FERRER V.

COMMISSIONER OF INTERNAL REVENUE usually subjects the taxpayer to further or additional civil or criminal
liabilities.
Estate of Benigno Toda Jr. ! Tax evasion connotes the integration of three factors:
G.R. No. 147188. September 14, 2004 ! (1) the end to be achieved, i.e., the payment of less than that known by the
DAVIDE, JR., C.J. taxpayer to be legally due, or the non-payment of tax when it is shown that
a tax is due
Lessons Applicable: Tax evasion v. Tax avoidance ! (2) an accompanying state of mind which is described as being evil, in bad
faith, willfull,or deliberate and not accidental; and
FACTS: ! (3) a course of action or failure of action which is unlawful.
! March 2, 1989: Cibeles Insurance Corp. (CIC) authorized Benigno P. Toda ! All are present in this case. The trial balance showed that RMI debited P
Jr., President and Owner of 99.991% of outstanding capital stock, to sell 40M as "other-inv. Cibeles Building" that indicates RMI Paid CIC (NOT
the Cibeles Building and 2 parcels of land which he sold to Rafael A. Altonaga)
Altonaga on August 30, 1987 for P 100M who then sold it on the same day ! Fraud in its general sense, is deemed to comprise anything calculated to
to Royal Match Inc. for P 200M. deceive, including all acts, omissions, and concealment involving a breach
! CIC included gains from sale of real property of P 75,728.021 in its annual of legal or equitable duty, trust or confidence justly reposed, resulting in
income tax return while Altonaga paid a 5% capital gains tax of P 10M the damage to another, or by which an undue and unconscionable
! July 12, 1990: Toda sold his shares to Le Hun T. Choa for P 12.5M advantage is taken of another.
evidenced by a deed of ale of shares of stock which provides that the buyer ! Here, it is obvious that the objective of the sale to Altonaga was to reduce
is free from all income tax liabilities for 1987, 1988 and 1989. the amount of tax to be paid especially that the transfer from him to RMI
! Toda Jr. died 3 years later. would then subject the income to only 5% individual capital gains tax, and
! March 29, 1994: BIR sent an assessment notice and demand letter to CIC not the 35% corporate income tax.
for deficiency of income tax of P 79,099, 999.22 ! Generally, a sale of or exchange of assets will have an income tax
! January 27, 1995: BIR sent the same to the estate of Toda Jr. incidence only when it is consummated but such tax incidence depends
! Estate filed a protest which was dismissed - fraudulent sale to evade the upon the substance of the transaction rather them mere formalities.
35% corporate income tax for the additional gain of P 100M and that there
is in fact only 1 sale.
! Since it is falsity or fraud, the prescription period is 10 years from the Vive Eagle Land, Inc. vs CA
discovery of the falsity or fraud as prescribed under Sec. 223 (a) of the
NIRC FACTS: In 1988, VELI, as vendor, through its president, petitioner Virgilio
! CTA: No proof of fraudulent transaction so the applicable period is 3 years Cervantes, and respondent Genuino Ice Co., Inc., as vendee, executed a deed of
after the last day prescribed by law for filing the return absolute sale (third deed of sale) over a parcel of land with a deed of assignment
! CA: affirmed of rights in which the latter assigned in favor of the respondent, for and in
! CIR appealed consideration of P4,000,000.00, all its rights and interests under the Deed of
ISSUE: W/N there is falsity or fraud resulting to tax evasion rather than tax Absolute Sale executed on April 13, 1988 by the Spouses Flores and the deed of
avoidance so the period for assessment has not prescribed. absolute sale executed by TATIC in its favor, insofar as that lot covered was
concerned.
