Beruflich Dokumente
Kultur Dokumente
General Principles
CIR opposed the ruling, claiming that it had a right to apply the
overpayment to another tax liability of Cebu Portland sales tax on a
manufactured product (the cement). CIR said that cement is a
manufactured and NOT a mineral product and therefore NOT exempt
from sales taxes. (mineral = exempt; manufactured = not exempt)
On the other hand, Cebu Portland said that it is exempt from sales tax
under the Tax Code because cement is a mineral product and NOT a
manufactured product.
Court of Tax Appeals held that the alleged sales tax liability of Cebu
Portland was still being questioned and therefore could not be set-off
against the refund.
R: NO. CIR has the right to apply the overpayment to Cebu Portlands
sales tax deficiency.
The sales tax was properly imposed upon the company for the reason
that cement has always been considered a manufactured product and
NOT a mineral product. (CIR v Republic Cement)
o
Cement was never considered a mineral product w/in the
meaning of the Tax Code, despite it being composed of 80%
mineral, because cement is a PRODUCT of the manufacturing
process.
o
Reliance cannot be made on Cebu Portland v CIR saying that
cement = mineral because this case has been overruled.
Thus, the Tax Code provides that no court shall have authority
to grant an injunction or restrain the collection of taxes,
except when in the opinion of the Court of Tax Appeals, the collection
by the BIR or the Bureau of Customs may jeopardize the interest of
the Government and/or the taxpayer.
o
In such a case, the Court, at any stage of the proceeding may
suspend the collection and require the taxpayer to either:
1. deposit the amount claimed OR
2. file a surety bond for not more than double the
amount with the Court.
The exception does not apply in this case. In fact, there is all the more
reason to enforce the rule given that even after crediting of the refund
against the tax deficiency, a balance of more than P4 million was still
due from the company.
To require the Commissioner to actually refund to the company the
amount of the judgment debt, which he will later have the right to
distrain for payment of its sales tax liability is an idle ritual.
From this amount, Algue Inc. paid the five family members P75,000 as
promotional fees.
Algue, Inc. declared this P75,000 as a deduction from its income tax as
a legitimate business expense.
The CIR questioned the deduction, claiming that it was not an ordinary,
reasonable, or necessary expense and was merely an attempt to evade
payment of taxes.
Sec. 30 of the Tax Code provides that ordinary and necessary expenses
incurred during the taxable year in carrying on any trade or business,
including a reasonable allowance for salaries or other compensation for
personal services actually rendered are tax-deductible.
Algue, Inc. was able to prove that the promotional fees were not
fictitious and were in fact paid periodically to the five family members.
Moreover, the amount of the promotional fees was reasonable,
considering that the five payees actually performed a service for Algue,
Inc. by making the sale of the properties of PSEDC possible.
Taxes are what we pay for civilized society. Without taxes, the
government would be paralyzed for lack of the motive power to
activate and operate it.
Hence, despite the natural reluctance to surrender part of ones hardearned income, every person who is able to must contribute his share
in running the government. The government, for its part, is expected to
respond in the form of BENEFITS for general welfare. This symbiotic
relationship is the rationale of taxation and should dispel the
erroneous notion that it is an arbitrary exaction by those in the seat of
power.
C.N. Hodges v. Municipal Board of Iloilo
The Local Autonomy Act gives municipal boards the authority to enact
ordinances for the collection of taxes on any person engages in any
occupation or business.
HOWEVER, the SC disagreed with this, saying that the tax imposed was
merely a coercive measure to make the enforcement of the
contemplated sales tax more effective.
Taxes are imposed for the SUPPORT of the government in return for the
general advantage and protection which the government affords to
taxpayers and their property.
Taxes are the lifeblood of the government. The power to tax includes
the power to devise ways and means to accomplish tax collection in
the most effective manner. Otherwise, gov may falter / fail.
The Charter of Manila gives the municipal board the power to tax
motor vehicles, but this is limited by the Motor Vehicles Law, which
disallows the imposition of fees on motor vehicles, EXCEPT property
taxes imposed by a municipal corp.
THUS, the law allows the City of Manila to impose a property tax on
motor vehicles operating within its limits.
ESSO deducted from its gross income for 1959, as part of its ordinary
and necessary business expenses, the amount it had spent for drilling
and exploration of its petroleum concessions.
Hence, ESSO filed an amended return where it asked for the refund of
P323,270 by reason of its abandonment, as dry holes, of several of its
oil wells. It also claimed as ordinary and necessary expenses in the
same return amount representing margin fees it had paid to the
Central Bank on its profit remittances to its New York Office.
I: W/n the margin fees are taxes OR necessary expenses which are
deductible from its gross income
1) Margin fees are NOT taxes because they are NOT imposed as a
revenue measure but as a police measure whose proceeds are applied
to strengthen the countrys international reserves. Thus, the fee was
imposed by the State in the exercise of its POLICE POWER and NOT
taxation power.
2) Neither are they necessary and ordinary business expenses.
An expense is considered NECESSARY where the expenditure is helpful
in the development of the taxpayers business.
It is ORDINARY when it connotes a payment which is normal in relation
to the business of the taxpayer and the surrounding circumstances.
The expenditure being ordinary and necessary is determined based on
its nature the extent and permanency of the work accomplished by
the expenditure.
In this case, ESSO was unable to show that the remittance to the head
office of part of its profits was made in furtherance of its own trade or
business.
It merely presumed that all corporate expenses are necessary and
appropriate in the absence of a showing that they are illegal or ultra
vires; which is erroneous. Claims for deductions are a matter of
legislative grace and do not turn on mere equitable considerations.
In case of failure of the owners of the market spaces to pay the tax for
three consecutive months, the City shall revoke the permit of the
privately-owned market to operate.
R: It is a license fee.
PAL v. Edu
PAL protested.
Taxes are for revenue, while fees are exactions for purposes of
regulation and inspection. Thus, fees are limited in amount to what is
necessary to cover the cost of the services rendered in that
connection.
It is the OBJECT of the charge, and NOT the name, that determines
whether a charge is a tax or a fee.
In this case, the money collected under the Motor Vehicle Law is not
intended for the expenditures of the Motor Vehicle Office but for the
construction and maintenance of public roads, streets and bridges.
Thus, since the said fees are collected NOT for the regulating motor
vehicles on public highways but for providing REVENUE for the gov in
order to construct public highways, they are TAXES, not merely fees.
PAL is exempt from paying such fees, except for the period between 27
June 1968 to 9 April 1979, where its tax exeption in the franchise was
repealed.
Villegas v. Hiu Chiong Tsai Pao Ho
Tabacalera paid for its liquor license and also paid sales tax on its sale
of general merchandise, including liquor.
I: W/n Tabacalera is liable for sales tax on the liquor despite already
having paid for its liquor license.
Both a license fee and a tax may be imposed on the same business or
occupation, or for selling the same article, without it being in violation
of the rule against double taxation.
American Mail Lines v. City of Basilan
Osmea v. Orbos
Pres. Marcos issued PD 1956 creating the Oil Price Stabilization Fund
(OPSF), which was designed to reimburse oil companies for cost
increases in crude oil and imported petroleum products resulting from:
o
exchange rate adjustments AND
o
increases in the world market prices of crude oil
A portion of the OPSF was taken from collections of ad valorem taxes
levied on oil companies.
Subsequently, by virtue of an EO, the OPSF was reclassified into a trust
liability account and ordered released from the NATIONAL TREASURY to
the MINISTRY of Energy. Said EO also authorized the investment of the
fund in government securities, with the earnings accruing to the fund.
Aquino then amended PD 1956 by promulgating EO 137, w/c expanded
the grounds for reimbursement to oil companies for possible COST
UNDERRECOVERY inccured resulting from the reduction of domestic
prices on petroleum products. The said cost underrecovery was left to
the determination of the Ministry of Finance.
Osmena then questioned the creation of the trust fund, saying that it
violates the Constitution.
Lutz v. Araneta
PCGG v Cojuangco
After the EDSA Revolution, Pres Aquino issued EOs 1, 2 and 14:
o
EO 1 created the Presidential Commission on Good
Government (PCGG) to assist the President in the recovery of
ill-gotten wealth accumulated by former Pres Marcos and his
family.
o
EO 2 states that the ill-gotten wealth is in the form of
properties located in the the Phils and other countries.
o
EO 14 empowered PCGG w/ assistance of the SolGen and
other gov agencies, to file and prosecute cases under EOs 1
and 2.
I: W/n the coconut levy funds partake of the nature of taxes, and if the
answer is in the affirmative, w/n they constitute public funds
R: The coconut levy funds partake of the nature of taxes w/c constitute
public funds
HOWEVER, the PCGG may be granted such voting right provided it can
show:
o
prima facie evidence that the shares are indeed ill-gotten
o
there is imminent danger of dissipation of the assets,
necessitating their continued sequestration and voting by the
PDLT paid the BIR about P164k+ for equipment and spare parts it
imported for its business. The amount included compensating, advance
sales and other internal revenue taxes. PLDT also paid VAT.
PLDT filed a claim for tax refund of the VAT, compensating taxes,
advance sales taxes and other taxes it had been paying erroneously
from October, 1992- December, 1994.
CTA granted the petition (although ruling that a portion from OctDec16, 1992 had already prescribed and was beyond the 2-yr period
allowed by law for refunds), ordering CIR to REFUND or to ISSUE in
favor of petitioner a Tax Credit Certificate in the reduced amount of
FPA on the other hand said that the issuance of LOI 1465 was a valid
exercise of police power of the state in insuring the fertilizer industry,
and that Fertiphil did not sustain any damage because the burden
imposed by the levy fell on the ultimate consumer, not the seller
I: 1. W/m the issuance of LOI 1465 was an exercise of the police power
of the state - NO
R:
In this case, the imposition of Php10 per bag is too excessive to serve a
mere regulatory purpose.
Even if it was an exercise of the police power of the state, the LOI
would still be invalid as it did not comply with the test of lawful
subjects and lawful means -- specifically, that the interest of the
public, generally, requires its exercise, and that the means employed
are reasonably necessary for the accomplishment of the purpose and
not unduly oppressive upon individuals.
The purpose for the issuance of LOI 1465 was to support a private
company:
o
First, it is expressly provided that the levy be imposed to
benefit a private company PPI.
o
Second, the levy was conditional and dependent on PPI
becoming financially viable.
o
Third, the levies were directly remitted and deposited in
FEBTC, the bank of PPI, which used said remittances to pay of
PPIs debts.
LIMITATIONS ON THE POWER OF TAXATION
Pascual v Secretary of Public Works
Congress passed an RA appropriating P85K for the construction of Pasig
Pres. Marcos issued PD 1956 creating the Oil Price Stabilization Fund
(OPSF), which was designed to reimburse oil companies for cost
increases in crude oil and imported petroleum products resulting from:
o
exchange rate adjustments AND
o
increases in the world market prices of crude oil
Osmena then questioned the creation of the trust fund, saying that it
violates the Constitution.
This case involved 2 Municipal Ordinances and the Local Autonomy Act
(RA 2264):
o
The Local Autonomy Act (RA 2264) grants municipalities the
authority to impose municipal taxes or fees upon persons
engaged in any occupation or business within their
jurisdictions, provided that they were not allowed to impose
percentage tax on sales and on items already subject to
specific tax under the NIRC
o
Municipal Ordinance No. 23 of Tanauan, Leyte imposes on soft
drink producers and manufacturers a tax of 1/16 of a
centavo for every bottle of soft drink corked.
o
Municipal Ordinance No. 27 imposes on soft drinks produced
or manufactured a tax of 1 centavo on each gallon of
volume capacity.
Pepsi filed an action to declare the Local Autonomy Act and the two
ordinances void. It claimed that RA 2264 is an undue delegation of
power.
R:
Neither is it a specific tax because soft drinks do not fall within the
enumeration of items subject to specific tax. The rate of the tax is also
reasonable and cannot be said to be unfair or oppressive.
The SSS had an office building in Bacolod City. It failed to pay realty
taxes for three consecutive years. The City levied upon the property
and forfeited it in its favor.
SSS protested the forfeiture on the ground that the SSS, being a
government owned and controlled corporation, is exempt from
payment of real estate taxes.
The CFI ruled that SSS is NOT covered by the exemption, saying that
the exemption only applies to properties owned by government
agencies and instrumentalities performing governmental/ sovereign
functions.
As operator of the NAIA, the Manila Intl Aiport (MIAA) administers the
land, improvements and equipment within the NAIA complex.
MIAA paid some of the real estate taxes due but was also held
delinquent.
The City of Paranaque threatened to sell the Airport lands should MIAA
fail to pay the real estate delinquency.
MIAA. A day before the scheduled public auction, the MIAA filed a
motion for an issuance of a TRO before the SC which the SC granted
immediately.
I: W/n the Airport lands and buildings of MIAA are exempt from real
estate taxes under existing laws
10
The BIR collected 1.5% income tax on the income derived by Sea-Land,
which Sea-Land paid.
Later, Sea-Land asked for a refund, claiming that it had paid the tax by
mistake. It invoked the tax exemption provided in the RP-US Military
Bases Agreement, which exempts from tax any profit derived by a US
national under a contract with the US government in connection with
the construction, maintenance, operation, and defense of the bases.
Sea-Land filed a petition for review with the CTA to judicially pursue its
claim for refund and to stop the running of the 2-year prescriptive
period.
Atlas Consolidated Mining entered into a Loan and Sales Contract with
Mitsubishi. Under the Contract, Mitsubishi would lend Atlas $20M for
the installation of a new concentrator for copper production, and in
turn, Atlas would sell to Mitsubishi all the copper concentrates
produced from the machine for the next 15 years.
11
The 31st Infantry Post Exchange was an agency under the control of the
US Army, operating in the Philippines. The Exchange bought goods,
such as soap and toiletries, and resold them to officers, soldiers, and
civilian employees of the US Army and their families.
The proceeds derived from the sales were then used for the betterment
of the condition of the personnel of the Army.
The Exchange filed an action for prohibition against the CIR for him to
desist from collecting the taxes from the merchants. The Exchange
claims that the taxes imposed on the merchants were driving up the
prices of goods sold to it by the merchants.
The Exchange claims that the merchants should be exempt from taxes
since the revenue law provides that no specific tax shall be collected
on any goods sold and delivered directly to the US Army of Navy for
their actual use or issue.
I: W/N the merchants selling goods to the Exchange are exempt from
sales tax. NO
R: The tax exemption covers those goods that are sold directly to the
US Army or Navy for their actual use or issue. In this case, the goods
are sold to the Exchange for resale to individuals belonging to the Army
or Navy, and not to the Army or Navy itself. Hence, they do not fall
within the exemption.
The reason upon which the rule rests must be the guiding principle to
control its operation. The limitations upon the taxing power of the state
must receive a practical construction which does not seriously impair
the taxing power of the Government imposing the tax.
The effect of the tax upon the functions of the Government and the
nature of the governmental agency determine finally the extent of the
exemption.
In this case, the tax laid upon Philippine merchants who sell to the
Exchange does not interfere with the supremacy of the US Government
or with the operations of its instrumentality the US Army, to such an
extent or in such a manner as to render the tax illegal. The tax does
not deprive the Army of the power to serve the Government or hinder
the efficient exercise of its power.
12
One of the contracts was with NDC in connection with the construction
of a wharf/port complex in Leyte. The other contract was with the
Philippine Phosphate Fertilizer Corp (Philfos) for the construction of an
ammonia storage complex also in Leyte.
The two contracts were divided into two parts the offshore portion
and the onshore portion. All materials and equipment in the contract
under the offshore portion were manufactured and completed in Japan.
After manufacture, these were transported to Leyte and installed to the
pier with the use of bolts.
CIR found that Marubeni was liable for contractor's tax on the offshore
portion.
Marubeni filed a petition with the CTA, arguing that the income derived
from the offshore portion should be exempt from tax since it was
derived outside of the Philippine jurisdiction.
I: W/N income of Marubeni is taxable even if it claims that it was
earned outside of the Philippines. NO, Marubeni is NOT liable for the
contractors tax.
In this case, the ship loaders, boats and mobile equipment used in the
construction projects were all designed, engineered and fabricated in
Japan. They were merely shipped to Leyte and assembled there. While
the construction and installation work were completed within the
Philippines, some pieces of equipment and supplies were completely
designed and engineered in Japan. Since these services were rendered
outside the taxing jurisdiction of the Philippines, they are therefore not
subject to the contractors tax.
After a few months, he asked his Base Commander at the Clark Air
Base for a permit to sell the car which was granted provided that the
sale should be made to a member of the US Armed Forces or a US
citizen employed in the US military base in the Philippines. He then
sold the car to
, Jr. who was a member of the US Marine Corps in Cavite. Johnson, Jr.
then sold the car to Meneses.
The CIR assessed him and he paid the income tax on the amount
realized from the sale. After paying the income tax, he sought a refund
from CIR claiming that he is exempt. While the action was pending, he
filed the case with the CTA seeking the recovery of what he paid plus
the legal rate of interest.
Reagan is imputing that the Clark Air Force is foreign soil or territory
and thus is beyond the governments jurisdictional power to tax. His
ground is based upon an obiter dictum in a 1962 decision
I: W/N the sale is exempt from income tax. NO
R: The sale is not exempt from income tax because it took place within
Philippine territory thus within the governments jurisdictional power to
tax.
Clark Air Force Base is not a foreign soil or territory for purpose of
income tax legislation. There is nothing in the Military Bases
Agreement that lends support to such assertion. It has not become
foreign soil or territory. The Philippines jurisdictional rights therein,
certainly not excluding the power to tax, have been preserved.
The Phils being independent and sovereign, its authority may be
exercised over its entire domain. There is no portion thereof that is
beyond its power. Its laws govern therein, and everyone to whom it
applies must submit to its terms. The ground occupied by an embassy
is not in fact the territory of the foreign State to which the premises
belong through possession or ownership. The lawfulness or
unlawfulness of acts there committed is determined by the territorial
sovereign.
A state is not precluded from allowing another power to participate in
the exercise of jurisdictional right over certain portions of its territory. If
it does so, it does not follow that such areas become impressed w/
alien character. They retain their status as native soil. They are still
subject to its authority. Itts jurisdiction may be diminished, but it does
not disappear. So it is with the bases under lease to the American
armed forces by virtue of the Military Bases Agreement of 1947. They
are not and cannot be foreign territory.
The law provides that no local and national taxes shall be imposed
within the zone. In lieu of taxes, 3% of the gross income of enterprises
operating within the zone shall be remitted to the National
Government, 1% to the local government units, and 1% to a
development fund to be utilized for the development of municipalities
outside Olangapo and Subic.
13
BCDA entered into a MOA and Escrow Agreement with TUNTEX and
ASIAWORLD, private corporations under the laws of the British Virgin
Islands, preparatory to the formation of a joint venture for the
development of Poro Point La Union and Camp John Hay as premier
tourist destinations and recreation centers.
Section 3: Investment Climate in John Hay Special Economic Zone.Pursuant to Section 5(m) and Section 15 of RA No. 7227, the John Hay
Poro Point Development Corporation shall implement all necessary
policies, rules, and regulations governing the zone, including
investment incentives, in consultation with pertinent government
departments. Among others, the zone shall have all the
applicable incentives of the Special Economic Zone under
Section 12 of Republic Act No. 7227 and those applicable
incentives granted in the Export Processing Zones, the Omnibus
Investment Code of 1987, the Foreign Investment Act of 1991, and new
investment laws that may hereinafter be enacted.
14
RA 7227 was enacted providing for the sound and balanced conversion
of the Clark and Subic military reservations and their extensions into
alternative productive uses in the form of special economic zones.
Petitioners claim that the said E.O as well as RA 7227 are replete with
constitutional infirmities and must be declared invalid and void.
Petitioner assail:
o
EO 80 and BCDA Board Resolution: allowing the tax and dutyfree sale at retail of consumer goods imported via clark for
consumption outside CSEZ.
o
EO 97, EO 97-A: granting $100 monthly and $200 yearly taxfree shopping privileges to SSEZ residents living outside
secured area of SSEZ and to Filipinos aged 15 and over
residing outside SSEZ
R:
Petitioners claim that the wording of RA 7227 clearly limits the grant of
tax incentives to the importation of raw materials and capital
equipment only, hence they claim that assailed issuances constitute
executive legislation for invalidly granting tax incentives in importation
of consumer goods. The court however said that to limit the tax-free
importation privilege of enterprises to those located inside the special
zone only to raw materials clearly runs counter to the intention of the
legislature to create a free port where free flow of goods or capital
within, into and out of the zones is insured.
15
The Province of Abra filed an action for certiorari against the CFI on the
ground that it granted the action for declaratory relief filed by the
Roman Catholic Bishop without allowing the Province to answer and
without hearing, in violation of its right to due process.
It also alleged that the judge (Hernando) failed to abide PD No. 464
which states that, No court shall entertain any suit ASSAILING the
validity of tax until the taxpayer pays under protest the tax assessed
against him.. nor shall any court declare any portion of the tax
assessed INVALID except if the taxpayer shall pay the just amount of
tax determined by the court.
I: W/n the judgment of the court granting the exemption to the Roman
Catholic Bishop of Bangued is valid
R: NO, it is invalid
In this case, the right of the Province of Abra to procedural due process
was violated by the summary judgment granting the exemption.
Instead of accepting the bare allegation of the bishop that the property
was being used exclusively, directly, and actually for public purposes,
the judge should have first required proof of these allegations.
