Tomas Calasanz vs CIR [1] Capital assets.
-The term 'capital assets' means property held
(GR No. L-26284, October 8, 1986)
Facts:
Ursula Calasanz inherited from her father Mariano de Torres an
agricultural land located in Cainta, Rizal. In order to liquidate
her inheritance, Ursula Calasanz had the land surveyed and
subdivided into lots. Improvements, such as good roads,
concrete gutters, drainage and lighting system, were i ntroduced
to make the lots saleable. Soon after, the lots were sold to the
 public at a profit.
In their joint income tax return for the year 1957 filed with the
Bureau of Internal Revenue, petitioners disclosed a profit of
P31,060.06 realized from the sale of the subdivided lots, and
reported fifty per centum thereof or P15,530.03 as taxable
capital gains.
Upon an audit and review of the return thus filed, the Revenue
Examiner adjudged petitioners engaged in business as real
estate dealers, and assessed a deficiency income tax on profits
derived from the sale of the lots based on the rates for ordinary
income.
Petitioners filed with the Court of Tax Appeals a petition for
review contesting the aforementioned assessments, but t he Tax
Court upheld the respondent Commissioner.
The theory advanced by the petitioners is that inherited land is
a capital asset within the meaning of Section 34[a] [1] of the
Tax Code and that an heir who liquidated his inheritance cannot
 be said to have engaged in the real estate business and may not
 be denied the
the preferential tax treatment given to gains
gains from sale
of capital assets, merely because he disposed of it in the only
 possible and advantageous way.
Respondent Commissioner maintained that the imposition of
the taxes in question is in accordance with law since petitioners
are deemed to be in the real estate business for having been
involved in a series of real estate transactions pursued for profit.
Respondent argued that property acquired by inheritance may
 be converted from an investment property to a business
 property if, as in the present case, it was subdivided, improved,
and subsequently sold and the number, continuity and
frequency of the sales were such as to constitute "doing
 business."
Respondent concluded that since the lots are ordi nary assets, the
 profits realized
r ealized therefrom
t herefrom are ordinary gains, hence taxable in
full.
Issue:
Whether the gains realized from the sale of the lots are taxable
in full as ordinary income or capital gains taxable at capital gain
rates.
Held: Taxable as ordinary income.
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:
 by the taxpayer [whether or not connected with his trade or
 business], but does not include, stock in trade of the taxpayer
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.
The statutory definition of capital assets is negative in nature. If
the asset is not among the exceptions, it is a capital asset;
conversely, assets falling within the exceptions are ordinary
assets. Also a property initially classified as a capital asset may
thereafter be treated as an ordinary asset if a co mbination of the
factors indubitably tend to show that the activity was in
furtherance of or in the course of the taxpayer's trade or
 business. Thus, a sale of inherited real property usually gives
capital gain or loss even though the property has to be
subdivided or improved or both to make it salable. However, if
the inherited property is substantially improved or very actively
sold or both it may be treated as held primarily for sale to
customers in the ordinary course of the heir's business.
Upon an examination of the facts on record, We are convinced
that the activities of petitioners are indistinguishable from those
invariably employed by one engaged in the business of selling
real estate. One strong factor against petitioners' contention is
the business element of development which is very much in
evidence.
Petitioners did not sell the land in the condition in which they
acquired it. While the land was originally devoted to rice and
fruit trees, it was subdivided into small lots and in the process
converted into a residential subdivision Extensive
improvements like the laying out of streets, construction of
concrete gutters and installation of lighting system and drainage
facilities, among others, were undertaken to enhance the value
of the lots and make them more attractive to prospective buyers.
Another distinctive feature of the real estate business
discernible from the records is the existence of contracts
receivables, which stood at P395,693.35 as of the year ended
December 31, 1957. The sizable amount of receivables in
comparison with the sales volume of P446,407.00 during the
same period signifies that the lots were sold on installment basis
and suggests the number, continuity and frequency of the sales.
Also of significance is the circumstance that the lots were
advertised for sale to the public and that sales and collection
commissions were paid out during the period in question.
CHINA BANKING CORP vs CA & CIR
GR No. 125508, July 19, 2000
FACTS:
 China Banking Corp made a 53% equity investment in
First CBC Capital, a Hong Kong subsidiary engaged in
financing and investment with “deposit-
“deposit -taking” function.
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 A regular examination by Bangko Sentral on China Bank’s
financial book and investment portfolio shows that First
CBC Capital has become insolvent.
 With the approval of Bangko Sentral, China Bank wrote
off as being worthless  its investment in First CBC in its
1987 Income Tax Return, and treated it as a  bad debt or as
an ordinary loss deductible from its gross income.
 CIR disallowed the deduction, contending that it should be
capital loss.
Issue:
1) Whether it is a capital loss or an ordinary loss.
2) WON China Banking is allowed to claim for the
deductions.