HELD: YES. Estate shall be liable since NOT yet prescribed. Respondent, wrote petitioner VELI and made demands for payment to the BIR
the capital gains tax and deliver the receipt and/or clearance thereof, plus the
! Tax avoidance and tax evasion are the two most common ways used by interests for all registration fees on account of delay in the payment of the capital
taxpayers in escaping from taxation. ax avoidance is the tax saving device gains tax and the 1% documentary stamp tax for the sale of the property from
within the means sanctioned by law. This method should be used by the VELI to respondent company. VELI, rejected demand. Hence a case for
taxpayer in good faith and at arms length. Tax evasion, on the other hand, specific performance and damages. The respondent alleged, inter alia, that
is a scheme used outside of those lawful means and when availed of, it petitioner failed (a) to transfer title to and in the name of the respondent over the
property covered by TCT No. 241846 despite the lapse of a reasonable time; (b)
to cause the eviction/removal of the squatters/occupants on the property; and (c)
to pay the capital gains tax and other assessments due to effectuate the transfer
of the titles of the property to and in its name.
Issues: WHETHER OR NOT VELI IS OBLIGED TO PAY FOR THE
EXPENSES FOR TRANSFER OF THE PROPERTY AND THE ISSUANCE
OF THE TITLES TO AND UNDER THE NAME OF RESPONDENT;
WHETHER OR NOT THE PETITIONERS ARE LIABLE TO PAY THE
CAPITAL GAINS TAX FOR THE SALE BETWEEN PETITIONER VELI
AND THE RESPONDENT?
This is the reason why, in the second sale, neither TATIC nor petitioner VELI
paid any capital gains tax. Similarly, in the third sale, i.e., between petitioner
VELI and the respondent, petitioner VELI, being a corporation, was not obliged
to pay the capital gains tax. However, petitioner VELI, as seller, should have
included in its ordinary income tax return, whatever gain or loss it incurred with
respect to the sale of the property in dispute, pursuant to Section 24(a) of the
1977 NIRC, as amended.

Ruling:
VELI is not liable for the payment of capital gains tax for the third deed of sale.
A capital gains tax is a final tax assessed on the presumed gain derived by SMI-Ed Philippines v. CIR
citizens and resident aliens, as well as estates and trusts, from the sale or
exchange of real property. Under the first sale, per the agreement of the Spouses In an action for refund of taxes allegedly erroneously paid, the CTA may
Flores, TATIC, and Tobias, the said spouses were obliged to pay the capital determine whether there are other taxes that should have been paid in lieu of the
gains tax. However, under the deed of absolute sale for the second sale, TATIC taxes paid. Such is not an assessment but a determination of the proper category
was not obliged to pay the said tax. The Court notes that in answer to the of tax to be paid which is merely incidental in determining the propriety of
respondents demand letter, petitioner VELI claimed that such tax could not be refund.
assessed against it or against TATIC for the reason that they are corporations If the taxpayer is found liable for taxes other than the ones alleged to be
and, therefore, exempt from the payment of capital gains tax for any sale or erroneously paid, the amount of taxpayers liability should be computed and
exchange or disposition of property. deducted from the refundable amount.
It is settled that only laws existing at the time of the execution of a contract are SC ruled that a PEZA-registered corporation that has never commenced
applicable thereto and not later statutes, unless the latter are specifically intended operations may not avail of the tax incentives and preferential rates given to
to have retroactive effect. When the first and second deeds of absolute sale took PEZA-registered enterprises.
place in 1988, the 1977 National Internal Revenue Code (NIRC), as amended The difference between individual and corporate capital gains tax on the sale oF
by Batas Pambansa Blg. 37 and Executive Order No. 237 was still in effect. real properties: oIndividuals are taxed on capital gains From the sale oF all real
Under Sections 21(e) and 34(h) of the 1977 NIRC, as amended, the Spouses properties located in the Philippines and classified as capital assets.oor domestic
Flores, as vendors, were liable for the payment of capital gains tax. In the corporations, however, the capital gains taxis imposed only on the presumed
second sale, however, TATIC was not similarly liable because while Article gain realized From the sale oF lands and/or buildings.