Tolentino v. Sec. of Finance
Several parties filed complaints in the SC questioning the legality of Expanded
VAT law (RA 7716), which sought to widen the tax base of the existing VAT
system
(*VAT: a tax levied on the sale, barter or exchange of goods and properties AS
WELL AS as on the sale or exchange of services; or SIMPLY tax on spending /
consumption):
R: Since the law granted the press a privilege, the law could take back
the privilege anytime WITHOUT offense to the Constitution.
The State, by granting exemptions, does NOT forever waive the
exercise of its sovereign prerogative. In withdrawing the exemption,
the law merely subjects the press to the same tax burden to which
other businesses have already been subject.
The case of Grosjean v. American Press Co. cited by the PPI is different
because in that case, the tax was found to be discriminatory because it
was imposed only on newspapers whose weekly circulation was over
P20k. These papers were critical of a certain senator who controlled
the state legislature. The censorial motivation of the law was thus
evident. HOWEVER, in this case, the motivation was not to censor but
merely to raise revenues.
What the legislature cannot impose upon the press is a license tax,
which is mainly for regulation AND is unconstitutional because it lays
PRIOR RESTRAINT on the exercise of a right.
In this case, the VAT is not a license tax because it is not a tax on the
exercise of a privilege or of a constitutional right. It is imposed on the
sale of goods purely for revenue purposes.
2) Philippine Bible Society claims that the imposition of VAT on the
sales of its bibles INFRINGES on religious freedom because the tax
INCREASES the price of the bibles, while REDUCING the volume of
sales.
It also claims exemption from the registration fee of P1k.
R: The resulting burden on the exercise of religious freedom is so
INCIDENTAL as to make it difficult to differentiate it from any other
economic imposition that might make the right to disseminate religious
doctrines costly.
To follow PBS argument of increasing the tax on the sale of vestments
would be to lay an impermissible burden on the right of the preacher to
make a sermon.
The registration fee is really just to pay for the expenses of registration
and enforcement of the provisions of the law. Even if PBS is excused
from paying taxes on those bibles that it distributes for free, it still has
to pay the registration fee since it also engages in the sale of bibles.
3. CREBA claims that the law:
a) impairs the obligations of contracts because the application of the
tax to existing contracts of the sale of real property by installment
would result in substantial increases in monthly amortizations, which
the buyer did not anticipate at the time he entered into the contract.
b) violates equal protection since the law exempts low-cost housing
from VAT but NOT middle-class housing.
c) Being an indirect, regressive tax, VAT violates the constitutional
mandate to provide a progressive system of taxation.
R:
a) VAT does NOT violate the non-impairment clause because the
obligation of contracts CANNOT defeat the authority of the government
to tax by virtue of its sovereignty.
b) Neither did it violate EPC because there was a substantial distinction
between the homeless poor and the middle class. The middle class can
afford to rent houses while the homeless poor cannot.
16
ABAKADA v Ermita
R.A. 9337 / the EVAT Law was enacted in May 2005. This law:
On the other hand, respondents countered that the law was complete,
that it left no discretion to the President, and that it merely charged the
President with carrying out the rate increase once any of the 2
conditions arise.
In this case, the legislature made the operation of the 12% rate
contingent upon 2 specified conditions. Thus, no discretion would be
exercised by the President, and he would only exercise the ministerial
duty of imposing the 12% rate.
Moreover, the President cant alter or modify / nullify / set aside the
findings of fact of the Secretary of Finance, who will ascertain the said
conditions because the SoF will not act as alter ego of President but
AGENT of the legislative department.
The NIRC exempts from VAT the sale of agricultural non-food products
in their original state if the sale is made by the primary producer or
owner of the land from which the same are produced.
The sale made by any other person / entity, like a trader or dealer, is
NOT exempt from the tax.
Misamis Oriental, w/c was engaged in the buying and selling of copra,
claimed that the memorandum circular was discriminatory and
violative of the equal protection clause because while coconut farmers
and copra producers are exempt, TRADERS and DEALERS are NOT,
although both sell copra in its original state.
17
CIR v. CA
Initially, the CIR classified the brands as FOREIGN BRANDS since they
were listed in the World Tobacco Directory as belonging to foreign
companies.
THUS, they were removed them from the foreign brand category.
After the enactment of RA 7654 but BEFORE its effectivity, the BIR
issued a circular reclassifying the three brands as foreign brands.
The CTA upheld the stand of Fortune, stating that at the time of the
enactment of RA 7654, the three brands were still classified as local
brands and could thus NOT be assessed the 55% tax, but only the 45%
tax. This was affirmed by the CA
The BIR may issue rules in the exercise of its quasi-legislative powers,
but these rules must be merely interpretative in nature.
It cannot go beyond providing for the means that can facilitate the
implementation of the law.
In this case, the circular issued by the BIR imposing the 55% tax rate
did not simply interpret the law BUT legislated under its quasilegislative authority.
Thus, the requirements of notice, hearing, and publication should not
have been then ignored.
2) The circular infringed on uniformity of taxation.
The Constitution requires taxation to be uniform and equitable.
Uniformity requires that all taxable articles or kinds of property of the
same class must be taxed at the same rate, and the tax must operate
with the same force and effect in every place where the subject may
be found.
In this case, other cigarettes bearing foreign brands were NOT included
within the scope of the circular. According to Commissioner Chato, the
reason for leaving out the other brands was because there was not
enough time to include them. Thus, the circular was hastily
promulgated, in violation of the rule on uniformity of taxation.
The CIR claimed that the law was unconstitutional for being violative of
the uniformity and equality of taxation clause of the Constitution since
other similar franchises were subject to a 5% franchise tax imposed by
the Tax Code.
CTA dismissed CIRs claim and ruled that the provisions of RA 3843
should apply.
R: No.
A tax is uniform when it operates with the same force and effect in
every place where the subject of it is found. Uniformity means that all
property belonging to the same class shall be taxed alike.
The Legislature has the inherent power not only to select the subjects
of taxation but to grant exemptions. TAX EXEMPTIONS have never been
deemed violative of the equal protection clause.
Lingayens power plant falls within the class of power plants created by
Act No. 3636, as amended by C.A. No. 132 and RA 3843. RA 3843
merely transferred the petitioner's power plant from that class
provided for in Act No. 667, until the approval of RA 3843.
18
Thus, the law merely transferred Lingayens power plant from its
former class to which it belonged. All power plants belonging to this
particular class were subject to the same 2% tax and therefore, the
rule on uniformity was not violated.
Sison v. Ancheta
It provided that:
o
The tax base for those earning compensation income at fixed
rates would be GROSS INCOME,
o
The tax base for the income of businesses and professionals
would be NET INCOME
R: NO!
2) As for EPC, the Constitution does not require things which are
different be treated the same. It is inherent in the power to tax that a
state be free to select the subjects of taxation and 'inequalities which
result from a singling out of one particular class for taxation, or
exemption infringe no constitutional limitation.
Uniformity does NOT call for perfect equality. It merely means that all
taxable articles / property of the same class shall be taxed at the same
rate.
The taxing power has the authority to make reasonable and natural
classifications for purposes of taxation.
In this case, there is a discernible basis of classification, which is the
SUSCEPTIBILITY of the income to the application of generalized
rules removing all deductible items for all taxpayers within the
class and fixing a set of reduced tax rates to be applied to all
of them.
There is ample justification for the law to adopt gross system of income
taxation to compensation income, while continuing the system of net
income taxation as regards the professional and business income.
19
The Mayor argued that the ordinance cannot be declared null and void
on the ground that it violates the rule on uniformity of taxation
because this rule applies only to purely tax or revenue measures and
not to regulatory measures, such as the ordinance.
20
The tax shall be based from the cargo manifest, bill of lading, or on any
record showing the number of cases received within the month.
The ordinance provides that the revenue derived from such "shall be
alloted as follows: 40% for Roads and Bridges Fund; 40% for the
General Fund and 20% for the School Fund.
Pepsi filed an action to nullify the ordinance on the ground that it
partakes of the nature of an import tax and is highly unjust and
discriminatory.
I: W/n the ordinance is valid
R: The ordinance is null and void.
1) The tax is discriminatory and violative of uniformity because it is
levied only on those persons who are agents or consignees of another
dealer, who must be one engaged in business outside the city.
Thus, local dealers (w/in city) NOT acting for or on behalf of other
merchants would be exempt from the tax.
2) Moreover, the tax shall be based on the number of bottles received,
NOT SOLD, by the taxpayer. These circumstances show that the
ordinance is limited in application to those soft drinks brought into the
City from outside thereof.
The tax thus partakes of the nature of an import duty, which is beyond
the authority of the city to impose by express provision of law.
3) In order for valid classification to take place it must be germane to
purpose of law, rest on substantial distinctions, apply equally to all
members of same class, apply to present and future conditions.
There is no valid classification here because if the purpose of the law
were merely to levy a burden upon the sale of soft drinks, there is no
reason why sales thereof by dealers other than agents or consignees of
producers or merchants outside the city should be exempt from the
tax.
On double taxation argument: double taxation, in general, is not
forbidden by our fundamental law, so it cannot be sustained.
R: NO, it is NOT.
21
In this case, the tax imposed is violative of the equal protection clause.
When the taxing ordinance was enacted, Ormoc Sugar was the ONLY
sugar central in the city.
A reasonable classification should be in terms applicable to future
conditions as well. The taxing power should not be singular and
exclusive as to exclude any subsequent established sugar central from
the coverage of the tax.
A subsequently established sugar central cannot be subject to tax
because the ordinance expressly points to Ormoc Sugar Company Inc
as the entity to be levied upon.
R: NO, it is valid!
the Streets and Bridges Funds of the City, w/c will be used for the
repair, maintenance, and improvement of its streets and bridges.
The Charter of Manila gives the municipal board the power to tax
motor vehicles, but this is limited by the Motor Vehicles Law, which
disallows the imposition of fees on motor vehicles, EXCEPT property
taxes imposed by a municipal corp.
THUS, the law allows the City of Manila to impose a property tax on
motor vehicles operating within its limits.
However, the Association of Customs Brokers contended that the
ordinance is void because it actually imposes a license tax in the guise
of a property tax.
I: W/n ordinance is valid
R: NO, it is void!
The ordinance infringes the rule of uniformity of taxation.
This is because it exacts the tax upon all motor vehicles operating
within the City of Manila, without distinguishing between those for HIRE
and for PRIVATE USE, as well as those REGISTERED IN MANILA and
those REGISTERD OUTSIDE BUT OCCASSIONALLY COME TO MANILA.
The ordinance imposes the tax ONLY on those vehicles registered in
Manila, even if those vehicles which are registered outside the city but
which use its streets also contribute equally to the deterioration of the
roads and bridges.
The taxing power has the authority to make reasonable and natural
classifications for purposes of taxation.
Thus, the fact that some places of amusement are taxed while others
like theatres and cinematographs are not does not violate uniformity
and equality in taxation.
22
Several banks doing business in the Philippines, including Phil Trust and
Peoples Bank, assailed the validity of the Revised Administrative Code
for being discriminatory and violative of the rule on uniformity in
taxation.
This is because the said law imposes a tax on capital, deposits, and
circulation on all banks doing business in the Phils, while exempting the
National City Bank of New York.
A tax is considered uniform when it operates with the same force and
effect in every place where the subject may be found.
The rule of uniformity does not call for perfect uniformity or perfect
equality, because this is hardly attainable.
In this case, the questioned statute applies uniformly to all banks in the
Philippines without distinction and discrimination.
Posadas v. National City Bank held that the NCBNY in the Philippines
was established by virtue of the Federal Reserve Act, w/c which
authorized the establishment of branches of national banking
associations in foreign countries or dependencies of the United States.
Act 2432 amending Act 2339 was passed imposing an annual tax of P2
per square meter upon electric signs, billboards, and spaces used for
posting or displaying temporary signs and all signs displayed on
premises not occupied by buildings.
Churchill and Tait, co-partners doing business under the firm Mercantile
Advertising Agency were owners of a billboard constructed on private
property in Manila.
R.A. 8240 was passed recodifying the NIRC where Sec 142 was
renumbered Sec 145.
British American Tobacco assailed the validity of Sec. 145 of the NIRC
(amended by RA 8240), arguing that the said provisions are violative of
the equal protection and uniformity clause of the Constitution.
Section 145 provides for a four-tier tax rate based on net retail price
per pack of cigarettes: (1) low-priced, (2) medium-priced, (3) highpriced, and (4) premium-priced.
23
2) The BIR RR is invalid because the NIRC does NOT authorize the BIR
to update the tax classification of new brands every 2 years or earlier.
24
They assert that the law unduly delegates the power to fix
revenue targets to the President as it lacks a sufficient
standard on that matter.
I: 1) W/n limiting the scope of the system of rewards and incentives
only to officials and employees of the BIR and the BOC violates
the constitutional guarantee of equal protection
2) Whether or not the law unduly delegates the power to fix
revenue targets to the President.
R: NO, it does not violate EPC and does NOT unduly delegate power to the
President
1) The equal protection clause recognizes a valid and reasonable
classification.
RA 9335 has an expressed public policy, w/c is the optimization of the
revenue-generation capability and collection of the BIR and the BOC.
Since the subject of the law is the revenue- generation capability and
collection of the BIR and the BOC, the incentives and/or sanctions
provided in the law should logically pertain to the said agencies.
Since the BIR and BOC perform the special function of taxation, such
substantial distinction is germane and intimately related to the purpose
of the law. Hence, the classification and treatment accorded to the BIR
and the BOC under RA 9335 fully satisfy the demands of equal
protection.
2. Two tests determine the validity of delegation of legislative power:
1) the completeness test
2) the sufficient standard test
A law is complete when it sets forth therein the policy to be executed and is
sufficient when it provides adequate guidelines or limitations of the
delegates authority
RA 9335 adequately states the policy and standards to guide the President
in fixing revenue targets and the implementing agencies in carrying
out the provisions of the law.
Revenue targets are based on the original estimated revenue collection
expected respectively of the BIR and the BOC for a given fiscal year as
approved by the Development Budget and Coordinating Committee
(DBCC) and submitted by the President to Congress. Thus, the
determination of revenue targets does not rest solely on the President
as it also undergoes the scrutiny of the Development Board
Also, Section 7 specifies the limits of the Boards authority and identifies the
conditions under which officials and employees whose revenue
collection falls short of the target by at least 7.5% may be removed
from the service.
Meralco v. Province of Laguna: Delegation to LGUs, Impairment
Clause
RA 7160 or the Local Gov Code of 1991 was then issued w/c allowed
local government units to create their own sources of revenue and to
levy taxes, fees and charges consistent w/ the basic policy of
autonomy.
Meralco paid under protest and sent a formal claim for refund to the
Provincial Treasurer claiming that the franchise tax it had paid to the
National Government (pursuant to P.D. 551) already included the
franchise tax imposed by the Provincial Tax Ordinance.
Meralco also contended that Lagunas imposition of franchise tax
contravened the provisions of P.D. 551 Section 1 which provided that
the franchise tax payable by all grantees of electric franchises shall be
2% of their gross receipts received from the sale of electric current and
from transactions incident to the generation, distribution and sale of
electric current
I: W/n the province of Laguna had the power to levy the franchise tax
R: Yes.
Under the present Constitution, where there is neither a grant nor a
prohibition by statute, the tax power must be deemed to exist although
Congress may provide statutory limitations and guidelines.
The reason for this is to safeguard the viability and self-sufficiency of
local government units by directly granting them general and broad tax
powers.
The LGC of 1991 explicitly authorizes provincial governments,
notwithstanding any exemption granted by law, to impose a tax on
businesses enjoying a franchise.
While the Court has referred to tax exemptions contained in special
franchises as being in the nature of contracts and a part of the
inducement for carrying on the franchise, these exemptions,
nevertheless, are far from being STRICTLY CONTRACTUAL.
However, contractual tax exemptions should not be confused w/ tax
exemptions under franchises.
Contractual tax exemptions are those agreed to by the taxing authority
in contracts, such as those contained in government bonds, where the
government acts in its private capacity and waives its governmental
immunity. Tax exemptions of this kind may NOT be revoked without
impairing the obligations of contracts.
On the other hand, a franchise partakes the nature of a grant which is
beyond the purview of the non-impairment clause of the Constitution.
Art 12 of the Consti provides that no franchise for the operation of a
public utility shall be granted except under the condition that such
privilege shall be subject to amendment, alteration or repeal by
Congress as and when the common good so requires.
25
CEPALCO v. CIR
By reason of the Tax Code amendment, the CIR sent a demand letter
requiring CEPALCO to pay deficiency income taxes for 1968 to 1971.
The company contested the assessments.
The CIR cancelled the assessments for 1970 and 1971 but insisted on
those for 1968 and 1969.
The company filed a petition for review with the Tax Court, which held
the company liable only for the income tax for the period from January
to August 1969 / before the passage of RA 6020 which reiterated its tax
exemption.
I: W/n CEPALCO is exempt from paying the provincial franchise tax.
R: Yes.
The argument that Congress cannot impair a legislative franchise is
untenable because under the Constitution, a franchise is subject to
amendment, alteration or repeal by the Congress when the public
interest so requires
RA 5431, in amending the Tax Code by subjecting to income tax all
corporate taxpayers (not expressly exempted), had the effect of
withdrawing CEPALCO's exemption from income tax.
HOWEVER, the exemption was restored by the subsequent enactment
of RA 6020 w/c reenacted the said tax exemption. Thus, CEPALCO is
only liable for the income tax for the period from January 1 to August 3,
1969 when its tax exemption was modified by RA 5431.
It is relevant to note that franchise companies, like PLDT have been
paying income tax in addition to the franchise. Also, the 1969
assessment appears to be highly controversial. The Commissioner at
the outset was not certain as to petitioner's income tax liability. It had
reason not to pay income tax because of the tax exemption in its
franchise.
The franchise was transferred to several parties until it was finally sold
to Lealda Electric Co.
In 1946, the NIRC was amended by RA 39, increasing the franchise tax
to 5%.
Lealda paid at first, but later filed a claim for refund w/ the CIR
contending that under its charter, it was liable to pay only 2% franchise
tax.
Because of CIRs inaction, it filed a petition w/ the CTA, w/c held Lealda
liable for the 5% franchise tax
R: YES!
The ruling in other cases (Visayan Electric and Manila Railrod) to the
effect that special laws or charters may not be amended, altered or
repealed, except by consent of all concerned cannot be inovked
because:
26
grantees were required to pay was to be in lieu of all taxes of any kind
levied, established, or collected by any authority whatsoever, now or in
the future
Lealda's charter did NOT contain such provision.
HISTORY: RA 39 amending the Tax Code became the basic franchise
tax law by fixing the tax to be paid by holders of all existing and future
franchises. Thus, the provisions of RA 39 should apply to Lealda since
its franchise was already existing at the time of the adoption of the
amendment.
27
The premises of Abra Valley were being used for the educational
purposes of the college (as classrooms of its high school and college
students).
In addition, its second floor was the permanent residence of the
President and Director of the College and his family.
The ground floor was being rented to a commercial establishment, the
Northern Marketing Corporation.
The Municipal and Provincial treasurers issued a Notice of Seizure upon
Abra Valley to satisfy their taxes. They then served a Notice of Sale,
the sale being held on the same day.
Dr. Millare, then municipal mayor, offered the highest bid and a
certificate of sale was issued to him.
Abra filed a petition to annul the Notice of Seizure and Notice of Sale.
CIF ruled in favor of CIR, saying that the property was NOT being used
exclusively for education purposes
I: W/n the property was used exclusively for educational purposes,
thereby exempting Abra Valley College from payment of tax.
R: No.
Abra Valley College is not exempt because the property was also being
used for commercial purposes.
The test of exemption from taxation is the USE of the property for
purposes mentioned in the Constitution.
While the Court allows a more liberal and non-restrictive interpretation
of the phrase exclusively used for educational purposes, reasonable
emphasis has always been made that exemption extends to facilities
which are incidental to and reasonably necessary for the
accomplishment of the main purposes.
While the use of the second floor for residential purposes of the
Director and his family may find justification under the concept of
incidental use, which is complimentary to the main or primary purpose,
the lease of the first floor to Northern Marketing CANNOT be
considered incidental to the purpose of education.
SC affirmed CFIs decision subject to the modification that half of the
assessed tax be returned to Abra, given that the ground floor is being
used for commercial purposes (leased) BUT the second floor being
used as incidental to education (residence of the director).
society. It owns and operates diff hospitals in the Phils namely St.
Lukes, Brent and St. Stephens.
On different dates, the Missionary District in the Philippines received
from the Missionary Society in the US various shipments of materials
for the construction and operation of the new St. Lukes Hospital and
the Brent Hospital in St. Stephens.
The Missionary District also received from a certain William Minnis of
Canada a stove for use of the Brent Hospital.
On these shipments, the CIR levied and collected the total amount of
P118k+ as compensating tax.
The Bishop of the Missionary District filed claims for refund of the
amount he had paid on the ground that under RA 1916, the materials
received by him were exempt from the payment of compensating tax.
CIR denied the claim for refund on the ground that the shipments
cannot be considered donations because the Missionary District is
merely a branch of the Missionary Society, and are thus identical. It
also alleged that St. Luke's Hospital is not a charitable institution and,
therefore, is not exempt from taxation because its admits pay patients.
The Secretary of Finance states in his Dept. Order No. 18 that hospitals
admitting pay patients and charity patients are not charitable
institutions.
CTA rendered a decision holding the shipments exempt from taxation
ordering CIR to refund to the Bishop.
