possible that real property may be
sold for less than adequate consideration for a bona fide business
purpose.
In the present case, Goodrich was compelled to sell the property
even at a price less than its market value, because it would have lost
all ownership rights over it upon the expiration of the parity
amendment. It was only attempting to MINIMIZE ITS LOSSES. At the
same time, it was able to lease the property for 25 years, renewable
for another 25. This can be regarded as another consideration on the
price.
The fact that the sale transaction may have partly resulted in a
donation does NOT change the fact that private respondent already
reported its income for 1974 by filing an income tax return.
BIR was negligent in not issuing an assessment w/in the 5-year
period.

Basilan Estates v CIR

CIR assessed Basilan Estates deficiencyincome tax and 25%


surcharge on unreasonable accumulated profit (Sec 25, Tax Code).

On non-payment of the assessed amount, a warrant of distraint


and levy was issued but the same was not executed because
Basilan Estates, Inc. succeeded in getting an Order to hold
execution and maintain constructive embargo instead.

Basilan Estates, Inc. filed with CTA a petition for review of the
Commissioner's assessment, alleging prescription of the period for
assessment and collection.

CTA held that there was no prescription.


Basilan claims that it never received notice of assessment or if it
did, it received the notice beyond the prescriptive period.
I: W/n the Commissioner's right to collect deficiency income tax
prescribed?
NO, it did not.
There is no dispute that the assessment for deficiency tax was
made on February 26, 1959.
Circumstances in this case point to official performance of duty /
REGULARITY which must necessarily prevail over Basilan's
contrary interpretation:
o
On the right side of the notice is also stamped "Feb. 26,
1959" denoting the date of release, according to BIR
practice.
o
The Commissioner himself in his letter answering
petitioner's request to lift, the warrant of distraint and
levy, asserts that notice had been sent to petitioner.
o
In the letter of the Regional Director forwarding the case
to the Chief of the Investigation Division which the latter
received on March 10, 1959, notice of assessment was
said to have been sent to petitioner.
o
Subsequently, the Chief of the Investigation Division
indorsed on March 18, 1959 the case to the Chief of the
Law Division. There it was alleged that notice was already
sent to petitioner on February 26, 1959.
Even granting that notice had been received by Basilan late, as
alleged, under Section 331 of the Tax Code requiring 5 years
within which to assess deficiency taxes, the assessment is
deemed made when notice to this effect is released,
mailed or sent by the Collector to the taxpayer and it is not
required that the notice be received by the taxpayer within
the aforementioned 5-year period.

Tupaz v Ulep
State Prosecutor Molon filed w/ the MTC an information against Petronilla
Tupaz and her late husband Jose Tupaz as corporate officers of El Oro
Engravers Corp, for non-payment of deficiency corporate income taxes
for year 1979. MTC dismissed the case for lack of jurisdiction.
7 months later, Monlon filed w/ the RTC 2 informations against the
accused and her late husband for the same alleged nonpayment of
deficiency corp income. Case 1 was raffled to Judge Ulep (Branch 105)
while Case 2 was raffled to Judge Solano (Branch 86).
Accused filed w/ RTC Branch 86 (Case 2) a motion to dismiss /quash the
information since it was exactly the same as the information against the

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accused pending before RTC Branch 105. This was denied.


In the meantime, Jose Tupaz died to Petronilla Tupaz filed w/ the RTC
Branch 105 a PETITION FOR REINVESTIGATION, w/c Judge Ulep granted.
RTC subsequently arraigned Petronilla.
2 years later, Judge Ulep issued an order directing the prosecution to
withdraw the information in Case 2, after discovering that said
information was identical to the one filed with his branch.
Thus, State Prosecutor Agcaoili filed a motion to withdraw information in
Case 1. Judge Ulep granted the motion for withdrawal of the
information and dismissed the case.
Prosecutor Agcaoili filed with Branch 105 a motion to reinstate
information, stating that the motion to withdraw information was made
through palpable mistake, and was the result of excusable neglect.
Reinstatement was granted.
Tupaz filed a motion for reconsideration, w/c was denied. Tupaz
contends that:
o
a) the period of assessment has prescribed, applying the
3 year prescriptive period
o
b) offense has prescribed since the complaint for
preliminary investigation was filed w/ the DOJ only on
June 1989 and the offense was committed in April 1980
when she filed the income tax return for the year 1989
I: W/n the period of assessment had prescribed and w/n the offense had
prescribed
R: NO.
The period of assessment has NOT prescribed.
The shortened period of 3 years to prescribe under B.P. Blg. 700 is not
applicable to petitioner. The said law specifically states that the
shortened period of three years shall apply to assessments and
collections of internal revenue taxes beginning taxable year 1984.
Assessments made after April 5, 1984 are governed by the 5-year
period if the taxes assessed cover taxable years prior to Jan. 1, 1984.
The deficiency income tax under consideration is for taxable year 1979
so the period of assessment is still 5 years, under the old law.
Art 22 of the RPC does NOT apply because provisions on the period of
assessment are NOT penal in nature.
Also, the offense has not prescribed.
Petitioner was charged with failure to pay deficiency income tax after
repeated demands by the taxing authority. By its nature, the violation
could only be committed AFTER service of notice and demand for
payment of the deficiency taxes upon the taxpayer.
Hence, it cannot be said that the offense has been committed as early
as 1980, upon filing of the income tax return. This is so because prior to
the finality of the assessment, the taxpayer has NOT committed any

violation for nonpayment of the tax.


The offense was committed only after the finality of the assessment
coupled with taxpayers willful refusal to pay the taxes within the
allotted period.
In this case, when the notice of assessment was issued on July 16, 1984,
the taxpayer still had 30 days from receipt thereof to protest or question
the assessment. Otherwise, the assessment would become final and
unappealable.
As he did not protest, the assessment became final and unappealable
on Aug 16, 1984.
Consequently, when the complaint for preliminary investigation
was filed with the DOJ on June 8, 1989, the criminal action was
instituted within the 5 year prescriptive period.
NOTE: THE 5-YR PERIOD TO COLLECT BEGINS TO TOLL FROM THE
FINALITY OF ASSESSMENT, NOT FROM THE FILING OF THE ITR.
On double jeopardy The reinstatement of the information would
expose her to double jeopardy. An accused is placed in double jeopardy
if he is again tried for an offense for which he has been convicted,
acquitted or in another manner in which the indictment against him was
dismissed without his consent. In the instant case, there was a valid
complaint filed against petitioner to which she pleaded not guilty. The
court dismissed the case at the instance of the prosecution, without
asking for accused-petitioners consent. This consent cannot be implied
or presumed. Such consent must be expressed as to have no doubt as
to the accuseds conformity. As petitioners consent was not expressly
given, the dismissal of the case must be regarded as final and with
prejudice to the re-filing of the case. Consequently, the trial court
committed grave abuse of discretion in reinstating the information
against petitioner in violation of her constitutionally protected right
against double jeopardy.

Nava v CIR

On 15 May 1951, Gonzalo P. Nava filed his income tax


return for the year 1950, and, on the same date, he was assessed by
the CIR in the sum of P4k+ based solely on said return.

Nava paid one-half of the tax due, leaving a balance of


P2k+.

Subsequently, Nava offered his backpay certificate to pay


said balance, but the CIR refused the offer.

He requested the CIR to hold in abeyance the collection


of said balance until the question of whether or not he was entitled to
pay the same out of his backpay shall have been decided, but this was
also rejected by the CIR in a reply letter.

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This rejection was followed by two more letters or notices


demanding payment of the balance thereof, the last of which was
dated 22 February 1955.
After investigation of Nava's 1950 income tax return, the
CIR issued a deficiency income tax assessment notice requiring Nava
to pay not later than 30 April 1955 the sum of P9k+, included the
balance of P2,491.00, still unpaid under the original assessment, plus a
50% surcharge.
Several notices of this revised assessment are alleged to
have been issued to the taxpayer, but Nava claims to have learned of
it for the first time on 19 December 1956, more than five years since
the original tax return was filed, and testified to that effect in the CTA.
CTA ruled that the right of the CIR to collect had not yet
prescribed and only reduced the amount due from Nava. Nava
appealed to the SC.
I: W/n the enforcement of the tax assessment has
prescribed.
R: YES, the tax assessment had prescribed.
The CTA, in making its decision, relied solely on the
duplicate copy of the deficiency income tax notice found in the BIR
office file of Nava. On the corresponding blank space for the date of
issue, the duplicate copy was typed 3/30/55.
Nava denied having received the original copy of the said
notice.
CIR failed to rebut this with competent evidence and
witnesses.
Thus, contrary to CTAs finding, the CIR utterly failed to
prove by substantial evidence that the assessment notice dated 30
March 1955 and other supposed written demand letters / notices
subsequent thereto were in fact issued / sent to the taxpayer.
The presumption that a letter duly directed and mailed
was received in the regular course of mail cannot be applied to the
case at bar. For the presumption to apply 1) the letter must be properly
addressed with postage prepaid, and (b) it must be mailed.
NONE of these requirements were shown, so there is NO
valid and effective issuance or release of said deficiency income tax
assessment notice dated 30 March 1955 and of the other demand
letters or notices subsequent to it (latest of which was purportedly sent
on 25 August 1956).
THUS, these dates cannot be reckoned with in computing
the period of prescription within which a court action to collect the
same may be brought.
It being undisputed that an original assessment of Nava's
1950 income tax return was made on 15 May 1951, and no valid and

effective notice of the re-assessment having been made against the


petitioner after that date (15 May 1951), it is evident that the period
under Section 331 of the Tax Code within which to make a reassessment expired on 15 May 1956.
Mere notations made without the taxpayer's intervention,
notice, or control, without adequate supporting evidence, cannot
suffice; otherwise, the taxpayer would be at the mercy of the revenue
offices, without adequate protection or defense.

RP v CA

BIR sent a demand letter to Nielson & Co on July 16, 1955 (1 st


LETTER) for deficiency taxes (ad valorem, annual occupation fees,
residence tax and surcharges). The letter was sent through ordinary
mail. The original letter was NOT returned to the BIR.

BIR reiterated its demand through THREE letters, one of w/c was
dated Sept 19, 1956 (2nd letter).

Nielson did NOT heed the demand so BIR filed a complaint for
collection w/ the CFI.

Case was dismissed for failure to serve summons. The case was
subsequently refiled.

Nielson claims that the assessment did NOT become final since it
did not receive the same.

BIR claims that since the assessment was sent through ordinary
mail and it was never returned to BIR, it must be considered to have
been received by Nielson upon the expiration of 5 days after mailing.

I: W/n the assessment was properly served upon Nielson and


became final

R: YES, the assessment was properly served and became final.

While it is correct that a mailed letter is deemed received by the


addressee in the ordinary course of mail, stilt this is merely a
disputable presumption, subject to controversion, and a direct denial of
the receipt thereof shifts the burden upon the party favored by the
presumption to prove that the mailed letter was indeed received by the
addressee.

Since the BIR had not adduced proof that Nielson had in fact
received the 1st demand letter, it cannot be assumed that Neilson
received the said letter.

HOWEVER, records show that BIR sent a follow-up letter dated


Sept 19, 1956 reiterating its demand for the payment of taxes as
originally demanded in the 1st letter.

The 2nd letter is considered a NOTICE OF ASSESSMENT in itself, w/c


was duly received by Nielson in accordance w/ its own admission.

Under Section 7 of RA 1125, the assessment is appealable to the

TAX 2 MONTERO | Y. Sanchez A2012

CTA w/in 30 DAYS from receipt of the letter.


The taxpayer's failure to appeal in due time, as in the case at bar,
makes the assessment in question final, executory and demandable.
Thus, Nielson is now barred from disputing the correctness of the
assessment or from invoking any defense that would reopen the
question of its liability on the merits.

CIR v Western Pacific Corp

On March 2, 1959, the respondent Western Pacific Corporation,


was assessed for P3,731.00, as deficiency income tax for the year
1953.

This assessment was brought about by the disallowance of certain


amounts in Western's return for 1953 of expense items, and bad debts.
The assessment was received by respondent on the same date (March
2, 1959).

THREE days later, CIR wrote Western a letter of demand for the
payment of the amount, including therein a breakdown of said
assessment.

Almost FOUR months after, Western, through an auditing firm,


requested for non-assessment. It calims that the period for making the
assessment had prescribed.

CIR denied the request on July 30, 1959 and reiterated its demand
for payment of the amount w/in 30 DAYS from receipt.

After a number of communications between the parties, CIR made


a final demand for payment on Oct 28, 1959.

Western, on Dec 18, 1959, filed w/ the CTA a petition for review of
the assessment. It argued that the period for making the assessment
had already prescribed.

CTA rendered judgment absolving Western from the assessment.

HOWEVER, it ruled out prescription, stating that March 2, 1959,


was the last day of the 5 year period within which to make the
assessment. Although the last day was IN FACT Feb 28, 1959, this was
a Saturday. Thus, the official act, in this case, the making and issuance
of an assessment, could be done the NEXT SUCCEEDING BUSINESS
DAY, w/c was March 2, a Monday. This was pursuant to the Revised
Admin Code and RA 1880.

On appeal, CIR contended that the CTA erred in taking cognizance


of the case, given that it lacked jurisdiction.

I: W/n the period for making and issuing the assessment has
prescribed

R: NO, the period has not yet prescribed.

RA 1880, as implemented by EO 25, ordains that all bureaus and


offices of gov shall hold office only 4 days a week or from Mon to Fri.

Sat and Sun are considered public holidays.


Thus, where the last day for issuing a tax assessment falls on a
Sat, it may be validly issued the following business day, a Monday.
As to the PETITION FOR REVIEW FILED w/ CTA: The
assessment should be maintained because when the petition for
review was brought to the CTA, the court no longer had jurisdiction to
entertain the same. THE ASSESSMENT HAD LONG BECOME FINAL.
A petition for review should be presented, within the reglementary
period, as provided for in Section 11, Republic Act No. 1125, which is
30 DAYS from RECEIPT of assessment. The 30-day period is
jurisdictional.
In this case, more than 30 days had already lapsed from the time
Western was assessed to when it formally assailed the assessment.
Western was ordered to pay the assessment.

RP v Marsman Dev

Marsman Dev was a timber licensee with concessions in


Camarines Norte.

An investigation was conducted on the business operation and


activities of the corporation leading to the discovery that certain taxes
were due (from) it on logs produced from its concession.

3 assessments were made by the BIR:


o
1st: Oct 1953: P13k+ for forest charges and surcharge
for the years 1945-49
o
2nd: Sept 1954: P45k+ was demanded from the
defendant corporation representing sales tax and
surcharges

TAX 2 MONTERO | Y. Sanchez A2012

o
3rd: Nov 1954: P400+ representing surcharges
Marsman acknowledged the assessments through a letter, where
it requested that it be furnished w/ an itemized statement of the taxes,
and gave notice of its intention to question the validity and the legality
of the assessments.
BIR told Marsman that it must, within 10 DAYS, comply w/ the
requirements for requests for reinvestigation and reexamination of tax
assessments.6
Marsman asked for an exemption from this requirements, which
was denied by the BIR.
BIR then reiterated that Marsman had 5 days to comply otherwise
assessment shall become final.
Marsman failed to act on this.
Final tax notices were sent to Marsman on April 1956.
A warrant of distraint and levy was issued 3 months later.
BIR filed a case with the CFI of Manila which ordered Marsman to
pay the total assessed amount of P53,133. Hence this appeal.
I: W/n the BIRs right to assess and collect taxes from 1945-1959
had prescribed
R: NO, BIRs right to assess and collect taxes from 1945-1959 had
not yet prescribed.
Marsman contends that CIR had only 5 years within which to
assess the percentage and forest charges herein involved.
For the filing of a return to be reckoned as the starting point of the
period to make an assessment, such return must have been
substantially complete. There was no showing that Marsman indeed
filed a return, and even if it did, the alleged return was incomplete.
Thus, in case of a false or fraudulent return, the period to make an
assessment is 10 YEARS. Assessment was made w/in the 10 YEAR
period.
As to the prescription of the right to collect on the 2 nd
assessment
Amendedcomplaints are deemed filed only on the date of its
admission; when it comes to substantive matters such as prescription,
the admission retroacts to the day it was actually filed, which in this
case was Aug 1959, STILL w/in the 5 year period to collect.
As to the prescription of the suit against Marmsans
liquidator
Section 77 of the Corporation Law provides for a three-year period
for the continuation of the corporate existence of the corporation for
purposes of liquidation.

Writing under oath specifying grounds relied on and other necessary docs

HOWEVER, there is nothing in the said provision which bars an


action for the recovery of the debts of the corporation against the
liquidator, after the lapse of the said three-year period.
The Government became a creditor of Marsman even before the
dissolution by the liquidation of its assets. By virtue of his being
liquidator, Burgess became TRUSTEE of the assets of Marsman for its
creditors, w/c already included the government.

CIR v Phoenix Assurance

Phoenix Assurance Co is a British insurance corporation licensed to


do business in the Philippines. It is engaged in worldwide reinsurance
with various foreign insurance companies.

It agreed to cede a portion of premiums received on original


insurances underwritten by its head office, subsidiaries, and branch
offices throughout the world, in consideration for assumption by the
foreign insurance companies of an equivalent portion of the liability
from such original insurances.

Phoenix filed its income tax returns from 1952 to 54, making
amendments (1955) to the originals (1953, 54, 55).

On May 6,1958, CIR assessed Phoenix withholding tax and on Aug


1, 1958, deficiency income tax for the years 1952 and 1954.

The deficiency income tax resulted from the disallowance by the


CIR to fix head office expenses allocable to its business in the Phils at
5% of gross Phil income.

CIR insisted that the deduction is 5% net of Phil income.

Phoenix protested and CIR denied it.

CTA said that the right of the CIR to assess deficiency taxes had
already prescribed.

I: W/n prescription had set in against the CIR

R: NO.

Period given by the Tax Code for the CIR to assess income tax is 5
YEARS from the filing of the income tax return.

CTA ruled that the original return was a complete one containing
info on various items of income and deduction from w/c the CIR
determines the tax liability of Phoenix. THIS IS WRONG.

The CIR could not have made a correct assessment of Phoenixs


tax liability based on the original return.

The deficiency assessment was based on the amended return


which is SUBSTANTIALLY DIFFERENT from the original return.

THUS, the right to issue the assessment must be counted from the
filing of the AMENDED income tax return.

Counting from the date of amendment of the return (1955) to the


date of assessment (1958), it can be seen that CIRs power to assess
the tax liability is WITHIN 5 YEARS.

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To hold otherwise would pave the way for taxpayer to evade the
payment of taxes simply reporting in their original return heavy losses
and amending the same more than 5 years later when the
Commissioner has lost his authority to assess the proper tax there
under.
The object of the tax code is to impose taxes for the needs of the
government, not to enhance tax avoidance to its prejudice.

Butuan Sawmill v CTA

Butuan sold logs to Japanese firms at prices FOB Vessel


Magallanes.

FOB prices included costs of loading, wharfage stevedoring and


other costs in the Philippines; that the quality, quantity and
measurement specifications of the logs were certified by the Bureau of
Forestry. Freight was paid by the Japanese buyers via a Letter of Credit.

Upon investigation by the BIR, it was ascertained that no sales tax


return was filed by Butuan, and neither did it pay the corresponding
tax on the sales.

Butuan was assessed for P40k+ for sales tax, penalty and
compromise penalty on its sales of logs, later on reduced to P38k+
after reinvestigation.

LC upheld the legality and correctness of the assessment since the


sales were domestic and thus subject to our tax made w/in the 10 year
period prescribed by law, since the company FAILED to file its sales
returns from 1951-1953, the omission of w/c was only discovered on
Sept 27, 1957.

I: W/n the sale was subject to sales tax YES

W/n assessments were made w/in the prescriptive period- YES

R: YES, sale was subject to sales tax.

Butuan contends that the disputed sales were consummated in


Japan, and, therefore, not subject to the taxing jurisdiction of our
Government. The contentions of petitioner are devoid of merit.

It is clear that said export sales had been consummated in the


Philippines and were, accordingly, subject to sales tax therein."

YES, assessments were made w/in prescriptive period.

An income tax return cannot be considered as a return for


compensating tax for purposes of computing the period of prescription
under Section 331 (5-year period to make an assessment) of the Tax
Code.

The taxpayer must file a return for the particular tax required by
law in order to avail himself of the benefits of Section 331.

If he does not file a return, an assessment may be made within 10


years from and after the omission to file a return under Sec 332a.