Held:
1) CAPITAL LOSS.
Equity investment is a capital asset resulting in a capital
gain or a capital loss. A capital asset is defined negatively
in Section 33(1) of the NIRC:
(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 t he 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)[4] 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 as a
merchant of stocks or securities, whether an individual,
 partnership or corporation, with an established place of
 business, regularly engaged in the purchase of securities and
their resale to customers; that is, one who as a merchant buys
securities and sells them to customers with a view to the gains
and profits that may be derived therefrom.
In the hands, however, of another who holds the shares of stock
 by way of an investment, the shares to him would be capital
assets. When the shares held by such investor become
worthless, the loss is deemed to be a loss from the sale or
exchange of capital assets.
2) NO.
Loss sustained by the holder of the securities, which are
capital assets (to him), is to be treated as a capital loss as if
incurred from a sale or exchange transaction.
A capital gain or a capital loss normally requires the
concurrence of two conditions for it to result:
(1) There is a sale or exchange; and
(2) the thing sold or exchanged is a capital asset.
When securities become worthless, there is strictly no sale or
exchange but the law deems the loss anyway to be "a loss from
the sale or exchange of capital assets.
Capital losses are allowed to be deducted only to the extent of
capital gains, i.e., gains derived from the sale or exchange of
capital assets, and not from any other income of the taxpayer.
COMPAGNIE FINANCIERE vs. CIR
G.R. No. 133834, August 28, 2006
FACTS:
Compagnie Financiere Sucres et Denree is a non-resident
 private corporation duly organized and existing under the laws
of the Republic of France. On October 21, 1991, petitioner
transferred its 8% equity interest in the Makati Shangri-La
Hotel and Resort, Incorporated to Kerry Holdings Ltd.
(formerly Sligo Holdings Ltd), as shown by a Deed of Sale and
Assignment of Subscription and Right of Subscription of the
same date. Transferred were (a) 107,929 issued shares of stock
valued at P100.00 per share with a total par value of
P10,792,900.00; (b) 152,031 with a par value of P100.00 per
share with a total par value of P15,203,100.00; (c) deposits on
stock subscriptions amounting to P43,147,630.28; and (d)
 petitioners right of subscription.
On November 29, 1991, petitioner paid the documentary
stamps tax and capital gains tax on the transfer under protest.
Thereafter, they filed a claim for refund of overpaid capital
gains tax in the amount of P107,869.00 and overpaid
documentary stamps taxes in the sum of P951,830.00 or a total
of P1,059,699.00. Petitioner alleged that the transfer of deposits
on stock subscriptions is not a sale/assignment of shares of
stock subject to documentary stamps tax and capital gains tax.
However, respondent did not act on petitioners claim for refund.
Thus, petitioner filed with the CTA a petition for review.
CTA denied petitioners claim for refund. The CTA held that it
is clear from Section 176 of the Tax Code that sales to secure
the future payment of money or for the future transfer of any
 bond, due-bill, certificates of obligation or stock are taxable.
Furthermore, petitioner admitted that it profited from the sale
of shares of stocks. Such profit is subject to capital gains tax.
Petitioner’s Motion for reconsideration were denied.
ISSUE:
Whether the Court of Appeals erred in holding that the
assignment of deposits on stock subscriptions is subject to
documentary stamps tax and capital gains tax.
HELD:
Along with police power and eminent domain, taxation is one
of the three basic and necessary attributes of sovereignty. Thus,
the State cannot be deprived of this most essential power and
attribute of sovereignty by vague implications of law. Rather,
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 being derogatory of sovereignty, the governing principle is that
tax exemptions are to be construed in strictissimi juris against
the taxpayer and liberally in favor of the taxing authority; and
he who claims an exemption must be able to justify his claim
 by the clearest grant of statute.
Significantly, petitioner cannot point to any specific provision
of the National Internal Revenue Code authorizing its claim for
an exemption or refund. Rather, Section 176 of the National
Internal Revenue Code applicable to the issue provides that the
future transfer of shares of stocks is subject to documentary
stamp tax. Clearly, under this provision, sales to secure the
future transfer of due-bills, certificates of obligation or
certificates of stock are liable for documentary stamp tax. No
exemption from such payment of documentary stamp tax is
specified therein.
Petitioner contends that the assignment of its deposits on stock
subscription is not subject to capital gains tax because there is
no gain to speak of. In the Capital Gains Tax Return on Stock
Transaction, which petitioner filed with the Bureau of Internal
Revenue, the acquisition cost of the shares it sold, including the
stock subscription is P69,143,630.28. The transfer price to
Kerry Holdings, Ltd. is P70,332,869.92. Obviously, petitioner
has a net gain in the amount of P1,189,239.64. As the CTA aptly
ruled, a tax on the profit of sale on net capital gain is the very
essence of the net capital gains tax law. To hold otherwise will
ineluctably deprive the government of its due and unduly set
free from tax liability persons who profited from said
transactions.