I: W/n the Bishop and Missionary District are exempt from tax
R: YES!
The following requisites must concur in order that a taxpayer may
claim exemption under RA 1916:
o
1) the imported articles must have been donated
o
2) the donee must be a duly incorporated / established
international civic organization, religious or charitable society,
or institution for civic, religious or charitable purposes
o
3) the articles so imported must have been donated for the
use of the organization, society or institution or for free
distribution and not for barter, sale or hire
The Bishop is admitted to be a corporation sole duly registered with
SEC and the Missionary District is a duly incorporated and established
religious society.
They are therefore entities separate and distinct from the Missionary
Society in the USA.
The fact that the Missionary District is a branch of the Missionary
Society is of no moment because it is a branch only in religious
matters, but in other respects, it is independent (just like the Phil
Catholic church to the universal Catholic church).
The materials and supplies were purchased by the Missionary Society
with money obtained from contributions from other people who should
be considered the real donors, affirmed by the testimony of Meyer,
Treasurer of the Missionary District.
Laslty, the Secretary of Finance CANNOT limit or otherwise qualify the
enjoyment of this exemption granted under RA 1916 in implementing
the law. Thus, the admission of pay patients does not detract from the
charitable character of a hospital, if, as in the case of St. Lukes
28
Lladoc v CIR
M.B. Estate of Bacolod City, donated P10k to Fr. Crispin Ruiz, then parish priest of
Victorias, Negros Occidental, for the construction of a new Catholic Church in
the locality. The total amount was actually spent for the purpose intended.
The following year, Fr. Ruiz was subsitituted by Fr. Lladoc.
Subsequently, the donor M.B. Estate, Inc. filed the donor's gift tax return.
CIR then issued an assessment for donee's gift tax against the Catholic Parish of
Victorias, of which Fr. Lladoc was already the priest. The tax amounted to
P1,370 including surcharges plus interests of 1% monthly, and the
compromise for the late filing of the return.
Fr. Lladoc protested to the assessment and requested the withdrawal of such,
but this was denied by the CIR, so he appealed to the CTA.
He contested that:
o
at the time of the donation, he was not the parish priest in
Victorias and it was his predecessor, Fr. Ruiz, that should be
liable
o
there is juridical person known as the "Catholic Parish Priest
of Victorias," and, therefore, he should not be liable for the
donee's gift tax and the head of the Diocese should be liable
instead
o
the assessment of the gift tax, even against the Roman
Catholic Church, would not be valid, for such would be a clear
violation of Art VI Sec 22 of the Constitution which exempts
from taxation cemeteries, churches and parsonages or
convents, appurtenant thereto, and all lands, buildings, and
improvements used exclusively for religious purposes.
CTA affirmed the decision of the CIR except with regard to the imposition of the
compromise penalty in the amount of P20
Fr. Lladoc appealed to the SC, and the SC issued a resolution ordering parties to
show cause why the Head of the Diocese should or should not be substituted
in lieu of Lladoc.
I: W/n Fr Lladoc should be liable for the assessed donee's gift tax on the P10k for
the construction of the Victorias Parish
R: YES, there is a tax liability, BUT Fr. Lladoc is NOT personally liable for the said
gift tax. Instead, the Head of the Diocese (Bishop of Bacolod) should pay the
said gift tax.
1) Gift tax is an excise tax, not property tax. Excise tax is NOT included
in tax exemption even if exclusively used for religious purposes.
In the present case, what the Collector assessed was a donee's gift tax; the
assessment was not on the properties themselves. It did not rest upon general
ownership; it was an excise upon the use made of the properties, upon the
exercise of the privilege of receiving the properties.
When a gift tax is imposed on property used exclusively for religious purposes, it
DOES NOT constitute an impairment of the Constitution. The phrase "exempt
from taxation," as employed in the Constitution should not be interpreted to
R: NO, it is not.
29
Except in large cities where the density of the population and the
development of commerce require the use of larger tracts of land for
buildings, a vegetable garden belongs to a house and, in the case of a
convent, it use is limited to the necessities of the priest, which comes under
the exemption.
SC reversed the appealed judgment in all its parts and held that both
lots are exempt from land tax and the defendants are ordered to refund to
plaintiff whatever was paid as such tax, without any special pronouncement
as to costs.
On the north side is an old cemetery with 2 of its walls still standing,
and a portion where formerly stood a tower, the base of which may still be
seen.
As required by the provincial board, the Church paid under protest, the
land tax on the lot adjoining the convent and the lot which formerly was the
cemetery with the portion where the tower stood.
The Bishop filed an action for the recovery of the sum paid by way of
land tax, alleging that the collection of this tax is illegal.
The lower court declared that the tax collected on the lot, which
formerly was the cemetery and on the portion where the tower stood, was
illegal. Both parties appealed from this judgment.
R: YES, the lots are exempt from land tax and the Province of Ilocos
Norte should refund the amounts paid.
The exemption in favor of the convent in the payment of the land tax
(Administrative Code) refers to the home of the parties who presides over
the church and who has to take care of himself in order to discharge his
duties.
It therefore must, in the sense, include not only the land actually
occupied by the church, but also the adjacent ground destined to the
ordinary incidental uses of man.
YMCA protested the assessment and filed a letter. In reply, the CIR
denied the claims of YMCA.
YMCA thus filed a petition to the CTA to take out the taxes and CTA
ruled in favor of YMCA.
I: W/n the income derived from rentals of real property owned by YMCA
(established as "a welfare, educational and charitable non-profit
corporation") is subject to income tax under the NIRC and Constitution
R: YES, the income derived by YMCA from rentals of its real property is
subject to income tax.
Under the NIRC: While Section 27 of the NIRC provides that nonprofit organizations and clubs shall not be taxed on their income, it also
provides that this exemption will NOT apply to income derived from 1)
properties, real or personal, and 2) any other activities conducted for
profit shall be subject to tax (amended by PD 1457).
30
NOTE (if Sir asks about how this differs with OTHER cases): The cases relied on
by YMCA do not support its cause. YMCA of Manila v. CIR and Abra Valley
College, Inc. v. Aquino are not applicable, because the controversy in both cases
involved exemption from the payment of property tax, not income tax. Hospital
de San Juan de Dios, Inc. v. Pasay City is not in point either, because it involves a
claim for exemption from the payment of regulatory fees, specifically electrical
inspection fees, imposed by an ordinance of Pasay City -- an issue not at all
related to that involved in a claimed exemption from the payment if income
taxes imposed on property leases. In Jesus Sacred Heart College v. Com. Of
Internal Revenue, the party therein, which claimed an exemption from the
payment of income tax, was an educational institution which submitted
substantial evidence that the income subject of the controversy had been
devoted or used solely for educational purposes. On the other hand, YMCA in
the present case had not given any proof that it is an educational institution, or
that of its rent income is actually, directly and exclusively used for educational
purposes.
In the middle of the lot was a hospital known as the Lung Center of the
Philippines.
A big space at the ground floor was being leased to private parties, for
canteen and small store spaces, and to medical practitioners who use
the same as their private clinics for their patients whom they charge
for their professional services.
31
Almost of the entire area on the left side of the building along Q Ave
was vacant and idle, while a big portion on the right side, at the corner
of Q Ave and Elliptical Road, was being leased for commercial purposes
to a private enterprise known as the Elliptical Orchids and Garden
Center.
The Lung Center accepts paying and non-paying patients. It also
renders medical services to out-patients, both paying and non-paying.
Aside from its income from paying patients, it also received gov
subsidies.
The City Assessor of QC assessed both the land and the hospital
building for real property taxes amounting to about P4M.
Lung Center filed a Claim for exemption from real property taxes
saying it was a charitable institution.
The Lung Centers request was denied, and a petition was, thereafter,
filed before the Local Board of Assessment Appeals of Quezon City (QCLBAA) for the reversal of the resolution of the City Assessor.
The Lung Center alleged that under Section 28, paragraph 3 of the
1987 Constitution, the property is exempt from real property taxes. It
averred that a minimum of 60% of its hospital beds are exclusively
used for charity patients and that the major thrust of its hospital
operation is to serve charity patients.
However, the Local Board held Lung Center liable for real property
taxes. Decision was affirmed by QC Central Board. Petition was
elevated to SC.
I: 1)W/n Lung Center is a charitable institution within the context of PD
1823 and under the Consti - YES
2) W/n the real properties of the Lung Center are exempt from real
property taxes- NO
R: 1) YES, the Lung Center is a charitable institution.
To determine whether an enterprise is a charitable institution, the
elements which should be considered include the statute creating it, its
purpose, by-laws, services and nature/ use of properties.
Under PD 1823, the Lung Center is a non-profit and non-stock
corporation which, subject to the provisions of the decree, is to be
administered by the Office of the President of the Philippines with the
Ministry of Health and the Ministry of Human Settlements. It was
organized for the welfare and benefit of the Filipino people principally
to help combat the high incidence of lung and pulmonary diseases in
the Philippines.
The Articles of Incorporation of LC provide that its medical services are
to be rendered to the public in general in any and all walks of life
including those who are poor and the needy without discrimination.
A charitable institution does not lose its character as such and its
exemption from taxes simply because it derives income from paying
patients, whether out-patient, or confined in the hospital, or receives
subsidies from the government, so long as the money received is used
for the CHARITABLE objective it is intended for, and no money inures to
the private benefit of the persons managing or operating the
institution.
In this case, the money received by the Lung Center becomes a part of
the trust fund and must be devoted to public trust purposes and
cannot be diverted to private profit or benefit.
Under PD 1823, the Lung Center is entitled to receive donations. The
Lung Center does not lose its character as a charitable institution
simply because of gov subsidies (donation).
2) NO, not all are exempt from real property tax.
The portions of its real property that are leased to private entities are
not exempt from real property taxes as these are not actually, directly
and exclusively used for charitable purposes.
Since taxation is the rule and exemption is the exception, a claim for
exemption from tax payments must be clearly shown and based on
language in the law too plain to be mistaken.
Under PD 1823, the Lung Center does NOT enjoy any property tax
exemption privileges for its real properties and buildings. If the
intentions were otherwise, the same should have been among the
enumeration of tax exempt privileges under Section 2 thereof.
Under the 1973 and 1987 Constitutions and RA 7160 in order to be
entitled to the exemption of property tax, the Lung Center should prove
that a) it is a charitable institution; and (b) its real properties are
ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes.
o
If real property is used for one or more commercial purposes,
it is not exclusively used for the exempted purposes but is
subject to taxation. THUS, exclusively means SOLELY.
o
What is meant by actual, direct and exclusive use of the
property for charitable purposes is the DIRECT, IMMEDIATE,
ACTUAL application of the PROPERTY itself to the purposes for
which the charitable institution is organized. It is NOT the use
of INCOME of the property w/c is the controlling factor (to
exempt).
In this case, while portions of the hospital are used for the treatment of
patients, other parts are being leased to private individuals for their
clinics and a canteen. Further, a portion of the land is being leased to a
private individual for her business enterprise under the business name
"Elliptical Orchids and Garden Center."
Thus, portions of the land leased to private entities and individuals are
NOT tax exempt, while those used for patients, paying and non-paying,
are exempt.
32
RBs case is covered by two special laws-one a banking law and the
other, a tax law.
FROM PAO: they're saying kasi that SEC 126 was repealed na. but then the basis
kasi for SEC 126 can be found in other laws. like the GENERAL BANKING ACT. in
that law it penalizes bank reserve deficiencies. parang they're saying they're
being penalized TWICE. one by the law and the other by the BIR. but the one by
the law is a TAX kasi its under nga the heading MISCELLANEOUS TAXES. so hindi
sya pwede double taxation kasi 1 is a tax and the other is a penalty lang.
Proctor & Gamble v Municipality of Jagna
The Municipal Council of Jagna, Bohol, enacted Municipal Ordinance 4
w/c imposed STORAGE FEES on all exportable copra deposited in the
bodega w/in the jurisdiction of Jagna, Bohol at the rate of 10 cents
PER 100 kilos.
P&G argues that the tax imposed in the said ordinance is an EXPORT
TAX on EXPORTABLE COPRA and thus, the said levy was inapplicable
to their business because they are store copra for their EXCLUSIVE USE
in connection w/ the manufacture of soap, edible oil, margarine and
other similar products, for purposes of profit / revenue.
R:
33
This case involved 2 Municipal Ordinances and the Local Autonomy Act
(RA 2264):
o
The Local Autonomy Act (RA 2264) grants municipalities the
authority to impose municipal taxes or fees upon persons
engaged in any occupation or business within their
jurisdictions, provided that they were not allowed to impose
percentage tax on sales and on items already subject to
specific tax under the NIRC
34
Tabacalera paid for its liquor license and also paid sales tax on its sale
of general merchandise, including liquor.
I: W/n Tabacalera is liable for sales tax on the liquor despite already
having paid for its liquor license.
Both a license fee and a tax may be imposed on the same business or
occupation, or for selling the same article, without it being in violation
of the rule against double taxation.
Province of Bulacan v CA
Republic paid under protest, claiming that the imposition of such tax is
beyond the power of the taxing authority of Bulacan.
35
The case was eventually elevated to CA and CA ruled that the Province
of Bulacan had NO authority to impose the tax
I: W/n the Province of Bulacan has the authority to impose such tax.
R: No, they do not have the authority.
Petitioners contend that their authority comes from Section 186 of the
LGC w/c provides that the province may levy taxes and fees not more
than 10% of the fair market value per cubic meter of ordinary stones,
sand, gravel etc, extracted from public lands.
However, a perusal of the said law shows that the tax imposed is an
excise tax being a tax upon the performance, carrying on, or exercise
of an activity and the LGC provides that cities, municipalities, and
barangays shall NOT extend to excise taxes enumerated under the
NIRC.
The NIRC levies a tax on all quarry resources, regardless of origin,
whether extracted from public or private land.
Thus, a province may not ordinarily impose taxes on stones, sand,
gravel, earth and other quarry resources, as the same are already
taxed under the NIRC.
HOWEVER, the province can impose a tax on stones, sand, gravel,
earth and other quarry resources extracted from public land because it
is expressly empowered to do so under the Local Government Code.
As to the quarry resources extracted from PRIVATE LAND, it may not do
so due to the limitations in the LGC (sec 133) in relation to the NIRC
(Sec 151).
Finally the petitioners cannot invoke the Regalian Doctrine to extend
the coverage to quarry resources because taxes, being burdens are
NOT presumed beyond what the applicable statute expressly and
clearly declares. Tax statutes are construed strictissimi juris against the
government.
Pacheco and his sister owned a parcel of real estate land identified that
was registered in Bulacan.
They then leased the land to Construction Components Inc, and
providing that during the existence or after the term of the lease, the
lessor (Pacheco,sister) should he decide to sell the property leased,
shall first offer the same to the lessee(Construction) and the lessee has
the priority to buy under similar conditions.
Construction then assigned its rights and obligations to Hydro Pipes w/
the consent of the Pachecos.
A deed of exchange was executed between the Pachecos and Delpher
Trades where Pachecos conveyed to Delpher the leased property
together w/ another parcel of land also located in Malinta Estate,
36
The goods were made to appear as having been sold so that no sales
tax was paid by HT upon the sale of goods, nor was any sales tax paid
on the supposed sales by PA. (The sales tax on sales of imported
articles was based on GROSS SELLING price)
HOWEVER, the arrangement itself does not justify the penalty imposed
by CTA. Sec 183 of the Internal Revenue Code speaks of willful neglect
to file the return / wilful making of a false / fraudulent return. An
attempt to minimize ones tax does not necessarily constitute
fraud.
A taxpayer may diminish his liability by any means w/c the law
permits.
Hen Tong appealed the assessment to the Board of Appeals, and the
case was transferred to the CTA upon its organization in 1954.
I: 1) W/n the Hen Tong was the importer of the goods; 2) W/n it was
guilty of fraud to warrant the imposition of a penalty of 50% deficiency
SC affirmed CTA findings that Heng Tong was the importer of the goods
based on evidence:
o
CIR v Toda
37
For the sale of the property to Royal Match (RMI), Altonaga paid
capital gains tax in the amount of P10M.
CIC then filed its corporate annual income tax return for the year
1989, declaring, among other things, its gain from the sale of real
property in the amount of about P75k+.
After crediting withholding taxes of P254k+, it paid P26k+ for its
net taxable income of P75k+
Toda sold his entire shares of stocks in CIC to Choa for P12.5M.
Three and a half years later, Toda died.
Subsequently, the BIR sent an assessment notice and demand
letter to the CIC for deficiency income tax for the year 1989 in the
amount of about P79k+.
The new CIC asked for a reconsideration, asserting that the
assessment should be directed against the old CIC, and not against the
new CIC, which is owned by an entirely different set of stockholders;
moreover, Toda had undertaken to hold the buyer of his stockholdings
and the CIC free from all tax liabilities for the fiscal years 1987-1989.
The Estate of Toda received a Notice of Assessment from the CIR
for deficiency income tax for the year 1989 in the amount of P79k+.
The Estate thereafter filed a protest, which the CIR dismissed.
The estate filed a Petition for Review before the CTA alleging,
among others, that the CIR erred in holding the estate liable for income
tax deficiency. Holding that CTA ruled in favour of the Estate.
I:W/n CTA erred in holding that Toda committed no fraud with
intent to evade the tax on the sale of the properties of Cibelles
Insurance Corporation
R: YES, CTA erred. Toda committed fraud so his Estate should pay
the P79k+ deficiency income tax for 1989, plus legal interest until the
amount is fully paid.
Tax avoidance and tax evasion are the two most common ways
used by taxpayers in escaping from taxation:
Tax avoidance is the tax saving device within the means
sanctioned by law. This method should be used by the taxpayer in
good faith and at arms length.
Tax evasion, on the other hand, is a scheme used outside of
those lawful means and when availed of, it usually subjects the
taxpayer to further or additional civil or criminal liabilities. It connotes
the integration of three factors: EBU!
o
1) end to be achieved (payment of < taxes)
o
2) bad faith / evil state of mind
o
3) unlawful course of action / failure of action
All these factors are present in the instant case.
Prior to the purported sale of the Cibeles property by CIC to
Altonaga, CIC received P40M from from RMI, and NOT Altonaga.
The P40M was debited by RMI and reflected in its trial balance as
"other inv. Cibeles Bldg." Another 40M was debited and reflected in
RMIs trial balance as "other inv. Cibeles Bldg."
This shows that the real buyer of the properties was RMI, and NOT
Altonaga.
The Estate admitted that the sale was made to Toda as part of the
tax planning scheme of CIC.
The scheme resorted to by CIC in making it appear that there were
two sales of the subject properties, i.e., from CIC to Altonaga, and then
from Altonaga to RMI cannot be considered a legitimate tax planning.
Such scheme is tainted with fraud.
Fraud pertains to acts and omissions for purposes of deception,
breach of trust or taking advantage is taken of another.
In this case, it is obvious that the objective of the sale to Altonaga
was to reduce the amount of tax to be paid especially that the transfer
from him to RMI would then subject the income to only 5% individual
capital gains tax, and NOT the 35% corporate income tax.
Altonagas sole purpose of acquiring and transferring title of the
subject properties on the same day was to create a tax shelter.
Altonaga never controlled the property and did not enjoy the normal
benefits and burdens of ownership. The sale to him was merely a tax
ploy, a sham, and without business purpose and economic substance.
To allow a taxpayer to deny tax liability on the ground that the
sale was made through another and distinct entity when it is proved
that the latter was merely a conduit is to sanction a circumvention of
our tax laws. Hence, the sale to Altonaga should be disregarded for
income tax purposes. The two sale transactions should be treated as a
single direct sale by CIC to RMI.
38
39
DG elevated the case to the CA, insisting that the basis for computing
the refund should be the increased rates in the NIRC and NOT under RA
1435.
CA ruled that the claim for refund should indeed be computed on the
basis of the amounts deemed paid under Secs 1 and 2 of RA 1435, and
that the claims for refund w/c prescribed and those not filed in the
admin level must be excluded.
The specific taxes collected on gasoline and fuel accrue to the Fund,
which is to be used for the construction and maintenance of the
highway system. But because the gasoline and fuel purchased by
mining and lumber concessionaires are used within their OWN
compounds and roads, they do NOT directly benefit the fund and its
use. Thus, the tax refund for such concessionares is but proper.
The mere fact that the privilege of refund was included in Section 5,
and not in Section 1, is insufficient to support DGs claim.
When the law itself does not explicitly provide that a refund under RA
1435 may be based on higher rates which were nonexistent at the time
of its enactment, this Court cannot presume otherwise. A legislative
lacuna cannot be filled by judicial fiat.
DG then asserts that equity and justice demand that the computation
of the tax refunds be based on actual amounts paid under Sections 153
and 156 of the NIRC. HOWEVER, there is no tax exemption solely on
the ground of equity.
The oil companies paid the specific taxes imposed under Secs153 and
156 of the NIRC on the sale of its products. Since the taxes were
included in the purchase price, they were eventually passed on to the
user -- Davao Gulf in this case.
DG then filed before the CIR a claim for refund in the amount of about
P120k+, w/c represented 25% of the specific taxes actually paid on the
said fules and oils. This was based on the case of Insular Lumber v.
CTA and Sec5, RA1435 w/c provided that when oils are used by
miners/forest concessionaires, 25% will be refunded by the CIR upon
submission of proof of actual use. (proceeds of the tax will accrue to
road and bridge funds)
40
the sellers obligation, but that is all and the amount added because of
the tax is paid to get the goods and for nothing else.