In this case, the omission to file sales return for the years 1951 to
1953 were discovered in Sept 17, 1957, still w/in the 10-year period.
Thus, the assessment and collection of tax has NOT YET prescribed.

Taligaman Lumber v CIR

Taligaman Lumber, a domestic corporation is engaged in the


business of cutting logs in its concessions and converting said logs into
lumber, as well as buying logs from other concessionaires.

Upon examination of the books of account of the Grace Park


branch, an agent of the BIR recommended, on December 23, 1953, an
assessment of P134k+ as deficiency sales tax on the sales made in
said branch for the years 1948 to 1952.

Upon reexamination of said books of account, the agent


recommended a reduction of the assessment to P93k+, plus 25%
surcharge.

After a reinvestigation, the amount was further reduced to P66k+.

Meanwhile, another internal revenue agent examined the records


of the Butuan City branch and as a consequence, the sum of P98k+
was assessed as deficiency sales tax, surcharge and penalties due on
the sales made in said branch for the period from 1948 to 1953.

Upon reinvestigation, the assessment was reduced to P39k+.

Upon refusal of the CIR to reconsider or modify either assessment,


Taligaman brought the matter for review to the CTA, w/c reduced the
amt to about P86k+.

I: W/n the right of the BIR to collect deficiency taxes for 1948 and
1949 is already barred by prescription

R:

Since prescription is one of the affirmative defenses set up by


Taligaman herein, it was incumbent upon Taligaman, if it wanted to
avail itself of the benefits of section 331 (5-year period to prescribe), to
prove that it had submitted said returns.

HOWEVER, it failed to do so, and it must be concluded that no


such returns had been filed and that the Government had 10 years
within which to make the corresponding assessments, based on
Sec332 a (false / fraudulent return w/ intent to evade tax or failure to
file a return).

Taligaman contends that the gov had admitted impliedly that


Taligaman had declared its receipts, though not correctly, thus
relieving Taligaman of the burden of proving that it had filed the
corresponding returns because of the phrase in its answer: petitioner
had failed to declare its correct taxable receipts during the years in
question.

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HOWEVER, the phrase next following is: Hence, the assessment


and collection of said taxes are authorized under the provisions of
section 332 of the National Internal Revenue Code."
In short, the Government relied upon the "failure to file a return",
referred to in said section 332, not to mere inaccuracies in the return
filed, which fall under section 331.

Tan Guan v Nable

This case involves 2 assessments that Tan Guan is challenging:

Tan Guan and one Gonzalo Padua were the cashier and the
president of one Imperial, involved in the manufacturing of cigarettes.

On the first assessment: Imperial acquired bobbins of cigarette


paper from one Mabuhay Cigarette Factory (860 bobbins) and Seng
Kee & Co. (300). On July 30, 1951, Imperial then told the BIR that they
delivered 300 bobbins subsequently to one Marikina Cigarette Factory.

CIR however found that the subsequent sale to Marikina was


fictitious hence, they demanded specific taxes on the quantity of
cigarettes that MIGHT be produced from the 300 bobbins of paper
acquired by Imperial on January 21, 1953.

On Feb 1953, Padua then gave his intention to appeal the


assessment. However when it reached the conference, nobody
appeared on behalf of Imperial leading for the CIR to issue a warrant of
distraint which was left unserved for Padua had no property to be
distrained.

On October 1957, a criminal action for violation of the Tax Code


was filed but was subsequently dismissed for prescription.

Thereafter, on March 1958, Commissioner then demanded from


Tan Guan (this time it was against Tan Guan, after Padua) for the
payment of the assessed specific taxes of 72, 450 and a second
assessment for specific taxes of 128,800.

On the second assessment: On December 5, 1950,


Manufacturing Co. asked permission from the CIR to sell bobbins of
cigarette paper to Imperial. On July 23, 1952, a representative of
Imperial claims that they never received the bobbins that was
supposed to be sold by Manufacturing Co.

However, Manufacturing Co. sought reconsideration for the


assessment of specific taxes and even presented testimony and
documentary evidence to prove delivery of the goods to Imperial. On
March 20, 1958, CIR then assessed Imperial 128,800 as specific taxes
on the cigarettes that Imperial COULD HAVE manufactured out of those

800 bobbins of cigarette paper. CIR then filed a civil action on May 7,
1958 against Tan Guan.
Tan Guan then, who could not be located initially, filed an appeal
on the distraint of his properties claiming prescription of action.
I: W/n the action had prescribed
R: No, the action did not prescribe.
Tan Guan is claiming that first, the initial 72,400 assessment was
made on January 21, 1953 while the second action was filed on May 7,
1958 or beyond the prescriptive period of 5 years.
However, in spite of what Tan Guan was claiming, the prescriptive
action was INTERRUPTED, firstly on February 1953 when Padua (on the
first assessment) appealed the disputed assessment of 72,400.
On the second assessment, there was no 5 years yet as the first
assessment was done on May 1953, while the second one was May 7
1958, clearly no 5 years yet. Moreover, the prescriptive period of five
(5) years applies only when a return is filed. However, in the case of a
false or fraudulent return with intent to evade tax or of a failure to file
a return, the tax may be assessed, or a proceeding in court for the
collection of such tax may be begun without assessment, at any time
within ten years after the discovery of the falsity, fraud, or omission.
Since in this case, there was no return, the 10 year prescriptive
period hasnt lapsed yet!
ADDITIONAL NOTES: The prescriptive period may be interrupted
by a REQUEST FOR REINVESTIGATION w/c is granted; and if on the
basis of such reinvestigation, another assessment is made, the
prescriptive period shall be counted from the new assessment.
HOWEVER, a mere request for reinvestigation will NOT suspend the
prescriptive period if not reconsidered/acted upon.

CIR v Ayala Securities Corp

Ayala Securities Corp filed its ITR w/ the CIR for the fiscal year w/c
ended on Sept 30, 1955.

Attached to its ITR was the audited financial statements showing a


surplus of P2M+.

Income tax due on the return was duly paid w/in the period
prescribed by law.

CIR then advised Ayala for the assessment of P758k unpaid tax on
its accumulated surplus.

Ayala protested ate assessment and sought reconsideration given


that the accumulation was 1) for a bona fide business purpose and not
to avoid imposition of tax, and 2) assessment was issued beyond 5 yrs.

CTA and SC both held that the assessment was made beyond the
5-year period and thus had no binding force and effect.

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I: W/n the assessment was done beyond the prescriptive period


R: YES.
In this case, the applicable provision is NOT Sec 332a but Sec 331.
Sec 332 should apply when there is fraud / falsity on the return
with intent to evade payment of tax.
There is no evidence presented by the CIR in this case as to any
fraud/falsity on the return w/ intent to avoid payment.
Fraud is a question of fact, circumstances must be proven and
alleged.
In this case, the assessment issued on Feb 21, 1961, received by
Ayala on March 22, 1961, was made BEYOND the 5 year period
prescribed under Sec331 (Ayala could file its income tax on or before
Jan 1956 thus, assessment must be made NOT later than Jan 1961).
Thus, it was no longer binding on Ayala Securities.

Phil Journalists v CIR

PJI filed its Annual Income Tax Return for the calendar year which
ended on December 31, 1994

August 10, 1995- Revenue District No. 33 of BIR issued Letter of


Authority to 2 of its officers to examine PJIs book of accounts and
accounting records for internal revenue taxes for period January 1,
1994 to December 31, 2004

PJI was told that there were deficiency taxes, inclusive of


surcharges, interest and compromise penalty

August 29, 1997- Revenue District Officer Jaime Concepcion


invited PJI to send a representative to an informal conference on
September 15, 1997 for an opportunity to object and present
documentary evidence relative to the proposed assessment

Sept 22, 1997- PJIs comptroller executed a Waiver of Statute


of Limitation under NIRC (The document "waived the running
of the prescriptive period provided by Sections 223 and 224 and
other relevant provisions of the NIRC and consent[ed] to the
assessment and collection of taxes which may be found due after
the examination at any time after the lapse of the period of
limitations fixed by said Sections 223 and 224 and other relevant
provisions of the NIRC, until the completion of the investigation")

Oct 5, 1998- Assessment Division of the BIR issued PreAssessment Notices which informed PJI of the results of the
investigation finding that petitioner had deficiency taxes
(P136,952,408.97)

Dec 9, 1998-BIR issued Assessment/Demand No. 33-1000757-94

Mar 16, 1999- a Preliminary Collection Letter was sent by


Deputy Commissioner Romeo S. Panganiban to the PJI to pay the
assessment within ten (10) days from receipt of the letter

November 10, 1999- Final Notice Before Seizure was issued by


the same deputy commissioner giving the PJI ten (10) days from
receipt to pay (received by PJI on Nov 24, 1999)

Nov 26, 1999- PJI asked BIR for a clarification how it became
liable for tax deficiency and sent a follow up letter asserting that
its record did not show receipt of Assessment/Demand No. 331-000757-94

Mar 28, 2000- PJI received Warrant of Distraint and Levy

May 12, 2000- PJI filed a Petition for Review with the CTA. One of
its grounds was that the assessment, having been made beyond
the 3-year prescriptive period was null and void

CTA ruled that the assessments were issued beyond the 3


year prescriptive period and that the Waiver of Statute of
Limitations null and void (unlimited for not containing expiry
date, failed to state the date of acceptance by the BIR and PJI was
not furnished a copy- all contrary to RMO 20-90)

CA reversed the CTA and ruled in favor of PJI.


I: 1) W/n there was a valid waiver of the statute of
limitations
R: NO. Thus, assessment was issued BEYOND the
prescriptive period.
The waiver of the statute of limitations is not a waiver of
the right to invoke the defense of prescription as erroneously held by
the Court of Appeals.
It is an agreement between the taxpayer and the BIR that
the period to issue an assessment and collect the taxes due is
extended to a date certain.
The waiver does NOT mean that the taxpayer
relinquishes the right to invoke prescription unequivocally particularly
where the language of the document is equivocal.
For the purpose of safeguarding taxpayers from any
unreasonable examination, investigation or assessment, our tax law
provides a statute of limitations in the collection of taxes. Thus, the law
on prescription, being 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.
RMO No. 20-90 implements the provisions of NIRC
relating to the period of prescription. The waiver must be in the form
identified. The phrase "but not after _________ 19___" should be filled
up. This indicates the expiry date of the period agreed upon to

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assess/collect the tax after the regular three-year period of


prescription.
The period agreed upon shall constitute the time
within which to effect the assessment/collection of the tax in
addition to the ordinary prescriptive period.
Waiver must be signed by the National Office
Commissioner for taxes more than P1M, or the Regional District Officer
for taxes still pending and period to assess is about to prescribe,
regardless of amount.
THE WAIVER WAS INVALID FOR THE FOLLOWING
REASONS:
o
It does not conform with the provisions of RMO No. 20-90. It did
not specify a definite agreed date between the BIR and petitioner,
within which the former may assess and collect revenue taxes.
Thus, petitioners waiver became unlimited in time, violating
Section 222(b) of the NIRC.
o
defective from the government side because it was signed only by
a revenue district officer, not the Commissioner, as mandated by
the NIRC and RMO No. 20-90
o
PJI was not furnished a copy of the waiver.

RP v Lim de Yu

Rita Lim de Yu filed her yearly income tax returns from 1948
through 1953.

BIR assessed the taxes due on each return, and Rita paid them
accordingly. On July 17, 1956 the Bureau issued to Rita deficiency
income tax assessments for the years 1945 to 1953 in the total
amount of P22,450.50.

She protested the assessments and requested a reinvestigation.

On August 30, 1956 she signed a "waiver" of the statute of


limitations under the Tax Code as condition to the reinvestigation
requested. In the waiver, Rita consented to ASSESSMENT AND C
OLLECTION if not made later than Dec 1958.

Even after reinvestigation, Rita failed in her contentions and was


assessed 50% surcharge.

Upon Rita's failure to pay, an action for collection was filed against
her in the CFI of Cotabato on May 11, 1959.
Lower court dismissed the case on the ground that right to collect
had already prescribed pursuant to the waiver.
I/R: 1) W/n lower court was correct in ruling that the
deficiency income taxes for 1948, 1949 and 1956 were NOT
collected on time
YES, lower court was correct. Deficiency taxes were NOT collected
on time.
Although Republic alleged that the returns were false and
fraudulent (prescribing 10 yrs instead of 5), it FAILED to establish such
allegation.
In fact, every time Rita filed her returns, and every time there was
a recomputation by the Bureau, she PAID the amounts due.
Even the Bureau itself appears none too sure as to the real amts of
net income for those years.
It is NOT enough that fraud is alleged as it must be duly
established. Hence, the 10yr period for fraud cases cannot be availed
of.
Also, the tax years 1948 to 1950 cannot be deemed included in
the "waiver of the statute of limitations.
Although Sec332 waiver provides fro an exemption to the code,
such AGEREMENT must be made BEFORE, and NOT AFTER the
expiration of the original period. It prevents prescription from attaching
and does NOT operate to authorize extension once prescription has
attached.
Thus, the amounts were not collected on time.
2) W/n LC was correct in dismissing the case because the
right to collect had prescribed already pursuant to waiver
NO, LC was incorrect on this point.
Assessment and collection are 2 dif processes. Sec331 gives gov 5
years from filing of return within w/c to assess taxes due. Sec332b
allows extension of this agreement by WRITTEN AGREEMENT between
taxpayer and CIR.
On the other hand, par.c. is concerned w/ collection of taxes after
assessment, regardless of whether made during 5yrs or UPON
extension.
Hence, collection can be affected w/in 5 yrs OR the agreed upon
extension between taxpayer and commissioner.
Thus, assessment and collection if made not later than Dec 1958
should be deemed to refer merely to the right to assess and NOT to

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collect, for it that were so, agreement would LIMIT instead of extend
the right to collect.
RP v Heirs of Cesar Jalandoni

Isabel Ledesma died intestate leaving real properties and personal


properties consisting of shares of stock in various domestic
corporations.

She left as heirs her husband and 3 children.

On November 19, 1948, Cesar Jalandoni, one of the children, filed


an estate and inheritance tax return.

On the basis of this return, BIR made an assessment calling for


payment of estate and inheritance taxes, stating that the assessment
was "to be considered partial pending investigation of the return."

These sums were paid by Cesar Jalandoni.

A second assessment was made on January 27, 1953 by BIR


showing that there was due from the estate deficiency estate and
inheritance taxes, respectively, for which reason a demand was made
on Bernardino Jalandoni stating therein that the same was still "to be
considered partial pending further investigation of the return.

These amounts were paid by Bernardino Jalandoni.

BIR then conducted another investigation and this time it found (1)
that the market value of the lands reported in the return filed by Cesar
Jalandoni was underdeclared; (2) that seven sugar lands in Talisay-Silay
were omitted from the return the same having a market value of
P100,200.00; and (3) the shares of stock owned by the deceased in the
Victorias Milling Company, Hawaiian-Philippine Company and Central
Azucarera de la Carlota, were underdeclared.

As such, the heirs were required to pay deficiency estate and


inheritance taxes, respectively, including accrued interests, with the
warning that failure on their part to pay the same would subject them
to the payment of surcharge, interest, and penalty for late payment of
the tax.

B. Jalandoni wrote a letter to CIR setting up the defense of


prescription in the sense that the deficiency in the estate and
inheritance taxes payment of which was required therein can no longer
be collected since more than five years had already elapsed
from the filing of the return invoking in his favor Section 331 of
NIRC.

CIR retorted claiming that the stand of counsel cannot be


entertained for the reason that, it appearing that the estate and
inheritance tax return which was filed by the administrator or by the
heirs contained omissions which amount to fraud indicative of an
intention to evade payment of the proper tax due the government, the

taxes then being collected could still be demanded within 10 years


from the discovery of the falsity or omission.
TC ordered Jalandonis to pay the amount.
I: W/n there was fraud w/c would make the assessment valid and
the prescriptive period 10 years
R: NO, There was no fraud and the assessment was filed BEYOND
the prescriptive period.
As to the sugarlands: Certainly if there is any mistake in the
valuation made by Jalandoni the same can only be considered as
honest mistake, or one based on excusable inadvertence, he being not
an expert in appraising real estate.
Of the 7 lots, 3 were actually included in the return. The 3 lots
were the most valuable with total value of 86k. Total value of 7 lots was
90k. There was reason therefore to believe that the omission was due
merely to inadvertence.
The deficiency assessment, moreover, was made by the CIR more
than five years from the filing of the return, and experience shows that
such an intervening period is sufficiently long to warrant an increase in
value of real estate which is precisely what was found by the CIR with
regard to the lands in question. It is certainly an error to impute fraud
based on an honest difference of opinion.
As to the shares: The fact that the value given in the returns did
not tally with the book value appearing in the corporate books is not in
itself indicative of fraud especially when we take into consideration the
circumstance that said book value only became known several months
after the death of the deceased.
Moreover, it is a known fact that stock securities frequently
fluctuate in value and a mere difference of opinion in relation thereto
cannot serve as proper basis for assessing an intention to defraud the
government.

Tan Guan v CIR

Tan Guan and Sia Lin, Chinese nationals, organized and registered
the Phil Surplus Company, a general partnership.

Tan filed an income tax return declaring deductions for service of


engine, freight and steam hoist.

Acting upon a confidential report, that the company posted


fictitious expenses in its books to avoid taxes, BIR investigated the
books of the partnership and discovered expenses NOT covered by
receipts, names of payees erased and payees who did not report sums
in question in their income tax.

Thus, BIR disallowed expense deductions in 1948. They were


treated as the income of individual partners and BIR assessed them
deficiency income taxes

TAX 2 MONTERO | Y. Sanchez A2012

I: W/n the deductions should be allowed to absolve Tan from


assessed deficiency liability
R: No, deductions should NOT be allowed.
CIRs findings that the facts constituting fraud proven by the CTA
were NOT rebutted by the taxpayer.
Tan did NOT present evidence to disprove findings, considering
that the investigation was made PRIOR to the 5-year period to preserve
and keep receipts.
For failure to overcome the burden, Tan cannot claim the expenses
as deduction from gross income.
Also, since the tax return was fraudulent due to fictitious
expenses, the CIR had 10 yrs to assess.
CIR did NOT lose its right to issue the assessment on 1957, which
is WITHIN 10 years from 1954, when the fraud was discovered.

Aznar v CTA

The late Matias Aznar filed his income tax returns of


1945-1949.

The CIR, having his doubts on the veracity of the reported


income of one who is obviously wealthy, caused BIR Examiner Honorio
Guerrero to ascertain the taxpayer's (Matias Aznar) true income for
said years by using the net worth and expenditures method of tax
investigation.

It was discovered that from 1946 to 1951, his net worth


had increased every year, much more than the income reported. The
findings clearly indicated that the taxpayer did not declare correctly
the income reported in his income tax returns for those years.

CIR notified the taxpayer of the assessed tax delinquency.

Taxpayer requested a reinvestigation which was granted.

After the reinvestigation, another deficiency assessment


to the reduced amount superseded the previous assessment and
notice thereof was received by Aznar in 1955.

In Feb 1953, CIR through the City Treasurer of Cebu,


placed the properties of Aznar under distraint and levy to secure
payment of the deficiency income tax in question.

Aznar argues that NIRC Sec. 331 applies in this case.


Section 331 provides for five years limitation upon assessment and
collection from the filing of the returns.

He argues that since the 1946 income tax return could be


presumed filed before March 1, 1947 and the notice of final and last
assessment was received by the taxpayer on March 2, 1955, a period
of about 8 years had elapsed, and the five year period provided by law
had already expired.