SUPREME TRANSLINER v. BPI
FACTS:
Supreme Transliner took out a loan from respondent and was
unable to pay. The respondent bank extrajudicially foreclosed
the collateral and, before the expiration of the one-year
redemption period, the mortgagors notified the bank of its
intention to redeem the property.
ISSUE:
Is the mortgagee-bank liable to pay the capital gains tax upon
the execution of the certificate of sale and before the expiry of
the redemption period?
HELD:
 NO. It is clear that in foreclosure sale there is no actual transfer
of the mortgaged real property until after the expiration of the
one-year period and title is consolidated in the name of the
mortgagee in case of non-redemption.
This is because before the period expires there is yet no transfer
of title and no profit or gain is realized by the mortgagor.
DOCTRINES:
 National Internal Revenue Code; capital gains tax;
documentary stamp tax; if right of redemption exercised.
Under Revenue Regulations (RR) No. 13-85 (December 12,
1985), every sale or exchange or other disposition of real
 property classified as capital asset under the National Internal
Revenue Code (NIRC) shall be subject to final capital gains tax.
The term “sale” includes pacto de retro and other forms of
conditional sale.
Section 2.2 of Revenue Memorandum Order (RMO) No. 29-86,
as amended by RMO Nos. 16-88, 27-89 and 6-92, states that
these conditional sales “necessarily includes mortgage
foreclosure sales (judicial and extrajudicial foreclosure sales).”
Further, for real property foreclosed by a bank on or after
September 3, 1986, the capital gains tax and documentary
stamp tax must be paid before title to the property can be
consolidated in favor of the bank.
Under Section 63 of Presidential Decree No. 1529, or the
Property Registration Decree, if no right of redemption exists,
the certificate of title of t he mortgagor shall be cancelled, and a
new certificate issued in the name of the purchaser.
But where the right of redemption exists, the certificate of title
of the mortgagor shall not be cancelled, but the certificate of
sale and the order confirming the sale shall be registered by
 brief memorandum thereof made by the Register of Deeds on
the certificate of title.
It is therefore clear that in foreclosure sale, there is no actual
transfer of the mortgaged real property until after t he expiration
of the one-year redemption period as provided in Act No. 3135,
or An Act or Regulate the Sale of Property Under Special
Powers Inserted In or Annexed to Real Estate Mortgages, and
title thereto is consolidated in t he name of the mortgagee in case
of non-redemption. In the interim, the mortgagor is given the
option whether or not to redeem the real property.
The issuance of the Certificate of Sale does not by itself transfer
ownership. RR No. 4-99 (March 16, 1999), further amends
RMO No. 6-92 relative to the payment of capital gains tax and
documentary stamp tax on extrajudicial foreclosure sale of
capital assets initiated by banks, finance and insurance
companies.
Under this RMO, in case the mortgagor exercises his right of
redemption within one year from the issuance of the certificate
of sale, no capital gains tax shall be i mposed because no capital
gain has been derived by the mortgagor and no sale or transfer
of real property was realized. Moreover, the transaction will be
subject to documentary stamp tax of only PhP 15 because no
land or realty was sold or transferred for a consideration.
 National Internal Revenue Code; non-retroactivity of rulings;
exception.
Section 246 of the National Internal Revenue Code sets out that
rule on non-retroactivity of rulings. In this case, the retroactive
application of Revenue Regulations No. 4-99 [to the transaction
which took place before its effectivity is more consistent with
the policy of aiding the exercise of the right of redemption.
As the Court of Tax Appeals concluded in one case, RR No. 4-
99 “has curbed the inequity of imposing a capital gains tax even
 before the expiration of the redemption period [since] there is
yet no transfer of title and no profit or gain is realized by the
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mortgagor at the time of foreclosure sale but only upon
expiration of the redemption period.”
In his commentaries [Hector] De Leon expressed the view that
while revenue regulations as a general rule have no retroactive
effect, if the revocation is due to the fact that the regulation is
erroneous or contrary to law, such revocation shall have
retroactive operation as to affect past transactions, because a
wrong construction cannot give rise to a vested right that can be
invoked by a taxpayer. Supreme Transliner, Inc. vs BPI Family
Savings Bank, Inc.
*Gonzales vs CTA
THE CITY LUMBER, INC. v. THE HON. MELENCIO
R. DOMINGO, Commissioner of Internal Revenue and
THE HON. COURT OF TAX APPEALS
G.R. No. L-18611, 30 January 1964
The alleged loss of plywood were rejected because said loss
was never reported in the books of petitioner; and neither was
 such loss reported in the income tax return of petitioner for the
 year, submitted some months after the alleged loss.