But the tax burden may not even be shifted to the purchaser at all. A
decision to absorb the burden of the tax is largely a matter of
economics. Then it can no longer be contended that a sales tax is a tax
on the purchaser.
The tax imposed by section 186 of the NIRC is a tax on the
manufacturer or producer and NOT a tax on the purchaser except
probably in a very remote and inconsequential sense. Accordingly its
levy on the sales made to tax-exempt entities like the NPC is
permissible.
The agreement between RP and the US concerning military bases
provides tax exemption for goods that will be used EXCLUSIVELY in the
construction, maintenance, operation and defense of bases. THUS, only
SALES to the quartermaster are exempt from taxation.
Hence, the circular of the Bureau of Internal Revenue w/c gives the tax
exemptions in the Agreement an expansive construction it is void. The
sales to the VOA are subject to the payment of percentage taxes under
section 186 of the Code.
HOWEVER, the Napocor enjoys tax exemption by virtue of an act of
Congress, in order to facilitate indebtedness.
41
Caltex v Commission on Audit (this doesnt cover all the issues, pls
read the digest gen made/the original if you wanna be super sure)
42
was issued when the OPSF was not yet existing and could not have
contemplated OPSF imposts at the time of its formulation. The LOI was
also never published in the Official Gazette so it has no force and
effect.
The SC said that even granting arguendo that the LOI has force and
effect, Caltexs claim must still fail. Tax exemptions as a general rule
are construed strictly against the grantee and liberally in favor of the
taxing authority. The burden of proof rests upon the party claiming
exemption to prove that it is in fact covered by the exemption so
claimed. The party claiming exemption must therefore be expressly
mentioned in the exempting law or at least be within its purview by
clear legislative intent.
In this case, CALTEX failed to prove that it is entitled, as a
consequence of its sales to ATLAS and MARCOPPER, to claim
reimbursement from the OPSF under LOI 1416.
Though LOI 1416 may suspend the payment of taxes by copper mining
companies, it does not give petitioner the same privilege with respect
to the payment of OPSF
3) Taxation is no longer envisioned as a measure merely to raise
revenue to support the existence of government; taxes may be levied
with a regulatory purpose to provide means for the rehabilitation and
stabilization of a threatened industry which is affected with public
interest as to be within the police power of the state.
PD 1956, as amended by EO 137, explicitly provides that the source of
OPSF is taxation. A taxpayer may not offset taxes due from the claims
that he may have against the government.
Taxes cannot be the subject of compensation because the government
and taxpayer are not mutually creditors and debtors of each other and
a claim for taxes is not such a debt, demand, contract or judgment as
is allowed to be set-off.
43
44
Maceda v Macaraig
Since May 27, 1976 (when PD 938 was issued) until June 11, 1984
when PD 1931 was promulgated (abolishing the tax exemptions of all
GOCCs), oil firms never paid excise or specific and ad valorem taxes for
petroleum products sold and delivered to the NPC. This non-payment of
taxes spanned for 8 years.
The oil companies started to pay specific and ad valorem taxes on their
sales of oil products to NPC only after the promulgation of PD 1931 w/c
withdrew all exemptions granted in favor of GOCCs and empowering
the Fiscal Incentives Review Board (FIRB) to recommend to the
President or to the Minister of Finance the restoration of the
exemptions which were withdrawn.
FIRB issued Resolution 10-85 w/c restored the tax exemption privileges
of NPC effective retroactively to June 11, 1984 up to June 30, 1985.
Thus, the NPC applied with the BIR for a refund of Specific Taxes paid
on petroleum products in the total amount of about P58k+.
Maceda, Senate member, introduced Resolution 22 w/c was aimed at
conducting an inquiry in aid of legislation in line w/ the reported tax
manipulations and evasions by oil companies (particularly Caltex, Shell
and Petrophil) by availing of their non-existing exemption of NPC from
indirect taxes, w/c resulted in obtaining a tax refund totaling P 1.55
Billion from the Department of Finance
The Blue Ribbon Committee conducted a lengthy formal inquiry on the
matter and recommended that the tax refund to NPC be cancelled, and
also to cancel the approval of deed of Assignment by NPC to Caltex,
and collect from Caltex its tax liabilities which were erroneously treated
as paid or settled with the use of the tax credit certificate that NPC
assigned to said firm.
Maceda contended that the exemption of NPC from INDIRECT
TAXATION was revoked and repealed by the latest amendment to the
NPC charter by PD 938, by the deletion of the phrases directly or
indirectly and on all petroleum products used by the Corporation in
the generation, transmission, utilization and sale of electric power
The exemption of NPC provided in Section of PD 938 regarding the
payments of all forms of taxes, etc cannot be interpreted to include
indirect tax exception since tax statutes must be strictly construed
against the one claiming the exemption must be strictly construed
against the one claiming the exemption
I: W/n NPC is liable for indirect tax
R: NO, NPC is NOT liable for indirect tax
Indirect taxes are taxes primarily paid by persons who can shift the
burden upon someone else. For example, the excise and ad valorem
taxes that oil companies pay to the BIR upon removal of petroleum
products from its refinery can be shifted to its buyer, like the NPC, by
adding them to the cash and/or selling price.
In interpreting a statute, legislative intent must be ascertained -- the
reason for its enactment should be kept in mind and the statute should
be construed with reference to its intended purpose + the evil sought
to be remedied.
In this case, NPC is a non-profit public corporation created for the
general good and welfare (development of hydroelectric generation of
power and production of electricity from other sources) wholly owned
by the government. From the very beginning of its corporate existence,
the NPC enjoyed preferential tax treatment to enable the Corporation
to pay the indebtedness and obligation and in furtherance and
effective implementation of the policy enunciated in Sec 1 of RA 6395.
From the changes made in the NPC charter, the intention to strengthen
its preferential tax treatment is obvious.
In the earlier law, RA 358 the exemptions was worded in general terms,
as to cover all taxes, duties, fees, imposts, charges, etc However, the
amendment under RA 6395 enumerated the details covered by the
exemption. Subsequently, PD 380, made even more specific the details
of the exemption of NPC to cover, among others, both direct and
indirect on all petroleum products used in its operation. PD 938
amended the tax exemption by simplifying the same law in general
terms. It succinctly exempts NPC from all forms of taxes, duties, fees,
imposts as well as costs and service fees including filing fees, appeal
bonds, supersede as bonds, in any court or administrative
proceedings.
The use of the phrase "all forms" of taxes demonstrate the intention of
the law to give NPC all the tax exemptions.
Provisions granting exemptions to government agencies may be
construed liberally, in favor of non-tax liability of such agencies. Thus,
the rule that tax exemptions should be strictly construed is NOT
applicable to NPC. The practical effect of an exemption is merely to
reduce the amount of money that has to be handled by government in
the course of its operations.
In the case of property owned by the state or a city or other public
corporations, the express exemption should not be construed with the
same degree of strictness that applies to exemptions contrary to the
policy of the state, since as to such property "exemption is the rule and
taxation the exception."
Maceda v Macaraig MR
Unfazed by the Decision that the SC decision, Maceda filed a motion for
reconsideration.
In the process, a hearing was held on July 9, 1992 where all parties
presented their respective arguments.
However, the MR was denied.
1) What kind of tax exemption privileges does NPC have?
45
This means, on the one hand, that the oil companies which wish to sell
to NPC absorb all or part of the economic burden of the taxes
previously paid to BIR, which could they shift to NPC if NPC did not
enjoy exemption from indirect taxes. This means also, on the other
hand, that the NPC may refuse to pay the part of the "normal"
purchase price of bunker fuel oil which represents all or part of the
taxes previously paid by the oil companies to BIR.
If NPC nonetheless purchases such oil from the oil companies
because to do so may be more convenient and ultimately less costly
for NPC than NPC itself importing and hauling and storing the oil from
overseas NPC is entitled to be reimbursed by the BIR for that part of
the buying price of NPC which verifiably represents the tax already
paid by the oil company-vendor to the BIR.
46
R: NO.
Direct taxes are those that are demanded from the very person who
should pay them while indirect taxes are those that are demanded in
from one person in the expectation that he can shift the burden to
someone else.
The contractor's tax is course payable by the contractor but in the last
analysis it is the OWNER of the building that shoulders the burden of
the tax because the same is shifted by the contractor to the owner as a
matter of self-preservation.
Thus, their bids "must take this into account and should not include
items for such taxes, licenses and other payments to Government
agencies.
HOWEVER, the said case is not controlling, since the Host Agreement
specifically exempts the WHO from "indirect taxes."
The CIR imposed a contractors tax and stated that "as the 3%
contractor's tax is not a direct nor an indirect tax on the WHO, but a
tax that is primarily due from the CONTRACTOR, the same is not
covered by the Host Agreement.
47
Nitafan v CIR
Nitafan, etc. were duly appointed and qualified Judges in the RTC, NCR.
They sough to prohibit CIR and the Financial Officer of the SC, from
making any deduction of withholding taxes from their salaries.
According to them, any tax withheld from their compensation as
judicial officers constitutes a decrease or diminution of their salaries,
contrary to the provision of Section 10, Article VIII of the 1987
Constitution mandating that during their continuance in office, their
salary shall not be decreased.
They also cited the cases of Perfecto vs. Meer and Endencia vs. David
would apply which declared the salaries of members of the Judiciary
exempt from payment of the income tax and considered such payment
as a diminution of their salaries during their continuance in office
I: W/n the withholding tax on judicial officers is unconstitutional
R: NO, it is constitutional.
The intent of the Constitutional Commission was to delete the
proposed express grant of exemption from payment of income tax to
members of the Judiciary, so as to "give substance to equality among
the three branches of Government" in the words of Commissioner
Rigos.
In the course of the deliberations, it was further expressly made clear,
specialty with regard to Commissioner Bernas' accepted amendment to
the amendment of Commissioner Rigos, that the salaries of members
of the Judiciary would be subject to the general income tax applied to
all taxpayers.
The Court thus discarded the ruling in Perfecto vs. Meer and Endencia
vs. David that declared the salaries of members of the Judiciary exempt
from payment of the income tax and considered such payment as a
diminution of their salaries during their continuance in office.
Also, the salaries of Justices and Judges are properly subject to a
general income tax law applicable to all income earners.
The payment of such income tax by Justices and Judges does NOT fall
within the constitutional protection against decrease of their salaries
during their continuance in office.
Besides, construing Section 10, Articles VIII, of the 1987 Constitution,
which, for clarity, is again reproduced hereunder: "The salary of the
Chief Justice and of the Associate Justices of the Supreme Court, and of
judges of lower courts shall be fixed by law. During their continuance in
office, their salary shall not be decreased" (Italics supplied).
It is plain that the Constitution authorizes Congress to pass a law fixing
another rate of compensation of Justices and Judges but such rate
must be higher than that which they are receiving at the time of
48
The Province of Abra filed an action for certiorari against the CFI on the
ground that it granted the action for declaratory relief filed by the
Roman Catholic Bishop without allowing the Province to answer and
without hearing, in violation of its right to due process.
It also alleged that the judge (Hernando) failed to abide PD No. 464
which states that, No court shall entertain any suit ASSAILING the
validity of tax until the taxpayer pays under protest the tax assessed
against him.. nor shall any court declare any portion of the tax
assessed INVALID except if the taxpayer shall pay the just amount of
tax determined by the court.
I: W/n the judgment of the court granting the exemption to the Roman
Catholic Bishop of Bangued is valid
R: NO, it is invalid
In this case, the right of the Province of Abra to procedural due process
was violated by the summary judgment granting the exemption.
Instead of accepting the bare allegation of the bishop that the property
was being used exclusively, directly, and actually for public purposes,
the judge should have first required proof of these allegations.
* CIR v. Mitsubishi Metal Corp.: International Comity
Atlas Consolidated Mining entered into a Loan and Sales Contract with
Mitsubishi. Under the Contract, Mitsubishi would lend Atlas $20M for
the installation of a new concentrator for copper production, and in
turn, Atlas would sell to Mitsubishi all the copper concentrates
produced from the machine for the next 15 years.
49
The 31st Infantry Post Exchange was an agency under the control of the
US Army, operating in the Philippines. The Exchange bought goods,
such as soap and toiletries, and resold them to officers, soldiers, and
civilian employees of the US Army and their families.
The proceeds derived from the sales were then used for the betterment
of the condition of the personnel of the Army.
The Exchange filed an action for prohibition against the CIR for him to
desist from collecting the taxes from the merchants. The Exchange
claims that the taxes imposed on the merchants were driving up the
prices of goods sold to it by the merchants.
The Exchange claims that the merchants should be exempt from taxes
since the revenue law provides that no specific tax shall be collected
on any goods sold and delivered directly to the US Army of Navy for
their actual use or issue.
I: W/N the merchants selling goods to the Exchange are exempt from
sales tax. NO
R: The tax exemption covers those goods that are sold directly to the
US Army or Navy for their actual use or issue. In this case, the goods
are sold to the Exchange for resale to individuals belonging to the
Army or Navy, and not to the Army or Navy itself. Hence, they do not
fall within the exemption.
The reason upon which the rule rests must be the guiding principle to
control its operation. The limitations upon the taxing power of the state
must receive a practical construction which does not seriously impair
the taxing power of the Government imposing the tax.
The effect of the tax upon the functions of the Government and the
nature of the governmental agency determine finally the extent of the
exemption.
In this case, the tax laid upon Philippine merchants who sell to the
Exchange does not interfere with the supremacy of the US Government
or with the operations of its instrumentality the US Army, to such an
extent or in such a manner as to render the tax illegal. The tax does
not deprive the Army of the power to serve the Government or hinder
the efficient exercise of its power.
50
The BIR collected 1.5% income tax on the income derived by Sea-Land,
which Sea-Land paid.
Later, Sea-Land asked for a refund, claiming that it had paid the tax by
mistake. It invoked the tax exemption provided in the RP-US Military
Bases Agreement, which exempts from tax any profit derived by a US
national under a contract with the US government in connection with
the construction, maintenance, operation, and defense of the bases.
Sea-Land filed a petition for review with the CTA to judicially pursue its
claim for refund and to stop the running of the 2-year prescriptive
period.
RA 7160 or the Local Gov Code of 1991 was then issued w/c allowed
local government units to create their own sources of revenue and to
levy taxes, fees and charges consistent w/ the basic policy of
autonomy.
Meralco paid under protest and sent a formal claim for refund to the
Provincial Treasurer claiming that the franchise tax it had paid to the
National Government (pursuant to P.D. 551) already included the
franchise tax imposed by the Provincial Tax Ordinance.
I: W/n the province of Laguna had the power to levy the franchise tax
R: Yes.
51
The law provides that no local and national taxes shall be imposed
within the zone. In lieu of taxes, 3% of the gross income of enterprises
operating within the zone shall be remitted to the National
Government, 1% to the local government units, and 1% to a
development fund to be utilized for the development of municipalities
outside Olangapo and Subic.
They assert that the SSEZ encompasses (1) the City of Olongapo, (2)
the Municipality of Subic in Zambales, and (3) the area formerly
occupied by the Subic Naval Base. However, EO 97-A, according to
them, narrowed down the area within which the special privileges
granted to the entire zone would apply to the present fenced-in
former Subic Naval Base only. It has hereby excluded the residents of
the first two components of the zone from enjoying the benefits
granted by the law.
52
I: W/n the City of Cebu has the power to impose taxes on the MCIA
R: YES.
Tax statutes are construed strictly against the government and liberally
in favor of the taxpayer. However this does not apply if the grantee of
the exemption is a political subdivision or instrumentality because the
effect of such exemption is merely to reduce the amount of money that
has to be handled by the government in the course of its operations.
In this case, the land where the airports managed by the MCIA were
erected can also be levied upon by the city of Cebu for the MCIAs
nonpayment of taxes. It was proven that in the city charter there was
a transfer of the lands, from the city of Cebu to the petitioner,
which amounted to an absolute conveyance of ownership not only
mere beneficial use.
Thus the ownership of the land passed from the Republic of the
Philippines to the MCIA. As MCIA owns the said land, it CAN become the
subject of levying for the nonpayment of taxes.
Finally, even if the petitioner was originally not a taxable person for
purposes of real property tax, it had already become, even if it be
conceded to be an agency or instrumentality of the Government, a
taxable person for such purpose in view of the withdrawal in the last
paragraph of Section 234 of exemptions from the payment of real
property taxes applies to the MCIAA.
CIR v Robertson
James, his brother, was also born in the Philippines and resided in the
country until repatriated to the US. He was also assigned to Subic, Olongapo
due to his work in the Navy.
THUS, they were all citizens of the United States, holders of American
passports and admitted as Special Temporary Visitors under Section 9 (a)
visa of the Philippine Immigration Act of 1940, as amended.
They were civilian employees in the U.S. Military Base in the Philippines in
connection with its construction, maintenance, operation, and defense; and
incomes were solely derived from salaries from the U.S. government by
reason of their employment in the U.S. Bases in the Philippines.
The CIR filed a petition for review w/ the SC, contending that the CTA erred
in holding that Robertson, etc. were, by virtue of Article XII, Par 2 of the RPUS Military Bases Agreement of 1947, exempt from Philippine income tax.
53
CIR argues that the laws granting tax exemptions must be construed strictly
against the taxpayer, and that the burden of proof is on Robertson, etc. to
establish that their residence in the country is by reason only of their
employment in connection with the construction, maintenance, operation or
defense of the U.S. Bases in the Philippines (as provided for under Article
XII, Par. 2 of the RP-US Military Bases Agreement of 1947).
According to CIR, they failed to discharge this burden, given that they own
residential properties in the Phils in their names.
In this case, respondents and their families upon repatriation in 1945 had
since acquired domicile and residency in the United States, and obtained
employment with the United States Federal Service.
It was not until after several years of a hiatus that they returned to the
Philippines by reason of duties with the US military bases in the Philippines
where they were gainfully employed by the U.S. Federal Government.
The situation of the petitioners is of no different mold as of the rest of the
U.S. civilian employees who continued to enjoy the benefits of tax
exemption under the Agreement, Petitioners' circumstances before the
questioned ruling remained obtaining thru the taxable years 1969-1972.
This Court cannot depart from the plain meaning of the tax exemption
provision. This does not however foreclose the possibility of respondents
coming to roost in the country contingent upon the termination of their tour
of duty, but only then may the bridge be crossed for tax purposes.
Basco v PAGCOR
Its operation was originally conducted in the well known floating casino
"Philippine Tourist." The operation was considered a success for it
proved to be a potential source of revenue to fund infrastructure and
socio-economic projects.
Subsequently,PAGCOR was created under P.D. 1869 to enable the
Government to regulate and centralize all games of chance authorized
by existing franchise or permitted by law -- particularly to establish
clubs and amusement games in order to raise revenues for projects like
flood control programs, beautification, sewerage and sewage projects,
Tulungan ng Bayan Centers, Nutritional Programs, Population Control,
etc.
PAGCOR is the 3rd largest source of government revenue, next to the
BIR and BOC.
Basco, etc. then filed a petition seeking to annul the PAGCOR Charter /
PD 1869 because it is allegedly contrary to morals, public policy and
order.
Particularly, they allege that it waived the Manila city gov's right to
impose taxes and license fees, which is recognized by law, and that
because it intrudes into the local gov's right to impose local taxes and
license fees, it violates the constitutionally enshrined principle of local
autonomy.
Based on the PD 1869, PAGCOR as franchise holder is exempt from
paying tax of any kind, except for a franchise tax of 5% gross revenues
/ earnings derived by the Corporation.
I: W/n PD 1869 creating PAGCOR is valid
R: YES.
Basco, etc.'s contention that P.D. 1869 constitutes a waiver of the right
of the City of Manila to impose taxes and legal fees and violates the
principle of local autonomy is WITHOUT MERIT.
1) The City of Manila, being a mere
Municipal corporation has no inherent right to impose taxes. Its "power
to tax" therefore must always yield to a legislative act which is superior
having been passed upon by the state itself which has the "inherent
power to tax."
2) Congress has the power of control over
local governments. If Congress can grant the City of Manila the power
to tax certain matters, it can also provide for exemptions or even take
back the power. THUS, the Charter of the City of Manila is subject to
control by Congress.
3) The City of Manila's power to impose
license fees on gambling, has long been revoked. As early as 1975, the
power of local governments to regulate gambling thru the grant of
"franchise, licenses or permits" was withdrawn by P.D. No. 771 and was
vested exclusively on the National Government.
4) Local governments have no power to
tax instrumentalities of the National Government. PAGCOR is a GOCC
w/ an original charter, PD 1869. All of its shares of stocks are owned
by the National Government, and it also exercises regulatory powers
(to regulate gambling casinos).
5) Basco, etc. also argues that the Local
Autonomy Clause of the Constitution will be violated by P.D. 1869, but
54
The CFI ruled in favor of the spouses, saying that their tax liabilities
were deemed settled under PD 213 (and not the other PDs) as shown
in the Amnesty Income Tax Returns Summary Statement and the Tax
Payment Acceptance Order which contain the assessment for the
questioned years.
By accepting payment, the Government has therefore WAIVED ITS
RIGHT to recover further deficiency income taxes under existing
assessments against them.
The Gov filed an appeal w/ the IAC, alleging that the spouses were NOT
qualified to avail of the tax amnesty because the benefits could only be
availed of by persons WITHOUT pending assessment against them
(according to Revenue Regulations Nos. 8-72 and 7-73).
IAC dismissed the appeal, rulling that RR 7-73 was null and void for
being contrary to/restrictive of PD 213.