CIR asserted that the 10-year period should apply since


this involved a false and fraudulent return. CIR and CTA found that the
very "substantial under declarations of income for six consecutive
years eloquently demonstrate the falsity or fraudulence of the income
tax returns with an intent to evade the payment of tax."
I: 1) W/n the right of the CIR to assess deficiency income
taxes for the years 1946-1948 had already prescribed at the time the
assessment was made on November 28, 1952
2) W/N the lower court erred in imposing the fraud
penalty (surcharge of 50%). Yes.
R: 1) YES, CIR still had the right to assess deficiency
income taxes. Right had NOT prescribed.
In the three different cases of (a) false return, (b)
fraudulent return with intent to evade tax, (c) failure to file a return,
the tax may be assessed, or a proceeding in court for the collection of
such tax may be begun without assessment, at any time within ten
years after the discovery of (a) falsity, (2) fraud, (3) omission. Our
stand that the law should be interpreted to mean a separation of the
three different situations of false return, fraudulent return with intent to
evade tax, and failure to file a return is strengthened immeasurably by
the last portion of the provision which segregates the situations into
three different classes, namely falsity, fraud and omission.
That there is a difference between false return and
fraudulent return cannot be denied. While the first merely implies
deviation from the truth, whether intentional or not, the second implies
intentional or deceitful entry with intent to evade he taxes due.
The ordinary period of prescription of five years within
which to assess tax liabilities under Sec. 331 of the NIRC should be
applicable to normal circumstances, but whenever the government is
placed at a disadvantage so as to prevent is lawful agents from proper
assessment of tax liabilities due to false returns, fraudulent return
intended to evade payment of tax, or failure to file returns, the period
of ten year provided for in Sec. 332 (a) NIRC, from the time of the
discovery of the falsity, fraud or omission even seems to be inadequate
and should be the one enforced.
There being undoubtedly false tax returns in this case,
Sec. 332 (a) of the NIRC should apply and that the period of ten years
within which to assess petitioners tax liability had not expired at the
time said assessment was made.
2) YES, LC should Not have imposed fraud penalty.
Fraud cannot be presumed but must be proven.
Fraudulent intent could not be deduced from mistakes however
frequent they may be, especially if such mistakes emanate from
erroneous entries or erroneous classification of items in accounting
methods utilized for determination of tax liabilities.

TAX 2 MONTERO | Y. Sanchez A2012

Matias Aznar undoubtedly filed his income tax returns for


"the years 1946 to 1951 and those tax returns were prepared for him
by his accountant and employees. It also appears that petitioner in his
lifetime and during the investigation of his tax liabilities cooperated
readily with the BIR and there is no indication in the record of any act
of bad faith committed by him.

The lower court's conclusion regarding the existence of


fraudulent intent to evade payment of taxes was based merely on a
presumption and not on evidence establishing a willful filing of false
and fraudulent returns so as to warrant the imposition of the fraud
penalty.

The fraud contemplated by law is actual and not


constructive. It must be intentional fraud, consisting of deception
willfully and deliberately done or resorted to in order to induce another
to give up some legal right.

Negligence, whether slight or gross, is not equivalent to


the fraud with intent to evade the tax contemplated by the law.

Thus, a mere mistake cannot be considered as fraudulent


intent, and if both petitioner and CIR committed mistakes in making
entries in the returns and in the assessment, respectively, under the
inventory method of determining tax liability, it would be unfair to treat
the mistakes of the petitioner as tainted with fraud and those of the
respondent as made in good faith.
* Yas: So I guess in this case, petitioner was liable of FALSE return, but
there was NO fraud?
CIR v Ayala Securities Corp

An assessment made on 21 February 1961 by the CIR


against the Ayala Securities Corporation (and received by the latter on
22 March 1961) for accumulated profit surplus for the fiscal year
ending 1955.

CTA reversed the assessment of the 25% surtax and


interest in the amount of P758,687.04, and thereby cancelled and
declared of no force and effect the assessment of the CIR.

SC affirmed CTA decision and ruled that the assessment


was made AFTER the expiration of the said 5-year prescriptive period
and was of no binding force and effect.

The Commissioner moved for reconsideration, contending


that the assessment to be filed w/in 5-years only refers to taxes which
have their basis the requirement of law to be reported in a return.
No law requires taxpayers to file returns of their accumulated profits,
as opposed to, for example, income taxes.

I: W/n BIR is mandated to make an assessment w/in 5


years from the filing of the taxpayer of his return w/ regard to surtaxes
on unreasonably accumulated profits
R: No, it does not.
The provisions of sections 331 and 332 of the National
Internal Revenue Code for prescriptive periods of 5 and 10 years after
the filing of the return do not apply to the tax on the taxpayers
unreasonably accumulated surplus under section 25 of the Tax Code
since no return is required to be filed by law or by regulation on such
unduly accumulated surplus on earnings. The 25% surtax is not subject
to any statutory prescriptive period.
A tax imposed upon unreasonable accumulation of
surplus is in the nature of a penalty. It would NOT be proper for the law
to compel a corporation to report improper accumulation of surplus.
Section 331 applies to assessment of NIRC taxes WHICH
REQUIRES THE FILING OF RETURNS. To start the running of the 5-year
period, the return must be one REQUIRED for the particular tax.
Thus, filing of income tax return does NOT start the
running of prescriptive period for assessment of SALES TAX (Butuan
Sawmill, Inc. v. Court of Tax Appeals)
No return could have been filed, and the law could not
possibly require, for obvious reasons, the filing of a return covering
unreasonable accumulation of corporate surplus profits.
It is well settled limitations upon the right of the
government to assess and collect taxes will not be presumed in the
absence of clear legislation to the contrary. In the absence of express
statutory provision, the right of the government to assess unpaid taxes
is imprescriptible. Since there is no express statutory provision limiting
the right of the Commissioner of Internal Revenue to assess the tax on
unreasonable accumulation of surplus provided in Section 25 of the
Revenue Code, said tax may be assessed at any time.
The underlying purpose of the additional tax in question
on a corporations improperly accumulated profits or surplus is to avoid
the situation where a corporation unduly retains its surplus earnings
instead of declaring and paying dividends to its shareholders or
members who would then have to pay the income tax due on such
dividends received by them.
Ayala Securities Corporation is a mere holding company
of its shareholders through its mother company, a registered copartnership then set up by the individual shareholders belonging to the
same family. Said prima facie evidence and presumption set up by the
Tax Code is applied without having been adequately rebutted by the
corporation.

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The Corporation falls under Revenue Regulation 2,


implementing the provisions of the income tax law which provides on
holding and investment companies that A corporation having
practically no activities except holding property, and collecting the
income therefrom or investing therein shall be considered a holding
company within the meaning of section 25. (Section 20)

Guagua Electric Light Plant v CIR

Guagua Electric Light Plant Co is a grantee of municipal


franchise by the municipal council of Guagua.

Guagua realized and reported a gross income in the sum


of P1M+ and paid thereon a franchise tax computed at 5% in
accordance w/ the NIRC.

Believing that it should pay franchise tax at the lower


rates provided for in its franchises instead of 5% fixed by Section 259
of the Tax Code, it filed a claim for refund for allegedly overpaid
franchise tax.

CIR denied refund of franchise tax corresponding to the


period prior to the fourth quarter of 1951 on the ground that the right
to its refund had prescribed. He however granted refund of P16k+.

Not satisfied, Guagua appealed to CTA.

CTA dismissed appeal upon motion of CIR on the ground


that the same was instituted beyond the 30-days, period provided for
in Section 11 of Republic Act 1125.

CIR assessed against Guagua Electric deficiency franchise


tax and later issued a revised assessment eliminating deficiency tax
for the period prior to January 1, 1956, as recommended.

I: W/n the government is precluded from recovering the


amount refunded to it on grounds of prescription and failure to set up
as counterclaim in the CTA case

R: YES, gov can no longer recover the amount refunded to


it.

CIR seeks recover of the amount of P16k+ alledly


erroneously refunded to Guagua Electric. It represents the diff between
the tax computed at 5% pursuant to Tax Code and 1% or 2% under its
franchises from Sept 1951 to Nov 1956.

If Guagua were required to pay the P16k+ IN ADDITION to


the P19k+, it would be paying TWICE the same deficiency tax for the
period from Jan to Nov 1956.

Moreoever, CIR revised his first deficiency tax assessment


by eliminating the deficiency tax for the period from Jan 1956 because
the right to assess the same had prescribed. By insisting on the
payment of the P16k+, he is in fact trying to collect the same

deficiency tax, the right to assess the same he found to have


been lost by prescription.
Also, it is wrong for CIR to say that right to assess and
collect is governed by Civil Code (6 years). What governs is the Tax
Code (special law should prevail over general law).
The constitutionality of collecting franchise tax at the rate
of 5% of the gross receipts as provided for in the Tax Code instead of at
the lower rates fixed by the franchise granted under Act 667, has
already been settled in several cases. Guagua Electric, whose
franchises were similarly granted under Act 667, being similarly
situated as the taxpayers-franchise holders in those cases already
decided by Us, shall likewise be subject to the 5% rate imposed in
Section 259 of the Tax Code.

Vera v Fernandez

Intestate estate of Tongoy was assessed deficiency


income taxes from 1963 to 1964 inclusive of 5% surcharge, 1%
monthly interest and compromise penalties.

The administrator opposed on the ground that the claim


was barred for being filed beyond the period prescribed in the ROC,
Rule 86 (in settlement of estate, taxes should be filed in administration
proceedings as claims against the estate as a regular money debt).

I: W/n Rule 86 of ROC (state of non-claims) bars the claim


of gov for unpaid taxes, even if period is still w/in the time in the NIRC

R: NO. Claim is NOT barred and gov can still collect w/in
the prescriptive period.

Taxes are of an entirely different character from the


claims (money claims against the decedent) enumerated in the
statute.

Under the familiar rule of statutory construction of


expressio unius est exclusio alterius, the mention of one thing implies
the exclusion of another thing not mentioned.

The reason for the more liberal treatment of claims for


taxes against a decedent's estate in the form of exception from the
application of the statute of non-claims is that taxes are the
lifeblood of the Government and their prompt and certain
availability are imperious need.

In fact, claims for taxes may be collected even AFTER the


distribution of the decedents estate among heirs who shall be liable in
proportion to their share of inheritance.

Payment of income tax shall be a lien in favor of the gov


from the time the assessment was made by the Cir until paid w/
interests, penalties, etc. Thus, BEFORE inheritance has passed to heirs,

TAX 2 MONTERO | Y. Sanchez A2012

unpaid taxes may be collected without having been presented under


the Rule 86 of the ROC.
Even assuming that claims for taxes have to be filed
within the time prescribed in Section 2, Rule 86 of the Rules of Court,
the claim in question may be filed even AFTER the expiration of the
time originally fixed.
In this case, gov filed its claim AFTER the expiration of the
time allowed but BEFORE the distribution of the estate. The claim
SHOULD be allowed, considering the claim is made for the people at
large.

RP v Limcaco

Limcaco is engaged in the importation of cigarettes and,


being such, owed the government revenue taxes.

To guarantee their payment, the private respondents


(Limcaco as the principal, Visayan as the surety) executed two
Importers bonds worth P3,000.

Upon arrival of their new shipment of cigarettes on July


15, 1946, the principal was assessed a tax of P6,000, which they paid
P1,000 in cash and P5,000 in check. The cigarettes were released
into their custody.

The check was subsequently dishonored for lack of funds.

On June 17, 1948, the CIR wrote Limcaco and


demanded from him deficiency tax due on the cigarettes, but it
remained unpaid despite repeated demands.

They instead resorted to Visayan Surety for fulfillment.

Visayan Surety requested for the complaint which would


be initiated against both Visayan and Limcaco be temporarily
suspended.

CIR filed a complaint praying for forfeiture of the


importers bonds and payment of the deficiency tax plus interest.

Defendants, however, interposed the defense of


prescription and questioned the validity of the assessment.

I: W/n there was prescription in the case.

R: NO, there was no prescription.

Being a complaint for taxes previously paid, compliance


with Sec. 306 of the NIRC must first be adequately performed.

A taxpayer must first file a claim for refund or tax credit


with the CIR first before maintaining a suit for recovery of tax alleged
to be illegally or erroneously assessed or collected. It is a condition
precedent, failure to do so will subject the claim to dismissal for lack of
cause of action.

No evidence was shown to prove that Visayan complied


with such a condition. The counterclaim should have been dismissed.

Governments action has not prescribed. The collection of


taxes should be done within 5 years after assessment. The assessment
was actually on June 17, 1948, the day when the demand letter
was sent to Limcaco and Visayan, not on the day they were originally
supposed to pay for the taxes.
To assess means to impose a tax, to charge with a tax, to
declare a tax to be payable, to apportion a tax to be paid and
contributed, to fix a rate, to fix or settle a sum to be paid by way of
tax, to set or charge a certain sum to each taxpayer, and to settle or
determine or fix the amount of tax to be paid.
The right to collect the deficient tax of P5,000 only
accrued after the dishonor. Judicial action having been instituted on
February 18, 1953, the five year period had not yet lapsed.
Even assuming that the earlier date is the date of
assessment, there would still be no prescription because the
prescription was interrupted when there is written
acknowledgement of the debt by the debtor. Moreover, it is not a
collection of taxes but of the bonds, which is an action separate and
distinct from an action to collect taxes (this is an action upon a written
contract, w/c must be brought w/in 10 yrs from the time the right of
action accrues).

RP v Ret

On February 23, 1949, Damian Ret filed with the BIR his
Income Tax Return for the year 1948, where he made it appear that his
net income was only P2k+ with no income tax liability at all.

The BIR found out later that the return was fraudulent
since Ret's income, derived from his sales of office supplies to different
provincial government offices, totaled P94k+.

The BIR assessed him deficiency income tax for 1948,


inclusive of the 50% surcharge for rendering a false and/or fraudulent
return.

Ret failed to file his Income Tax return for 1949,


notwithstanding the fact that he earned a net income of P150k+, also
from sale of office supplies. His income, as assessed for tax purposes,
showed a deficiency tax for 1949.

CIR demanded from Ret the payment of the above sums,


but he failed and/or refused to pay said amounts.

On January 20, 1951, the Collector issued income tax


assessment notices to Ret, urging him to pay the sums mentioned, but
with the same result.

Upon recommendation of the Collector, Ret was


prosecuted for a violation of Sections 45[a], 51[d] and 72, of the

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N.I.R.C. penalized under Sec. 73, thereof (Crim. Cases Nos. 19037, and
19038. He pleaded guilty to the two (2) cases and was sentenced to
pay a fine of P300.00 in each.
After his conviction, the Republic filed the present
complaint for the recovery of Ret's deficiency taxes in the total sum of
P103k+ plus 5% surcharge and 1% monthly interest.
Instead of answering, he presented a Motion to Dismiss
on February 8, 1958, claiming that the "cause of action had already
prescribed".
CFI held that the five-year period fixed by law for the
filing of suit for the collection of income tax having already expired, the
plaintiff has no cause of action against the defendant and the motion
to dismiss should be and is hereby granted, and the case is dismissed
without pronouncement as to costs.
I: W/n right of BIR to collect income taxes had already
prescribed
R: YES, cause of action has already prescribed.
Section 332 of the Revenue Code does NOT apply to
income taxes if the collection of said taxes will be made by summary
proceedings, because this is provided for by Section 51 (d); but if the
collection of income taxes is to be effected by court action, then
section 332 will be the controlling provision.
The gov contends that granting the applicability of Sec
332, it has 10 yrs from discovery of fraud, falsity or omission within w/c
to file the action.
Under this section, the CIR is given 2 alternatives:
o
Assess tax WITHIN 10 YRS from discovery of falsity, fraud,
omission
o
File an action in court for the collection of tax WITHOUT
ASSESSMENT also WITHIN 10 YRS from discovery of
falsity, fraud, omission
In this case, the assessment has been made and this fact
has taken it out of the realm of Sec 332 (a) and placed it under Sec
332 (c) w/c provides that payment must be made w/in 5 YEAR
prescriptive period.
The CIR made the assessment on January 20, 1951 and
had up to January 20, 1956 to file the necessary action. It was only on
September 5, 1957, that an action was filed in Court for the
collection of alleged deficiency income tax far beyond the 5-year
period.
Gov was NOT prohibited from collecting deficiency
income tax during pendency of criminal cases. The present
complaint against Ret is NOT for the recovery of civil liability arising
from the offense of falsification; it is for the collection of deficiency

income tax. The criminal actions are entirely separate and distinct from
the present civil suit. There is nothing in the law which would have
stopped CIR from filing this civil suit simultaneously with or during the
pendency of the criminal cases.
It is also averred that the period of prescription for
the collection of tax was suspended because of the written
extrajudicial demand made by the CIR.
HOWEVER, the only agreement that could have
suspended
the
running
of
the
prescriptive
period
was
a written agreement between Solano and the Collector, entered before
the expiration of the five (5) year prescriptive period, extending the
period of limitations prescribed by law.
In the instant case, there is no such written agreement.

RP v Razon

Haig Assadourian (an Egyptian national) was hired as general


manager of Jai Alai.

He eventually left the Phils for the USA after securing a tax
clearance. He never returned to the Phils.

Jai Alai through its VP Jose Razon entered into a contract w/


Assadourain (Ass) where Jai Alai would pay Ass P200k as full payment
of all his claim for percentages earned by the Jai Alai from 1940-1945,
as well as those to be earned from 1946-1950 (for his services as
general manager).

The same were by Jai Alai by telegraphic transfer and later by Sen.
Madrigal, a stockholder.

In 1949, the BIR discovered the failure to file a withholding tax


return.

Thus, in 1952, it wrote a letter to Jai Alai demanding payment of


taxes w/c Jail Alai should have withheld on the P200k payment in
accordance w/ the Tax Code enclosing assessment notices.

Upon failure to pay, CIR commenced a collection suit in 1953.

I: W/n action for collection had prescribed

R: NO, action to collect had not yet prescribed.

For its omission / failure to file a withholding tax return, the


applicable provision of the then Tax Code is that a proceeding in court
for collection may be filed WITHOUT ASSESSMENT any time w/in 10 yrs
from discovery of omission.

In this case, omission was discovered in 1949 during the


investigation of the BIR examiner.

The judicial suit was intitiated in 1953 impleading Jai Alai. Thus,
only 4 years had elapsed from the time of discovery of the
omission to file a return from filing a judicial suit. Action to collect
had NOT prescribed.

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OTHERS:
Assadourian was a nonresident alien not engaged in trade or
business in the Philippines, which means that he was within the
purview of Section 53 (b) of the then National Internal Revenue Code
which requires any person or corporation in control of his earnings as
such nonresident alien to withhold 20% from such annual or periodical
gains, profits and income as tax.
With regard to the payment of Jai-Alai to Assadourian, it was held
that it was not merely for the purchase price of certain inchoate or
contingent interest belonging to him, but it was considered income
where withholding tax is mandatory. This is due to the fact that
Assadourian, in consideration of the sum of 200,000.00,
acknowledged full payment of all his claim for percentages earned by
the Jai-Alai Stadium for the years 1940 to 1945, and to be earned
during the years 1946 to 1950. Since Jai-Alai made payment directly
to Assadourian, there is no doubt that the former is liable for
withholding tax.
Payment made by Sen. Madrigal was really payment made on
behalf of Jai Alai.

RP v Acebedo

A notice of assessment was issued on September 24, 1949 to Felix


Acebedo in the amount of P5,962.83.

He asked for a reinvestigation on October 11, 1949.

There is no evidence that this request was considered or acted


upon.

In fact, on October 23, 1950 the then CIR issued a warrant of


distraint and levy for the full amount of the assessment, but there was
no follow up of this warrant.

Acebedo again requested for a reinvestigation of his tax liability on


October 6, 1951. Nothing came of this request either.

Acebedos lawyers then wrote the CIR informing him that the
books of their client were ready at their office for examination. The
reply was dated more than a year later, or on October 4, 1955, when
the Collector bestirred himself for the first time in connection with the
reinvestigation sought, and required that the defendants specify his
objections to the assessment and execute "the enclosed forms for
waiver, of the statute of limitations."

The last part of the letter was a warning that unless the waiver
"was accomplished and submitted within 10 days the collection of the
deficiency taxes would be enforced by means of the remedies provided
for by law.

CIR filed a complaint on December 27, 1961.