1487 of the Civil Code provides that the seller is obliged to pay the capital
gains tax based on its obligation to transfer title over the property to the
vendee under Sections 21(e) and 34(h) of the 1977 NIRC, the payment of
capital gains tax from the sale, exchange of disposition of real property
devolved only upon individual taxpayers. In fact, the Bureau of Internal
Revenue (BIR), in response to the queries of several corporations which had
sold, exchanged or disposed of their real properties, more particularly in BIR
Ruling Nos. 159 (September 13, 1985), 127 (July 12, 1983), 191 (November 15,
1983), 195 (November 15, 1983), 60 (May 12, 1986), 177 (September 17, 1986),
and 415-87 (December 23, 1987), definitely ruled that the corporations were
exempt from the payment of capital gains tax. Their income from the sale or
exchange or disposition of real property was treated as ordinary income, and was
taxed as such.
 CIR vs PAL
FACTS: PHILIPPINE AIRLINES, INC. had zero taxable income for 2000 but
would have been liable for Minimum Corporate Income Tax based on its gross
income. However, PHILIPPINE AIRLINES, INC. did not pay the Minimum
Corporate Income Tax using as basis its franchise which exempts it from all
other taxes upon payment of whichever is lower of either (a) the basic
corporate income tax based on the net taxable income or (b) a franchise tax of
2%.
ISSUE: Is PAL liable for Minimum Corporate Income Tax?
HELD: NO. PHILIPPINE AIRLINES, INC.s franchise clearly refers to "basic
corporate income tax" which refers to the general rate of 35% (now 30%). In
addition, there is an apparent distinction under the Tax Code between taxable
income, which is the basis for basic corporate income tax under Sec. 27 (A) and
gross income, which is the basis for the Minimum Corporate Income Tax under
Section 27 (E). The two terms have their respective technical meanings and
cannot be used interchangeably. Not being covered by the Charter which makes
PAL liable only for basic corporate income tax, then Minimum Corporate
Income Tax is included in "all other taxes" from which PHILIPPINE
AIRLINES, INC. is exempted.
The CIR also can not point to the Substitution Theory which states that
Respondent may not invoke the in lieu of all other taxes provision if it did not
pay anything at all as basic corporate income tax or franchise tax. The Court
ruled that it is not the fact tax payment that exempts Respondent but the exercise
of its option. The Court even pointed out the fallacy of the argument in that a
measly sum of one peso would suffice to exempt PAL from other taxes while a
zero liability would not and said that there is really no substantial distinction
between a zero tax and a one-peso tax liability. Lastly, the Revenue
Memorandum Circular stating the applicability of the MCIT to PAL does more
than just clarify a previous regulation and goes beyond mere internal
administration and thus cannot be given effect without previous notice or
publication to those who will be affected thereby.
CIR v. Burroughs Ltd.
FACTS: Petitioner contends that respondent is no longer entitled to a refund
because Memorandum Circular No. 8-82 dated March 17, 1982 had revoked
and/or repealed the BIR ruling of January 21, 1980.
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.
RULING: Petitioner's aforesaid contention is without merit. What is applicable
in the case at bar is still the Revenue Ruling of January 21, 1980 because private
respondent Burroughs Limited paid the branch profit remittance tax in question
on March 14, 1979. Memorandum Circular No. 8-82 dated March 17, 1982
cannot be given retroactive effect in the light of Section 327 of the National
Internal Revenue Code which provides-
Sec. 327. Non-retroactivity of rulings. Any revocation, modification, or reversal
of any of the rules and regulations promulgated in accordance with the preceding
section or any of the rulings or circulars promulgated by the Commissioner shag
not be given retroactive application if the revocation, modification, or reversal
will be prejudicial to the taxpayer except in the following cases (a) where the
taxpayer deliberately misstates or omits material facts from his return or in any
document required of him by the Bureau of Internal Revenue; (b) where the
facts subsequently gathered by the Bureau of Internal Revenue are materially
different from the facts on which the ruling is based, or (c) where the taxpayer
acted in bad faith.