I: W/n payment of deficiency income taxes under a tax amnesty law
operates to divest the government of the right to recover against the
taxpayer even if there is an existing assessment against the latter
R: YES.
What was granted under PD 213 is not just an exemption but an
amnesty, and the Government is estopped from collecting the
difference between the deficiency tax assessment and the amount
already paid by them as amnesty tax.
Being in the nature of a general pardon/intentional overlooking of the
State of its authority to impose penalties on persons otherwise guilty of
evasion or like violations, it constitutes absolute forgiveness or a
waiver by the Government of its right to collect what would otherwise
be due it.
The findings of respondent appellate court that the deficiency income
taxes were paid by the spouses and accepted by the government
under PD 213 are entitled the highest respect. In case of doubt, tax
statutes are to be construed strictly against the Government and
liberally in favor of the taxpayer.
August 13, 1986, CIR assessed ROH Auto Products, Inc. with income
deficiency and business taxes for fiscal years that ended September
30, 1981 and September 30, 1982 in an aggregate amount of
P1,410,157.71.
August 22, 1986, when the President still has legislative powers,
promulgated EO No. 41, declaring a one-time tax amnesty on unpaid
income taxes, later amended to include estate and donor's taxes
and taxes on business, for the taxable years 1981 to 1985.
55
ROH Auto Products, Inc. availed the amnesty and paid the corresponding
amnesty taxes due. And requested the CIR through a letter that the
deficiency tax notice should be cancelled and withdrawn.
CIR denied the request on the ground that Revenue Memorandum Order No.
4-87, dated 09 February 1987, implementing EO No. 41, had construed the
amnesty coverage to include only assessments issued by the
Bureau of Internal Revenue after the promulgation of the executive
order on 22 August 1986 and not to assessments theretofore
made.
ROH appealed the denial to CTA, and ruled in favor of the taxpayer. The
CTA ruled that provisions in the statute granting tax amnesty for unpaid
taxes from 1981-1985 , to make taxpayers still answerable for a tax liability
which, through the statute, should have been erased with the proper
availment of the amnesty.
CA affirmed the decision of the CTA. Tax Amnesty is to give tax evaders,
who wish to relent and are willing to reform, a chance to do so by availing of
the amnesty provided for by the statute and thereby become a part of the
new society with a clean slate.
R: NO.
a)
b)
c)
d)
e)
f)
g)
Republic v Caguioa
56
57
TC ruled against Smart, on the ground that tax laws are strictly
construed against the taxpayer, and that LGUs are empowered to tax
by a valid delegation of legislative power and the direct authority
granted to it by the fundamental law, hence not violative of the nonimpairment clause.
I: W/n SMART is liable for franchise tax
R: YES, SMART is liable.
Section 137, in relation to Section 151 of the Local Government Code
(RA 7160) allows local governments to impose franchise taxes, while
Section 193 thereof withdrew all tax exemption privileges granted to
franchises prior to its issuance, except local water districts,
cooperatives duly registered under RA No. 6938, non-stock and nonprofit hospitals and educational institutions.
Since Smarts franchise (RA 7294) was granted two months AFTER the
issuance of the Local Government Code, its tax exemption privileges
are NOT deemed withdrawn by the Local Government Code.
However, the phrase in lieu of all taxes in RA 7294 must be
construed in the context of the whole Act granting the franchise to
Smart.
Tax statutes, and exemptions granted therein, are construed strictly
against the taxpayer and liberally in favor of the Government.
In this case, the 3% tax on all gross receipts in lieu of all taxes
provision in RA 7294 was NOT clear whether it applies to both national
and local taxes.
Thus, this provision must be construed strictly against Smart which
claims the exemption. Smart has the burden of proving that, aside from
the imposed 3% franchise tax, Congress intended it to be exempt from
all kinds of franchise taxes - whether local or national. However, Smart
failed in this regard.
The was also no violation of the non-impairment clause of the
Constitution. In fact, aside from the ambiguous in lieu of all taxes
phrase in the franchise, it also has an express condition that it is
subject to amendment, alteration, or repeal.
Hilado v CIR
Emilio Hilado filed his income tax return for 1951 with the treasurer of
Bacolod City wherein he claimed, among other things, the amount of
P12k+ as a deductible item from his gross income pursuant to General
Circular V-123 issued by the CIR. (This circular was issued pursuant to
certain rules laid down by the Secretary of Finance.)
58
discretion to be exercised in the manner it may see fit, but the nonpayment of which cannot give rise to any enforceable right.
Also, the second Gen circular, w/c nullified the first is consistent w/ the
NIRC (Sec. 30), which provides that that losses sustained are allowable
as deduction only within the corresponding taxable year.
The NIRC exempts from VAT the sale of agricultural non-food products
in their original state if the sale is made by the primary producer or
owner of the land from which the same are produced.
The sale made by any other person / entity, like a trader or dealer, is
NOT exempt from the tax.
59
60
61
may claim refund or tax credits for the excess quarterly income tax
with the BIR within ten 10 years under Article 1144 of the Civil Code.
I: W/n the tax refund should be denied on the ground of prescription,
despite PBComs reliance on RMC No. 7-85, changing the prescriptive
period of 2 years to 10 years.
R: No. The relaxation of revenue regulations by RMC 7-85 is not
warranted as it disregards the two-year prescriptive period set by law.
The NIRC states that the taxpayer may file a claim for refund or credit
with the CIR w/in 2 years after payment of tax, before any suit in CTA is
commenced.
The 2-year prescriptive period should be computed from the time of
filing the Adjustment Return and final payment of the tax for the year.
Clearly, the prescriptive period of 2 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.
When the Acting CIR issued RMC 7-85, changing the prescriptive period
of 2 years to 10 years on claims of excess quarterly income tax
payments, such circular created a clear inconsistency with the
provision of the NIRC.
In so doing, the BIR did not simply interpret the law; rather it legislated
guidelines contrary to the statute passed by Congress. Rules and
regulations issued by administrative officials to implement a law
cannot go beyond the terms and provisions of the latter.
Art. 8 of the Civil Code recognizes judicial decisions, applying or
interpreting statutes as part of the legal system of the country.
But administrative decisions do not enjoy that level of recognition.
A memorandum-circular of a bureau head could not operate to vest a
taxpayer with shield against judicial action. For there are no vested
rights to speak of respecting a wrong construction of the law by the
administrative officials and such wrong interpretation could not place
the Government in estoppel to correct or overrule the same.
Moreover, the non-retroactivity of rulings by the CIR is not applicable in
this case because the nullity of RMC No. 7-85 was declared by
respondent courts and not by the CIR.
Lastly, a claim for refund is in the nature of a claim for exemption and
should be construed in strictissimi juris against the taxpayer.
NASUTRA and Soriamont mutually agreed to have the vessel sail for
Japan without any cargo.
CIR failed to act promptly on the claim, so Tokyo filed a petition for
review before CTA. CTA ruled in favour of Tokyo.
CIR filed a petition contending that Tokyo had the burden of proof to
support its claim of refund, Tokyo failed to prove that it did not realize
any receipt from its charter agreement and it suppressed evidence
when it did not present its charter agreement.
62
Reyes v Almanzor
A claim for refund is in the nature of a claim for exemption and should
be construed in strictissimi juris against the taxpayer. The taxpayer has
the burden of proof to show that he is entitled to refund.
The Act also suspended the operation of Article 1673 of the Civil Code
(ejectment of lessess).
The Reyeses, thus, were precluded from raising the rentals and from
ejecting the tenants.
They also argued that the income approach should have been used
in determining land values instead of the comparative sales
approach which the assessor adopted.
R: NO. SC ruled in favor of Reyeses and board was askesd to make reassessment.
Taxation is equitable when its burden falls on those better able to pay.
Taxation is progressive when its rate goes up depenfing on the
resources of the person affected. Taxes are uniform when all taxable
articles or kinds of property of the same class are taxed at the same
rate.
63
The taxing power has the authority to make reasonable and natural
classification for purposes of taxation. Laws should operate equally and
uniformly, however, on all persons under similar circumstances.
Under the Real Property Tax Code (PD 464), property must be
appraised at its current and fair market value.
1)
2)
Also, although taxes are the lifeblood of the government and should be
collected without unnecessary hindrance, such collection should be
made in accordance with law as any arbitrariness will negate the very
reason for government itself.
In this case, since the Reyeses are burdened by the Rent Freeze Laws
(RA 6359 and PD 20), they should not be penalized by the same
government by the imposition of excessive taxes they cannot ill afford
and would eventually result in the forfeiture of their properties, under
the principle of social justice.
SET-OFF OF TAXES
64
BIR sent a letter to Philex asking it to settle its tax liabilities for 1991 to
1992 .
Philex protested that it has pending claims for VAT input credit/refund
for the taxes it paid for 1989 and that the refund should be applied
against the tax liabilities.
BIR replied that the pending claims have NOT yet been established so
it follows that no legal compensation can take place, hence, the
reiteration of the demand for payment.
Philex raised the issue to the CTA.
Pending proceeding in CTA, BIR issued a Tax Credit Certificate 13M
which, when applied to the total tax liabilities of Philex of P123M
effectively lowered the Philex's tax obligation.
Despite the reduction, CTA denied Philexs petition for review and still
ordered Philex to pay the remaining balance of P110M plus interest,
saying that for legal compensation to take place, both obligations must
be liquidated and demandable.
The liquidated debt of the Philex to the government cannot, therefore,
be set-off against the unliquidated claim which Philex conceived to
exist in its favour. It also invoked the principle that "taxes cannot be
subject to set-off on compensation since claim for taxes is not a debt or
contract."
Philex appealed to the CA, which denied such appeal and its MR.
A few days after the denial of MR, Philex obtained its VAT input
credit/refund not only for 1989 to 1991 but also for 1992 and 1994.
THUS, Philex contended that the same should off-set its excise tax
liabilities since both had already become "due and demandable, as well
as fully liquidated and legal compensation can properly take place.
I: 1) W/n legal compensation between the VAT input credit/refund and
tax liability could take place- NO
2) W/n the imposition of interest and surcharge is unjustified NO, it is
justified
3) W/n BIR violated Section 106 of the NIRC when it gave the refunds
only in 1996 YES
R:
1) Taxes cannot be subject to compensation. Government and the
taxpayer are not creditors and debtors of each other. Debts are due to
the Government in its corporate capacity, while taxes are due to the
Government in its sovereign capacity. National Revenue Code of 1939
provided for offsetting but such provision was dropped in the NIRC of
1997.
2) Imposition of surcharges and interests are justified. The logic
of such imposition is the principle that taxes are the lifeblood of the
government and so should be collected without unnecessary
hindrance. Tax is that it is compulsory and does not depend upon the
consent of the taxpayer. Tax Code of 1977: The payment of the
surcharge is mandatory and the BIR is not vested with any authority to
waive the collection thereof.
Francia v IAC
Engracio Francia was the registered owner of a residential lot and a 2story house in Pasay City.
Francia was not present during the auction sale since he was in Iligan
City at that time helping his uncle ship bananas.
Francia thus filed a complaint to annul the auction sale, alleging that:
o
his tax liability should have been offset with the money paid
to him by the government when they expropriated his other
property
65
made at public auction, upon the theory that the lesser the price, the
easier it is for the owner to effect redemption.
The Company did not disput that it did have liabilities totaling about
P4k+. HOWEVER, as a defense, it also claimed to have paid to the RP
P9k+ for reforestation charges from July 1948 to December
1956 and April 1947 to June 1948.
These were paid in pursuance of RA 115 w/c provides that there shall
be collected, in addition to the regular forest charges provided under
the NIRC, the amount of 50 cents on each cubic meter of timber cut
out and removed from any public forest for commercial purposes.
(purpose: reforestation of water sheds, denuded areas, etc.)
The Company contended that since the Republic had not made use of
those reforestation charges collected, Republic should refund them, so
it requested a refund from the Director of Forestry (that the amt be
credited w/ reforestation charges imposed on them) so that the amount
if paid could be set-off
1) There is nothing in the law which requires that the amount collected
as reforestation charges should be used exclusively for the
reforestation of the area covered by the license of a licensee or
concessionaire, and that if not so used, the same should be refunded to
him.
66
2) Under Article 1278, NCC, compensation should take place when two
persons are CREDITORS and DEBTORS of each other.
In this case, RP and the Company are NOT mutual creditors and
debtors of each other. Said amount are in the coffers of the
government as tax collected. Since they are not mutually creditors and
debtors of each other. Consequently, the law on compensation is
inapplicable.
TAXPAYER SUIT
Anti-Graft League of the Phils v San Juan
67
Lozada v COMELEC
A petition for mandamus was filed by Jose Mari Lozada and Romeo Igot
as a representative suit for and in behalf of those who wanted to
participate in the election irrespective of party affiliation.
68
R:
What the case at bar seeks is one that entails expenditure of public
funds which MAY BE illegal because it would be spent for a purpose
that of calling a special election has no authority either in the
Constitution or a statute.
The unchallenged rule is that the person who impugns the validity of a
statute must have a personal and substantial interest in the case such
that he has sustained, or will sustain, direct injury as a result of its
enforcement.
appropriation for the purpose, and this power of the Batasan Pambansa
may neither be subject to mandamus by the courts much less may
COMELEC compel the Batasan to exercise its power of appropriation.
From the role Batasan Pambansa has to play in the holding of special
elections, which is to appropriate the funds for the expenses thereof, it
would seem that the initiative on the matter must come from said
body, not the COMELEC, even when the vacancies would occur in the
regular not interim Batasan Pambansa.
The power to appropriate is the sole and exclusive prerogative of the
legislative body, the exercise of which may not be compelled through a
petition for mandamus
OTHER: Section 5(2), Article VIII of the 1973 Constitution refers to the
regular Batasang Pambansa (BP) and not the interim BP. Therefore,
their claim to hold special elections to fill in the vacancies in the
interim BP will fail for there is no basis for such in the Transitory
Provisions of the Constitution governing procedures in the interim BP.
INCOME TAX
A.
IN GENERAL
Madrigal v Rafferty
CIR argued that the taxes imposed by the Income Tax Law are
taxes upon INCOME and NOT upon capital and property. The fact that
Madrigals marriage was under conjugal partnership has no bearing on
income considered as income.
69
I: W/N the additional income tax should be divided into 2 equal parts
because of the conjugal partnership existing between them. NO
BGROUND: Income tax law of US extended to Phils was for the purpose of
mitigating the evils arising from inequalities of wealth through a progressive
scheme of taxation, w/c places a burden on those who are able to pay.
Income tax is supposed to reach the earnings of the entire nongovernmental property of the country.
Income as contrasted with capital or property is to be the test.
The essential difference between capital and income is that capital is a
FUND; income is a FLOW.
CAPITAL is a fund of property existing at an instant of time.
INCOME is a flow of services rendered by that capital by the payment of
money from it or any other benefit rendered by a fund of capital in relation
to such fund through a period of time.
CAPITAL is wealth, while INCOME is service of wealth.
SC of Georgia: The fact that property is a tree, income is the fruit; labor is
a tree, income is a fruit; capital is a tree, income is a fruit. A tax on income
is not a tax on property. Income, as here used can be defined as PROFITS or
GAINS.
In this case, Susana Paterno has an inchoate right in the property of her
husband during the life of the conjugal partnership.
She has an interest in the ultimate property rights and in the ownership of
property acquired as income AFTER SUCH INCOME HAS BECOME CAPITAL.
She has NO ABSOLUTE RIGHT to ONE-HALF THE INCOME of the conjugal
partnership.
As she has no estate and income actually and legally vested in her and
entirely distinct from her husbands property, the income CANNOT properly
be considered SEPARATE INCOME of the wife for the purposes of additional
tax.
Moreover, the Income Tax Law does not look on the spouses as individual
partners in an ordinary partnership. The husband and wife are only entitled
to the exemption of 8k, granted by law. The higher schedules of the
additional tax directed at incomes of the wealthy may not be partially
defeated by reliance on the provisions in our Civil Code dealing with the
conjugal partnership and having no application to the Income Tax Law. The
aims and purposes of the Income Tax Law must be given effect.
The only occasion for a wife making a return is where she has income from
a sole and separate estate in excess of $3,000, but together they have an
income in excess of $4,000, in which the latter event either the husband or
wife may make the return but not both.
In all instances the income of husband and wife whether from separate
estates or not, is taken as a WHOLE for the purpose of the NORMAL TAX.
Where the wife has income from a separate estate makes return made by
her husband, while the incomes are added together for the purpose of the
normal tax they are taken SEPARATELY for the purpose of the additional tax.
In this case, however, the wife has no separate income within the
contemplation of the Income Tax Law.
Fisher v Trinidad
the coproration.
PADC, as result of the business for that year, declared a "stock
dividend." The proportionate share of the said stock divided of the
Fisher as P24,800, such amount being issued to Fisher.
Later on, Fisher, upon demand of the CIR, paid under protest the sum
of about P889 as income tax on the said stock dividend.
CIR demurred to the petition upon the ground that it did not state facts
sufficient to constitute cause of action. The demurrer was sustained, so
Fisher appealed.
Fisher cited US SC decisions to sustain his claim where in each of the
cases, an effort was made to collect an "income tax" upon "stock
dividends" and it was held that "stock dividends" were CAPITAL and
NOT income and therefore NOT subject to the "income tax" law.
CIR argued that although in Eisner v Macomber, a "stock dividend is
NOT income," said Act No. 2833, in imposing the tax on the stock
dividend, does not violate the provisions of the Jones Law, and that US
statutes providing for tax on stock dividends are diff from Phil statutes.
In the US (Chapter 463, Act of Congress), the term "dividends" pertains
to any distribution made / ordered to be made by a corporation-- stock
dividend shall be considered income, to the amount of its cash value.
In the Phils, Act No. 2833, the term "dividends" pertains to any
distribution made / ordered to be made by a corporation, . . . out of its
earnings or profits accrued since March 1, 1913 and payable to its
shareholders, whether in cash or in stock of the corporation, . . . . Stock
dividend shall be considered income, to the amount of the earnings or
profits distributed.
I: W/n "stock dividends" are "income" and taxable under the provisions
of Act 2833
R: NO, they are not.
In this case, SC first determined the definition of stock dividends.
Stock dividends represent undistributed increase in the capital of
corporations/ entities for a particular period. They are used to show the
increased interest or proportional shares in the capital of each
stockholder.
In other words, the inventory of the property of the corporation, etc.,
for particular period shows an increase in its capital, so that the stock
theretofore issued does NOT show the real value of the stockholder's
interest, and additional stock is issued showing the increase in the
actual capital, or property, or assets of the corporation, etc.
Blacks Law: An income is the return in money from one's business,
labor, or capital invested; gains, profit or private revenue.
Justice Hughes of US SC defined income as cash / its equivalent. IT
DOES NOT mean choses in action/ unrealized increments in the value
of the property
The stockholder who receives a stock dividend has received nothing
but a representation of his increased interest in the capital of the
corporation, but ALL THE PROPERTY / CAPITAL of the corp STILL
BELONGS to the corp. There has been no separation of the interest of
the stockholder from the general capital of the corporation.
Thus, a certificate of stock represented by the stock dividend is
simply a statement of his proportional interest or participation
70
71
Conwi v CTA
In the year 1970 and 1971, they were assigned, for certain periods, to
other subsidiaries of P&G outside of the Philippines and were earning
US dollars.
When they filed their income tax returns, they computed their tax due
by applying the dollar-peso conversion rates on the basis of the floating
rate ordained by the BIR ruling No. 70-27.
Petitioners from the second case also filed using the same conversion
rate but amended their income tax returns in 1973 and used the par
value of the peso as prescribed in Section 48 of RA 265 in relation to
CA 699.
CTA held that the proper conversion rate for the purpose of reporting
and paying the Philippine income tax on the dollar earnings of the
petitioners are the rates prescribed under Revenue Memorandum
Circulars Nos. 7-71 and 41-71(free market rate of conversion).
Thus, their claims were denied.
Petitioners are correct as to their claim that their dollar earnings are
not receipts derived from foreign exchange transactions because
foreign exchange transactions refer to those transactions where there
is conversion of an amount of money or currency of one country into
an equivalent amount of money or currency of another.
B.
Principles
of
Income
Taxation
in
the
72
Definitions
Resident citizens and resident aliens
Sec 22 (F) The term "resident alien" means an individual whose residence
is within the Philippines and who is not a citizen thereof.
Garrison v CA
Petitioners refused to file their income tax returns, claiming that they
are NOT resident aliens but only special temporary visitors. They also
claimed to be exempt by virtue of the US-RP Military Bases Agreement.
Sec 45 NIRC provides that an alien residing in the Phils who has a gross
income of at least P1,800 for the taxable year is required to file an
income tax return. This is regardless of whether gross income was
derived from sources w/in or outside the Phils.
In this case, the petitioners fall within the letter of the codal that an
alien residing in the Philippines is obliged to file an income tax
return.
None of them may be considered a non-resident alien, a mere
transient or sojourner, who is not under any legal duty to file an
income tax return under the Philippine Tax Code.
This is made clear by Revenue Regulations No. 2 of the Department of
Finance (Feb 1940) w/c provides that an alien actual present in the
Philippines who is not a mere transient or sojourner IS a resident of the
Philippines for purposes of income tax.
Whether he is a transient or not is determined by his intentions with
regard to the length and nature of his stay. If he lives in the Philippines
and has no definite intention as to his stay, he is a resident.
One who comes to the Philippines for a definite purpose which in its
nature may be promptly accomplished is a transient.