After Acebedo filed his answer but before trial started, he moved
to dismiss on the ground of prescription.
TC dismissed the complaint, saying that a mere request for
reinvestigation or reconsideration of an assessment does NOT have the
effect of such suspension. This is an appeal by the plaintiff from the
order of dismissal.
I/R:
1) W/n the assessment begun prior to the expiration of the
period agreed upon in writing by the CIR and before the
expiration of the 5-year period
NO, the waiver of statute of limitations was ineffective because
it was executed BEYOND the 5-year limitation (in 1959).
2) W/n the period of prescription was suspended by
Acebedos requests for reinvestigation / reconsideration of tax
assessment
NO. A mere request for reinvestigation / recon DOES NOT give an
effect of suspension. Otherwise, there would be no point to the legal
reqment that extension of the original period be agreed upon in
writing.
HOWEVER, there are cases when taxpayer may be prevented from
setting up prescription even if he has waived it in writing as when by
his repeated requests / positive acts, the gov has been persuaded to
postpone collections to make him feel that the demand was NOT
unreasonable / that no harassment / injustice is meant.
When a taxpayer asks for a reinvestigation of the tax assessment
issued to him and such reinvestigation is made, on the basis of which
the Government makes another assessment, the five-year period with
which an action for collection may be commenced should be counted
from this last assessment.
In this case, the delay in collection could not be attributed to
Acebedo at all. His requests in fact had been unheeded until
then, and there was nothing to impede enforcement of the tax
liability by any of the means provided by law.
By October 4, 1955, more than five years had elapsed since
assessment in question was made, and hence prescription had
already set in, making subsequent events in connection with the said
assessment entirely immaterial.
Even the written waiver of the statute signed by the defendant on
December 17, 1959, which was the only evidence presented , could no
longer revive the right of action, for under the law such waiver must be
executed within the original five-year period within which suit could

CIR v CA

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January 15, 1982 and November 20, 1981: Carnation filed its
Corporation Annual Income Tax Return and its Manufacturers/Producers
Percentage Tax Return respectively for the quarter ending September
30, 1981.
In 1987, Carnation, through its Senior Vice President, signed three
separate "WAIVERS of the Statute of Limitations Under the National
Internal Revenue Code" wherein it waived the running of the
prescriptive period provided for in provisions of the NIRC and consents
to the assessment and collection of the taxes which may be found due
after reinvestigation and reconsideration at anytime before or after the
lapse of the period of limitations fixed the provisions of the NIRC, but
not after (13 April 1987 for the earlier-executed waiver, or June 14,
1987 for the later waiver, or July 30, 1987 for the subsequent waiver,
as the case may be).
However, the taxpayer does not waive any prescription already
accrued in its favor.
The waivers were not signed by the BIR Commissioner or any
of his agents.
Carnation received BIR's letter of demand asking the said corporation
to pay deficiency income tax, deficiency sales tax and deficiency sales
tax on undeclared sales, all for the year 1981. This demand letter was
accompanied by 3 assessment Notices.
Carnation disputed the assessments and requested a reconsideration
and reinvestigation thereof.
CIR contends that the waivers signed by Carnation were valid although
not signed by the BIR Commissioner because:
o
(a) when the BIR agents/examiners extended the period to audit
and investigate Carnation's tax returns, the BIR gave its implied
consent to such waivers;
o
(b) the signature of the Commissioner is a mere formality and the
lack of it does not vitiate binding effect of the waivers; and
o
(c) that a waiver is not a contract but a unilateral act of
renouncing ones right to avail of the defense of prescription and
remains binding in accordance with the terms and conditions set
forth in the waiver
CTA held that assessment Notices are NULL AND VOID for having been
issued beyond the five-year prescriptive period provided by law.
I: W/n the 3 waivers signed Carnation are valid and binding as to toll
the running of the prescriptive period for assessment and not bar the
Government from issuing subject deficiency tax assessments?
R: NO, the waivers are NOT valid. The prescriptive period is NOT
suspended.
Sec. 203 of the National Internal Revenue Code, the law then
applicable provides that Except as provided in the succeeding section,

internal revenue taxes shall be assessed within five years after the
return was filed, and no proceeding in court without assessment for the
collection of such taxes shall be begun after the expiration of such
period. For the purpose of this section, a return filed before the last day
prescribed by law for the filing thereof shall be considered as filed on
such last day: Provided, That this limitation shall not apply to cases
already investigated prior to the approval of this Code.
Carnations income 1981 with income and sales taxes could have been
validly assessed only until January 14, 1987 and November 19, 1986,
respectively. In other words the assessments by the CIR should be
passed from:

January 15, 1982 up to January 12 1987 only

November 20, 1981 up to November 19, 1986 only


However, Carnations income and sales taxes were assessed only on July
29, 1987, beyond the five-year prescriptive period.
ALSO, Section 319 of the Tax code is clear and explicit that the waiver of
the five-year prescriptive period must be in writing and signed by both
the BIR Commissioner and the taxpayer.
Here, the three waivers signed by Carnation do NOT bear the written
consent of the BIR Commissioner as required by law.
These "waivers" to be invalid and without any binding effect on petitioner
(Carnation) for the reason that there was no consent by the CIR.
Neither implied consent can be presumed nor can it be contended that
the waiver required under Sec. 319 of the Tax Code is one which is
unilateral nor can it be said that concurrence to such an agreements a
mere formality because it is the very signatures of both the
Commissioner of Internal Revenue and the taxpayer which give birth to
such a valid agreement.

RP v Lopez

BIR made an assessment on Benito Lopez resulting in a deficiency


income tax of 245k.

Lopez moved for a reconsideration of the assessment.

BIR eventually complied and reduced the amount.

After that, Lopez manifested that he will settle the obligation by


the end of the month. However, he pleaded for another reinvestigation.

BIR against granted the request and lessened the deficiency


amount to 25k.

Notwithstanding the reduction, Lopez again requested for a 3 rd


reinvestigation.

BIR agreed on the request provided that Lopez waives the statue
of limitations.

Lopez countered that the BIR should then finish the investigation
by Dec 31, 1957 or else the case would prescribe.

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Ignoring the deadline set by Lopez, BIR issued the assessment on


March 23, 1960.
Due to non-payment of tax several times, a collection suit was
filed against Lopez. Lopez moved to dismiss the case on the ground of
prescription. The CFI granted the motion and dismissed the case.
I: W/n the deadline set by Lopez (Dec 31, 1957) would be binding
and operative.
R: NO, the deadline is NOT binding and operative.
The 5-year prescriptive period within which the Govt may sue to
collect tax is to be counted from the last revised assessment due to
taxpayers request for reinvestigation and the time employed in the
reinvestigation should be deducted from the total period of limitation.
In this case, the 5-year limitation has not yet elapsed. If the period
from the time of first reinvestigation up to the time of filing of the
collection complaint (4 years 3 months 6 days) is deducted from the
total period of limitation period (6 years 2 months and 15 days), the
total prescriptive would still be less than 5 years (1 year 3 months and
6 days).
The deadline set by the taxpayer, which technically reduces the
prescriptive period against the Govt, cannot be binding as it works to
the detriment of the state, which diminishes the opportunities of
collecting taxes due to the Govt. But even if the date was binding, the
period would still be less than 5 years due to deductions caused by
reinvestigation.
The proper remedy of the taxpayer was to appeal the ruling to the
CTA, not request for another reinvestigation. The failure to appeal to
the CTA constitutes a waiver of the defenses and estops the taxpayer
from raising objections thereafter.
The Court took note of the extraordinary reduction of the
deficiency tax from 245k to 20k, which evidences carelessness of the
BIR in making grossly excessive assessments. It also observed the
BIRs toleration repeated request for reinvestigation. Irregularities of
this kind provoke suspicion over the competency and honesty of
Revenue Officials. It is expected that immediate and drastic steps to
stop such practices shall be exercised promptly.

RP v Ker & Company

BIR examined and audited Kers returns and books of accounts


and issued assessment for deficiency income tax form 1947 to 1950
due and payable on dates indicated in the accompanying notice e of
assessment.

The assessments from 1948 to 1950 carried a surcharge of


50% under Sec 72 of the Tax Code for filing of fraudulent returns.
BIR demanded payment together w/
Ker refused to pay and set up defense of prescription of CIRs
right to collect.
CFI dismissed the claim for collection of deficiency taxes for
1947 but ordered Ker to pay deficiency taxes from 1948 to 1950.
Republic filed a motion for recon contending that CIRs right
did NOT prescribe because taxpayers income tax return was
fraudulent, in w/c case prescription sets in 10 YRS from DATE of
discovery of fraud.
Motion was denied.
I/R:
1) W/n CIRs right to assess deficiency income tax for
1947 already prescribed
YES, assessment for 1947 was issued 5 YEARS, 3 MONTHS
AND 13 DAYS from date return was filed.
Republic did NOT allege fraud nor present evidence to prove
it.
Since 1947 assessment had become final and executory, Ker
can no longer raise defenses w/c go into merits of assessment like
prescription of CIRs right to assess tax.
2) W/n filing of petition for review by Ker in CTA
suspended the running of the prescriptive period to collect
deficiency income from 1948 to 1950
YES, filing of petition for review suspended running of
prescriptive period.
Under Section 333 of the Tax Code, the running of the
prescriptive period to collect the tax shall be suspended for the period
during which the Commissioner of Internal Revenue is prohibited from
beginning a distraint and levy or instituting a proceeding in court, and
for sixty days thereafter.
From March 1, 1956 when Ker & Co., Ltd. filed a petition for
review in the CTA, the CIR was prevented, from filing an ordinary action
in the Court of First Instance to collect the tax. Besides, to do so would
be to violate the judicial policy of avoiding multiplicity of suits and the
rule on lis pendens.
ALSO, note: surcharge and interest shall accrue from the time
the tax became due = thus, DATE OF ASSESSMENT as shown in
assessment notice (not date of complaint)

RP v Arache

In 1958, Republic filed an action against Joseph Arache (principal)


and Globe Assurance Co (surety) for the forfeiture of the surety bond

TAX 2 MONTERO | Y. Sanchez A2012

executed to them to secure payment for the sum of P22k+


representing Araches income tax for 1946 and surcharge plus interest.
Arache interposed the defense of prescription and alleged that he
was compelled against his will to execute the surety bond sought to be
forfeited, because BIR refused to issue him a tax clearance w/c he
needed to make a business trip abroad.
Globe likewise adopted the same defenses as that of its codefendant, Arache.
Court ruled in favor of Republic, ordering Arache and Globe to pay
CIR solidarily w/ interest.
I: W/n Arache may validly invoke prescription
R: NO, the defense of prescription cannot be invoked.
A taxpayer may be prevented from setting up the defense of
prescription even if he has no previously waived it in writing as when
by his repeated requests or positive acts, the Government has been,
for good reasons, persuaded to postpone collection to make him feel
that the demand was not unreasonable or that no harassment or
injustice is meant by the Government.
And when such situation comes to pass there are authorities that
hold, based on weighty reasons, that such an attitude or behavior
should not be countenanced if only to protect the interest of the
Government.
In this case, the delay in the collection of his 1946 tax liability was
due to Araches own repeated requests for reinvestigation and similarly
repeated requests for extension of time to pay.
Arcache admitted in writing his tax obligation and promised to pay
the same, not once but several times even after the date when
according to him the government's right to collect had already
prescribed.
In fact, he not only made such repeated promise to settle his
account but he actually made two partial payments, the first of P2,000
and the last P1,000.
Moreover, it is to be noted that the present action was filed for the
forfeiture of the bond in satisfaction of the tax obligation. Thus, the
action is for the enforcement of a written contractual obligation, for
which the prescriptive period is ten years which in this case had not
yet elapsed when the action was filed.
It is already settled in this connection that the giving of a bond as
a condition of an extension of time for the payment of income tax,
even after the collection of the tax as such was barred by the statute of
limitations, does not preclude recovery on the bond.
LEARNING: The taxpayer may be ESTOPPED from claiming
prescription when he asks for a reinvestigation of the tax assessment
issued to him and such reinvestigation is made.

Phil National Oil Co v CA

Tirso Savellano submitted a sworn statement to the BIR informing


them that PNB failed to withold 15% final tax on interest earnings
and/or yields from the money placements of PNOC with the said bank,
in violation of
PD1931, w/c withdrew all tax exemptions of
government-owned and controlled corporations.

BIR requested PNOC to settle its liability for taxes on the interests
earned by its money placements with PNB and which PNB did not
withhold.

PNOC proposed to BIR compromise its tax liability, by setting-off


its tax liability against a claim for tax refund/credit of the NAPOCOR.
then pending with the BIR (P335k+). The amount of the claim for tax
refund/credit was supposedly a receivable account of PNOC from
NAPOCOR.

On Oct 8, 1986, BIR sent a demand letter to PNB, as withholding


agent, for the payment of the final tax on the interest earnings and/or
yields from PNOC's money placements with the bank. On the same
date, the BIR also mailed a letter to PNOC informing it of the demand
letter sent to PNB.

After several negotiations between BIR and PNOC, they agreed to


a compromise regarding the tax liability of PNOC.

Savellano was paid by the BIR a tax equal to15% of the amount in
the compromise agreement.

I: W/n the right of BIR to assess and collect the income tax had
already prescribed

R: No, BIR's right had NOT yet prescribed.

Sections 268 and 269(c) of the NIRC of 1977, as amended, should


be read in conjunction with one another:
o
Section 268 requires that assessment be made within
three years from the last day prescribed by law for the
filing of the return.
o
Section 269(c), on the other hand, provides that when an
assessment is issued within the prescribed period
provided in Section 268, the BIR has three years, counted
from the date of the assessment, to collect the tax
assessed either by distraint, levy or court action.

Therefore, when an assessment is timely issued in accordance


with Section 268, the BIR is given another three-year period,

TAX 2 MONTERO | Y. Sanchez A2012

under Section 269(c), within which to collect the tax assessed,


reckoned from the date of the assessment.
In the case of PNB, an assessment was issued against it by the BIR on
October 8, 1986, so that the BIR had until October 7, 1989 to
enforce it and to collect the tax assessed. The filing, however, by
Savellano of his Amended Petition for Review before the CTA
on July 2, 1988 already constituted a judicial action for
collection of the tax assessed which stops the running of the
three-year prescriptive period for collection thereof. A judicial
action for the collection of a tax may be initiated by the filing of a
complaint with the proper regular trial court; or where the assessment
is appealed to the CTA, by filing an answer to the taxpayer's petition
for review wherein payment of the tax is prayed for.
The present case is unique, however, because the Petition for Review
was filed by Savellano, the informer, against the BIR, PNOC, and PNB.
The BIR, the collecting government agency; PNOC, the taxpayer; and
PNB, the withholding agent, initially found themselves on the same
side. Savellano, in his Amended Petition for Review w/ the CTA prayed
for (1) the CTA to direct the BIR Commissioner to enforce and collect
the tax, and (2) PNB and/or PNOC to pay the tax making the said
CTA Case7 a collection case.
It is immaterial that the Amended Petition for Review was filed by the
informer Savellano and NOT the taxpayer; and that the prayer for the
enforcement of the tax assessment and payment of the tax was also
made by the informer, not the BIR. This should not affect the nature of
the case as a judicial action for collection. What is controlling here is
the fact that the BIR Commissioner cannot file a judicial action in any
other court for the collection of the tax because such a case would
necessarily involve the same parties and involve the same issues
already being litigated before the CTA in the said case. The threeyear prescriptive period for collection of the tax shall
commence to run only after the promulgation of the decision of
this Court in which the issues of the present case are resolved
with finality.
In case the CTA grants the Petition and the prayer therein, as what has
happened in the present case, the ultimate result would be the
collection of the tax assessed. Consequently, upon the filing of the
Amended Petition for Review by private respondent Savellano, judicial
action for collection of the tax had been initiated and the running of
the prescriptive period for collection of the said tax was terminated.
Supposing that the said CTA Case is not a collection case which stops
the running of the prescriptive period for the collection of the tax, the
said CTA case, at the very least, suspends the running of the said
CTA Case No. 4249

prescriptive period. Under Section 271 of the NIRC of 1977, as


amended, the running of the prescriptive period to collect
deficiency taxes shall be suspended for the period during
which the BIR Commissioner is prohibited from beginning a
distraint or levy or instituting a proceeding in court, and for 60
days thereafter.
The pendency of the present case before the CTA, the Court of Appeals
and the SC legally prevents the BIR Commissioner from instituting an
action for collection of the same tax liabilities assessed against PNOC
and PNB in the CTA or the regular trial courts. To rule otherwise would
be to violate the judicial policy of avoiding multiplicity of suits and the
rule on lis pendens.
Whether the filing of the Amended Petition for Review by Savellano
entirely stops or merely suspends the running of the prescriptive
period for collection of the tax, it had been premature for the BIR
Commissioner to issue a writ of garnishment against PNB and for the
Central Bank of the Philippines to debit the account of PNB pursuant to
the said writ, because the case was by then, pending review by the
Court of Appeals. However, since the SC found that the compromise
agreement is without force and effect, it ordered the enforcement of
the assessment against PNB. Any issue or controversy arising from the
premature garnishment of PNB's account and collection of the tax by
the BIR became moot and academic.

BPI v CIR (2005)


Far East Bank & Trust Co v CIR
FEBTC filed with the Bureau of Internal Revenue an application for a tax
credit/tax refund of alleged excess payments of its gross receipts tax.
FEBTC claimed it had overpaid its gross receipt tax for the 3rd and 4th
quarters of 1994 and the entire 1995 amounting to P14,816,373. Since no
action was taken by the CIR on its claim, petitioner filed a case in the CTA
on October 18, 1996 to comply with the 2-year reglementary period and
avoid the prescription of its action. On July 30, 1998, the CTA rendered a
decision denying the claim for lack of evidence.
It appears that petitioner failed to file its formal offer of evidence in the
CTA, constraining the tax court to rule in favor of the CIR. On August 26,
1998, 22 days after its receipt of the decision, petitioner filed a motion for
reconsideration. The CTA denied the motion for being filed out of time and
for lack of merit. Aggrieved, petitioner elevated the case to the CA. CA
found the petition devoid of merit. Eventually, it dismissed the petition and
affirmed the CTA decision in toto. Petitioners motion for reconsideration
was also denied. Thus, this petition.

Issue:
Can procedural rules be relaxed to give due course to the petition? NO, not
in this case. Petition is denied against FEBTC.
Rationale:
First, it is well-settled that the courts cannot consider evidence which has
not been formally offered. Parties are required to inform the courts of the
purpose of introducing their respective exhibits to assist the latter in ruling
on their admissibility in case an objection thereto is made. Without a formal
offer of evidence, courts are constrained to take no notice of the evidence
even if it has been marked and identified. Needless to say, the failure of
petitioner to make a formal offer of evidence was detrimental to its cause.
This case does not fall within the exception in Oate v. Court of Appeals
where the Court relaxed the foregoing rule and allowed evidence, not
formally offered, to be considered on condition that: (1) evidence must
have been identified by testimony duly recorded and (2) it must have been
incorporated in the records of the case. In this case, "[petitioners] duly
marked and identified exhibits [were] not incorporated in the records...
They are nowhere to be found."
A tax refund is in the nature of a tax exemption which must be construed
strictissimi juris against the taxpayer. To stress, the taxpayer must present
convincing evidence to substantiate a claim for refund. Without any
documentary evidence on record, petitioner failed to discharge the burden
of proving its right to a tax credit/tax refund. Therefore, the CTA and CA
correctly denied its claim.
Second, if no appeal or motion for reconsideration is filed on time, the
judgment or final order of the court becomes final and executory. Here, the
records of the case confirm that petitioners motion for reconsideration in
the CTA was filed out of time. Petitioner received its notice and a copy of
the CTA decision on August 4, 1998.15 Under the rules, it had fifteen days
(or until August 19, 1998) to move for reconsideration. By the time it filed
its motion for reconsideration on August 26, 1998, the decision of the CTA
had already attained finality. As a final judgment, it had by then already laid
the issues to rest and the appellate courts could no longer review it.
CIR v Phil Global Comm
Philippine Global Communication was assessed for deficiency taxes in April
1994. On May 1994, they filed 2 letters of protest requesting for the
cancellation of the tax assessment for lack of factual and legal basis. In
2002, respondents received a decision from the CIR denying the protest.
Respondents appealed the CTA and ruled that the right to collect on the
1994 tax assessment has prescribed.
ISSUE: W/N the action to collect has prescribed. (YES)

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RATIO:
Section 269(c) provides that any internal revenue tax which has been
assessed within the period of limitation above-prescribed may be collected
by distraint or levy or by a proceeding in court within three years following
the assessment of the tax. The assessment, in this case, was presumably
issued on 14 April 1994 since the respondent did not dispute the CIRs
claim. Therefore, the BIR had until 13 April 1997. The earliest attempt of
the BIR to collect the tax due based on this assessment was when it filed its
Answer in CTA Case No. 6568 on 9 January 2003.
Reason for Prescriptive Period:
Under the former law, the right of the Government to collect the tax does
not prescribe. However, in fairness to the taxpayer, the Government should
be estopped from collecting the tax where it failed to make the necessary
investigation and assessment within 5 years after the filing of the return
and where it failed to collect the tax within 5 years from the date of
assessment thereof. Just as the government is interested in the stability of
its collections, so also are the taxpayers entitled to an assurance that they
will not be subjected to further investigation for tax purposes after the
expiration of a reasonable period of time.
Prescription in the assessment and in the collection of taxes is provided by
the Legislature for the benefit of both the Government and the taxpayer;
for the Government for the purpose of expediting the collection of taxes, so
that the agency charged with the assessment and collection may not tarry
too long or indefinitely to the prejudice of the interests of the Government,
which needs taxes to run it; and for the taxpayer so that within a
reasonable time after filing his return, he may know the amount of the
assessment he is required to pay, whether or not such assessment is well
founded and reasonable so that he may either pay the amount of the
assessment or contest its validity in court.
Without such legal defense taxpayers would furthermore be under
obligation to always keep their books and keep them open for inspection
subject to harassment by unscrupulous tax agents.
Suspension of Prescriptive Period:
Section 224 provides that the prescriptive period is suspended when the
taxpayer requests for a reinvestigation. This exception does not apply to
this case since the respondent never requested for a reinvestigation. More
importantly, the CIR could not have conducted a reinvestigation where, as
admitted by the CIR in its Petition, the respondent refused to submit any
new evidence.
Request for reconsideration-- refers to a plea for a reevaluation of an assessment on the basis of existing