The prejudice that would result to private respondent Burroughs Limited by a
retroactive application of Memorandum Circular No. 8-82 is beyond question
for it would be deprived of the substantial amount of P172,058.90. And, insofar
as the enumerated exceptions are concerned, admittedly, Burroughs Limited
does not fall under any of them.
 BANK OF AMERICA NT & SA VS. CA BASILAN ESTATES V. CIR AND CTA (TAX)

In the 15% remittance tax, the law specifies its own tax base to be on the profit The first question for resolution is whether depreciation shall be
remitted abroad. There is absolutely nothing equivocal or uncertain about the determined on the acquisition cost or on the reappraised value of the assets.
language of the provision. The tax is imposed on the amount sent abroad, and
the law calls for nothing further. DEPRECIATION is the gradual diminution in the useful value of tangible
property resulting from wear and tear and normal obsolescense. The term is also
FACTS: applied to amortization of the value of intangible assets, the use of which in the
1. Bank of America is a foreign corporation licensed to engage in business in the trade or business is definitely limited in duration. Depreciation commences with
Philippines through a branch in Makati. the acquisition of the property and its owner is not bound to see his property
2. Bank of America paid 15% branch profit remittance tax amounting to gradually waste, without making provision out of earnings for its replacement.
PhP7.5M from its REGULAR UNIT OPERATIONS and another 405K PhP Accordingly, the law permits the taxpayer to recover gradually his capital
from its FOREIGN CURRENCY DEPOSIT OPERATIONS investment in wasting assets free from income tax.
3. The tax was based on net profits after income tax without deducting the
amount corresponding to the 15% tax. Precisely, Section 30 (f)(1) states:
4. Bank of America thereafter filed a claim for refund with the BIR for the
portion the corresponds with the 15% branch profit remittance tax. BOAs In general - a reasonable allowance for deterioration of property arising out of its
claim: BIR should tax us based on the profits actually remitted (45M), and use or employment in the business or trade, or out of its not being used:
NOT on the amount before profit remittance tax (53M)... The basis should be the Provided, that when the allowance authorized under this subsection shall equal
amount actually remitted abroad. the capital invested by the taxpayer... no further allowance shall be made...
5. CIR contends otherwise and holds that in computing the 15% remittance tax,
the tax should be inclusive of the sum deemed remitted. ...allows deduction from gross income for depreciation but limits the recovery to
the capital invested in the asset being depreciated.
ISSUES: Whether or not the branch profit remittance tax should be base on the
amount actually remitted? The income tax law does not authorize the depreciation of an asset beyond its
acquisition cost. Hence, a deduction over and above such cost cannot be claimed
HELD: YES. and allowed. The reason is that deductions from gross income are privileges, not
1. It should be based on the amount actually committed, NOT what was applied matters of right. They are not created by implication but upon clear expression in
for. the law.
2. There is nothing in Section 24which indicates that the 15% tax/branch profit
remittance is on the total amount of profit; where the law does NOT qualify that Moreover, the recovery, free of income tax, of an amount more than the invested
the tax is imposed and collected at source, the qualification should not be read capital in an asset will transgress the underlying purpose of a depreciation
into law. allowance. for then what the taxpayer would recover will be, not only the
3. Rationale of 15%: To equalize/ share the burden of income taxation with acquisition cost but also some profit. Recovery in due time thru depreciation on
foreign corporations investment made is the philosophy behind depreciation allowance; the idea of
profit on the investment made has never been the underlying reason for the
allowance of a deduction for depreciation.
Compagnie Fruitiere Sucres et denrees vs CIR
Accordingly, the claim for depreciation has no justification in the law. The
Manila Wine Merchants vs CIR determination therefore, of the Commissioner disallowing said amount, affirmed
by the CTA is sustained.