Also, looking at the Bases Agreement, it is clear that for American
nationals residing in the country may be relieved of the duty to pay
income tax for any given year, it is incumbent on them to show BIR
that in that year they had derived income exclusively from their
employment in connection with the US bases, and none whatever
from Philippine sources or sources other than the US sources.
Non-resident citizens
(E) The term "nonresident citizen" means:
(1) A citizen of the Philippines who establishes to the
satisfaction of the Commissioner the fact of his physical
presence abroad with a definite intention to reside therein.
(2) A citizen of the Philippines who leaves the Philippines
during the taxable year to reside abroad, either as an
immigrant or for employment on a permanent basis.
(3) A citizen of the Philippines who works and derives income
from abroad and whose employment thereat requires him to
be physically present abroad most of the time during the
taxable year.
(4) A citizen who has been previously considered as
nonresident citizen and who arrives in the Philippines at any
time during the taxable year to reside permanently in the
Philippines shall likewise be treated as a nonresident citizen
for the taxable year in which he arrives in the Philippines with
respect to his income derived from sources abroad until the
date of his arrival in the Philippines.
(5) The taxpayer shall submit proof to the Commissioner to
show his intention of leaving the Philippines to reside
permanently abroad or to return to and reside in the
Philippines as the case may be for purpose of this Section.
RR 1-79 (January 8, 1979) di raw mahanap?
RR 5-01 (July 31, 2001) see separate doc (from Greta)
73
74
Carmelino F. Pansacola filed his income tax return for the taxable year
1997 that reflected an overpayment of P5,950. In it, he claimed the
increased amounts of personal and additional exemptions under Sec
35 of the NIRC, although his certificate of income tax withheld on
compensation indicated the lesser allowed amounts on these
exemptions.
CTA also denied his claim, saying it would be absurd to allow the
deduction from a taxpayers gross income earned on a certain year of
exemptions availing on a different taxable year. Pansacola sought
reconsideration, but it was denied.
CA also denied his petition, ruling that the NIRC took effect on January
1, 1998, thus the increased exemptions were effective only to cover
taxable year 1998 and CANNOT be applied retroactively.
I: W/n the exemptions under Section 35 of the NIRC, which took effect
on January 1, 1998, could be availed of for the taxable year 1997 (thus
making Pansacola entitled to refund)
R: NO!
The NIRC (Sec 75, D) provides that personal and additional exemptions
shall be determined in accordance with the main provisions in Title II,
NIRC .
On the other hand, "taxable year" means the calendar year, upon the
basis of which the net income is computed under Title II of the NIRC
(Sec 22, P).
75
Petitioners taxable income covers his income for the calendar year
1997. The law cannot be given retroactive effect because nothing in
the law provides for such.
Personal and additional exemptions are considered as deductions from
gross income. Deductions for income tax purposes partake of the
nature of tax exemptions, hence strictly construed against the
taxpayer and cannot be allowed unless granted in the most explicit
and categorical language too plain to be mistaken.
In April 15, 1996, petitioner M.E. Holding Corporation (M.E.) filed its
1995 Corporate Annual Income Tax Return, claiming the 20% sales
discount it granted to qualified senior citizens.
Grant was partial because ME failed to support the rest of the claimed
discount w/ corresponding cash slips.
76
It paid 15% branch profit remittance tax on profit from its regular
banking unit operations (about P7M+) and on profit from its foreign
currency deposit unit operations (about P445k+). The tax was based
on net profits after income tax w/o deducting the amount
corresponding to the 15% tax.
Later, Bank of America claimed a refund from the BIR of the portion of
payment corresponding to the 15% branch profit remittance tax, given
that the tax should have been computed on the basis of profits
ACTUALLY remitted, and NOT on the amount BEFORE profit remittance
tax.
CTA upheld petitioner bank in its claim for refund, but CA set aside CTA
decision.
R: CTA was correct; bank can claim refund because tax base should be
the PROFIT remitted abroad, NOT that w/c is applied for.
In 1979, Burroughs applied with the Central Bank for authority to remit
their branch profits to their parent company abroad amounting to
P7.6M.
It paid the 15% branch profit remittance tax based on the prior amount
(P1.147M) but actually remitted to the head office only approximately
P6.5M:
* amount applied for (P7.6M) branch profit (15% of 7.6M) = 6.5M
They filed a claim for a tax refund, saying that the 15% remittance tax
should have been based on the AMOUNT ACTUALLY REMITTED and NOT
the amount BEFORE actual remittance. The tax should have amounted
to P974,999.89.
The CTA agreed with Burroughs Limited and ordered the CIR to issue a
tax credit in their favor.
I: W/n the tax base is the amount applied for remittance or the profit
actually remitted after deducting the 15% profit remittance tax- WHAT
IS ACTUALLY REMITTED
W/N Burroughs Limited is entitled to the tax refund -YES, THEY ARE
R: NIRC Sec 24 provides that any profit remitted abroad by the branch
to its head office shall be subject to a tax of 15%.
77
Based on this, the 1980 BIR Ruling also provided (c/o Comnissioner
Plana) that the 15% would be imposed on the branch profits actually
remitted and not on the total branch profits out of which the
remittance is to be made.
In the present case, the CIR argues that the 1980 BIR Ruling was
superseded by 1982 Memorandum Circular No. 8-82 (March 17,
1982) which states that the tax will be based on the profit remittance
actually applied for because the tax is collected at the source.
However, the court ruled that the branch profits were actually remitted
in 1979, making the applicable interpretation that of the 1980 BIR
Ruling and NOT the 1982 Memorandum Circular.
Sec. 327 of the NIRC states that rulings cannot be given retroactive
effect if they would cause prejudice to the taxpayer, except in the
following exceptions:
It paid 15% branch profit remittance and later claimed a refund for
overpayment.
Compania contended that the correct tax base for computing the
branch profit remittance tax should be the profit ACTUALLY remitted
abroad net of income already subjected to final tax.
CIR on the other hand contends that the case of Burroughs is not
applicable to the instant case because of Revenue Memorandum
Circular No. 8-82, dated March 17, 1982, which states that since the
"tax is imposed and collected at source, necessarily the tax base
should be the amount actually applied for by the branch with the
Central Bank of the Philippines as profit to be remitted abroad."
As the latter ruling seems to have given rise to some misconception
that it modified BIR Ruling No. 016-79 with respect to the manner of
computation of the 15% branch profit remittance tax, this Office
issued a clarificatory ruling on October 23, 1981 explaining
The above ruling (of January 21, 1980) merely EMPHASIZED the
distinction between the total branch profit which is remittable and that
portion of the branch profit actually remitted without deduction on
account of the tax to be paid.
The phrase "any profit remitted abroad" should be construed to
mean the profit to be remitted. Hence, there must be an actual
remittance, as distinguished from profit which is remittable.
EXAMPLE: If the total branch profit is P115k but the amount to be
remitted is P100k, then tax base should be P100k.
Moreover, the 15% profit remittance tax imposed by Section 24 (b)(2)
of the Tax Code is an income tax, it is therefore clear that the same is
non-deductible from the gross (profit) income. Inasmuch as the tax is
an exaction on profit realized for remittance abroad, the deduction
thereof as an expense is not sustained by law nowhere in Section 30 of
the Tax Code is it provided that the same is deductible. Besides
deductions from gross income are masters of legislative grace, what is
not expressly granted by the law is deemed withheld.
Considering that the 15% branch profit remittance tax is imposed and
collected at source, necessarily the tax base should be the amount
actually applied for by the branch with the Central Bank of the
Philippines as profit to be remitted abroad.
It is desired that this Circular be given as wide publicity as possible.
Remitted = refers to the total branch profits w/c would be sent abroad
and NOT total profits of the branch (not all of w/c need to be sent
abroad)
THUS, the company is entitled to a refund or tax credit in the amount
of P152,690.61 corresponding to overpaid branch profit remittance
taxes during the years from 1981 to 1983.
As to the 1984 and 1985 branch profit remittance taxes, no refund or
tax credit is due the petitioner since the latter did not present any
proof of passive income it received during the period.
78
not provide for similar crediting of 20% of the gross amount of royalties
paid.
The purpose of the most favored nation clause is to grant to the
contracting party treatment not less favorable than that which has
been or may be granted to the most favored among other countries. It
is intended to establish the principle of equality of international
treatment providing that the citizens or subjects of the contracting
nations may enjoy the privileges accorded by either party to those of
the most favored nation.
The essence of the principle is to allow the taxpayer in one state to
avail of more liberal provisions granted in another tax treaty to which
the country of residence of such taxpayer is also a party provided that
the subject matter of taxation, in this case royalty income, is the same
as that in eh tax treaty under which the taxpayer is liable.
Both Articles 13 of the RP-US Tax Treaty and Article 12 of the RPGermany Tax Treaty speaks of tax on royalties for the use of trademark,
patent, and technology. The entitlement of the 10% rate of US firms
despite the absence of a matching credit (20% for royalties) would
derogate from the design behind the most grant equality of
international treatment since the tax burden laid upon the income of
the investor is not the same in the two countries. THE SIMILARITY IN
THE CIRCUMSTANCES OF PAYMENT OF TAXES IS A CONDITION FOR THE
ENJOYMENT OF MOST FAVORED NATION TREATMENT PRECISELY TO
UNDERSCORE THE NEED FOR EQUALITY OF TREATMENT.
RP-US Tax Treaty DOES NOT GIVE A MATCHING CREDIT OF 20%
FOR THE TAXES PAID TO THE PHILIPPINES ON ROYALTIES AS
ALLOWED UNDER the RP-West Germany Tax Treaty, SC Johnson
cannot be deemed entitled to the 10% granted under the latter treaty
for the reason that there is no payment of taxes on royalties under
similar circumstances.
Tax refunds are in the nature of tax exemptions. As such they are
regarded as in derogation of sovereign authority and to be construed
strictissimi juris against the person or entity claiming exemption. The
burden of proof is upon him who claims exemption in his favor and he
must be able to justify his claim by the clearest grant of organic or
statute law. SC Johnson is claiming for a refund of the alleged
overpayment of tax on royalties; however, there is nothing on record to
support a claim that the tax on royalties under the RP-US Tax Treaty is
paid under similar circumstances as the tax on royalties under the RPWest Germany Treaty.
Marubeni v CIR
79
80
At one point, they reduced their capital to P250k with the approval of
the SEC but this reduction was never implemented.
The CIR examined the books of Wine Merchants and found that it had
unreasonably accumulated a surplus of P428k from 1947-1957 in
excess of the reasonable needs of business subject to the surtax of 2%
imposed by Section 25 of the Tax Code.
CTA ruled that the purchase of shares in Wack Wack, Union Insurance,
and Acme Commercial were harmless and not subject to 25% surtax.
81
R: YES, it is unrelated.
CIR v Tuason
b.
82
assessment and the presumption that its failure to distribute surplus profits is
for the reasonable needs of the business.
Cyanamid Phils v CA
M. Tax-exempt corporations
CIR v Sinco Educational Corp
83
The college derived its income solely from the tuition fees paid by
students enrolled and realized profits out of its operation but did not
distribute any dividend or profit to its stockholders.
CIR said that part of the net income accumulated by the corporation
inured to the benefit of Sinco, president and founder of the corporation,
and therefore it is not entitled to the exemption prescribed by the law.
Much less can it be said that the payments made by the college to the
Community Publishers, Inc. redounded to the personal benefit of Sinco
simply because he is one of its stockholders.
84
CIR v CA (1992)
85
CIR v CA (1991)
Castaneda filed a formal written claim with CIR for a refund of the said
amount, saying that he cash equivalent of his terminal leave is exempt
from income tax.
To comply with the two-year prescriptive period within which claims for
refund may be filed, Castaneda filed with the CTA Petition for Review,
seeking the refund of income tax withheld from his terminal leave.
PD 985 also makes it clear that the actual service is the period of
time for which pay has been received, excluding the period covered
by terminal leave.
SC, however, denied the MR and held that the money value of the
accumulated leave credits of Atty. Bernardo Zialcita are NOT taxable.
86
Atlas Consolidated Mining entered into a Loan and Sales Contract with
Mitsubishi where it was provided that Mitsubishi would LEND Atlas
$20M for the installation of a new concentrator for copper production.
In turn, Atlas would SELL to Mitsubishi all the copper concentrates
produced from the machine for the next 15 years.
The NIRC provides that income received from loans in the Philippines
extended by financing institutions owned, controlled, or financed by
foreign governments are exempt from tax.
Mitsubishi and Atlas claim that the interest earned from the loan falls
under the above exemption because Mitsubishi was merely acting as
an agent of Eximbank, which is a financing institution owned,
controlled, and financed by the Japanese Government. They allege that
Mitsubishi was merely the conduit between Atlas and Eximbank, and
that the ultimate creditor was really Eximbank.
NIRC provides that income received from loans in the Phils extended by
financial institutions owned, controlled or financed by foreign govs are
exempt from tax. Mitsubishi and Atlas thus claim that interest income
from the loan falls under such exemption because Mitsubishi was
merely an agent of Eximbank, a financing institution owned,controlled
and financed by the Jap gov.
HOWEVER, Mitsubishi was NOT a mere agent of Eximbank. It entered
into the agreement with Atlas in its own independent capacity.
The transaction between Mitsubishi and Atlas on one hand,
AND Mitsubishi and Eximbank on the other, were separate and
distinct.
Thus, the interest income of the loan paid by Atlas to Mitsubishi is
entirely different from the interest income paid by Mitsubishi to
Eximbank. What was subject of the withholding tax is not the interest
income paid by Mitsubishi to Eximbank but the interest income earned
by Mitsubishi from the loan to Atlas.
Since the transaction was between Mitsubishi and Atlas, the exemption
that would have been applicable to Eximbank, does not apply. The
interest is therefore not exempt from tax.
It is true that under the contract of loan with Eximbank, Mitsubishi
agreed to use the amount as a loan to and in consideration for
importing copper concentrates from Atlas, but this only proves the
justification for the loan as represented by Mitsubishi which is a
standard banking practice for evaluating the prospects of due
repayment.
Laws granting exemption from tax are construed strictissimi juris
against the taxpayer and liberally in favor of the taxing power.
While international comity is invoked in this case on the nebulous
representation that the funds involved in the loans are those of a
foreign government, scrupulous care must be taken to avoid opening
means to violate our tax laws. Otherwise, the mere expedient of having
Phil corp enter into a contract for loans with private foreign entities,
which in turn will negotiate independently with their governments,
could be availed to take advantage of the tax exemption law under
discussion.
Q. DEDUCTIONS
CIR v ISABELA CULTURAL CORP
87
88
Section 34 (A) (1), formerly Section 29 (a) (1) (A), of the NIRC provides
that there shall be allowed as deduction from gross income all ordinary
and necessary expenses paid or incurred during the taxable year in
carrying on, or which are directly attributable to, the development,
management, operation and/or conduct of the trade, business or
exercise of a profession.
CIR disallowed 50% or P4M+ of the deduction and assessed the corp a
deficiency income taxes in the amount of P2M+.
CTA dismissed the appeal, so corp filed a petition for review w/ CA.
The parties are in agreement that the subject advertising expense was
paid or incurred within the corresponding taxable year and was
incurred in carrying on a trade or business. Hence, it was necessary.
In the case at bar, the P9M+ claimed as media advertising expense for
Tang alone was almost one-half of its total claim for marketing
expenses.
89
If the expenditures are for the advertising of the first kind, then, except
as to the question of the reasonableness of amount, there is no doubt
such expenditures are deductible as business expenses. If, however,
the expenditures are for advertising of the second kind, then normally
they should be spread out over a reasonable period of time.
In this case, the subject advertising expense was of the second kind.
Not only was the amount staggering; the respondent corporation itself
also admitted, in its letter protest to the Commissioner of Internal
Revenues assessment, that the subject media expense was incurred in
order to protect the corporations brand franchise.
The corporations venture to protect its brand franchise was
tantamount to efforts to establish a reputation. This was akin to the
acquisition of capital assets and therefore expenses related thereto
were not to be considered as business expenses but as capital
expenditures.
AGUINALDO v CIR
The BIR investigating officers found that AIC Fish Net deducted from its
gross income the amount of 61k as additional renumeration paid to the
officers of Aguinaldo Industries.
The examiner found that this money was taken from the sale of the
Muntinlupa property, an isolated transaction not in the usual course of
business. Thus, the examiner recommended that the amount be
disallowed as a deduction.
AIC contends that the money was paid as an allowance or bonus to its
officers as provided in its by-laws.
CTA upheld the CIRs decision and held Aguinaldo Industries liable for
17k in back taxes.
AIC argues that the profit derived from the sale of the Muntinlupa land
is not taxable for it is tax exempt under RA 901 as a new and
necessary industry.
I: W/n the bonus given to Aguinaldos officers was an ordinary and
necessary business expense and therefore deductible
R: No, it was not deductible.
The records show that the sale effected through a broker who got a
commission and there is no evidence of any service rendered by the
officer.
In computing net income, there shall be allowed as deductions all
ordinary and necessary expenses paid or incurred during the taxable
year in carrying on any trade or business including reasonable
allowances for personal services actually incurred.
In the basis of the forgoing standard, the bonus cannot be deemed as a
deductible expense for tax purposes, even though the sale could be
classified as a transaction for carrying on the trade or business of the
corporation.
There is no actual evidence that the officers actually rendered some
service in the perfection of the sale
For bonuses to be deductible it must answer two questions:
o
First, has personal service actually been rendered by the
officers?
o
Second, if so, is it a reasonable allowance therefore?
In this case, the shares in the profit were extraordinary and unusual
expenses and as such, cannot be deemed as necessary expenses.
Aguinaldo was also held liable to pay surcharge and interest on the
back taxes.
This was based on an understanding that only gold mines were taxexempt (RA 909).
90
Atlas still appealed to the CTA and assailed the disallowance of the
following items as deductible from their gross income: transfer agents
fee, stockholders relation service fee, US stock listing expenses,
suit expenses and provision for contingencies.
The CTA allowed the aforementioned deductions except for the items
titled stockholders relation services and suit expenses (only partial
disallowance, from P23k to P13k to finally, as deduced by the CTA,
P6k).
Since the exemption was only good until the first quarter of 1958, of
the net taxable income of petitioner is subject to income tax. Hence, it
assessed of Atlas promotion fees (amounting to P25k for the whole
year) with income tax.
Both parties appealed to the SC regarding the decision of the CTA.
I/ R:
1. Were the expenses paid for the services rendered by a PR
firm to be considered allowable deduction as business
expense?
NO, it is considered a capital expenditure. This is based on US
jurisprudence where it was held that expenses incurred to create a
favorable image does NOT make it a business expense.
Test of deductibility: 1) expense must be ordinary & necessary 2) it
must be paid or incurred n carrying on a trade or business 3) it must
be proven by evidence
2. Was the US stock listing fee to be considered allowable
deduction?
YES, because it is made annually to the stock exchange for the
privilege of having its stock listed. It is therefore ordinary & necessary.
An expense is necessary - when it is appropriate & helpful in the
development of the taxpayer's business. It is ordinary - when it is
normal in relation to the business of the taxpayer. But there is no hard
& fast rule on this. INTENTION is also important
3. Were suit expenses to be considered allowable deduction?
NO,litigation expenses incurred in defense or protection of title are
CAPITAL in nature and not deductible. It is considered a part of the
cost of the property.
ROXAS v CTA
However, the government did not have enough funds to pay them. So they
make arrangement for the Rehabilitation Finance Corp. to advance 1.5M as
loan with the land as collateral. Roxas y Cia. will then pay its loan from the
proceeds of the yearly amortizations paid by the farmers.
Antonio and Eduardo got married, leaving Jose to stay in the house for
which he paid rentals to Roxas y Cia. the amount of P8000/yr.
The CIR assessed the company deficiencies in real estate dealers tax on
the house rentals from Jose, securities dealers tax from profits from the
purchase and sale of securities and the unreported net profits from the sale
of the Batangas Land. It also disallowed deductions claimed by the
brothers. Roxas protested the assessment.
Issues:
1.
W/N Roxas y Cia. is liable for payment of fixed real estate dealers tax?
YES
2. W/N the profit derived from the sale of Batangas land considered an
ordinary gain 100% taxable?NO
3. W/N the expenses claimed can be included as deductions?
R: The Roxas y Cia. is liable to pay fixed tax as real estate
dealer from the rentals of Jose but the Batangas land is considered a capital
asset 50% taxable only. The contributions to the Manila Police trust fund
was allowed as deductions. The Christmas funds to Pasay Police, Pasay
Fireman, Baguio Police were not allowed as deductions. As well as the
contributions to civic org., Our lady of Fatima Chapel.
Rationale:
1. Section 194 of the Tax Code, in considering as real estate dealers
owners of real estate receiving rentals of at least P3,000.00 a year,
does not provide any qualification as to the persons paying the rentals.
. "Real estate dealer" includes any person engaged in
the business of buying, selling, exchanging, leasing or
renting property on his own account as principal and
holding himself out as a full or part-time dealer in real
estate or as an owner of rental property or properties
rented or offered to rent for an aggregate amount of
three thousand pesos or more a year: . ...
2.
The sale of the Batangas land is only an isolated transaction and it was
done at the request of the government for lack of funds to pay the said
property. The Municipality of Nasugbu even passed a resolution
expressing gratitude to the Roxas y Cia. In fine, Roxas y Cia.
cannot be considered a real estate dealer for the sale in
question. Hence, pursuant to Section 34 of the Tax Code the
lands sold to the farmers are capital assets, and the gain
derived from the sale thereof is capital gain, taxable only to
the extent of 50%.