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records without need of additional evidence. It may


involve both a question of fact or of law or both.
Request for reinvestigationrefers to a plea for reevaluation of an assessment on the basis of newlydiscovered evidence or additional evidence that a
taxpayer intends to present in the investigation. It may
also involve a question of fact or law or both. (RR 12-85)
Undoubtedly, a reinvestigation, which entails the reception and evaluation
of additional evidence, will take more time than a reconsideration of a tax
assessment, which will be limited to the evidence already at hand; this
justifies why the former can suspend the running of the statute of
limitations on collection of the assessed tax, while the latter cannot. In the
present case, the separate letters of protest dated 6 May 1994 and 23 May
1994 are requests for reconsideration. The CIRs allegation that there was a
request for reinvestigation is inconceivable since respondent consistently
and categorically refused to submit new evidence and cooperate in any
reinvestigation proceedings.
The distinction between a request for reconsideration and a request for
reinvestigation is significant. It bears repetition that a request for
reconsideration, unlike a request for reinvestigation, cannot suspend the
statute of limitations on the collection of an assessed tax. If both types of
protest can effectively interrupt the running of the statute of limitations, an
erroneous assessment may never prescribe. If the taxpayer fails to file a
protest, then the erroneous assessment would become final and
unappealable.29 On the other hand, if the taxpayer does file the protest on
a patently erroneous assessment, the statute of limitations would
automatically be suspended and the tax thereon may be collected long
after it was assessed.
The government also urges that partial payment is "acknowledgement of
the tax obligation", hence a "waiver on the defense of prescription." But
partial payment would not prevent the government from suing the
taxpayer. Because, by such act of payment, the government is not thereby
"persuaded to postpone collection to make him feel that the demand was
not unreasonable or that no harassment or injustice is meant."
NOTE:
Prior to the issuance of Revenue Regulations No. 12-85, which distinguishes
a request for reconsideration and a request for reinvestigation, there have
been cases wherein these two terms were used interchangeably. But upon
closer examination, these cases all involved a reinvestigation that was
requested by the taxpayer and granted by the BIR.
BPI v CIR (2008)

November 26, 1986: CIR issued to the petitioner a pre-assessment notice


(PAN). November 29, 1986: BPI sent in a letter requested for the details
of the amounts alleged as 1982-1986 deficiency taxes mentioned in the
PAN April 7, 1989: CIR issued to the petitioner, assessment/demand
notices for deficiency withholding tax at source (Swap Transactions) and
DST involving the amounts of P190,752,860.82 and P24,587,174.63, for the
years 1982 to 1986. April 20, 1989: BPI filed a protest on the
demand/assessment notices. May 8, 1989, petitioner filed a supplemental
protest. March 12, 1993: BPI requested for an opportunity to present or
submit additional documentation on the Swap Transactions with the then
Central Bank Attached to the letter dated June 17, 1994, in connection with
the reinvestigation of the abovementioned assessment, petitioner
submitted to the BIR, Swap Contracts with the Central Bank. BPI executed
Waivers of the Statutes of Limitations, the last of which was
effective until Dec. 31, 1994. August 9, 2002: CIR issued a final
decision on petitioners protest ordering the withdrawal and cancellation of
the deficiency withholding tax assessment in the amount of
P190,752,860.82 and considered the same as closed and terminated. On
the other hand, the deficiency DST assessment in the amount of
P24,587,174.63 was reiterated and the petitioner was ordered to pay the
said amount within thirty (30) days from receipt of such order. Petitioner
received a copy of the said decision on January 15, 2003. Thereafter,
January 24, 2003, petitioner filed a Petition for Review before in Court.
August 31, 2004: the Court rendered a Decision denying the petitioners
Petition for Review, and BPI was ordered to pay the corresponding tax dues.
September 21, 2004, BPI filed a Motion for Reconsideration which was
again denied for lack of merit. March 9, 2005: BPI filed with the Court En
Banc a Motion for Extension of Time to File Petition for Review praying for
an extension of fifteen (15) days from March 10, 2005 or until March 25,
2005. Petitioners motion was granted. March 28, 2005, (March 25 was
Good Friday), petitioner filed the instant Petition for Review, arguing that
the court overlooked the significance of the waiver made by parties valid
until Dec. 31, 2004 and that the court erred in holding that the collection
for tax deficiency has not yet prescribed. CTA ruled that BPIs protest and
supplemental protest should be considered requests for reinvestigation
which tolled the prescriptive period provided by law to collect a tax
deficiency by distraint, levy, or court proceeding. It further held that BPIs
cabled instructions to its foreign correspondent bank to remit a specific sum
in dollars to the Federal Reserve Bank, the same to be credited to the
account of the Central Bank, are in the nature of a telegraphic transfer
subject to DST under Section 195 of the Tax Code. In its Petition for Review
dated 24 November 2006, BPI argues that the governments right to collect
the DST had already prescribed because the Commissioner of Internal
Revenue (CIR) failed to issue any reply granting BPIs request for
reinvestigation manifested in the protest letters dated 20 April and 8 May
1989. It was only through the 9 August 2002 Decision ordering BPI to pay

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deficiency DST, or after the lapse of more than thirteen (13) years, that the
CIR acted on the request for reinvestigation, warranting the conclusion that
prescription had already set in. The Office of the Solicitor General (OSG)
filed a Comment dated 1 June 2007, on behalf of the CIR, asserting that the
prescriptive period was tolled by the protest letters filed by BPI which were
granted and acted upon by the CIR. Such action was allegedly
communicated to BPI as, in fact, the latter submitted additional documents
pertaining to its SWAP transactions in support of its request for
reinvestigation. Thus, it was only upon BPIs receipt on 13 January 2003 of
the 9 August 2002 Decision that the period to collect commenced to run
again. The OSG cites the case of Collector of Internal Revenue v. Suyoc
Consolidated Mining Company, et al.(Suyoc case) in support of its argument
that BPI is already estopped from raising the defense of prescription in view
of its repeated requests for reinvestigation which allegedly induced the CIR
to delay the collection of the assessed tax. In its Reply dated 30 August
2007, BPI argues against the application of the Suyoc case on two points:
first, it never induced the CIR to postpone tax collection; second, its request
for reinvestigation was not categorically acted upon by the CIR within the
three-year collection period after assessment. BPI maintains that it did not
receive any communication from the CIR in reply to its protest letters.
Issue: Whether the collection of the deficiency DST is barred by
prescription and whether BPI is liable for DST on its SWAP loan transactions.

Held: WHEREFORE, the petition is GRANTED. The Decision of the Court of


Tax Appeals dated 15 August 2006 and its Resolution dated 5 October
2006, are hereby REVERSED and SET ASIDE. No pronouncement as to
costs.
Rationale: Section 318 of the Tax Code of 1977 provides: Period of
limitation upon assessment and collection.Except as provided in the
succeeding section, internal revenue taxes shall be assessed within five
years after the return was filed, and no proceeding in court without
assessment for the collection of such taxes shall be begun after the
expiration of such period. For the purposes of this section, a return filed
before the last day prescribed by law for the filing thereof shall be
considered as filed on such last day: Provided, That this limitation shall not
apply to cases already investigated prior to the approval of this Code.
The statute of limitations on assessment and collection of national internal
revenue taxes was shortened from five (5) years to three (3) years by Batas
Pambansa Blg. 700. Thus, the CIR has three (3) years from the date of

actual filing of the tax return to assess a national internal revenue tax or to
commence court proceedings for the collection thereof without an
assessment. When it validly issues an assessment within the three (3)-year
period, it has another three (3) years within which to collect the tax due by
distraint, levy, or court proceeding. The assessment of the tax is deemed
made and the three (3)-year period for collection of the assessed tax begins
to run on the date the assessment notice had been released, mailed or sent
to the taxpayer. As applied to the present case, the CIR had three (3) years
from the time he issued assessment notices to BPI on 7 April 1989 or until 6
April 1992 within which to collect the deficiency DST. However, it was only
on 9 August 2002 that the CIR ordered BPI to pay the deficiency.
In order to determine whether the prescriptive period for collecting the tax
deficiency was effectively tolled by BPIs filing of the protest letters dated
20 April and 8 May 1989 as claimed by the CIR, we need to examine
Section 320 of the Tax Code of 1977, which states:
Sec. 320. Suspension of running of statute.The running of the statute of
limitations provided in Sections 318 or 319 on the making of assessment
and the beginning of distraint or levy or a proceeding in court for collection,
in respect of any deficiency, shall be suspended for the period during which
the Commissioner is prohibited from making the assessment or beginning
distraint or levy or a proceeding in court and for sixty days thereafter;
when the taxpayer requests for a re-investigation which is granted
by the Commissioner; when the taxpayer cannot be located in the
address given by him in the return filed upon which a tax is being assessed
or collected: Provided, That if the taxpayer informs the Commissioner of
any change in address, the running of the statute of limitations will not be
suspended; when the warrant of distraint and levy is duly served upon the
taxpayer, his authorized representative, or a member of his household with
sufficient discretion, and no property could be located; and when the
taxpayer is out of the Philippines. There is nothing in the records of this
case which indicates, expressly or impliedly, that the CIR had granted the
request for reinvestigation filed by BPI. What is reflected in the records is
the piercing silence and inaction of the CIR on the request for
reinvestigation, as he considered BPIs letters of protest to be.
In fact, it was only in his comment to the present petition that the CIR,
through the OSG, argued for the first time that he had granted the request
for reinvestigation. His consistent stance invoking the Wyeth Suaco case,
as reflected in the records, is that the prescriptive period was tolled by
BPIs request for reinvestigation, without any assertion that the same had
been granted or at least acted upon.
In the Wyeth Suaco case, private respondent Wyeth Suaco Laboratories,
Inc. sent letters seeking the reinvestigation or reconsideration of the
deficiency tax assessments issued by the BIR. The records of the case

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showed that as a result of these protest letters, the BIR Manufacturing


Audit Division conducted a review and reinvestigation of the assessments.
The records further showed that the company, thru its finance manager,
communicated its inability to settle the tax deficiency assessment and
admitted that it knew of the ongoing review and consideration of its
protest.
As differentiated from the Wyeth Suaco case, however, there is no evidence
in this case that the CIR actually conducted a reinvestigation upon the
request of BPI or that the latter was made aware of the action taken on its
request. Hence, there is no basis for the tax courts ruling that the filing of
the request for reinvestigation tolled the running of the prescriptive period
for collecting the tax deficiency.
Neither did the waiver of the statute of limitations signed by BPI supposedly
effective until 31 December 1994 suspend the prescriptive period. The CIR
himself contends that the waiver is void as it shows no date of acceptance
in violation of RMO No. 20-90. At any rate, the records of this case do not
disclose any effort on the part of the Bureau of Internal Revenue to collect
the deficiency tax after the expiration of the waiver until eight (8) years
thereafter when it finally issued a decision on the protest.
We also find the Suyoc case inapplicable. In that case, several requests for
reinvestigation and reconsideration were filed by Suyoc Consolidated
Mining Company purporting to question the correctness of tax assessments
against it. As a result, the Collector of Internal Revenue refrained from
collecting the tax by distraint, levy or court proceeding in order to give the
company every opportunity to prove its claim. The Collector also conducted
several reinvestigations which eventually led to a reduced assessment. The
company, however, filed a petition with the CTA claiming that the right of
the government to collect the tax had already prescribed.
When the case reached this Court, we ruled that Suyoc could not set up the
defense of prescription since, by its own action, the government was
induced to delay the collection of taxes to make the company feel that the
demand was not unreasonable or that no harassment or injustice was
meant by the government.
In this case, BPIs letters of protest and submission of additional documents
pertaining to its SWAP transactions, which were never even acted upon,
much less granted, cannot be said to have persuaded the CIR to postpone
the collection of the deficiency DST.
The inordinate delay of the CIR in acting upon and resolving the request for
reinvestigation filed by BPI and in collecting the DST allegedly due from the
latter had resulted in the prescription of the governments right to collect

the deficiency. As this Court declared in Republic of the Philippines v.


Ablaza:
The law prescribing a limitation of actions for the collection of the income
tax is beneficial both to the Government and to its citizens; to the
Government because tax officers would be obliged to act promptly in the
making of assessment, and to citizens because after the lapse of the period
of prescription citizens would have a feeling of security against
unscrupulous tax agents who will always find an excuse to inspect the
books of taxpayers, not to determine the latters real liability, but to take
advantage of every opportunity to molest peaceful, law-abiding citizens.
Without such a legal defense taxpayers would furthermore be under
obligation to always keep their books and keep them open for inspection
subject to harassment by unscrupulous tax agents. The law on prescription
being a remedial measure should be interpreted in a way conducive to
bringing about the beneficent purpose of affording protection to the
taxpayer within the contemplation of the Commission which recommend
the approval of the law.
Given the prescription of the governments claim, we no longer deem it
necessary to pass upon the validity of the assessment
CIR v Capitol Subdivision
In this case Capitol Subdivision, Inc. is a corporation engaged in the
purchase sane and barter of urban estates and their improvement into
residential lots for resale to the public. Capitol filed their income tax returns
promptly and paid the taxes however when an investigation was made they
were found liable for tax deficiency. So they were sent income tax
assessment notices on April 8, 1953. On May 30, 1953 Capitol then
requested for the breakdown of the amounts reflected so that they could be
able to determine where the deficiencies came from. On July 1, 1955 CIR
then reiterated its request for the payment of the taxes. On October 15,
1955 CIR then tried to explain the disallowed taxes explaining that they
were really expenses an they requested for reinvestigation. On Sept. 2,
1959 after reinvestigation the examiner in a memo reiterated the demand
for the taxes and affirmed the prior assessment and demanded again for
the deficiency. On September 16, 1959 petitioner invoked the defense of
prescription. CTA rendered a decision saying that the right of the court had
already prescribed because under the tax code any remedy for collection
such as levy or distraint prescribes after 5 years from the date of
assessment and since assessment was made on April 8, 1953 it had already
prescribed.
Issue: Won the right to collect already prescribed Not yet.
Ratio:

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The SC held in this case that the right to collect had not yet been
lost. Although there is no question that the period began on April 8, 1953
when the assessment was made it was interrupted several times by the
respondent. First when it asked for an itemized information. Although it did
not specifically use the words review or reinvestigation one can see from
the request itself had the effect of questioning/assailing the correctness of
the assessment. Then again the period was interrupted when it requested
for reinvestigation thus the period was tolled gain and it was only Sept. 2,
1959 when the reinvestigation was denied the period began again and
when the taxpayers case was filed with the CTA on December 28, 1959
and the CIR answered (tantamount to a judicial action) it was well within
the prescription period.
April 8, 1953 December 28,1959 = 6 years, 8 months, 21 days
Less (all the interruptions): May 30, 1953 (clarification) June 21, 1955
( denied the petition) = 2 years 21 days
= There was left a period of 4 years and 8 months well within the
prescription period.
Lim, Sr v CA
Petitioner spouses Emilio E. Lim, Sr. and Antonia Sun Lim, with business
address at No. 336 Nueva Street, Manila, were engaged in the dealership of
various household appliances They filed income tax returns for the years
1958 and 1959. a raid was conducted at their business address by the NBI.
A similar raid was made on petitioners' premises at 111 12th Street,
Quezon City. Seized by the BIR from the Lim couple were business and
accounting records which served as bases for an investigation. BIR
informed petitioners that revenue examiners had been authorized to
examine their books of account. The 1958 and 1959 tax returns were found
false and fraudulent.
Lim asked for reinvestigation but was denied. On October 10, 1967, the BIR
rendered a final decision holding that there was no cause for reversal of the
assessment against the Lim couple. Petitioners were required to pay
deficiency income taxes for 1958 and 1959 amounting to P1,237,190.55
inclusive of interest, surcharges and compromise penalty for late payment.
The final notice and demand for payment was served on petitioners
through their daughter-in-law on July 3, 1968. Still there was no payment;
thus, four (4) separate criminal informations were filed against petitioners
for violation of Sections 45 and 51 in relation to Section 73 of the National
Internal Revenue Code. Trial ensued. The decisions of the court were.
In Criminal Cases Nos. 1789 and 1788:
WHEREFORE, in view of the foregoing considerations, the Court
finds the accused Emilio E. Lim, Sr. and Antonia Sun Lim guilty of a
violation of Section 51 penalized under Section 73 of the National
Internal Revenue Code and each is hereby sentenced in each case
to pay a fine of P2,000.00 and to pay the government pursuant to

Presidential No. 69 the amounts of P580,588.75 and P656,601.80


as deficiency income taxes for the years 1958 and 1959,
respectively, and the costs of the proceedings.
In Criminal Cases Nos. 1790 and 1791:
WHEREFORE, in view of the foregoing considerations, the Court finds the
accused Emilio E. Lim, Sr. and Antonia Sun Lim guilty of a violation of
Section 45 in relation to Section 332 of the National Internal Revenue Code
as amended, penalized under Section 73 of the same Code and hereby
sentences each to pay a fine of P4,000.00 in each case and the costs of the
proceedings.
On September 26, 1977, petitioners moved for a reconsideration of the
decision dated September 1, 1977. On April 4, 1978, the Court of Appeals
promulgated a resolution as follows:
WHEREFORE, pursuant to Article 89 of the Revised Penal Code, by the
death of appellant Emilio E. Lim, Sr. his criminal liability is totally
extinguished but his counsel is hereby required to inform the Court as to
who are the heirs of the deceased following which the caption should be
modified so as to reflect the civil aspect and substitution of the heirs, as
defendants. In all other respects, the decision of this Court promulgated
September 1, 1977, stands.
Hence the present petition for review by certiorari.
Issue:
1) W/N the period to file the criminal cases against Lim has
prescribed. NO.
2) W/N the payment of deficiency taxes could be included in the
criminal cases. No.
3) W/N the pecuniary liability of Emilio Lim is extinguished because
of his death. Yes.
Held/Ratio:
1) Petitioners maintain that the five-year period of limitation under Section
354 should be reckoned from April 7, 1965, the date of the original
assessment while the Government insists that it should be counted from
July 3, 1968 when the final notice and demand was served on petitioners'
daughter-in-law.
Inasmuch as the final notice and demand for payment of the deficiency
taxes was served on petitioners on July 3, 1968, it was only then that the
cause of action on the part of the BIR accrued. This is so because prior to
the receipt of the letter-assessment, no violation has yet been committed
by the taxpayers. The offense was committed only after receipt was
coupled with the wilful refusal to pay the taxes due within the alloted
period. The two criminal informations, having been filed on June 23, 1970,
are well-within the five-year prescriptive period and are not time-barred.
With regard to Criminal Cases Nos. 1790 and 1791 which dealt with

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petitioners' filing of fraudulent consolidated income tax returns with intent


to evade the assessment decreed by law, petitioners contend that the said
crimes have likewise prescribed. They advance the view that the five-year
period should be counted from the date of discovery of the alleged fraud
which, at the latest, should have been October 15, 1964, the date stated by
the Appellate Court in its resolution of April 4, 1978 as the date the
fraudulent nature of the returns was unearthed.
On behalf of the Government, the Solicitor General counters that the crime
of filing false returns can be considered "discovered" only after the manner
of commission, and the nature and extent of the fraud have been definitely
ascertained. It was only on October 10, 1967 when the BIR rendered its
final decision holding that there was no ground for the reversal of the
assessment and therefore required the petitioners to pay P1,237,190.55 in
deficiency taxes that the tax infractions were discovered.
Not only that. The Solicitor General stresses that Section 354 speaks not
only of discovery of the fraud but also institution of judicial proceedings.
Note the conjunctive word "and" between the phrases "the discovery
thereof" and "the institution of judicial proceedings for its investigation and
proceedings." In other words, in addition to the fact of discovery, there
must be a judicial proceeding for the investigation and punishment of the
tax offense before the five-year limiting period begins to run. It was on
September 1, 1969 that the offenses subject of Criminal Cases Nos. 1790
and 1791 were indorsed to the Fiscal's Office for preliminary investigation.
Inasmuch as a preliminary investigation is a proceeding for investigation
and punishment of a crime, it was only on September 1, 1969 that the
prescriptive period commenced.
2) The petition, however, is impressed with merit insofar as it assails the
inclusion in the judgment of the payment of deficiency taxes in Criminal
Cases Nos. 1788-1789. The trial court had absolutely no jurisdiction in
sentencing the Lim couple to indemnify the Government for the taxes
unpaid. The lower court erred in applying Presidential Decree No. 69,
particularly Section 316 thereof, which provides that "judgment in the
criminal case shall not only impose the penalty but shall order payment of
the taxes subject of the criminal case", because that decree took effect
only on January 1, 1973 whereas the criminal cases subject of this appeal
were instituted on June 23, 1970. Save in the two specific instances,
Presidential Decree No. 69 has no retroactive application.
(In the case of People v. Tierra, reiterated People v. Arnault) ... While
Section 73 of the National Internal Revenue Code provides for the
imposition of the penalty for refusal or neglect to pay income tax or to
make a return thereof, by imprisonment or fine, or both, it fails to provide
for the collection of said tax in criminal proceedings. As well contended by
counsel for appellant, Chapters I and II of Title IX of the National Internal
Revenue Code provides only for civil remedies for the collection of the
income tax, and under Section 316, the civil remedy is either by distraint of
goods, chattels, etc., or by judicial action. It is a commonly accepted

principle of law that the method prescribed by statute for the collection of
taxes is generally exclusive, and unless a contrary intent be gathered from
the statute, it should be followed strictly.
Under the cited Tierra and Arnault cases, it is clear that criminal conviction
for a violation of any penal provision in the Tax Code does not amount at
the same time to a decision for the payment of the unpaid taxes inasmuch
as there is no specific provision in the Tax Code to that effect.
3) Considering that under Section 316 of the Tax Code prior to its
amendment the trial could not order the payment of the unpaid taxes as
part of the sentence, the question of whether or not the supervening death
of petitioner Emilio E. Lim, Sr. has extinguished his tax liability need not
concern us. However, with regard to the pecuniary penalty of fine imposed
on the deceased Lim, this is necessarily extinguished by his death in
accordance with Section 89 of the Revised Penal Code.