The second question for resolution is whether the miscellaneous expenses
and officer's travelling expenses are allowable expenses as the same could
not be supported by appropriate papers.
On this ground, the petitioner may be sustained for under Section 337 of the Tax
Code, receipts and papers supporting such expenses need be kept by the
taxpayer for a period of 5 years from the last entry. At the time of the
investigation, said 5 years have lapsed. Taxpayer's stand on this issue is
therefore sustained.
The third question is on the unreasonably accumulated profits.
Section 25 of the Tax Code which imposes a surtax on profits unreasonably
accumulated provides:
Sec. 25. Additional tax on corporations improperly accumulating profits or
surplus - (a) Imposition of tax. - If any corporation, except banks, insurance
companies, or personal holding companies, domestic or foreign, is formed or
availed of for the purpose of preventing imposition of tax upon its shareholders
or members or the shareholders or members of another corporation, through the
medium of permitting its gains and profits to accumulate instead of being
divided or distributed, there is levied and assessed against such corporation, for
each taxable year, a tax equal to 25% of the undistributed portion of its
accumulated profits or surplus which shall be in addition to the tax imposed by
Section 24, and shall be computed, collected, and paid in the same manner and
subject to the same provisions of law, including penalties, as that tax.
Petitioner failed to provide sufficient explanation. In order to determine whether
profits were accumulated for the reasonable needs of the business or to avoid the
surtax upon shareholders, the controlling intention of the taxpayer is that which
is manifested at the time of the accumulation, not subsequently declared
intentions which are merely the products of afterthought. As correctly held by
the CTA, while certain expenses of the corporation were credited against large
amounts, the unspent balance was retained by the stockholders without
refunding them to petitioner at the end of each year. These advances were in fact
indirect loans to the stockholders indicating the unreasonable accumulation or
surplus beyond the needs of the business.
CYANAMID PHILIPPINES, INC. VS. CA, CTA AND CIR
In order to determine whether profits are accumulated for the reasonable needs
of the business to avoid the surtax upon the shareholders, it must be shown that
the controlling intention of the taxpayer is manifested at the time of the
accumulation, not intentions subsequently, which are mere afterthoughts.
Facts:
Petitioner is a corporation organized under Philippine laws and is a wholly
owned subsidiary of American Cyanamid Co. based in Maine, USA. It is
engaged in the manufacture of pharmaceutical products and chemicals, a
wholesaler of imported finished goods and an imported/indentor. In 1985 the
CIR assessed on petitioner a deficiency income tax of P119,817) for the year
1981. Cyanamid protested the assessments particularly the 25% surtax for undue
accumulation of earnings. It claimed that said profits were retained to increase
petitioners working capital and it would be used for reasonable business needs
of the company. The CIR refused to allow the cancellation of the assessments,
petitioner appealed to the CTA. It claimed that there was not legal basis for the
assessment because 1) it accumulated its earnings and profits for reasonable
business requirements to meet working capital needs and retirement of
indebtedness 2) it is a wholly owned subsidiary of American Cyanamid
Company, a foreign corporation, and its shares are listed and traded in the NY
Stock Exchange. The CTA denied the petition stating that the law permits
corporations to set aside a portion of its retained earnings for specified purposes
under Sec. 43 of the Corporation Code but that petitioners purpose did not fall
within such purposes. It found that there was no need to set aside such retained
earnings as working capital as it had considerable liquid funds. Those
corporations exempted from the accumulated earnings tax are found under Sec.
25 of the NIRC, and that the petitioner is not among those exempted. The CA
affirmed the CTAs decision.
Issue: Whether or not the accumulation of income was justified.
Held:
In order to determine whether profits are accumulated for the reasonable needs
of the business to avoid the surtax upon the shareholders, it must be shown that
the controlling intention of the taxpayer is manifested at the time of the
accumulation, not intentions subsequently, which are mere afterthoughts. The
accumulated profits must be used within reasonable time after the close of the
taxable year. In the instant case, petitioner did not establish by clear and
convincing evidence that such accumulated was for the immediate needs of the
business.