91
3.
Christmas Funds (Pasay & Baguio Police, Pasay Fireman) Not for
public purpose, gifts to families of public officials
ZAMORA v CIR
Mariano Zamora, owner of the Bay View Hotel and Farmacia Zamora, Manila,
filed his income tax returns the years 1951 and 1952. The Collector of Internal
Revenue found that he failed to file his return of the capital gains derived from
the sale of certain real properties and claimed deductions which were not
allowable. The collector required him to pay the deficiency income tax for the
years 1951 and 1952. On appeal by Zamora, the CTA modified the decision
appealed from and ordered him to pay the reduced total sum of P30,258.00
(P22,980.00 and P7,278.00, as deficiency income tax for the years 1951 and
1952, respectively), pursuant to section 51(e), Int. Revenue Code. With costs
against petitioner. Having failed to obtain a reconsideration of the decision,
Mariano Zamora appealed.
It is alleged by Mariano Zamora that the CTA erred in disallowing
P10,478.50 as promotion expenses incurred by his wife for the promotion of the
Bay View Hotel and Farmacia Zamora. He contends that the whole amount of
P20,957.00 as promotion expenses in his 1951 income tax returns, should be
allowed and not merely one-half of it, on the ground that, while not all the
itemized expenses are supported by receipts, the absence of some supporting
receipts has been sufficiently and satisfactorily established. For the said amount
was spent by Mrs. Esperanza A. Zamora (wife of Mariano), during her travel to
Japan and the United States to purchase machinery for a new Tiki-Tiki plant, and
to observe hotel management in modern hotels.
The CTA, however, found that for said trip Mrs. Zamora obtained only the
sum of P5,000.00 from the Central Bank and that in her application for dollar
allocation, she stated that she was going abroad on a combined medical and
business trip, which facts were not denied by Mariano Zamora. No evidence had
been submitted as to where Mariano had obtained the amount in excess of
P5,000.00 given to his wife which she spent abroad. No explanation had been
made either that the statement contained in Mrs. Zamora's application for dollar
allocation that she was going abroad on a combined medical and business trip,
was not correct. The alleged expenses were not supported by receipts. Mrs.
Zamora could not even remember how much money she had when she left
abroad in 1951, and how the alleged amount of P20,957.00 was spent.
Issue: Whether the CTA erred in (1) disallowing P10,478.50, as promotion
expenses incurred by his wife for the promotion of the Bay View Hotel and
Farmacia Zamora (which is of P20,957.00, supposed business expenses); (2)
disallowing 3-% per annum as the rate of depreciation of the Bay View Hotel
Building
Held: Petition is dismissed. Decision appealed from is affirmed.
Ratio:
Section 30, of the Tax Code, provides that in computing net income, there
shall be allowed as deductions all the ordinary and necessary expenses paid
or incurred during the taxable year, in carrying on any trade or business
o
Since promotion expenses constitute one of the deductions in
conducting a business, same must testify these requirements.
Claim for the deduction of promotion expenses or entertainment
expenses must also be substantiated or supported by record
showing in detail the amount and nature of the expenses incurred.
o
Considering that the application of Mrs. Zamora for dollar
allocation shows that she went abroad on a combined medical and
business trip, not all of her expenses came under the category of
ordinary and necessary expenses; part thereof constituted her
personal expenses.
o
There having been no means by which to ascertain which expense
was incurred by her in connection with the business of Mariano
Zamora and which was incurred for her personal benefit, the
Collector and the CTA in their decisions, considered 50% of the
said amount as business expenses and the other 50%, as her
personal expenses. The allocation is very fair to Mariano Zamora,
there having been no receipt whatsoever, submitted to explain the
alleged business expenses, or proof of the connection which said
expenses had to the business or the reasonableness. While in
situations like the present, absolute certainty is usually no
possible, the CTA should make as close an approximation as it can,
bearing heavily, if it chooses, upon the taxpayer whose
inexactness is of his own making.
92
EXPENSES
C.M. Hoskins & Co, Inc.
Mr. C.M. Hoskins owns 99.6% of the corp and was the company
President.
He was also Chairman of the Board and received salary and bonuses
and got 50% share of the sales commissions earned by the company.
CM Hoskins filed its income tax return w/ net income of about P92k+.
After paying the latter, CIR verified the tax returns and DISALLOWED 4
items of deduction & assessed it deficiency income taxes.
The Tax Court set aside 3 of the disallowances, but upheld CIRs
disallowance of the 50% supervision fees earned by Mr. Hoskins.
(P99k+)
I: W/n the 50% share of Mr. Hoskins in the supervision fees received by
the company can be considered as deductions (CIR claims that this
amount is inordinately large, bearing a very close relationship to the
Mr. Hoskin's dominant stockholdings and therefore amounted in law to
a distribution of its earnings and profits)
R: NO.
In this case, Hoskins was:
o
Chairman of the board of directors of CM Hoskins, w/c bears
his name
o
owned 99.6% of its total authorized capital stock
o
was salesman-broker for his company, receiving a 50% share
of the sales commissions earned by petitioner, besides his
monthly salary of P3,750.00 amounting to an annual
compensation of P45,000.00 and an annual salary bonus of
P40,000.00
o
plus free use of the company car and receipt of other similar
allowances and benefits
Thus, the Tax Court correctly ruled that the payment by CM Hoskins to
Hoskins 50% share of the 8% supervision fees received by CM Hoskins
as managing agents of the real estate, subdivision projects of Paradise
Farms, Inc. and Realty Investments, Inc. was inordinately large and
could not be considered a deduction.
If such payment were to be allowed as a deductible item, then Hoskins
would receive on these three items alone (salary, bonus and
supervision fee) a total of P189k+, which would be double the
petitioner's reported net income for the year.
While a ONE-time fee could be considered fair & deductible as an
expense, in this case, Mr.Hoskins was receiving these supervisory fees
EVERY YEAR regardless of whether services were actually rendered by
him.
If it was allowed, his total compensation would be DOUBLE the
company's own net income.
The fact that such payment was authorized by a standing resolution of
CM Hoskins's board of directors, since "Hoskins had personally
conceived and planned the project" cannot change the picture. There
could be no question that as Chairman of the board and practically an
absolutely controlling stockholder of petitioner, holding 99.6% of its
stock, Hoskins wielded tremendous power and influence in the
formulation and making of the company's policies and decisions.
Test of Reasonableness for Bonuses: (CPR)
o
1) the payment of bonuses is in fact compensation
o
2) it must be for personal services actually rendered
o
3) the bonuses, when added to the salaries, are reasonable
when measured by the amount & quality of the services
performed with relation to the business of the taxpayer.
Hopkins fails to pass the test.
On the right of the employer as against CIR to fix the compensation of
its officers and employees, the question of the allowance or
93
Before the exhibition took place, Calanco applied w/ CIR for exemption
from payment of the amusement tax, relying on the provisions of
Section 260 of the National Internal Revenue Code.
After the said exhibition, CIR investigated the tax case of Calanoc, and
from the statement of receipts which was furnished the agent, CIR
found that the gross sales amounted to P26k+; the expenditures
incurred was P25k+ and the net profit was only P1,375.
Upon examination of the said receipts, the agent also found the
following items of expenditures: (a) P461.65 for police protection; (b)
P460.00 for gifts; (c) P1,880.05 for parties; and (d) several items for
representation.
Out of the proceeds of the exhibition, only P1.3k+ was remitted to the
SWC for the said charitable purpose for which the permit was issued.
CIR demanded from Calanoc the payment of the amount of 533.00; the
expenditures incurred was P25,157.62; and the net profit was only
P1,375,38.
Not satisfied with the assessment imposed upon him, Calanoc brought
this case to the CTA, but CTA ruled in favor of CIR.
The Court examined the records of the case and agreed with
the lower court that most of the items of expenditures
contained in the statement submitted to the agent are either
exorbitant or not supported by receipts.
The expenditures for the gifts, parties and other items for
representation are rather excessive, considering that the purpose of
the exhibition was for a charitable cause.
Also, Calanoc denies having received the stadium fee of P1k which is
not included in the receipts, and claims that if he did, he can not be
made to pay almost seven times the amount as amusement tax.
HOWEVER, evidence showed that while he did not receive said stadium
fee, amount was paid by the O-SO Beverages directly to the stadium
for advertisement privileges in the evening of the entertainments.
Thus, Calanoc had no right to include it as expense items. IT seems
that the P1k went into his pocket and was NOT accounted for.
Calanoc also admitted that he could not justify the other expenses,
such as those for police protection and gifts. He claims further that the
accountant who prepared the statement of receipts is already dead
and could no longer be questioned on the items contained in said
statement.
MOREOVER, the payment of P461.65 for police protection is
illegal as it is a consideration given by the Calanoc to the police for
the performance by the latter of the functions required of them to be
rendered by law.
2.
3.
CIR however DISALLOWED the deductions of all 3 items enumerated above and
assessed Kuenzle for deficiency income taxes.
Kuenzle requested for the re-examination of this assessment and contended that
the 3 items enumerated are treated as Deductions from gross income
invoking sec34 of NIRC. Specifically, the salaries and fees of the non-resident
president and VP as well as the bonuses of resident officers and employees
fall under EXPENSES which are ordinary and necessary expenses paid
or incurred during the taxable year in carrying on any trade or business,
including a reasonable allowance for salaries or other compensation for
personal services actually rendered.
CIR modified its assesment by allowing as deductible all items comprising
directors' fees and salaries of the non-resident president and VP, BUT
disallowing:
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CTA: upheld the assessment made by the CIR. CTA ruled that while the bonuses
given to the non-resident officers are reasonable, bonuses given to the
resident officers and employees are, quite EXCESSIVE.
Since the non-resident president and VP gave the same amount of duties and
services as compared to resident officers and employees (nonresidents gave
their full time and attention to the services of the corporation, directed and
supervised the business operations, were policy-makers, etc.), there is NO
SPECIAL REASON for granting greater bonuses to the lower ranking officers
than those given to non-resident president and VP.
2) W/n bonuses given in EXCESS of the yearly salaries of the employees can be
allowable as deductions YES
This is because of the determination of REASONABLENESS FACTORS:
I/R:
1) W/n the reasonableness of the amount of bonuses given to resident officers
and employees should follow the same pattern for determining the
reasonableness of the amount of bonuses given to non-resident officers- YES
GR: Bonuses to employees made in good faith and as additional compensation
for the services actually rendered by the employees are deductible, provided
such payments, when added to the stipulated salaries, do NOT exceed a
REASONABLE compensation for the services rendered.
The condition precedents to the deduction of bonuses to employees are: (CPR)
(1) the payment of the bonuses is in fact compensation;
3) W/n the payment of interests on earned but unpaid salaries and bonuses can
be considered deductions- NO
In order that interest may be deductible, it must be paid "on indebtedness". Here
the items involved are unclaimed salaries and bonus participation w/c
CANNOT constitute indebtedness because even if they constitute an obligation
on the part of the corporation, it is not the corps fault if they remained
unclaimed. Since the corporation had at all times sufficient funds to pay the
salaries of its employees, whatever an employee may fail to collect is NOT an
indebtedness. It is the employees concern to collect it in due time.
INTEREST
Paper Industries Corp of the Phils v CA
In 1969, 1972 and 1977, Picop obtained loans from foreign creditors in
order to finance the purchase of machinery and equipment needed for
its operations.
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In its 1977 Income Tax Return, Picop claimed the interest payments on
the loans as DEDUCTIONS from its 1977 gross income.
The CIR disallowed this deduction upon the ground that, because the
loans had been incurred for the purchase of machinery and equipment,
the interest payments on those loans should have been capitalized
instead and claimed as a depreciation deduction taking into account
the adjusted basis of the machinery and equipment (original
acquisition cost plus interest charges) over the useful life of such
assets.
I: W/n the interest payments can be deducted from gross income YES
transaction tax
R:
The 1977 NIRC does not prohibit the deduction of interest on a loan
incurred for acquiring machinery and equipment. Neither does our
1977 NIRC compel the capitalization of interest payments on such a
loan.
The 1977 Tax Code is simply silent on a taxpayer's right to elect one or
the other tax treatment of such interest payments. Accordingly, the
general rule that interest payments on a legally demandable loan are
deductible from gross income must be applied.
In this case, the CIR does not dispute that the interest payments were
made by Picop on loans incurred in connection with the carrying on of
the registered operations of Picop, i.e., the financing of the purchase of
machinery and equipment actually used in the registered operations of
Picop. Neither does the CIR deny that such interest payments were
legally due and demandable under the terms of such loans, and in fact
paid by Picop during the tax year 1977.
The CIR has been unable to point to any provision of the 1977 Tax Code
or any other Statute that requires the disallowance of the interest
payments made by Picop.
After the filing of the gift tax returns, CIR appraised the real property
donated for gift tax purposes at P1M+ and assessed the total sum of
about P117k as donor's gift tax, interest and compromises due thereon.
The donor's tax was paid by de Preito, but since the sum of about P55k
represnted the total interest on account of deliquency, she calimed the
P55k as deduction from her income tax return.
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TAXES
CIR v Lednicky
*NOTE: There are 3 cases involved here, all of which were elevated to the SC and
were decided jointly given that they involve the same parties and issues. The
Tax Court decided for the spouses, but SC reversed the decision.
GR 18286: V. E. Lednicky and Maria Valero Lednicky, were husband and wife,
both American citizens residing in the Philippines, and have derived all their
income from Philippine sources. In 1957, the spouses filed their income tax
return for 1956 and correspondingly paid taxes amounting to about P320k+. In
1959, the spouses filed an amended income tax return for 1956. The
amendment consisted in a claimed deduction paid in 1956 to the US
government as federal income tax for 1956. Simultaneously with the filing of the
amended return, the spouses requested the refund. When the Commissioner of
Internal Revenue failed to answer the claim for refund, the spouses filed a
petition with the Court of Tax Appeals.
GR 18169: The same thing was done in 1956, when the spouses filed their
domestic income tax return for 1955 and later on filed an amended income tax
return. On the basis of this amended return, the spouses paid about P570k+.
After audit, the Commissioner determined a deficiency of P16k+, which amount
the spouses paid.
Back in 1955, however, the spouses filed with the US Internal Revenue Agent in
Manila their Federal income tax return for the years 1947, 1951, 1952, 1953 and
1954 on income from Philippine sources on a cash basis. Payment of these
federal income taxes, including penalties and delinquency interest in the amount
of $264,588.82, were made in 1955 to the US Director of Internal Revenue,
Baltimore, Maryland, through the National City Bank of New York, Manila Branch.
In 1958, the spouses amended their Philippines income tax return for 1955 to
including US Federal income taxes, interest accruing up to 15 May 1955, and
exchange and bank charges, totaling P516k+ and filed a claim for refund.
GR 21434: The facts are similar to above cases but refer to the spouses income
tax returns for 1957, filed in 1958, for which the spouses paid a total sum of
P196,799.65. In 1959, they filed an amended return for 1957, claiming deduction
of P190,755.80, representing taxes paid to the US Government on income
derived wholly from Philippine sources. The spouses also filed a claim for refund
of overpayment.
Issue: W/n a US citizen, residing in the Phils who derived all his income from the
Phils can deduct from his income tax the amount of income taxes paid to the US
government
Held/ Ratio: NO.
1. The construction and wording of Section 30 (c) (1) (B) of the
Internal Revenue Act shows the laws intent that the right to deduct
income taxes paid to foreign government from the taxpayers gross
income is given only as an alternative or substitute to his right to claim
a tax credit for such foreign income taxes under section 30 (c) (3) and
(4). Thus, unless the alien resident has a right to claim such tax credit
if he so chooses, he is precluded from deducting the foreign income
taxes from his gross income.
2. The purpose of the law is to prevent the taxpayer from claiming twice
the benefits of his payment of foreign taxes, by deduction from gross
income and by tax credit. This danger of double credit certainly can not
exist if the taxpayer can not claim benefit under either of these
headings at his option, so that he must be entitled to a tax credit (the
spouses admittedly are not so entitled because all their income is
derived from Philippine sources), or the option to deduct from gross
income disappears altogether.
3. Double taxation becomes obnoxious only where the taxpayer is taxed
twice for the benefit of the same governmental entity. In the present
case, while the taxpayers would have to pay two taxes on the same
income, the Philippine government only receives the proceeds of one
tax. As between the Philippines, where the income was earned and
where the taxpayer is domiciled, and the United States, where that
income was not earned and where the taxpayer did not reside, it is
indisputable that justice and equity demand that the tax on the income
should accrue to the benefit of the Philippines. Any relief from the
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4.
alleged double taxation should come from the United States, and not
from the Philippines, since the USs right to burden the taxpayer is
solely predicated on his citizenship, without contributing to the
production of the wealth that is being taxed.
To allow an alien resident to deduct from his gross income whatever
taxes he pays to his own government amounts to conferring on the
latter power to reduce the tax income of the Philippine government
simply by increasing the tax rates on the alien resident. Every time the
rate of taxation imposed upon an alien resident is increased by his own
government, his deduction from Philippine taxes would correspondingly
increase, and the proceeds for the Philippines diminished, thereby
subordinating our own taxes to those levied by a foreign government.
Such a result is incompatible with the status of the Philippines as an
independent and sovereign state.
LOSSES
PICOP v CA
In 1977, Picop entered into a merger agreement with Rustan Pulp &
Paper Mills & Rustan Manfucturing Corp (both also BOI-registered).
R: No.
The purpose is to allow these firms to accumulate its losses in the early
years of its business and offset the losses in the later years when they
are already earning.
RPPM far from benefiting from the tax incentive granted by the BOI
statute, in fact gave up the struggle and went out of existence and its
former stockholders joined the much larger group of Picop's
stockholders.
To grant Picop's claimed deduction would be to permit Picop to shelter
its otherwise taxable income (an objective which Picop had from the
very beginning) which had not been earned by the registered
enterprise which had suffered the accumulated losses.
BAD DEBTS
Philex Mining c CIR
Philex Mining and Baguio Gold entered into an agreement wherein the
Philex would manage and operate Baguio Golds mining claim, the Sto.
Nio mine. The agreement was denominated as a Special Power of
Attorney.
However, the mine suffered continuing losses over the years which
resulted Philexs withdrawal as manager of the mine and in the
eventual cessation of mine operations.
In its 1982 annual income tax return, Philex deducted from its gross
income the amount of P112M as "loss on settlement of receivables
from Baguio Gold against reserves and allowances."
However, the BIR disallowed the amount as deduction for bad debt and
assessed petitioner deficiency income tax.
Philex protested, arguing that the deduction must be allowed since all
requisites for a bad debt deduction were satisfied, to wit: (a) there was
a valid and existing debt; (b) the debt was ascertained to be worthless;
and (c) it was charged off within the taxable year when it was
determined to be worthless.
I: W/n advances made by Philex to Baguio Gold can be considered a
bad debt and be deductible- NO
R: Advances were in the nature of an INVESTMENT and NOT a loan,
therefore not deductible.
A reading of the agreement shows denominated as the SPA indicates
that the parties had intended to create a partnership and establish a
common fund for the purpose.
They also had a joint interest in the profits of the business as shown by
a 50-50 sharing in the income of the mine.
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The SPA clearly provides that Philex would only be entitled to the
return of a proportionate share of the mine assets to be computed at a
ratio that the manager's account had to the owner's account. Except
to provide a basis for claiming the advances as a bad debt deduction,
there is no reason for Baguio Gold to hold itself liable to Philex under
the compromise agreements, for any amount over and above the
proportion agreed upon in the SPA.
In this case, the advances were not "debts" of Baguio Gold to petitioner
inasmuch as Baguio was under no unconditional obligation to return
the same to the former under the SPA.
As for the amounts that Philex paid as guarantor to Baguio Gold's
creditors, the tax court was correct in saying that Baguio Gold's debts
were not yet due and demandable at the time that Philex paid the
same. Verily, Philex pre-paid Baguio Gold's outstanding loans to its
bank creditors and this conclusion is supported by the evidence on
record.
Thus, Philex cannot claim the advances as a bad debt deduction from
its gross income. Deductions for income tax purposes partake of the
nature of tax exemptions and are strictly construed against the
taxpayer, who must prove by convincing evidence that he is entitled to
the deduction claimed. I
PRC accordingly filed a petition for review with the Court of Tax Appeals
(CTA) on the same assignment of error.
The Tax Court reversed and set aside the Commissioner's disallowance
of the interest expense but maintained the disallowance of the
supposed bad debts of 13 (out of 16) debtors.
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DEPRECIATION
Basilan Estates, Inc v CIR
It filed its income tax returns and was charged deficiency income tax
due to disallowed depreciation, travelling expenses, miscellaneous
expenses and unreasonably accumulated profits.
Thus, Basilan filed before the CTA a petition for review of the
Commisioners assessment alleging prescription of period for
assessment and collection, error in disallowing claimed depreciations,
traveling and miscellaneous expenses and error in finding the
existence of unreasonably accumulated profits but CA affirmed he
deficiency assessment.
Its president and chairman of the board is the same Isabelo Lim.
The corp duly filed its 1956 and 1957 income tax returns and
respectively paid corresponding taxes.
100
DEPLETION
Consolidated Mines, Inc v CTA
Consolidated Mines (CM), engaged in mining, had filed its income tax
returns for 1951, 1952, 1953 and 1956.
its auditor, Felipe Ollada claimed the refund of the sum of P107,472.00
representing alleged overpayments of income taxes for the year 1951.