TAXPAYERS REMEDIES
Refunds
Vda de Aguinaldo v CIR

Leopoldo Aguinaldo and his wife Andrea received cash dividends


worth P10k from Aguinaldo Brothers, Inc.

They did NOT declare said dividends in their joint ITR, but declared
P5k of said dividends in their ITR for 1953 and paid corresponding tax.

A year after, BIR re-examined the 1952 &1953 ITRs of the spouses
and discovered the non-declaration.

BIR readjusted the ITRs, increasing the declared income, w/c


resulted in deficiency income tax in 1952 and overpayment of tax in
1953.

The examination report recommended that the overpayment for


1953 of P1k+ be credited against the deficiency tax for 1952.

In Oct 1957, CIR assessed Aguinaldo for deficiency income tax for
1952, without crediting the overpayment in 1953.

Aguinaldo protested the assessment, and requested that the


overpayment for 1953 be credited. The request was denied.

He asked for a reconsideration but the CIR said that the P1,600
cannot be credited against the tax for 1952 since the claim for tax
credit was filed beyond the 2-year period provided for in 309 of the
NIRC.

After the husbands death, the wife Andrea appealed to the CTA.

The CTA dismissed the appeal for lack of cause of action.

I: W/n petitioner is entitled to tax credit for 1953 pursuant to 309


of the Tax Code.

R: No, petitioner is not entitled to tax credit.

Petitioner contends that Sec 309 does NOT require the filing of a
claim w/in 2 years from payment of the tax before credit should be
given.

Section 309 of the Tax Code CLERALY requires the filing by the
taxpayer of the written claim for credit / refund WITHIN 2 yrs after the

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payment of tax, before the CIR can exercise his authority to grant
credit/ refund.
Such reqment is the condition precedent and non-compliance
PRECLUDES CIR from exercising the authority given.
In this case, the Aguinaldos paid the income tax on August 14,
1954 although the adjustment took place on August 29, 1955.
Tax credit was filed in JAN 1958, so clearly, more than two years
have elapsed (reckoned from both dates), beyond the period stated in
309.

Gibbs v CIR (Feb 1960)

Allison and Esther Gibbs protested the 1950 deficiency income tax
assessment issued against them by the CIR, on the ground that said
deficiency assessment was based on a disallowance of bad debts and
losses claimed in their income tax return for 1950.

CIR rejected Gibbs' protest and reiterated his demand.

Gibbs however paid the deficiency and at the same time


demanding the immediate refund of the amount paid.

CIR denied the request for refund, and required Gibbs to pay the
amounts of P1.5k and P2k as surcharge, interest, and compromise
penalty.

Notice of said denial was received by Gibbs on November 14,


1956.

On September 27, 1957 - Gibbs filed with CTA a petition for


review and refund, with a motion for suspension of collection of
penalties.

CIR filed a motion to dismiss, on the ground that the petition was
filed beyond the 30-day period provided under Section 11, in relation
to Section 7, of RA No. 1125, which motion, was opposed by Gibbs.

CTA dismissed the petition saying they no longer had jurisdiction


because Gibbs filed the appeal 10 months after the receipt, clearly
beyond the 30-day period set by law.

Gibbs argued that Section 306 of the Revenue Code provides that
judicial proceedings may be instituted for recovery of an internal
revenue tax within two years from the date of payment. CTA said this
was before RA1125 was enacted.

I: W/n the appeal of Gibbs was made within the statutory period

R: NO, the appeal was NOT made w/in the statutory period.

RA No. 1125 provides that CTA has appellate jurisdiction to


review decisions of the CIR in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties
imposed in relation thereto but filing must be within 30 days after
receipt of such ruling.

TAX 2 MONTERO | Y. Sanchez A2012

SEC. 306 of the Tax Code provides that for Recovery of tax
erroneously or illegally collected, the suit shall be begun within 2 years
from the date of payment of the tax or penalty.
RA No. 1125 was intended to cope with a situation where the
taxpayer, upon receipt of a decision or ruling of the CIR, elects to
appeal to the CTA instead of paying the tax. For this reason, the latter
part of said Section 11 RA 1125, provides that no such appeal would
suspend the payment of the tax demanded by the Government, unless
for special reasons, the CTA would deem it fit to restrain said collection.
Section 306 of the Tax Code, on the other hand, contemplates
of a case wherein the taxpayer paid the tax, whether under protest or
not, and later on decides to go to court for its recovery.
THUS, where payment has already been made and the
taxpayer is merely asking for its refund, he must first file with
the CIR a claim for refund WITHIN 2 YEARS from time of
payment before taking the matter to the CTA, as required by
Section 306 of the NIRC.
Appeals from decisions of CIR to CTA must ALWAYS be
perfected within 30 days after the receipt of the decision that
is being appealed, as required by Section 11 of RA No. 1125.
If the CIR takes time in deciding the claim, and the period
of two years is about to end, the suit or proceeding must be
started in the CTA before the end of the 2-year period without
awaiting the decision of the Collector.
This is so because of the positive requirement of Section 306 and
the doctrine that delay of the Collector in rendering decision does not
extend the peremptory period fixed by the statute.
THERE is no conflict and the 2 laws must be reconciled.
In this case, Gibbs filed the appeal MORE THAN 10 MONTHS after
receipt of the CIRs notice of denial. Thus, it was beyond the 30-day
period.

Cir v Palanca

On July 1950, Palanca donated several stocks in La Tondena to his


son. HOWEVER, he failed to file a return on the donations on time.

Thus CIR assessed him deficiency taxes (tax + surcharge +


Interest), which he in turn paid on June 1955 (1st assessment).

On March 1956, Palanca filed an Income Tax Return.

On November 1956 he filed an amended tax return and a claim


for the refund of overpaid taxes (1 st). The claimed overpayment
was due to a failure to deduct from his ITR a deduction on the interest
paid on the gift tax stated earlier.

He claimed that the interest fell under then section 30 of NIRC


which authorizes the deduction from gross income of interest paid
within the taxable year on indebtedness.
BIR denied refund. After several appeals, all were denied.
Meanwhile, CIR considered the donation of stocks to his son to be
a transfer in contemplation of death. He was then assessed the sum of
P191k+ as estate and inheritance taxes (2 nd assessment).
BASED on this 2nd assessment, Palanca again AMENDED his
original return, asking for another deduction of P60k+ representing
estate + inheritance taxes. THUS, Palanca was asking for a refund of
P20k+ (diff between 1st and 2nd assessment).
WITHOUT WAITING FOR BIRs decision, Palanca filed a petition for
review / CTA.
CTA granted the claim for refund and ruled in favor of Palanca.
CIR appealed to SC.
I/R: 1) W/n the interest paid on delinquent estate and
inheritance taxes is DEDUCTIBLE from gross income
YES, interest paid is deductible from gross income.
Citing CIR v. Prieto: Under the law, for interest to be deductible, it
must be shown that there be an indebtedness, that there should be
interest upon it, and that what is claimed as an interest deduction
should have been paid or accrued within the year.
In this case, what was sought to be deducted was interest paid as
a consequence of the LATE PAYMENT of estate and inheritance taxes,
and the same was paid w/in the year it was sought to be deducted.
Such interest was made upon indebtedness and was thus
deductable.
2) W/N action for refund (2nd) has prescribed for violating the 30
day period requirement
NO, the claim for refund had NOT yet prescribed.
There was only 1 transaction (transfer of shares of stock) w/c
became the TAXABLE EVENT.
HOWEVER, since 2 assessments were made by the BIR, the FIRST
being the donees gift tax, and the SECOND as estate tax, there
were 2 claims for refund as well.
THUS, the 30-day period did NOT even commence to run in this
incident because the 1st assessment was abandoned and a subsequent
assessment was issued to Palanca. The 2 nd assessment was likewise for
a different liability.
Considering that it is the interest paid on the 2nd assessment
(estate and inheritance tax) that Palanca is claiming refund for, then
the 30-day period should be computed from the receipt of the final
denial by the Bureau of Internal Revenue of the said claim Denial:
1959!

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Also, the claim at bar refers to the alleged overpayment by


Palanca of his 1955 income tax. Inasmuch as the said account was paid
by him by installment, then the computation of the 2-year prescriptive
period, under Section 306 of the National Internal Revenue Code,
should be from the date of the last installment (which was on Aug 14,
1956.)

Gibbs v CIR (Nov 1965)

On Feb 1956, CIR issued against Finley Gibbs a deficiency income


tax assessment notice.

1 month after, Allison Gibbs, signing as attorney in fact for her


brother, acknowledged receipt of the above assessment notice and
notified the CIR that Finley Gibbs was then living in California and that
the latter was notified by him of the said deficiency assessment.

In the same letter, Allison Gibbs questioned the disallowance of


certain items which gave rise to the deficiency assessment and
requested for a correction of it.

CIR denied the request on August 1965.

Having deemed the denial as the final decision of the CIR, Allison
Gibbs wrote on October 1956 the CIR saying they are paying the
assessed amount as a sign of good faith, but reiterated that the
assessment is contrary to law. She also demanded refund of the
payment.

In a letter in Oct 1956, CIR denied petitioners claim for refund.


Such denial was admittedly received by the office of Allison Gibbs on
NOV 1956.

In Sept 1958, Allison, signing as counsel for Finley, wrote another


letter addressed to CIR to reiterate the demand for refund. Letter also
said that the denial letter in Oct 1956 was NOT a ruling on Finleys
claim for refund.

On Oct 1958, petitioners filed with the CTA a Petitioner for Review
and Refund of Income Tax with Motion for Suspension of Collection of
Additional Taxes, alleging mainly the claims for refunds and tax credits
in the letter.

CTA dismissed the case on the ground of lack of jurisdiction given


that the petition for review was filed BEYOND 30 days from date of
receipt of CIRs decision.

I/R: 1) W/n Gibbs claims have already prescribed

YES, Gibbs claims HAVE already prescribed

Petitioners contend that the claims had NOT yet prescribed


because there was no evidence that they received a copy of the letter
in Oct 1956 DENYING their claim for refund, and the letter itself is NOT
a denial of their claim for refund.

HOWEVER, it is has been proven that Allison is not a mere atty-infact but counsel of Gibbs, and thus, receipt she should have
immediately filed an appeal upon denial.
Also, the claim that the letter of Oct 26 1956 was NOT a denial of
the claim for refund was unmeritorious. The letter clearly states that
for reasons stated in our letter dated Aug 28 1956, THIS OFFICE has
NO JUSTIFIABLE BASIS to grant your request.
2) W/n withholding tax credits amount to payment for the
purpose of determining the 2-year period provided in Sec 306
of the NIRC
YES, w/holding tax credits = payment!
2 year period shall be counted from the DATE THE WITHOLDING
TAX IS DUE.
A taxpayer, resident or non-resident, who contributes to the
withholding tax system, does so not really to deposit an amount to the
CIR but to perform and extinguish his tax obligation for the year
concerned.
In other words, he is paying his tax liabilities for that year.
Consequently, a taxpayer whose income is withheld at the source
will be deemed to have paid his tax liability when the same falls due at
the end of the tax year.
THUS, it is when the tax liability falls due, that the 2-year
prescriptive period under Section 306 of the Revenue Code starts to
run with respect to payments effected through the withholding tax
system.
It is of no consequence whatever that a claim for refund or credit
against the amount withheld at the source may have been presented
and may have remained unresolved since.
Taxpayer who has paid the tax, whether under protest or not, and
who is claiming a refund of the same, must file a claim for refund with
the CIR within 2 years from the date of his payment of the tax (Sec
306, NIRC)
He must then appeal to the CTA w/in 30 DAYS from receipt of the
CIRs decision denying claim for refund (Sec 11, RA 1125)
If, however, the Collector takes time in deciding the claim, and the
period of two years is about to end, the suit or proceeding must be
started in the CTA BEFORE the end of the 2-year period WITHOUT
awaiting the decision of the Collector. This is so because of the positive
requirement of Section 306 and the doctrine that delay of the Collector
in rendering decision does not extend the peremptory period fixed by
the statute.

CIR v Sweeney

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International Club of Iloilo, Inc. (the Club) is a non-profit, non-stock


corporation organized to promote athletic and social relations among
its members.
In consonance with its purpose, the club, during its lifespan from
1949 to 1951, maintained and operated a clubhouse with a bar,
wherein liquor and light refreshments were sold exclusively to its
members and their guest with a light overprice to cover operational
expenses.
The Club never paid fixed or percentage taxes as operator of a bar
during its brief lifespan.
In 1950, CIR addressed and demanded from the Club payment of
the sum of P1,987.01 as fixed and percentage tax and surcharge as
operator of a bar for the period covering August 1949 to September
1950.
In 1951, J. N. Sweeney, then president of the Club, wrote the City
Treasurer of Iloilo, protesting the aforementioned assessment against
the Club and asking that it be withdrawn for the reason that the Club
was a private one and not organized for profit so it should not be held
liable for the taxes sought to be collected.
This protest remained unanswered for about 10 months.
In the meantime, the Club was dissolved sometime in Sept 1951.
In Jan 1952, CIR denied Sweeneys request for withdrawal.
BIR demanded from Sweeney payment of P3k+ representing fixed
and percentage taxes and surcharge, as operator of a bar for Aug 1959
to Aug 1951.
Although no payment was made, BIR did NOT take positive steps
to enforce collection.
HOWEVER, on August 15, 1953 and October 15, 1953, the CIR
urged the City Fiscal of Iloilo to prosecute criminally the past presidents
of the Club for violation of sections 182, 183 and 191 of the tax Code.
On the same date, the Club sought a refund for the amounts paid
under protest.
Not having received any reply from the CIR regarding said claim
for refund, the Club filed a PETITON FOR REVIEW w/ the CTA.
I: W/n CTA has jurisdiction YES
W/n the Club is liable for the tax. NO, the club is not liable.
R:
The CIR contends that the CTA has no jurisdiction to order the
refund of the taxes involved because, first, said amounts had been
paid by respondents in the extra-judicial settlement of the case against
them (The extrajudicial settlement refers to the act of the respondents
in paying the assessed tax liabilities. The CIR also contends that this
act of paying is in the form of a compromise wherein the CIR will
withdraw the information if they pay their liabilities.), and second,

respondents had no cause of action in as much as the petitioner has


not yet ruled upon the respondents requests for refund.
As to CIRs first contention, the CIR had not entered into a
compromise as to the payment of the taxes whose refund is now being
sought. The Compromise entered into by respondents was only in
regard to the payment of P50.00 by each of them in order to avoid
criminal prosecution which might affect their standing as businessmen
in their community.
In fact upon payment of said P50.00 by each of them, the City
Fiscal desisted from continuing the prosecution. But that was entirely
apart from and independent of the payment of the taxes which, as
already, was made under protests and on the same day, a petition
demanding refund was filed with the same court.
As to CIRs second contention, taxpayers need not wait for the
action of the CIR on the request for refund before taking the matter to
court. The law does not require the taxpayer to wait for the CIRs
action on its request for refund because the taxpayer only has two
years after the payment of the taxes from which to claim the refund.
If he files beyond two years, then he can no longer claim.
ALSO, the club cannot be liable for payment of fixed and
percentage taxes because it was not engaged in the business of selling
liquor.
Its bar dispensed liquor only to members, their families and their
guest. It is true that for a time it made a little profit in such sale, that is
to say, the little overprice put on the liquor dispensed, presumably
intended to cover expenses in the maintenance of the bar, exceeded
said expenses but said profits never went to the members of the Club
but were used in the operation of the Club, which as a matter of fact
incurred a loss, so that it may not be said that the operation of the bar
and in dispensing liquor to its members or families and their guest the
International Club of Iloilo, Inc. was engaged in business and that it was
organized for profit.

CIR v Tokyo Shipping Co.

Tokyo Shipping Co. Ltd (Tokyo Shipping) is a foreign corporation


represented in the Philippines by Soriamont Steamship Agencies,
Incorporated (Soriamont). It owns and operates tramper vessel M/V
Gardenia.

NASUTRA chartered M/V Gardenia to load tons of raw sugar in the


Philippines.

Mr. Lising, the operations supervisor of Soriamont


paid the
required income and common carrier's taxes based on the expected
gross receipts of the vessel.

Upon arriving, however, at Guimaras Port of Iloilo, the vessel found


no sugar for loading.

TAX 2 MONTERO | Y. Sanchez A2012

On January 10, 1981, NASUTRA and Soriamont mutually agreed to


have the vessel sail for Japan without any cargo.
On March 23, 1981, Tokyo Shipping sought to refund the prepaid
income and common carriers tax alleging that no sale was realized
from its agreement with Nasutra.
CIR failed to act on the matter.
Thus Tokyo Shipping filed a petition for review with the CTA on May
14, 1981.
CTA ruled in favor of Tokyo Shipping. It found that the chartered
vessel sailed out of the Philippine port with absolutely no cargo laden
on board as cleared and certified by the Customs authorities.
It also found that the Appellate Division of the BIR and the
examiner who examined this case has already recommended the
approval of Tokyo Shippings claim for refund.
I: W/n Tokyo Shipping is entitled to refund
R: YES, Tokyo is entitled to a refund. (after 15 years refund was
delayed)
Pursuant to this Section 24(b) (2)8, a resident foreign corporation
engaged in the transport of cargo is liable for taxes depending on the
amount of income it derives from sources within the Philippines. Thus,
before such a tax liability can be enforced the taxpayer must be shown
to have earned income sourced from the Philippines.
The CTA held that sufficient evidence has been adduced by Tokyo
Shipping to prove that it derived no receipt from its charter agreement
with NASUTRA.
This finding of fact show that M/V "Gardenia" arrived in Iloilo on
January 10, 1981 but found no raw sugar to load and returned to Japan
without any cargo laden on board. This claim is supported by the
Clearance Vessel to a Foreign Port issued by the District Collector of
Customs and the Certification by the Officer-in-Charge, Export Division
of the Bureau of Customs Iloilo. Documents issued by the Customs
officer enjoy the presumption of regularity. CIR did not present
evidence to counter this presumption. Records also show the

A corporation organized, authorized, or existing under the laws of any foreign country, engaged
in trade or business within the Philippines, shall be taxable as provided in subsection (a) of this
section upon the total net income derived in the preceding taxable year from all sources within the
Philippines: Provided, however, That international carriers shall pay a tax of two and one-half per
cent (2 1/2%) on their gross Philippine billings: "Gross Philippine Billings" include gross revenue
realized from uplifts anywhere in the world by any international carrier doing business in the
Philippines of passage documents sold therein, whether for passenger, excess baggage or mail,
provided the cargo or mail originates from the Philippines. The gross revenue realized from the
said cargo or mail include the gross freight charge up to final destination. Gross revenue from
chartered flights originating from the Philippines shall likewise form part of "Gross Philippine
Billings" regardless of the place or payment of the passage documents . . . . .

inconsistent stand of the CIR. It did not withdraw its opposition to the
petition for review even when its counsel manifested that the BIR
examiner and the appellate division of the BIR have both
recommended the approval of Tokyo Shippings claim for refund.
Evidence supports the CTAs decision regarding the propriety of
tax refund due to Tokyo Shipping. Fair deal is expected by our
taxpayers from the BIR and the duty demands that BIR should refund
without any unreasonable delay what it has erroneously collected.
On the issue that Tokyo did NOT present its charter agreement w/
NASUTRA, it presupposes without any basis that the charter agreement
is prejudicial evidence against Tokyo. It will show that Tokyo earned a
charter fee with or without transporting its supposed cargo from Iloilo
to Japan.
CIR did not present evidence to support this allegation. Moreover,
the charter agreement could have been presented by CIR itself thru
the proper use of a subpoena duces tecum.