Petitioner seeks the review of a decision of the Court Tax
Appeals, upholding an assessment by respondent on an
additional income of P16,678.63 representing minor deductions
from the alleged expenses, on undisclosed sales of plywood,
nails and GI sheets amounting to P7,902.07, and on a cash credit
 balance of P7,896.80. Petitioner claims that the respondent
court erred in not holding that plywood and GI sheets were
actually lost in a fire occuring in the city and in not considering
the credit cash balance as a loan secured by petitioner.
ISSUE:
Whether or not petitioner can claim deductions on his
expenses/loss?
RULING:
 No. Petitioner introduced as a witnesses in his favor the Chief
of Police of the City of Dumaguete to testify on the existence
of a fire in the city by reason of which the store of petitioner
was looted of plywood and kegs of nails. But said witness
declared that they recovery only 100 pieces of plywood and 5
kegs of nails, but these were returned to petitioner. The Court
 below, however, rejected the alleged loss of plywood because
said loss was never reported in the books of petitioner; and
neither was such loss reported in the income tax return of
 petitioner for the year, submitted some months after the alleged
loss.
We hold that the conduct of petitioner in not reporting said loss
in his book of account or in his income tax turn proves that the
alleged loss had not been suffered.
On the alleged loan of the sum of around P8,000.00 which
petitioner claims to be the cash credit balance appearing
petitioner claims to be his book of account.
Petitioner's book of account failed to show such a loan also.
 Neither were any receipts or other evidence produced t o show
that said amount was a loan secured by petitioner, or that a loan
was ever secured. In view of these we find that the respondent
court did commit the error charged.
W/N the assessment violates Memorandum Order V-634
(An order of Commissioner granting Regional Directors
authority close tax cases involving deficiency assessments
not exceeding P10,000.00 in taxes and penalties)
The order in question was applicable only to subordinate
officers of the BIR and could not bind the Commissioner
himself, who has been entrusted by law to make final
assessments. The Commissioner cannot delegate this power to
make a final assessment to his subordinate. Delegatus nor potest
delegare; i.e. the person to whom an office or duty is delegated
cannot lawfully devolve the duty on another.
PLARIDEL SURETY vs. CIR 
G.R. No. L-21520, December 11, 1967
FACTS:
Petitioner Plaridel Surety & Insurance Co., is a domestic
corporation engaged in the bonding business. Petitioner, as
surety, and Constancio San Jose, as principal, solidarily
executed a performance bond in favor of the P. L. Galang
Machinery Co., Inc., to secure the performance of San Jose's
contractual obligation to produce and supply logs to the latter.
To afford itself adequate protection against loss or damage on
the performance bond, petitioner required San Jose and one
Ramon Cuervo to execute an indemnity agreement obligating
themselves, solidarily, to indemnify petitioner for whatever
liability it may incur by reason of said performance bond. San
Jose later failed to deliver the logs to Galang Machinery and the
latter sued on the performance bond. San Jose constituted a
chattel mortgage on logging machineries and other movables in
 petitioner's favor while Ramon Cuervo executed a real estate
mortgage.
Petitioner effected payment in favor of Galang Machinery in
the total sum of P44,490.00. In its income tax return for the year
1957, petitioner claimed the said amount of P44,490.00 as
deductible loss from its gross income.
CIR disallowed the claimed deduction of P44,490.00 and
assessed against petitioner the sum of P8,898.00, plus interest,
as deficiency income tax for the year 1957.
ISSUE:  Whether or not the payment effected to Galang
Machining is a deductible loss from the gross income of
 petitioner surety company?
RULE: No.
Petitioner was duly compensated for otherwise than by
insurance —   thru the mortgages in its favor executed by San
Jose and Cuervo —  and it had not yet exhausted all its available
remedies, especially as against Cuervo, to minimize its loss.
Loss is deductible only in the taxable year it actually happens
or is sustained. However, if it is compensable by insurance or
otherwise, deduction for the loss suffered is postponed to a
subsequent year, which, to be precise, is that year in which it
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appears that no compensation at all can be had, or that there is
a remaining or net loss, i.e., no full compensation.
There is no question that the year in which the petitioner
Insurance Co. effected payment to Galang Machinery pursuant
to a final decision occurred in 1957. However, under the same
court decision, San Jose and Cuervo were obligated to
reimburse petitioner for whatever payments it would make to
Galang Machinery. Clearly, petitioner's loss is compensable
otherwise (than by insurance). It should   follow, then, that the
loss deduction cannot be claimed in 1957.