To determine the reasonable needs of the business, the United States Courts
have invented the Immediacy Test which construed the words reasonable
needs of the business to mean the immediate needs of the business, and it is
held that if the corporation did not prove an immediate need for the
accumulation of earnings and profits such was not for reasonable needs of the
business and the penalty tax would apply. (Law of Federal Income Taxation Vol
7) The working capital needs of a business depend on the nature of the business,
its credit policies, the amount of inventories, the rate of turnover, the amount of
accounts receivable, the collection rate, the availability of credit and other
similar factors. The Tax Court opted to determine the working capital
sufficiency by using the ration between the current assets to current liabilities.
Unless, rebutted, the presumption is that the assessment is correct. With the
petitioners failure to prove the CIR incorrect, clearly and conclusively, the Tax
Courts ruling is upheld.
CIR vs Tuason
The importance of liability is the purpose behind the accumulation of the income
and not the consequences of the accumulation. Thus, if the failure to pay
dividends were for the purpose of using the undistributed earnings & profits for
the reasonable needs of the business, that purpose would not fall to overcome
the presumption and correctness of CIR.
FACTS:
CTA set aside petitioners revenue commissioners assessment of 1.1 M as the
25% surtax on private respondents unreasonable accumulation of surplus for the
year 1975-1978.
Private respondent protested the assessment on the ground that the
accumulation of surplus profits during the years in question was solely for the
purpose of expanding its business operations as a real estate broker.
Private res. Filed a petition that pending determination of the case, an order be
issued restraining the commissioner and/or his reps from enforcing the warrants
of distraint and levy. Writ of injunction was issued by tax court.
Due to the reversal of CTA of the commissioners decision, CIR appeals to the
SC.
ISSUES:
1. Whether or not private respondent is a holding company and/or investment
company?
2. Whether or not Antonio accumulated surplus for years 75-78
3. Whether or not Tuason Inc. is liable for the 25% surtax on undue
accumulation of surplus for 75-78
HELD: Yes to all. Antionio is liable for the 25% surtax assessed.
Sec. 25. Additional tax on corporation improperly accumulating profits or
surplus.
(a) Imposition of tax. If any corporation, except banks, insurance companies,
or personal holding companies, whether domestic or foreign, is formed or
availed of for the purpose of preventing the imposition of the tax upon its
shareholders or members or the shareholders or members of another corporation,
through the medium of permitting its gains and profits to accumulate instead of
being divided or distributed, there is levied and assessed against such
corporation, for each taxable year, a tax equal to twenty-five per centum of the
undistributed portion of its accumulated profits or surplus which shall be in
addition to the tax imposed by section twentyfour, and shall be computed,
collected and paid in the same manner and subject to the same provisions of law,
including penalties, as that tax.
(b) Prima facie evidence. The fact that any corporation is a mere holding
company shall be prima facie evidence of a purpose to avoid the tax upon its
shareholders or members. Similar presumption will lie in the case of an
investment company where at any time during the taxable year more than fifty
per centum in value of its outstanding stock is owned, directly or indirectly, by
one person.
In this case, Tuason Inc, a mere holding company for the corporation did not
involve itself in the development of subdivisions but merely subdivided its own
lots and sold them for bigger profits. It derived its income mostly from interest,
dividends, and rentals realized from the sale of realty.
Tuason Inc is also owned by Antonio himself. While these profits were
actually made, the commissioner points out that the corp. did not use up its
surplus profits. Antonio claims that he spent the money to build an apartment in
urdaneta but theres a large discrepancy bet. The market value and the alleged
investment cost.
The importance of liability is the purpose behind the accumulation of the
income and not the consequences of the accumulation. Thus, if the failure to pay
dividends were for the purpose of using the undistributed earnings & profits for
the reasonable needs of the business, that purpose would not fall to overcome the
presumption and correctness of CIR.