Phil Bank of Comm v CIR

The Philippine Bank of Communications (PBCom), a commercial


banking corporation duly organized under Philippine laws, filed its
quarterly income tax returns for the 1st and 2nd quarters of 1985,
reported profits, and paid the total income tax of P5M++.

The taxes due were settled by applying PBComs tax credit memos
and accordingly, the BIR issued Tax Debit Memo for P3M and P1.6M,
respectively.

Subsequently, however, PBCom suffered losses so that when it


filed its Annual Income Tax Returns for the year-ended 1985, it
declared a net loss of P25M, thereby showing no income tax liability.

For the succeeding year, 1986, PBCom likewise reported a net loss
of P14.1M, and thus declared no tax payable for the year.

But during these two years, PBCom earned rental income from
leased properties.

The lessees withheld and remitted to the BIR withholding


creditable taxes.

On 7 August 1987, PBCom requested the CIR, among others, for a


tax credit of P5M representing the overpayment of taxes in the 1st and
2nd quarters of 1985.

Thereafter, on 25 July 1988, PBCom filed a claim for refund of


creditable taxes withheld by their lessees from property rentals.

Pending the investigation of the CIR, PBCom instituted a Petition


for Review before the CTA.

CTA dismissed this for lack of merit; and thus denied PBComs
claim for refund/tax credit of overpaid income tax on the ground that it
was filed BEYOND the 2-year reglementary period provided for by law.

TAX 2 MONTERO | Y. Sanchez A2012

PBComs claim for 2nd refund was likewise denied on the


assumption that it was automatically credited by PBCom against its tax
payment in the succeeding year.
I/R:
1) W/n PBCom is correct in saying that the FIRST REFUND
was filed on time
NO, PBCom was incorrect. PBCom relied on RMC 7-85 w/c says that
the prescriptive period is 10 and NOT 2 yrs.
The issuance is administrative and it CANNOT contravene the NIRC
w/c is a statute.
Although administrative issuances are accorded great respect,
such interpretation is NOT conclusive and will be ignored if found to be
erroneous.
Also, State cannot be put in estoppel by mistakes of its agents.
There are no vested rights to speak of respecting a wrong
interpretation.
Also, non-retroactivity of rulings of CIR is NOT applicable in this
case because the nullity of the RMC was declared by the COURTS and
NOT the CIR.
The 2-year prescriptive period should be computed from the time
of filing the Adjustment Return (when the refund is ascertained) and
final payment of the tax for the year.
2) W/n the CA was correct in denying the plea for tax
refund or tax credits on the ground of prescription, despite
petitioner's good faith reliance on RMC No. 7-85, changing the
prescriptive period of 2 years to 10 yrs
YES, CA was correct. Tax refund should be denied on ground of
prescription.
With respect to corporate taxpayers, in case of overpayment of
quarterly income taxes, there is a need to specify whether the
taxpayer intends to avail of a tax refund or a tax credit, thus Sec. 69
of the 1977 NIRC (now, Sec. 76 of the 1997 NIRC) provides that any
excess of the total quarterly payments over the actual income tax
computed in the adjustment or final corporate income tax return, shall
either (a) be refunded to the corporation, or (b) may be credited
against the estimated quarterly income tax liabilities for the quarters
of the succeeding taxable year.
The Corporation must signify in its annual corporate adjustment
return (by marking the option box provided in the BIR form) its
intention, whether to request for a refund or claim for an automatic tax
credit for the succeeding taxable year.
To ease the administration of tax collection, these remedies are in
the alternative, and the choice of one precludes the other.

PBCom opted to apply for automatic tax credit. This was the basis
used (vis-a-vis the fact that the 1987 annual corporate tax return was
not offered by the petitioner as evidence) by the CTA in concluding that
PBCom had indeed availed of and applied the automatic tax credit to
the succeeding year, hence it can no longer ask for refund, as to [sic]
the two remedies of refund and tax credit are alternative. Since
PBCom opted for an automatic tax credit in accordance with Section 69
of the 1977 NIRC, as specified in its 1986 Final Adjusted Income Tax
Return, such a finding of fact must be respected by the Supreme Court.
This, especially, in light that the 1987 annual corporate tax return of
PBCom was not offered as evidence to controvert said fact.

CIR v CA

BPI, a bank, acted as liquidator for Paramount Acceptance Corporation


during dissolution on March 31, 1986.

Paramount filed its Corporate Income Tax Return (CITR) for calendar
year of 1985. Paramount paid a total of P1.2+M.

After deducting Paramounts total quarterly income tax payments of


P1.2+M from its income tax of P1.1+M, the return showed a refundable
amount of P65k.

The appropriate box in the return was marked with a cross (x)
indicating To be refunded the amount of P65k.

The following day or April 15, BPI filed and instant petition with CTA to
toll the running of the prescriptive period for filing a claim for refund of
overpaid income taxes.

The question was whether the 2-year prescriptive period for filing a
refund should be counted from April 2, when the CITR was actually filed
(under Sec. 230 of NIRC, where its provided that the period must be
counted from the day of payment of tax) or from April 15 (under Sec.
70b) where the final adjustment return could still be filed without
incurring any penalties.

CTA rendered a decision stating that period commenced from April 15,
1986, the last day for filing the corporate income tax return, and, since
the claim for refund was filed on April 14, 1988 and the action was
brought on April 15, 1988, it held that prescription had not set in.

CTA ordered CIR to refund Paramount.

CA affirmed the decision.

I: W/n the prescriptive period should commence when the Corporate


Income Tax Return is actually filed (Sec. 230), or from April 15 where
final adjustment could be filed w/o incurring penalties.

R: Prescriptive period should commence from the filing the Adjustment


Return or Annual Income Tax Return and Final Payment of Income Tax.
PERIOD in this case had already prescribed and no refund can be

TAX 2 MONTERO | Y. Sanchez A2012

made.
In CIR v. TMX Sales, SC held that the filing of a quarterly income tax
return and payment of quarterly income tax should only be considered
mere installments of the annual tax due.
These quarterly tax payments which are computed based on the
cumulative figures of gross receipts and deductions in order to arrive at
a net taxable income, should be treated as advances or portions of the
annual income tax due, to be adjusted at the end of the calendar or
fiscal year.
This is reinforced by Sec. 87 [now Sec. 69] which provides for the filing
of adjustment returns and final payment of income tax. Consequently,
the 2-year prescriptive period provided in Section 230 should be
computed from the time of filing the Adjustment Return or Annual
Income Tax Return and Final Payment of Income Tax.
This is so because at that point, it can already be determined whether
there has been an overpayment by the taxpayer. Moreover under Sec
49a, payment is made at the time return is filed.
In the case at bar, Paramount filed its corporate annual income tax
return on April 2, 1986. However, BPI, as liquidator of Paramount, filed
a written claim for refund only on April 14, 1988 and a petition for
refund only on April 15, 1988.
Both claim and action for refund were barred by prescription.

CIR v Philamlife

Philamlife paid to the BIR its first quarterly corporate


income tax for 1983 amounting to P3.2M+.

On August 29, 1983, it paid P300k+ for the Second


Quarter of 1983.

For the Third Quarter of 1983, it declared a net taxable


income of P2M+ and tax due of P708k+.

After crediting the amount of P3M+ it declared a


refundable amount of P3.1M+.

For its Fourth and final quarter ending December 31,


Philamlife suffered a loss and thereby had no income tax liability.

In the return for that quarter, it declared a refund of


P3.9M representing the first and second quarterly payments.

In 1984, private respondent again suffered a loss and


declared no income tax liability. However, it applied as tax credit for
1984, the amount of P3.9M representing its 1982 and 1983 overpaid
income taxes and the amount of P250,867.00 as withholding tax on
rental income for 1984.

On September 26, 1984, Philamlife filed a claim for its


1982 income tax refund of P133,084.00.

On November 22, 1984, it filed a petition for review with


the CTA with respect to its 1982 claim for refund of P133,084.00.
On December 16, 1985, it filed another claim for refund
with the CIR appellate division.
On January 2, 1986, Philamlife filed a petition for review
w/ the CTA regarding its 1983 and 1984 claims for refund.
CTA ordered the refund to the Philamlife for the first and
second quarters of 1983. CA affirmed the decision, hence this appeal.
I: Where corporate taxpayer remits/pays to the BIR tax
withheld on income for the first quarter but whose business operations
actually resulted in a loss for that year, should not the running of the
prescriptive period commence from the remittance/payment at the end
of the first quarter of the tax withheld instead of from the filing of the
Final Adjustment Return?
R: NO, prescriptive period should commence from the
time of filing of final adjustment return.
Section 292 (now Section 230) stipulates that the twoyear prescriptive period to claim refunds should be counted from date
of payment of the tax sought to be refunded.
Although quarterly taxes due are required to be paid
within 60 days from the close of each quarter, the fact that the amount
shall be deducted from the tax due for the succeeding quarter shows
that until a final adjustment return shall have been filed, the
taxes paid in the preceding quarters are merely partial taxes
due from a corporation.
Neither amount can serve as the final figure to quantity
what is due the government nor what should be refunded to the
corporation.
This interpretation may be gleaned from the last
paragraph of Section 69 of the Tax Code which provides that the
refundable amount, in case a refund is due a corporation, is that
amount which is shown on its final adjustment return and not on its
quarterly returns.
Therefore, when private respondent paid P3,246,141.00
on May 30, 1983, it would not have been able to ascertain on that
date, that the said amount was refundable. The same applies with
cogency to the payment of P396,874.00 on August 29, 1983.
Clearly, the prescriptive period of two years should
commence to run only from the time that the refund is ascertained,
which can only be determined after a final adjustment return is
accomplished.
In the present case, the claim for refund and petition for
review were made within the two-year reglementary period.

TAX 2 MONTERO | Y. Sanchez A2012

Philamlife being a corporation, Section 292 (now Section


230) cannot serve as the sole basis for determining the two-year
prescriptive period for refunds.
As we have earlier said in the TMX Sales case, Sections
68, 69, and 70 on Quarterly Corporate Income Tax Payment and
Section 321 should be considered in conjunction with it.
Moreover, even if the two-year period had already lapsed,
the same is not jurisdictional and may be suspended for reasons of
equity and other special circumstances.

ACCRA v CA

ACCRA Investments, a domestic corp engaged in real estate and


mgmt consultancy, filed its annual corp income tax return.

In the return, it declared as creditable all taxes withheld at source


by various witholding agents, amounting to P82k.

The withholding agents had already paid and remitted the


amounts to BIR, way ahead of ACCRAIns filing of its return.

ACCRAIn filed a claim for refund inasmuch as it had no tax liability


against which to credit the amounts withheld.

CTA denied the claim on the ground that the 2-year prescriptive
period had already lapsed, based on the case of Gibbs ruling w/c stated
that a taxpayer whose income is withheld at source will be deemed to
have paid his tax liability when the same falls due at the end of the tax
year.

THUS, w/ the withholding agents paying taxes WAY AHEAD of


ACCRAIn, its now too late for ACCRAIn to claim for a refund, since it is
deemed to have paid a long time ago already.

I: W/n ACCRAIN is barred from recovering the 82k overpaid taxes

R: No, ACCRAIN is NOT barred from recovering. The prescriptive


period did NOT run when the taxes were paid.

Sec 230 of the old NIRC provides that no suit or proceeding shall
begin after the expiration of two years from the date of payment of the
tax or penalty regardless of any supervening cause that may arise
after payment.

The lower court was wrong in considering the end of the tax
year as the proper reckoning date based on Gibbs, because ACCRAIn
is NOT claming a refund for overpaid witholding taxes, per se.

INSTEAD, it is asking for the recovery of 82k, refundable or


creditable amount determined upon the petitioner corps filing of its
FINAL ADJUSTMENT TAX RETURN on / before April 15 1982.

THUS, there is the need to file a return first before a claim for
refund can prosper inasmuch as the respondent Commissioner by his
own rules and regulations mandates that the corporate taxpayer
opting to ask for a refund must show in its final adjustment return the

income it received from all sources and the amount of withholding


taxes remitted by its withholding agents to the Bureau of Internal
Revenue.
The petitioner corporation filed its final adjustment return for its
1981 taxable year on April 15, 1982, w/c was WITHIN the period.

Philex Mining v CIR

Philam entered into a Mining License Agreement w/ Ministry of Nat


Resources (now DENR).

From the period July 1, 1980 to December 31, 1981, Philam


purchased from several oil companies, refined and manufactured
mineral oils, motor fuels, and diesel fuel oils.

The specific taxes passed on to the petitioner amounted to


P2,492,677.22.

On October 1982, pursuant to R.A. 1435, petitioner filed a


claim for refund with the CIR for P623,169.30, representing the 25%
of the specific taxes paid on their use of refined and manufactured
mineral oils, motor fuels and diesel fuel oils.

Pending CIR action, on November 1982, the petitioner filed a case


for tax refund with the CTA.

The petitioner sought judgment ordering the CIR to pay as refund


the amount of P623,169.30, with 20% interest per annum, plus the
costs of suit.

On August 4, 1994, the CTA rendered its decision, quoted at the


outset, granting the tax refund, but only to the extent of
P16,747.36 (only 20% of the specific taxes deemed paid under R.A.
1435).

Petitioner seeks a higher tax base (specific taxes actually paid) for
the refund it seeks.

I: W/N CA erred in basing the tax refund on the 20% specific taxes
deemed paid under RA 1435 (taxes deemed paid) instead of the
increased rates imposed by Sec 142 and 145 (taxes actually paid)

R: NO, court's decision was proper.

Right to refund under R.A. 1435

RA 1435 (An Act to Provide Means for Increasing the Highway


Special Fund) states that mining and lumber companies seldom use
national highways. Since the gasoline and fuel purchased by mining
and lumber companies are used within their own compounds and
roads, and they do not benefit directly from the Fund, the government
granted to these companies a 25% partial refund of specific taxes paid
on purchases of manufactured diesel and fuel oils.

Tax refund under R.A. 1435 is computed on the basis of the


specific tax deemed paid and NOT on the increased rates actually paid
under 1977 NIRC.

TAX 2 MONTERO | Y. Sanchez A2012

Since the partial refund authorized under Section 5, R.A. 1435, is


in the nature of a tax exemption, it must be construed strictissimi
juris against the grantee.
The subsequent codification of tax laws under the NIRC Sec 153
and 156 mandated increase rates of specific taxes on oils, fules, etc.
Although PHILEX paid the taxes on their oil and fuel based on the
increased rates, the latter law did NOT specifically provide for a refund
based on the increased rates.
Also, claims for refund w/c were not filed w/ CIR and those that
prescribed must be deemed excluded for being outside the ambit of
legislative enactment.

CIR v PNB

Philippine National Bank (PNB) issued to BIR PNB Cashiers Check


No. 109435 for P180,000,000.00, representing PNBs advance income
tax payment for the banks 1991 operations.

The BIR acknowledged receipt of the amount by issuing a payment


order and receipt.

PNB requested the issuance of a tax credit certificate (TCC) to be


utilized against future tax obligations of the bank.

For the first and second quarters of 1991, PNB also paid additional
taxes.

By the end of 1991, PNBs annual income tax liabilityresulted to a


credit balance in its favor in the amount of P73,298,892.60.

On July 28, 1997, PNB wrote then BIR Commissioner VinzonsChato, to inform her about the above developments and to reiterate its
request for the issuance of a TCC, this time for the unutilized balance
of its advance payment made in 1991 amounting to P73,298,892.60.

CIR denied the request .

PNB filed a petition for review w/ CTA.

CTA denied the claim on the ground that it had already prescribed
(beyond the 2-year prescriptive period).

PNB filed a petition for review with the Court of Appeals (CA).

The CA reversed the CTA considering the special circumstance


that the tax credit PNB has been seeking is to be sourced not from any
tax erroneously or illegally collected but from advance income tax
payment voluntarily made in response to then President Aquinos call
to generate more revenues for the government.

I: W/n PNBs claim for refund/ credit was time-barred

R: NO, it was not.

IN THIS CASE, PNB sought the application of amounts advanced to


the BIR to future annual income tax liabilities, in view of its inability to
carry-over the remaining amount of such advance payment to the four

(4) succeeding taxable years, not having incurred income tax liability
during that period.
It would be improper to treat the same as erroneous, wrongful or
illegal payment of tax within the meaning of Section 230 of the Tax
Code, since it would be inequitable to strictly impose the two
(2)-year prescriptive period as to legally bar any request for
such tax credit certificate considering the special
circumstances under which the advance income tax payment
was made and the unexpected event (four years of business
losses) which prevented such application or carry over.
The mandate of Rev. Reg. No. 10-77 is hardly of any application to
PNBs advance payment which, needless to stress, are not quarterly
payments reflected in the adjusted final return, but a lump sum
payment to cover future tax obligations. Neither can such advance
lump sum payment be considered overpaid income tax for a given
taxable year, so that the carrying forward of any excess or overpaid
income tax for a given taxable year is limited to the succeeding
taxable year only.
Limiting the right to carry-over the balance of
respondents advance payment only to the immediately
succeeding taxable year would be unfair and improper
considering that, at the time payment was made, BIR was put on
due notice of PNBs intention to apply the entire amount to its
future tax obligations.
The suspension of the two (2)-year prescriptive period is
warranted not solely by the objective or purpose pursuant to which
PNB made the advance income tax payment in 1991. Records show
that the BIRs very own conduct led PNB to believe all along
that its original intention to apply the advance payment to
its future income tax obligations will be respected by the BIR.
An availment of tax credit for reasons other than erroneous /
wrongful collection of taxes may have a different prescriptive period.
ABSENT any provision in the Tax Code / special laws, period = 10
years under Art 1144 of the CC.

Philam Asset Mgmt v CIR

IN A NUTSHELL: Philam wanted to claim for refund on unutilized


tax credits (Case 1) and unapplied creditable withholding tax (Case 2) .
HOWEVER, this was denied by CTA.

1st case:

Philam Asset Management, Inc. (Philam) is a domestic corporation


which acts as the investment manager of both Philippine Fund, Inc.
(PFI) and Philam Bond Fund, Inc. (PBFI), which are open-end investment
companies.