CIR vs Priscilla Estate
Facts :
The corporation duly filed its income tax returns for the years
1949, 1950 and 1951. On 13 June 1952, however, it amended
its income tax returns for 1951 and paid the tax corresponding
to the assessment made by the petitioner on the basis of the
returns, as amended; and on 13 September 1952, the company
claimed a refund of P4,941.00 as overpaid income tax for the
year 1950 for having deducted from gross i ncome only the sum
of P6,013.85 instead of P39,673.25 as its loss in the sale of a lot
and building. Thereupon, the Commissioner of Internal
Revenue conducted an investigation of the company's income
tax returns for 1949 through 1951 and, thereafter, granted a tax
credit of P1,443.00 for 1950 but assessed on 3 November 1953
deficiency income taxes of P3,575.49 for 1949 and P22,166.10
for 1951.
The Priscila Estate, Inc., contested the deficiency assessments
and when the Commissioner of Internal Revenue refused to
reconsider them, the former brought suit to the tax court which
after trial, rendered the decision that, in 1961, the
Commissioner elevated to this Supreme Court for review.
Issues:
1. WON the Barong Barong should not be charged as a
deduction to the gross income but rather added to the cost
of the new building?
2. WON the basis for depreciation should be limited to the
capital invested which is the assessed value?
Ruling:
1. It should be charged as deduction to the Gross income. the
tax court found that the removal of the "barong-barong",
instead of being voluntary, was forced upon the
corporation by the city engineer because the structure was
a fire hazard; that the rental income of the old building was
about P3,730.00 per month, and that t he corporation had no
funds but had to borrow, in order to construct a new
 building. All these facts, taken together, belie any intention
on the part of the corporation to demolish the old building
merely for the purpose of erecting another in its place.
Since the demolished building was not compensated for by
insurance or otherwise, its loss should be charged off as
deduction from gross income
2. Depreciation is a question of fact, and is "not measured by
a theoretical yardstick, but should be determined by a
consideration of the actual facts." The petitioner himself on
 page 26 of his appeal brief, asserts that "what consist of the
depreciable amount (sic) is elusive and is a question of
fact."
Since the petitioner does not claim that the tax court, in applying
certain rates and basis to arrive at the allowed amounts of
depreciation of the various properties, was, arbitrary or had
abused its discretion, and since the Supreme Court, before the
Revised Rules, limited its review of decisions of the Court of
Tax Appeals to questions of law only, the findings of the tax
court on the depreciation of the several assets should not be
disturbed.
Dumaguete Cathedral vs. CIR
(GR No. 182722, Jan. 22, 2010)
Cooperatives, including their members, deserve a preferential
tax treatment because of the vital role they play in the
attainment of economic development and social justice. Thus,
although taxes are the lifeblood of the government, the State’s
 power to tax must give way to foster the creation and growth of
cooperatives. To borrow the words of Justice Isagani A. Cruz:
"The power of taxation, while indispensable, is not absolute and
may be subordinated to the demands of social justice." 
FACTS:
 Dumaguete Cathedral Credit Cooperative (DCCCO) is a
credit cooperative with the following objectives and
 purposes: (1) to increase the income and purchasing power
of the members; (2) to pool the resources of the members
 by encouraging savings and promoting thrift to mobilize
capital formation for development activities; and (3) to
extend loans to members for provident and productive
 purposes.
 (BIR) Operations Group Deputy Commissioner, issued
Letters of Authority authorizing BIR Officers to examine
 petitioner’s books of accounts and other accounting
records for all internal revenue taxes for the taxable years
1999 and 2000.
 On 2002, DCCCO received Pre-Assessment Notices for
deficiency withholding taxes for taxable years 1999 and
2000. The deficiency withholding taxes cover the
 payments of the honorarium of the Board of Directors,
security and janitorial services, legal and professional fees,
and interest on savings and time deposits of its members.
 DCCCO informed BIR that it would ONLY pay the
deficiency withholding taxes corresponding to the
honorarium of the Board of Directors, security and
 janitorial services, legal and professional fees for the year
1999 and 2000, EXCLUDING penalties and interest.
 After payment, DCCCO received from the BIR Tr anscripts
of Assessment and Audit Results/Assessment Notices,
ordering petitioner to pay the deficiency withholding taxes,
INCLUSIVE of penalties, for the years 1999 and 2000.
 DCCO's contention:
Under Sec. 24. Income Tax Rates.  —   x x x x (B) Rate of
Tax on Certain Passive Income: —  (1) Interests, Royalties,
Prizes, and Other Winnings.  —   A final tax at the rate of
twenty percent (20%) is hereby imposed upon the amount
of interest from any currency bank deposit and yield or any
other monetary benefit from deposit substitutes and from
trust funds and similar arrangements; x x x applies only to
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  banks and not to cooperatives, since the phrase "similar
arrangements" is preceded by terms referring to banking
transactions that have deposit peculiarities. Therefore, the
savings and time deposits of members of cooperatives are
not included in the enumeration, and thus not subject to the
20% final tax. Also, pursuant to Article XII, Section 15 of
the Constitution 25 and Article 2 of Republic Act No. 6938
(RA 6938) or the Cooperative Code of the Philippines,
cooperatives enjoy a preferential tax treatment which
exempts their members from the application of Section
24(B)(1) of the NIRC.