After the investigation the examiners reported that CM had overstated
its claim for depletion.
The CIR then assessed CM for deficiency taxes. CM appealed this
assessment to the CTA. CM then questioned the judgment of the CTA
regarding the rate of depletion it adopted.
I: W/n CM overstated its rate of depletion; W/n the rate of depletion
adopted by the CTA was proper
R: Yes, CM overstated its rate of depletion.
The rate of depletion per ton of the ore deposit mined and sold by the
Company is P0.6196 per ton 49 not P0.59189 as contended by the
Commissioner nor P1.0197 as claimed by the Company;
The Tax Code provides that in computing net income there shall be
allowed as deduction, in the case of mines, a reasonable allowance for
depletion thereof not to exceed the market value in the mine of the
product thereof which has been mined and sold during the year for
which the return is made [Sec. 30(g) (1) (B)].
= Rate of Depletion
101
mining purposes, the same could not appreciably increase the ore potentials of
the Company's mines. The following are the correct figures.
The correct figures therefore are:
P2,515,000.00 (mine cost proper) + P131,878.44
(development cost)
4,271,892 (estimated ore deposit)
or
P2,646,878.44 (mine cost) = P0.6196 (rate of depletion
deposit)
4,271,892 (estimated ore per ton)
RESEARCH AND DEVELOPMENT
3M Phils v CIR
Facts:
3M Philippines, Inc., a subsidiary of 3M-St. Paul, is a non-resident foreign
corporation with principal office in St. Paul, Minnesota, USA. It is the exclusive
importer, manufacturer, wholesaler, and distributor in the Philippines of all
products of the latter. To enable it to manufacture, package, promote, market,
sell and install the highly specialized products of its parent company, and render
the necessary post-sales service and maintenance to its customers, petitioner
entered into a "Service Information and Technical Assistance Agreement" and a
"Patent and Trademark License Agreement" with the latter under which the
petitioner agreed to pay to 3M-St. Paul a technical service fee of 3% and a
royalty of 2% of its net sales. Both agreements were submitted to, and approved
by, the Central Bank of the Philippines.
In its income tax return for the fiscal year ended October 31, 1974, the petitioner
claimed the following deductions as business expenses:
(a)
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(a)
Petitioner points out that the Central bank "has no say in the assessment and
collection of internal revenue taxes as such power is lodged in the Bureau of
Internal Revenue," that the Tax Code "never mentions Circular 393 and there is
no law or regulation governing deduction of business expenses that refers to
said circular." The argument is specious, for, although the Tax Code allows
payments of royalty to be deducted from gross income as business expenses, it
is CB Circular No. 393 that defines what royalty payments are proper. Hence,
improper payments of royalty are not deductible as legitimate business
expenses.
Facts: ESSO deducted from its gross income for 1959, as part of its ordinary and
necessary business expenses, the amount it had spent for drilling and
exploration of its petroleum conscessions. The Commissioner disallowed the
claim on the ground that the expenses should be capitalized and might be
written off as a loss only when a dry hole should result. Hence, ESSO filed an
amended return where it asked for the refund of P323,270 by reason of its
abandonment, as dry holes, of several of its oil wells. It also claimed as ordinary
103
and necessary expenses in the same return amount representing margin fees it
had paid to the Central Bank on its profit remittances to its New York Office.
Issue: Whether the margin fees may be considered ordinary and necessary
expenses when paid.
Held: For an item to be deductible as a business expense, the expense must
ebe ordinary and necessary; it must be paid or incurred within the taxable year;
and it must be paid or incurred in carrying on a trade or business. In addition,
the taxpayrer must substantially prove by evidence or records teh deductions
claimed under law, otherwise, the same will be disallowed. There has been no
attempt to define ordinary and necessary with precision. However, as guiding
principle in the proper adjudication of conflicting claims, an expenses is
considered necessary where the expenditure is appropriate and helpdul in the
development of the taxpayers business. It is ordinary when it connotes a
payment which is normal in relation to the business of the taxpayer and the
surrounding circumstances. Assuming that the expenditure is ordinary and
necessary in the operation of the taxpayers business; the expenditure, to be an
allowable deduction as a business expense, must be determined from the nature
of the expenditure itself, and on the extent and permanency of the work
accomplished by the expenditure. Herein, ESSO has not shown that the
remittance to the head office of part of its profits was made in furtherance of its
own trade or business. The petitioner merely presumed that all corporate
expenses are necessary and appropriate in the absence of a showing that they
are illegal or ultra vires; which is erroneous. Claims for deductions are a matter
of legislative grace and do not turn on mere equitable considerations.
CAPITAL ASSETS
Calasanz v CIR
Ursula Calasanz (wife of Tomas) inherited from her father a parcel of land in
Cainta, Rizal. In order to liquidate her inheritance, she had the land surveyed,
and subdivided into lots, and put up improvements such as roads, drainage,
lighting, etc., to make it more saleable. Afterwards, the lots were sold. She and
her husband in the same year filed a join income tax return with the BIR,
disclosing a profit of P 31, 060. 06 from the sale of the lots, and reported 50% or
P15,530.03 as taxable capital gains. However upon audit and review, they were
adjudged as petitioners engaged in real estate business and were thus assessed
real estate dealers tax and deficiency income tax on ordinary gain.
The spouses Calasanz contended that inherited land is a capital asset within the
meaning of Section 34 of the Tax Code and that an heir who liquidates his
inheritance cannot be said to have engaged in real estate business and may not
be denied the preferential tax treatment given to gains from sale of capital
assets, merely because he disposed of it in the only possible and advantageous
way. They also averred that the land was sold because of their intention to effect
a liquidation, its being divided into smaller lots made it easier to dispose of.
However they also admitted that the improvements they introduced to the land
were added to facilitate its sale.
Issue: Whether or not petitioners are real estate dealers liable for real estate
dealers fixed tax
Whether the gains realized from the sale are taxable in full as ordinary income or
capital gains taxable at capital gain rates
Held: The Court decided in favor of the respondent. Petitioners engaged in the
real estate business and accordingly, the gains from the sale of the lots are
ordinary income taxable in full.
Ratio: The assets of a taxpayer are classified for income tax purposes into
ordinary assets and capital assets. Section 34[a] [1] of the National Internal
Revenue Code broadly defines capital assets as follows:
[1] Capital assets.-The term 'capital assets' means property held by the taxpayer
[whether or not connected with his trade or business], but does not include,
stock in trade of the taxpayer or other property of a kind which would properly
be included, in the inventory of the taxpayer if on hand at the close of the
taxable year, or property held by the taxpayer primarily for sale to customers in
the ordinary course of his trade or business, or property used in the trade or
business of a character which is subject to the allowance for depreciation
provided in subsection [f] of section thirty; or real property used in the trade or
business of the taxpayer.
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ORDINARY INCOME
Tuason v Lingad
In 1948 the petitioner inherited from his mother several tracts of land, among
which were two contiguous parcels situated on Pureza and Sta. Mesa streets in
Manila, with an area of 318 and 67,684 square meters, respectively.
When the petitioner's mother was yet alive she had these two parcels
subdivided into twenty-nine lots. Twenty-eight were allocated to their then
occupants who had lease contracts with the petitioner's predecessor at various
times from 1900 to 1903, which contracts expired on December 31, 1953. The
29th lot (hereinafter referred to as Lot 29), with an area of 48,000 square
meters, more or less, was not leased to any person. It needed filling because of
its very low elevation, and was planted to kangkong and other crops.
After the petitioner took possession of the mentioned parcels in 1950, he
instructed his attorney-in-fact, J. Antonio Araneta, to sell them.
There was no difficulty encountered in selling the 28 small lots as their
respective occupants bought them on a 10-year installment basis. Lot 29 could
not however be sold immediately due to its low elevation.
Sometime in 1952 the petitioner's attorney-in-fact had Lot 29 filled, then
subdivided into small lots and paved with macadam roads. The small lots were
then sold over the years on a uniform 10-year annual amortization basis. J.
Antonio Araneta, the petitioner's attorney-in-fact, did not employ any broker nor
did he put up advertisements in the matter of the sale thereof.
In 1953 and 1954 the petitioner reported his income from the sale of the small
lots (P102,050.79 and P103,468.56, respectively) as long-term capital gains. On
May 17, 1957 the Collector of Internal Revenue upheld the petitioner's treatment
of his gains from the said sale of small lots, against a contrary ruling of a
revenue examiner.
On the basis of the 1957 opinion of the Collector of Internal Revenue, the
revenue examiner approved the petitioner's treatment of his income from the
sale of the lots in question. which was concurred in by the Commissioner of
Internal Revenue.
On January 9, 1963, however, the Commissioner reversed himself and
considered the petitioner's profits from the sales of the mentioned lots as
ordinary gains. On January 28, 1963 the petitioner received a letter from the
Bureau of Internal Revenue advising him to pay deficiency income tax for 1957
Issue:
1.)W/n he was engaged in the business of leasing the lots he inherited from his
mother as well other real properties
2.)W/n his subsequent sales of the mentioned lots cannot be recognized as sales
of capital assets but of "real property used in trade or business of the taxpayer
Held:
the judgment of the Court of Tax Appeals is affirmed, except the portion thereof
that imposes 5% surcharge and 1% monthly interest, which is hereby set aside.
No costs.
Rationale:
As thus defined by law, the term "capital assets" includes all the
properties of a taxpayer whether or not connected with his trade or business,
except: (1) stock in trade or other property included in the taxpayer's inventory;
(2) property primarily for sale to customers in the ordinary course of his trade or
business; (3) property used in the trade or business of the taxpayer and subject
to depreciation allowance; and (4) real property used in trade or business. If the
taxpayer sells or exchanges any of the properties above-enumerated, any gain
or loss relative thereto is an ordinary gain or an ordinary loss; the gain or loss
105
from the sale or exchange of all other properties of the taxpayer is a capital gain
or a capital loss.
Under section 34(b) (2) of the Tax Code, if a gain is realized by a
taxpayer (other than a corporation) from the sale or exchange of capital assets
held for more than twelve months, only 50% of the net capital gain shall be
taken into account in computing the net income.
When the petitioner obtained by inheritance the parcels in question,
transferred to him was not merely the duty to respect the terms of any contract
thereon, but as well the correlative right to receive and enjoy the fruits of the
business and property which the decedent had established and maintained. 7
Moreover, the record discloses that the petitioner owned other real properties
which he was putting out for rent, from which he periodically derived a
substantial income, and for which he had to pay the real estate dealer's tax
Under the circumstances, the petitioner's sales of the several lots
forming part of his rental business cannot be characterized as other than sales
of non-capital assets.
The sales concluded on installment basis of the subdivided lots
comprising Lot 29 do not deserve a different characterization for tax purposes.
Circumstances show that he was engaged in the real estate business
This Court notes, however, that in ordering the petitioner to pay the
deficiency income tax, the Tax Court also required him to pay a 5% surcharge
plus 1% monthly interest. In our opinion this additional requirement should be
eliminated because the petitioner relied in good faith upon opinions rendered by
no less than the highest officials of the Bureau of Internal Revenue, including the
Commissioner himself.
China Banking Corp v CA
Sometime in 1980, petitioner China Banking Corporation made a 53% equity
investment in the First CBC Capital (Asia) Ltd., a Hongkong subsidiary engaged
in financing and investment with "deposit-taking" function. The investment
amounted to P16,227,851.80, consisting of 106,000 shares with a par Value of
P100 per share.
In the course of the regular examination of the financial books and investment
portfolios of petitioner conducted by Bangko Sentral in 1986, it was shown that
First CBC Capital (Asia), Ltd., has become insolvent. With the approval of
Bangko Sentral, petitioner wrote-off as being worthless its investment in First
CBC Capital (Asia), Ltd., in its 1987 Income Tax Return and treated it as a bad
debt or as an ordinary loss deductible from its gross income.
Respondent Commissioner of internal Revenue disallowed the deduction and
assessed petitioner for income tax deficiency in the amount of P8,533,328.04,
inclusive of surcharge, interest and compromise penalty. The disallowance of
the deduction was made on the ground that the investment should not be
classified as being "worthless" and that, although the Hongkong Banking
Commissioner had revoked the license of First CBC Capital as a "deposit-taping"
company, the latter could still exercise, however, its financing and investment
activities. Assuming that the securities had indeed become worthless,
respondent Commissioner of Internal Revenue held the view that they should
then be classified as "capital loss," and not as a bad debt expense there being
no indebtedness to speak of between petitioner and its subsidiary.
Petitioner contested the ruling of respondent Commissioner before the CTA. The
tax court sustained the Commissioner, holding that the securities had not indeed
become worthless and ordered petitioner to pay its deficiency income tax for
1987 of P8,533,328.04 plus 20% interest per annum until fully paid. When the
decision was appealed to the Court of Appeals, the latter upheld the CTA. In its
instant petition for review on certiorari, petitioner bank assails the CA decision.
The petition must fail.
The claim of petitioner that the shares of stock in question have become
worthless is based on a Profit and Loss Account for the Year-End 31 December
1987, and the recommendation of Bangko Sentral that the equity investment be
written-off due to the insolvency of the subsidiary. While the matter may not be
indubitable (considering that certain classes of intangibles, like franchises and
goodwill, are not always given corresponding values in financial statements,
there may really be no need, however, to go of length into this issue since, even
to assume the worthlessness of the shares, the deductibility thereof would still
be nil in this particular case. At all events, the Court is not prepared to hold that
both the tax court and the appellate court are utterly devoid of substantial basis
for their own factual findings.
Subject to certain exceptions, such as the compensation income of individuals
and passive income subject to final tax, as well as income of non-resident aliens
and foreign corporations not engaged in trade or business in the Philippines, the
tax on income is imposed on the net income allowing certain specified
deductions from gross income to be claimed by the taxpayer. Among the
deductible items allowed by the National Internal Revenue Code ("NIRC") are
bad debts and losses.
An equity investment is a capital, not ordinary, asset of the investor the sale or
exchange of which results in either a capital gain or a capital loss. The gain or
the loss is ordinary when the property sold or exchanged is not a capital asset.
A capital asset is defined negatively in Section 33(1) of the NIRC; viz:
(1) Capital assets. - The term 'capital assets' means property held by the
taxpayer (whether or not connected with his trade or business), but does not
include stock in trade of the taxpayer or other property of a kind which would
properly be included in the inventory of the taxpayer if on hand at the close of
the taxable year, or property held by the taxpayer primarily for sale to
customers in the ordinary course of his trade or business, or property used in the
trade or business, of a character which is subject to the allowance for
depreciation provided in subsection (f) of section twenty-nine; or real property
used in the trade or business of the taxpayer.
Thus, shares of stock; like the other securities defined in Section 20(t) of the
NIRC, would be ordinary assets only to a dealer in securities or a person
engaged in the purchase and sale of, or an active trader (for his own
account) in, securities. Section 20(u) of the NIRC defines a dealer in
securities thus:
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"(b) Basis for determining gain or loss from sale or disposition of property. - The
basis of property shall be - (1) The cost thereof in cases of property acquired on
or before March 1, 1913, if such property was acquired by purchase; or
"(2) The fair market price or value as of the date of acquisition if the same was
acquired by inheritance; or
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"(3) If the property was acquired by gift the basis shall be the same as if it would
be in the hands of the donor or the last preceding owner by whom it was not
acquired by gift, except that if such basis is greater than the fair market value of
the property at the time of the gift, then for the purpose of determining loss the
basis shall be such fair market value; or
again stress that the basic rule is still that any capital loss can be deducted
only from capital gains under Section 33(c) of the NIRC.
"(4) If the property, other than capital asset referred to in Section 21 (e), was
acquired for less than an adequate consideration in money or moneys worth, the
basis of such property is (i) the amount paid by the transferee for the property or
(ii) the transferor's adjusted basis at the time of the transfer whichever is
greater.
(a) The equity investment in shares of stock held by CBC of approximately 53%
in its Hongkong subsidiary, the First CBC Capital (Asia), Ltd., is not an
indebtedness, and it is a capital, not an ordinary, asset.
"(5) The basis as defined in paragraph (c) (5) of this section if the property was
acquired in a transaction where gain or loss is not recognized under paragraph
(c) (2) of this section. (As amended by E.O. No. 37)
In sum -
(b) Assuming that the equity investment of CBC has indeed become "worthless,"
the loss sustained is a capital, not an ordinary, loss.
(c) The capital loss sustained by CBC can only be deducted from capital gains if
any derived by it during the same taxable year that the securities have become
"worthless."
CIR v Rufino
This is a petition for review on certiorari of the CTA decision which absolved petitioners from
liability for capital gains tax on stocks received by them from Eastern Theatrical, Inc. The
Rufinos were majority stockholders of Eastern Theatrical Co., Inc (hereinafter Old ETC)
which had a corporate term of 25 years, which terminated on January 25, 1959, president of
which was Ernesto Rufino. On December 8, 1958, the Eastern Theatrical Co, Inc.
(hereinafter New ETC, with a corporate term of 50 years) was organized, and the Rufinos
were also the majority stockholders of the corporation, with Vicente Rufino as the GeneralManager. Both ETCs were engaged in the same business.
Old ETC held a stockholders meeting to merge with the New ETC on December 17, 1958
to continue its business after the end of Old ETCs corporate term. The merger was
authorized by a board resolution. It was expressly declared that the merger was necessary
to continue operating the Capitol and Lyric Theaters in Manila even after the expiration of
corporate existence, to preserve both its booking contracts and to uphold its collective
bargaining agreements. Through the two Rufinos (Ernesto and Vicente), a Deed of
Assignment was executed, which conveyed and transferred all the business, property,
assets and good will of the Old ETC to the New ETC in exchange for shares of stock of
the latter to be issued to the shareholders at the rate of one stock for each stock held in
the Old ETC. The Deed was to retroact from January 1, 1959. New ETCs Board approved
the merger and the Deed of Assignment on January 12, 1959 and all changes duly
registered with the SEC.
The BIR, after examination, declared that the merger was not undertaken for a bona fide
business purpose but only to avoid liability for the capital gains tax on the exchange of the
old for the new shares of stock. He then imposed deficiency assessments against the
private respondents, the Rufinos. The Rufinos requested for a reconsideration, which was
denied. Therefore, they elevated their matter to the CTA, who reversed the judgment of the
CIR, saying that they found that there was no taxable gain derived from the exchange of
old stocks simply for new stocks for the New Corporation because it was pursuant to a valid
plan of reorganization. The CIR raised it to the SC on petition for review on certiorari.
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Issue:
WON there was a valid merger and that there was no taxable gain derived
therefromYES, the CTA was correct in ruling that there WAS a merger and
that no taxable gain was derived. CTA decision is AFFIRMED.
Rationale:
Validity of transfer
In support of its argument that the Rufinos were trying to avoid the payment of
capital gains tax, the CIR said that the New ETC did not actually issue stocks in
exchange for the properties of the Old ETC. The increase in capitalization only
happened in March 1959, or 37 days after the Old ETC expired. Prior to
registration, the New ETC could not have validly performed the transfer. The SC
ruled that the retroactivity of the Deed of Assignment cured the defect and there
was no impediment.
The Commissioner of Internal Revenue, being of opinion that the reorganization attempted
was without substance and must be disregarded, held that petitioner was liable for a tax as
though the United corporation had paid her a dividend consisting of the amount realized
from the sale of the Monitor shares.
Issue:
W/N there had been a reorganization within the meaning of the Revenue Act of 1928 and
therefore make petitioner Gregory liable only to a tax on the capital net gain for the sale of
his shares of stocks under the Averill Corporation and not tax on the dividends. NO
Held:
The judgment is AFFIRMED.
Rationale:
Section 112 of the Revenue Act of 1928 (26 USCA 2112) deals with the subject of gain or
loss resulting from the sale or exchange of property. Such gain or loss is to be recognized in
computing the tax, except as provided in that section.
Gregory v Helvering
Petitioner Gregory was the owner of all the stock of United Mortgage Corporation, which
held among its assets 1,000 shares of the Monitor Securities Corporation. In order to
procure a transfer of these shares to herself and diminish the amount of income tax which
would result from a direct transfer by way of dividend, she sought to bring about a
'reorganization' under section 112(g) of the Revenue Act of 1928.
Averill Corporation was organized under the laws of Delaware. Three days later, the United
Mortgage Corporation transferred to the Averill Corporation the 1,000 shares of Monitor
stock, for which all the shares of the Averill Corporation were issued to the petitioner.
Subsequently, Averill Corporation was dissolved, and liquidated by distributing all its assets,
namely, the Monitor shares, to the petitioner. No other business was ever transacted, or
intended to be transacted, by that company. Petitioner thereafter paid tax on the capital net
gains when she sold her shares.
In these circumstances, the facts speak for themselves and are susceptible of but one
interpretation. The whole undertaking, though conducted according to the terms of
subdivision (B), was in fact an elaborate and devious form of conveyance masquerading as
a corporate reorganization, and nothing else. The rule which excludes from consideration
the motive of tax avoidance is not pertinent to the situation, because the transaction upon its
face lies outside the plain intent of the statute. To hold otherwise would be to exalt artifice
above reality and to deprive the statutory provision in question of all serious purpose.
The governments remedy: The merger merely deferred the payment for taxes until the
future, which the government may assert later on when gains are realized and benefits are
distributed among the stockholders as a result of the merger. The taxes are not forfeited but
merely postponed and may be imposed at the proper time later on.
BUSINESS PURPOSE
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