TAX 2 MONTERO | Y. Sanchez A2012

Both PFI and PBFI agreed to pay Philam by way of compensation


for its services and facilities, a monthly management fee from which
PFI and PBFI withhold an amount equivalent to a 5% creditable tax.
In April 1998, Philam filed its income tax return for the taxable
year 1997 representing a net loss of approximately P2.6M.
Philam failed to utilize the creditable tax on professional fees
withheld by PFI and PBFI so it filed a claim for refund with the BIR
representing unutilized excess tax credits.
BIR did not act on the claim for refund hence in November 1999,
Philam filed a petition for review with the CTA. In 2002, The CTA
denied the claim for refund.
2nd case:
In April 1999, Philam filed its income tax return for the taxable
year 1998 declaring a net loss of approximately P1.5M.
Philam had an unapplied creditable withholding tax which had
been previously withheld in that year by PFI and PBFI.
Philam likewise declared in its 1999 tax return an amount
representing its prior excess credits for taxable year 1998.
In the succeeding year, Philam had a tax due approximately in the
amount of P80K and a creditable withholding tax approximately in the
amount of P915K. In 2000, Philam filed for a claim for refund with
respect to the unapplied creditable withholding tax.
BIR did not act on the claim for refund hence Philam filed a
petition for review before the CTA in 2000. The CTA denied the claim
for refund.
Ruling of CA for claim of refund for both cases:
CA denied the claim for refund of Philams excess creditable taxes
withheld for the years 1997 and 1998, ruling that Philam did not
indicate its option to have the amounts either refunded or carried over
and applied to the succeeding year.
The CA also ruled that to request for either a refund or a credit of
income tax paid, a corporation must signify its intention by marking
the corresponding option box on its annual corporate adjustment
return, and failure to do so would result in the automatic carry-over of
any excess tax credit for the prior year.
I: W/n Philam is entitled to a refund of its creditable taxes withheld
for taxable years 1997 and 1998
R: Philam is entitled to a tax refund of its 1997 excess tax credits,
while it is not entitled to a tax refund which corresponds to its 1998
excess tax credits.
Ratio for allowing a tax refund of Philams 1997 excess tax credits
Section 76 of the Tax Code offers two options to a taxable
corporation whose total quarterly income tax payments in a given
taxable year exceeds its total income tax due.

These options are (1) filing for a tax refund or (2) availing of a tax
credit. The first option is relatively simple: any tax on income that is
paid in excess of the amount due the government may be refunded,
provided that a taxpayer properly applies for the refund.
The second option works by applying the refundable amount, as
shown on the Final Adjustment Return (FAR) of a given taxable year,
against the estimated quarterly income tax liabilities of the succeeding
taxable year. These two options under Section 76 are alternative in
nature the choice of one precludes the other.
Failure to signify ones intention in the FAR does not mean outright
barring of a valid request for a refund, should one still choose this
option later on.
Requiring that the income tax return or the FAR of the succeeding
year be presented to the BIR in requesting a tax refund has no basis
in law and jurisprudence:
1. Section 76 does not mandate it. The law merely requires the filing
of the FAR for the preceding -- not the succeeding -- taxable year.
2. Moreover, there is no automatic grant of a tax refund. Exercising
the option for a tax refund or a tax credit does not ipso facto
confer upon a taxpayer the right to an immediate availment of the
choice made. Neither does it impose a duty on the government to
allow tax collection to be at the sole control of a taxpayer.
3. Moreover, the BIR ought to have on file its own copies of
petitioners FAR for the succeeding year, on the basis of which it
could rebut the assertion that there was a subsequent credit of the
excess income tax payments for the previous year. Its failure to
present this vital document to support its contention against the
grant of a tax refund to petitioner is certainly fatal.
4. Furthermore, the Tax Code allows the refund of taxes to a taxpayer
that claims it in writing within two years after payment of the
taxes erroneously received by the BIR. Despite the failure of
Philam to make the appropriate marking in the BIR form, the filing
of its written claim effectively serves as an expression of its choice
to request a tax refund, instead of a tax credit.
In the present case, although petitioner did not mark the refund
box in its 1997 FAR, neither did it perform any act indicating that it
chose a tax credit. On the contrary, it filed in 1998 a claim for refund
of its excess taxes withheld in 1997. Under these circumstances,
Philam is entitled to a tax refund of its 1997 excess tax credits.
Ratio for disallowing a tax refund of Philams 1998 excess tax
credits
As to the second case, Section 76 also applies. The carry-over
option under Section 76 is permissive. Once chosen, the carry-over
option shall be considered irrevocable for that taxable period, and no

TAX 2 MONTERO | Y. Sanchez A2012

application for a tax refund or issuance of a tax credit certificate shall


then be allowed.
The subsequent acts of Philam reveal that it has effectively chosen
the carry-over option:
1. First, the fact that it filled out the portion Prior Years Excess
Credits in its 1999 FAR means that it categorically availed itself of
the carry-over option. If an application for a tax refund has been -or will be -- filed, then that portion of the BIR form should
necessarily be blank, even if the FAR of the previous taxable year
already shows an overpayment in taxes.
2. Second, the resulting redundancy in the claim of Philam for a
refund of its 1998 excess tax credits cannot be countenanced. It
cannot be allowed to avail itself of a tax refund and a tax credit at
the same time for the same excess income taxes paid.

3.

Third, the first-in first-out (FIFO) principle enunciated by the CTA


does not apply. The amount to be applied against the
approximately P80K income tax due in the 1998 FAR of Philam
may be taken from its excess credits in 1997 or from those
withheld in 1998 or from both. Whichever of these the amount will
be taken from will not make a difference. Whether the FIFO
principle is applied or not, Section 76 remains clear and
unequivocal. Once the carry-over option is taken, actually or
constructively, it becomes irrevocable.
Philam has chosen that option for its 1998 creditable withholding
taxes. Thus, it is no longer entitled to a tax refund of the amount
corresponding to its 1998 excess tax credit. Nonetheless, the amount
will not be forfeited in the governments favor, because it may be
claimed by petitioner as tax credits in the succeeding taxable years.

FEBTC v CIR

FEBTC is the trustee of various retirement plans established by


several companies for its employees. As trustee of the retirement
plans, petitioner was authorized to hold, manage, invest and reinvest
the assets of these plans. It invested the retirement funds in various
money market placements, bank deposits, deposit substitute
instruments and government securities. These investments necessarily
earned interest income. Petitioners claim for refund centers on the tax
withheld by the various withholding agents, and paid to the CIR for the
four (4) quarters of 1993, amounting to P6,049,971.83.

On four dates, 12 May 1993, 16 August 1993, 31 January 1994,


and 29 April 1994, petitioner filed its written claim for refund with the
BIR, alleging that the employees trusts are exempted by specific
mandate of law from income taxation. Nonetheless, the claims were
denied.

Meanwhile, the petitioner already had a pending petition before the CTA,
apparently involving the same legal issue but a previous taxable period.
Hoping to comply with the 2-year period within which to file an action for
refund under Section 230 of the Tax Code, petitioner filed a Motion to
Admit Supplemental Petition in the said pending case.
The CTA denied the motion, claiming that it would further delay the
proceedings. Nonetheless, the CTA advised that petitioner could instead file
a separate petition for review for the refund of the withholding taxes paid in
1993.
Petitioner followed the CTAs advice, and on October 9, 1995, it filed
another petition for review with the CTA. This was again denied due to
prescription and for failing to submit such necessary documentary proof of
transactions, such as confirmation receipts and purchase orders.
Its MR and/or Motion New Trial were also denied. The CA affirmed the CTAs
ruling.
Issues/Held: Did the lower courts erred in dismissing FEBTCs petition on a
mere technicality? NO! Petition denied.
Ratio:
1. Procedural error of FEBTC
Sec. 6 of Rule 43 provides that the petition for review must be accompanied
by "certified true copies of such material portions of the record referred to
in the petition and other supporting papers". Under Section 7, Rule 43, the
failure to attach such documents which should accompany the petition is
sufficient ground for the dismissal of the petition.
The CA would have no way to ascertain the veracity of the submissions
unless the certified true copies of such portions of the record referred to in
the petition be attached. The records are an essential requisite for the
determination of prima facie basis for giving due course to the petition.
The confirmation receipts and purchase orders would ordinarily show the
fact of purchase of treasury bills or money market placements by the
various funds. They represent the best evidence on the participation of the
funds. What has to be established though, as a matter of evidence, is that
the amount sought to be refunded to petitioner actually corresponds to the
tax withheld on the interest income earned from the exempt employees
trusts. The need to be determinate on this point especially that petitioner
earns interest income not only from its investments of employees trusts,
but on a whole range of accounts which do not enjoy the same broad
exemption as employees trusts. For these certifications to hold value, there
is particular need for them to segregate such taxes withheld from the
interest income of employees trusts, and those withheld from other income
sources. Otherwise, these certifications are ineffectual to establish the
present claim for refund.

TAX 2 MONTERO | Y. Sanchez A2012

FEBTC failed to submit documentary proof of transactions.


2. It is a fact that Income from Employees trust are exempted from income
tax, therefore, Section 230 of the NIRC applies.
RA 4917, RA 8424 and Section 60(B) of the NIRC granted exemption from
income tax to employees trusts. But FEBTC did pay the income tax when it
was withheld, therefore Such taxes were erroneously assessed or collected,
giving rise to the application of Section 230.
SEC. 230. ....In any case, no such suit or proceeding shall
be begun after the expiration of two years from the
date of payment of the tax or penalty regardless of any
supervening cause that may arise after payment...
3. When should the 2-year prescriptive period be reckoned?
FEBTC submits that it should be reckoned from the date of its filing of the
Supplemental Petition on 28 April 1995, not from the filing of its new
petition for review after the Supplemental Petition was denied.
Even granting that this should be the case, such argument would still
preclude the refund of taxes wrongfully paid from January to 27 April 1993,
the two (2)-year prescriptive period for those taxes paid then having
already become operative.
4. Could the 2-year prescriptive period for the refund be deemed tolled by
the filing of the Supplemental Petition? NO!
In this case, there is no doubt that the CTA has jurisdiction over actions
seeking the refund of income taxes erroneously paid. But it should be borne
in mind that petitioner initially sought to bring its claim for refund for the
taxes paid in 1993 through a supplemental petition in another case pending
before the CTA, and not through an original action. The admission of
supplemental pleadings remains in the sound discretion of the court. It is
only upon the admission by the court of the supplemental complaint that it
may be deem to augment the original complaint. Until such time, the court
acquires no jurisdiction over such new claims as may be raised in the
supplemental complaint. In this case, the CTA refused to admit the
supplemental petition, thus it cannot even be deemed as having been filed.
The CTA only acquired jurisdiction over the claim for refund for taxes paid
by petitioner in 1993 only upon the filing of the new Petition for Review on
9 October 1995.

Pilipinas Shell v CIR


Petitioner Pilipinas Shell Petroleum Corporation (PSPC) is the Philippine
subsidiary of the international petroleum giant Shell, and is engaged in the
importation, refining and sale of petroleum products in the country.

CASE 1 validity of transfer of TCCs

From 1988 to 1997, PSPC paid part of its excise tax liabilities with Tax Credit
Certificates (TCCs) which it acquired through the Department of Finance
(DOF)
One
Stop
Shop
Inter-Agency
Tax
Credit
and Duty Drawback Center (Center)
from
other
BOI-registered
companies. BIR accepted the TCC payments and issued a tax debit
memoranda (TDM) .
April 22 1998 - However, despite such payment, BIR assess PSPC for
alleged deficiency excise tax liabilities of PhP1.7M for the taxable years
1992 and 1994 to 1997, inclusive of delinquency surcharges and interest.
BIR said that PSPC is not a qualified transferee of the TCCs it acquired
from other BOI-registered companies.
PSPC protested the collection letter, but the protest was denied. PSPC filed
its motion for reconsideration. CIR did not reply. PSPC filed a petition for
review before the CTA
CTA held that payment by the
that respondents attempt to
penalties from PSPC without
due process. Thus, it held that
appealed to the CA.

use of TCCs was legal and valid, and


collect alleged delinquent taxes and
an assessment constitutes denial of
the April 22 assessment was invalid. CIR

CASE 2 fraudulent transfer of TCCs

Pending appeal of Case 1, the Center sent letters to PSPC requiring the
latter to submit copies of pertinent sales invoices and delivery receipts
covering a) sale transactions with
the TCC assignors/transferors
purportedly in connection with an ongoing post audit and; b) PSPC
Industrial Fuel Oil (IFO) deliveries to Spintex International, Inc. PSPC replied
saying that the required submission of these documents had no legal basis,
for the applicable rules and regulations on the matter only require that both
the assignor and assignee of TCCs be BOI-registered entities. The Center
ignored this defense and informed PSPC of the cancellation of the first
batch of TCCs transferred to PSPC and the TDM covering PSPCs use of
these TCCs as well as the corresponding TCC assignments. PSPCs MR was
ignored.
November
22,
1999
PSPC
received
the November
15,
1999 assessment letter from respondent for excise tax deficiencies,
surcharges, and interest based on the first batch of cancelled TCCs
and TDM covering PSPCs use of the TCCs. PSPC protested the assessment
letter, but the protest was denied by the BIR, constraining it to file another
petition for review before the CTA

TAX 2 MONTERO | Y. Sanchez A2012

[On March 30, 2004, R.A.9282 was promulgated amending RA 1125,


expanding the jurisdiction of the CTA and enlarging its membership. It
became effective on April 23, 2004 after its due publication. Thus, CTA
CASE 2 was heard and decided by a CTA Division.]
CTA Division held that respondent failed to prove with convincing evidence
that the TCCs transferred to PSPC were fraudulently issued as respondents
finding of alleged fraud was merely speculative. CIR and the Center did not
present proof that PSPC acted fraudulently. They merely based their
conclusions on the audited financial statements of the transferors which did
not clearly show the actual export sales of transactions from which the
TCCs were issued. The Center erroneously based its findings of fraud on two
possibilities: either the transferor did not declare its export sales or
underdeclare them, without specifying identifying or proving the fraudulent
acts. The CTA Division concluded that the TCCs transferred to PSPC
were not fraudulently issued. The CTA Division said that the November
assessment was not precluded by the CASE 1 as the latter
concerned the validity of the transfer of the TCCs, while CASE 2
involved alleged fraudulent procurement and transfer of the TCCs.
CTA En Banc ruled, among other things, that BIRs assessment did not
prescribe considering that no payment took effect as the subject
TCCs were canceled upon post audit. Consequently, the filing of the
tax return sans payment due to the cancellation of the TCCs resulted in the
falsity and/or omission in the filing of the tax return which put them in the
ambit of the applicability of the 10-year prescriptive period from the
discovery of falsity, fraud, or omission. The CTA En Banc also applied Aznar
v. Court of Tax Appeals, where this Court held that without proof that the
taxpayer participated in the fraud, the 50% fraud surcharge is not imposed,
but the 25% late payment and the 20% interest per annum are applicable.
Held:
The CTA En Banc Decision is hereby REVERSED and SET ASIDE, and CTA
Decision in CASE 1 disallowing the April 22, 2009 assessment is
hereby REINSTATED.
Issue/Ruling:
*Important Issue
1. WON the CTA gravely erred in ordering petitioner
PSPC to pay P285,766,987.00, as alleged deficiency
excise taxes, for the taxable years, 1992 and 1994
to 1997: YES

2.

(See definition of tax credit and TCC below9)

CTA En Banc is incorrect. We cannot subscribe to the CTA En Bancs holding


that the suspensive condition suspends the effectivity of the TCCs as
payment until after the post-audit. This strains the very nature of a TCC. A
TCC is an undertaking by the government through the BIR or DOF,
acknowledging that a taxpayer is entitled to a certain amount of tax credit
from either an overpayment of income taxes, a direct benefit granted by
law or other sources and instances granted by law such as on specific
unused input taxes and excise taxes on certain goods. As such, tax credit is
transferable in accordance with pertinent laws, rules, and regulations. The
effectivity and validity of the TCC do not depend on the outcome of a postaudit. The subsequent post-audit cannot void the TCCs and allow the
respondent to declare that utilizing canceled TCCs results in nonpayment
on the part of PSPC.
Ratio: If we are to sustain the appellate tax court, it would be absurd to
make the effectivity of the payment of a TCC dependent on a post-audit
since there is no contemplation of the situation wherein there is no postaudit. Does the payment made become effective if no post-audit is
conducted? Or does the so-called suspensive condition still apply as no
law, rule, or regulation specifies a period when a post-audit should or could
be conducted with a prescriptive period? Clearly, a tax payment through a
TCC cannot be both effective when made and dependent on a future event
for its effectivity. Our system of laws and procedures abhors ambiguity.
Moreover, if the TCCs are considered to be subject to post-audit as a
suspensive condition, the very purpose of the TCC would be defeated as
there would be no guarantee that the TCC would be honored by the
government as payment for taxes. No investor would take the risk of
utilizing TCCs if these were subject to a post-audit that may invalidate
them, without prescribed grounds or limits as to the exercise of said postaudit.
TCC is an undertaking by the government through the BIR or DOF,
acknowledging that a taxpayer is entitled to a certain amount of tax credit
9

Tax credits were granted under EO 226 as incentives to encourage investments in certain
businesses. A tax credit generally refers to an amount that may be subtracted directly from ones
total tax liability. It is an allowance against the tax itself or a deduction from what is owed by a
taxpayer to the government.
A TCC is a certification, duly issued to the taxpayer named therein, by the Commissioner or his
duly authorized representative, reduced in a BIR Accountable Form in accordance with the
prescribed formalities, acknowledging that the grantee-taxpayer named therein is legally entitled a
tax credit, the money value of which may be used in payment or in satisfaction of any of his
internal revenue tax liability (except those excluded), or may be converted as a cash refund,
or may otherwise be disposed of in the manner and in accordance with the limitations, if any, as
may be prescribed by the provisions of these Regulations.

TAX 2 MONTERO | Y. Sanchez A2012

from either an overpayment of income taxes, a direct benefit granted by


law or other sources and instances granted by law such as on specific
unused input taxes and excise taxes on certain goods. As such, tax credit is
transferable in accordance with pertinent laws, rules, and regulations.
*Other issues:
3. WON the CTA appeals gravely erred in imposing
surcharges and interests on the alleged deficiency
excise tax of petitioner PSPC: YES
Assuming that fraud attended the procurement of the subject TCCs, it
cannot prejudice PSPCs rights as earlier explained since PSPC has not been
shown or proven to have participated in the perpetration of the fraudulent
acts, nor is it shown that PSPC committed fraud in the transfer and
utilization of the subject TCCs.
While the Center has authority to cancel the TCCs, it must bear in mind the
nature of the TCCs immediate effectiveness and validity for which
cancellation may only be exercised before a transferred TCC has been fully
utilized or canceled by the BIR after due application of the available tax
credit to the internal revenue tax liabilities of an innocent transferee for
value, unless of course the claimant or transferee was involved in the
perpetration of the fraud in the TCCs issuance, transfer, or utilization. The
utilization of the TCC will not shield a guilty party from the consequences of
the fraud committed.
While we agree with respondent that the State in the performance of
governmental function is not estopped by the neglect or omission of its
agents, and nowhere is this truer than in the field of taxation, this principle
cannot be applied to work injustice against an innocent party. In the case
at bar, PSPCs rights as an innocent transferee for value must be
protected. Therefore, the remedy for respondent is to go after the claimant
companies who allegedly perpetrated the fraud (was the subject of a
criminal prosecution before the Sandiganbayan.)
4.

WON the assessment dated 15 November 1999 is


void considering that it failed to comply with the
statutory as well as regulatory requirements in the
issuance of assessments: YES

5.
Respondent merely relied on the findings of the Center which did not give
PSPC ample opportunity to air its side. While PSPC indeed protested the
formal assessment, such does not denigrate the fact that it was deprived of
statutory and procedural due process to contest the assessment before it
was issued.

What is applicable is RR 12-99 10, which superseded RR 12-85, pursuant to


Sec. 244 in relation to Sec. 245 of the NIRC implementing Secs. 6, 7, 204,
228, 247, 248, and 249 on the assessment of national internal revenue
taxes, fees, and charges. The procedures delineated in the said statutory
provisos and RR 12-99 were not followed by respondent, depriving PSPC of
due process in contesting the formal assessment levied against
it. Respondent ignored RR 12-99 and did not issue PSPC a notice for
informal conference and a preliminary assessment notice, as required.
PSPCs November 4, 1999 motion for reconsideration of the purported
Center findings and cancellation of the subject TCCs and the TDM was not
even acted upon. PSPC was merely informed that it is liable for the amount
of excise taxes it declared in its excise tax returns for 1992 and 1994 to
1997 covered by the subject TCCs via the formal letter of demand and
assessment notice. For being formally defective, the November 15, 1999
formal letter of demand and assessment notice is void.

10

Paragraph 3.1.4 of Sec. 3, RR 12-99 pertinently provides:


3.1.4 Formal Letter of Demand and Assessment Notice.The formal letter of demand and
assessment notice shall be issued by the Commissioner or his duly authorized
representative. The letter of demand calling for payment of the taxpayers deficiency tax or
taxes shall state the facts, the law, rules and regulations, or jurisprudence on which the
assessment is based, otherwise, the formal letter of demand and assessment notice shall
be void. The same shall be sent to the taxpayer only by registered mail or by personal delivery. x
x x (Emphasis supplied.)

TAX 2 MONTERO | Y. Sanchez A2012