ISSUE:
Whether or not DCCCO is liable to pay the deficiency
withholding taxes on interest from savings and time deposits of
its members for the taxable years 1999 and 2000, as well as the
delinquency interest of 20% per annum
RULING:
DCCCO is not liable. The NIRC states that a "final tax at the
rate of twenty percent (20%) is hereby imposed upon the
amount of interest on currency bank deposit and yield or any
other monetary benefit from the deposit substitutes and from
trust funds and similar arrangement x x x" for individuals under
Section 24(B)(1) and for domestic corporations under Section
27(D)(1). Considering the members’ deposits with the
cooperatives are not currency bank deposits nor deposit
substitutes, Section 24(B)(1) and Section 27(D)(1), therefore,
do not apply to members of cooperatives and to deposits of
 primaries with federations, respectively.
Under Article 2 of RA 6938, as amended by RA 9520, it is a
declared policy of the State to foster t he creation and growth of
cooperatives as a practical vehicle for promoting self-reliance
and harnessing people power towards the attainment of
economic development and social justice. Thus, to encourage
the formation of cooperatives and to create an atmosphere
conducive to their growth and development, the State extends
all forms of assistance to them, one of which is providing
cooperatives a preferential tax treatment.
The legislative intent to give cooperatives a preferential tax
treatment is apparent in Articles 61 and 62 of RA 6938, which
read:
ART. 61. Tax Treatment of Cooperatives.  —   Duly registered
cooperatives under this Code which do not transact any
 business with non-members or the general public shall not be
subject to any government taxes and fees imposed under the
Internal Revenue Laws and other tax laws. Cooperatives not
falling under this article shall be governed by the succeeding
section. ART. 62. Tax and Other Exemptions. —  Cooperatives
transacting business with both members and nonmembers shall
not be subject to tax on their transactions to members.
 Notwithstanding the provision of any law or regulation to the
contrary, such cooperatives dealing with nonmembers shall
enjoy the following tax exemptions; x x x.
This exemption extends to members of cooperatives. I t must be
emphasized that cooperatives exist for the benefit of their
members. In fact, the primary objective of every cooperative is
to provide goods and services to its members to enable them to
attain increased income, savings, investments, and productivity.
Therefore, limiting the application of the tax exemption to
cooperatives would go against the very purpose of a credit
cooperative. Extending the exemption to members of
cooperatives, on the other hand, would be consistent with the
intent of the legislature. Thus, although the tax exemption only
mentions cooperatives, this should be construed to include the
members.
It is also worthy to note that t he tax exemption in RA 6938 was
retained in RA 9520. The only difference is that Article 61 of
RA 9520 (formerly Section 62 of RA 6938) now expressly
states that transactions of members with the cooperatives are
not subject to any taxes and fees. T hus: ART. 61. Tax and Other
Exemptions. Cooperatives transacting business with both
members and non-members shall not be subjected to tax on
their transactions with members. In relation to this, the
transactions of members with the cooperative shall not be
subject to any taxes and fees, including but not limited to final
taxes on members’ deposits and documentary tax.
 Notwithstanding the provisions of any law or regulation to the
contrary, such cooperatives dealing with nonmembers shall
enjoy the following tax exemptions. Moreover, no less than our
Constitution guarantees the protection of cooperatives. Section
15, Article XII of the Constitution considers cooperatives as
instruments for social justice and economic development. At
the same time, Section 10 of Article II of the Constitution
declares that it is a policy of the State to promote social justice
in all phases of national development. In relation thereto,
Section 2 of Article XIII of the Constitution states that the
 promotion of social justice shall include the commitment to
create economic opportunities based on freedom of initiative
and self-reliance. Bearing in mind the for egoing provisions, the
Court found that an interpretation exempting the members of
cooperatives from the imposition of the final tax under Section
24(B)(1) of the NIRC is more in keeping with the letter and
spirit of the Constitution.
AFISCO INSURANCE CORPORATION et. Al, vs. CIR
Facts:
The petitioners are 41 non-life insurance corporations,
organized and existing under the laws of the P hilippines entered
into a Quota Share Reinsurance Treaty and a Surplus
Reinsurance Treaty with the Munchener Ruckversicherungs-
Gesselschaft (hereafter called Munich), a non-resident foreign
insurance corporation. The reinsurance treaties required
 petitioners to form a pool.
On April 14, 1976, the pool of machinery insurers submitted a
financial statement and filed an Information Return of
Organization Exempt from Income Tax for the year ending in
1975, on the basis of which it was assessed by the CIR
deficiency corporate taxes and withholding taxes in the amount
on dividends paid to Munich and to the petitioners,
respectively. These assessments were protested by the
 petitioners through its auditors Sycip, Gorres, Velayo and Co.
On January 27, 1986, the CIR denied the protest and ordered
the petitioners, assessed as Pool of Machinery Insurers, to pay
deficiency income tax, interest, and with[h]olding tax. The CA
ruled in the main that the pool of machinery insurers was a
6
 partnership taxable as a corporation, Hence, this Petition for
Review before us.
Issues:
1. Whether or not the contend that the pool or clearing house
was an informal partnership, which was taxable as a
corporation under the NIRC;
2. Whether or not the remittances to petitioners and
MUNICHRE of their respective shares of reinsurance
 premiums, pertaining to their individual and separate
contracts of reinsurance, were dividends subject to tax; and
3. Whether or not the respondent Commissioners right to
assess the Clearing House had already prescribed.
First Issue:
Pool Taxable as a Corporation
Petitioner’s Contention: They point out that the reinsurance
 policies were written by them individually and separately, and
that their liability was limited to the extent of their allocated
share in the original risks thus reinsured. Hence, the pool did
not act or earn income as a reinsurer. Its role was limited to its
 principal function of allocating and distributing the risk(s)
arising from the original insurance among the signatories to the
treaty or the members of the pool based on their ability to absorb
the risk(s) ceded[;] as well as the performance of incidental
functions, such as records, maintenance, collection and custody
of funds, etc.
The Court is not persuaded.
Section 24 of the NIRC, provides:
SEC. 24. Rate of tax on corporations. -- (a) Tax on domestic
corporations. -- A tax is hereby imposed upon the taxable net
income received during each taxable year from all sources by
every corporation organized in, or existing under the laws of the
Philippines, no matter how created or
organized, but not including duly registered general co-
 partnership, general professional partnerships, private
educational institutions, and building and loan associations xxx.
Ineludibly, the Philippine legislature included in the concept of
corporations those entities that resembled them such as
unregistered partnerships and associations. Parenthetically, the
 NLRCs inclusion of such entities in the tax on corporations was
made even clearer by t he Tax Reform Act of 1997, which
amended the Tax Code. Pertinent provisions of the new law
read as follows:
SEC. 22. -- Definition. -- When used in this Title:
(B) The term corporation shall include partnerships,
no matter how created or organized, joint-stock
companies, joint accounts (cuentas en participacion),
associations, or insurance companies, but does not
include general professional partnerships [or] a joint
venture or consortium formed for the purpose of
undertaking construction projects or engaging in
 petroleum, coal, geothermal and other energy
operations pursuant to an operating or consortium
agreement under a service contract without the
Government. General professional partnerships  are
 partnerships formed by persons for the sole purpose of
exercising their common profession, no part of the
income of which is derived from engaging in any trade
or business.
Thus, the Court in E vangelista v. C ollector of I nternal
Revenue held that Section 24 covered these unregistered
partnerships and even associations or joint accounts, which
had no legal personalities apart from their individual
members. In Evangelista:
xxx Accordingly, a pool of individual real property
owners dealing in real estate business was considered
a corporation for purposes of the tax in sec. 24 of the
Tax Code in Evangelista v. Collector of Internal
 Revenue, supra. The Supreme Court said:
The term partnership includes a syndicate, group,
 pool, joint venture or other unincorporated
organization, through or by means of which any
 business, financial operation, or venture is carried on.
Article 1767 of the Civil Code recognizes the creation of a
contract of partnership when two or more persons bind
themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits among
themselves. Its requisites are: (1) mutual contribution to a
common stock, and (2) a joint interest in the profits. In other
words, a partnership is formed when persons contract to devote
to a common purpose either money, property, or labor with the
intention of dividing the profits between
themselves. Meanwhile, an association implies associates who
enter into a joint enterprise x x x for the transaction of business.
In the case before us, the ceding companies entered into a Pool
Agreement or an association that would handle all the insurance
 businesses covered under their quota-share reinsurance
treaty and surplus reinsurance treaty with Munich.
The following unmistakably indicates a partnership or an
association covered by Section 24 of the NIRC:
(1) The pool has a common fund, consisting of money and
other valuables that are deposited in the name and
credit of the pool. This common fund pays for the
administration and operation expenses of the pool.
(2) The pool functions through an executive board, which
resembles the board of directors of a corporation,
composed of one representative for each of the ceding
companies.
(3) True, the pool itself is not a reinsurer and does not
issue any insurance policy; however, its work is
indispensable, beneficial and economically useful to
the business of the ceding companies and Munich,
 because without it they would not have received their
 premiums. The ceding companies share in the
 business ceded to the pool and in the expenses
according to a Rules of Distribution annexed to the
Pool Agreement. Profit motive or business is,
therefore, the primordial reason for the pools
formation.
As aptly found by the CTA:
xxx The fact that the pool does not retain any profit or income
does not obliterate an antecedent fact, that of the pool being
used in the transaction of business for profit. It is apparent, and
 petitioners admit, that their association or coaction was
indispensable [to] the transaction of the business. x x x If
7
together they have conducted business, profit must have been
the object as, indeed, profit was earned. Though the profit was
apportioned among the members, this is only a matter of
consequence, as it implies that profit actually resulted.
The petitioners reliance on Pascual v. Commissioner is
misplaced, in Pascual, there was no unregistered partnership,
 but merely a co-ownership which took up only two isolated
transactions. The Court of Appeals did not err in
applying Evangelista, which involved a partnership that
engaged in a series of transactions spanning more than ten
years, as in the case before us.
Second Issue:
Pools R emittances Are Taxable
Petitioners contention: further contend that the remittances of
the pool to the ceding companies and Munich are not dividends
subject to tax. They insist that taxing such remittances
contravene Sections 24 (b) (I) and 263 of the 1977 NIRC and
would be tantamount to an illegal double taxation, as it would
result in taxing the same premium income twice in the hands of
the same taxpayer. Moreover, petitioners argue that since
Munich was not a signatory to the Pool Agreement, the
remittances it received from the pool cannot be deemed
dividends.
Double taxation means taxing the same property twice when it
should be taxed only once. That is, xxx taxing the same person
twice by the same jurisdiction for the same thing. In the instant
case, the pool is a taxable entity distinct from the individual
corporate entities of the ceding companies. The tax on
its income is obviously different from the tax on
the dividends received by the said companies. Clearly, there is
no double taxation here.
The tax exemptions claimed by petitioners cannot be granted,
since their entitlement thereto remains unproven and
unsubstantiated. It is axiomatic in the law of taxation that taxes
are the lifeblood of the nation. Hence, exemptions therefrom are
highly disfavored in law and he who claims tax exemption must
 be able to justify his claim or right. Petitioners have failed to
discharge this burden of proof. The sections of the 1977 NIRC
which they cite are inapplicable, because these were not yet in
effect when the income was earned and when the subject
information return for the year ending 1975 was filed.
Referring to the 1975 version of the counterpart sections of the
 NIRC, the Court still cannot justify the exemptions
claimed. Section 255 provides that no tax shall xxx be paid
upon reinsurance by any company that has already paid the tax
xxx. This cannot be applied to the present case because, as
 previously discussed, the pool is a taxable entity distinct from
the ceding companies; therefore, the latter cannot individually
claim the income tax paid by the former as their own.
On the other hand, Section 24 (b) (1) pertains to tax on foreign
corporations; hence, it cannot be claimed by the ceding
companies which are domestic corporations. Nor can Munich,
a foreign corporation, be granted exemption based solely on this
 provision of the Tax Code, because the same subsection
specifically taxes dividends, the type of remittances forwarded
to it by the pool. Although not a signatory to the Pool
Agreement, Munich is patently an associate of the ceding
companies in the entity formed, pursuant to their reinsurance
treaties which required the creation of said pool.
Under its pool arrangement with the ceding companies, Munich
shared in their income and loss. This is manifest from a reading
of the Quota Share Reinsurance Treaty and Articles of the
Surplus Reinsurance Treaty. The foregoing interpretation of
Section 24 (b) (1) is in line with the doctrine that a tax
exemption must be construed strictissimi juris, and the
statutory exemption claimed must be expressed in a language
too plain to be mistaken.
Finally, the petitioners claim that Munich is tax-exempt based
on the RP-West German Tax Treaty is likewise unpersuasive,
 because the internal revenue commissioner assessed the pool
for corporate taxes on the basis of the information return it had
submitted for the year ending 1975, a taxable year when said
treaty was not yet in effect. Although petitioners omitted in
their pleadings the date of effectivity of the treaty, the Court
takes judicial notice that it took effect only later, on December
14, 1984.
Third Issue: Prescription
Petitioners also argue that the government’s right to assess and
collect the subject tax had prescribed. They claim that the
subject information return was filed by the pool on April 14,
1976. On the basis of this return, the BIR telephoned petitioners
on November 11, 1981, to give them notice of its letter of
assessment dated March 27, 1981. Thus, the petit ioners contend
that the five-year statute of limitations then provided in the
 NIRC had already lapsed, and that the internal revenue
commissioner was already barred by prescription from making
an assessment.
We cannot sustain the petitioners. The CA and the CTA
categorically found that the prescriptive period was tolled under
then Section 333 of the NIRC, because the taxpayer cannot be
located at the address given in the information return filed and
for which reason there was delay in sending the
assessment. Indeed, whether the governments right to collect
and assess the tax has prescribed involves facts which have been
ruled upon by the l ower courts. It is axiomatic that in the
absence of a clear showing of palpable error or grave abuse of
discretion, as in this case, this Court must not overturn the
factual findings of the CA and the CTA.